PSU banks need $37 billion fresh capital to meet Basel III norms, says Moody's

Public sector banks in the country will need to raise up to US $37 billion over the next 4-5 years to meet Basel III compliance norms, credit rating agency Moody's said on Monday.

The estimate is based on assumptions that there would be a moderate recovery in the economy and a gradual decline in the non-performing loans from the current levels.

"Our rated public-sector banks in the country will need to raise Rs 1.5-2.2 trillion, (US $26-37 billion) between FY15 and the full implementation of Basel III in FY19," Moody's said in a report titled, 'Indian banks could need USD 26-37 billion in external capital for Basel III compliance'.

A significant part of the required capital - Rs 800-900 billion (US $13-15 billion) - could be in the form of additional tier I (AT1) capital.

The rating agency rates 11 public sector banks in the country, representing 62 per cent of net loans in the banking system.

Basel III raises the minimum required levels for both total tier I capital to 7 per cent and common equity tier I (CETI) capital to 5.5 per cent. They will also need to meet a capital conservation buffer in order to pay dividends.

"Public sector banks barely meet current minimum capital requirements, and we anticipate that they will find it difficult to raise capital quickly in the current environment," Moody's Vice President Gene Fang said.

According to Moody's, low capital levels remain a key credit weakness for the public-sector banks.

Fang said weak asset quality has depressed profitability and internal capital generation, leaving state-run banks reliant on periodic capital injections from the government.

"With Prime Minister Narendra Modi's administration looking to reduce the budget deficit, the amount available for such injections is not likely to grow," he added.

Moody's said banks may tap the equity markets to raise capital, but with still-low bank valuations, banks could struggle to raise the required amount.