India Rating: Extended Basel III deadline to ease pressure on banks

As per the rating agency, India Ratings (formerly Fitch), the putting off of Basel III by the Reserve Bank of India (RBI) till March 2019 would ease pressure on banks. There were industry-wide concerns about the potential stress on asset quality and consequential impact on performance and profitability of banks. Thus, the apex bank extended deadline for banks to implement Basel III capital norms up to March 31, 2019, instead of March 31, 2018.

• Though, capital injection would remain a priority for banks through the rest of this decade, as the total capital required during the migration to Basel III has only gone up due to addition of an extra year.
• The government’s commitment to maintain its majority shareholding in public sector banks assures them of steady equity injections.
• Now, the budgeted amount of Rs 11,200 crore is higher than the new requirement of under Rs 10 billion equity by PSU banks in FY15, injecting the full amount will help reduce capital pressures in subsequent years.
• It can also help meet part of any shortfall in the hybrid tier 1 requirement of Rs 13,400 crore now estimated for FY15.
• The revised norms have also tightened the loss absorption features of hybrid capital by eliminating the temporary write-down feature in both hybrid tier 1 and tier 2 instruments.
• These instruments can be either permanently written down or converted into equity that improves the quality of capital by increasing any potential loss that investors may face.

Note: Basel series of norms refer to a broad supervisory standards formulated by Basel Committee on Banking Supervision (BCBS) to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

Month: Current Affairs - March, 2014