The Reserve Bank of India (RBI), on Mar. 27, 2014, has extended the transitional period for full implementation of Basel III Regulations in India by one year from Mar. 31, 2018 to Mar. 31, 2019, closer to the internationally agreed date of Jan. 1, 2019.
''RBI's move provides short term breather to banks (specifically public sector banks or PSBs) facing challenge of raising tier I capital to meet Basel III norms. In addition, RBI has also tightened the loss absorption features of non-equity capital instruments which is expected to strengthen protection provided to depositors /other senior Debt holders, but could reduce investor appetite for these instruments, which in any case is not yet tested well in Indian markets so far,'' said ICRA.
''Overall, although RBI has given a short term breather to PSBs, it has clearly asked the banks to be proactive in capital management to avoid last minute rush. As there is no relief on overall capital requirement on full implementation of Basel III norms, capital would remain a big challenge for PSBs; PSBs Tier I capital requirement for Basel III and for growth during FY15-FY19 remains relatively large at 120-135% of their current market capitalization.''
''Thus, the improvement in investor sentiment as well as development of Additional Tier 1 capital instruments market would be critical for meeting the huge capital requirement. As private sector banks are better capitalized, have better internal capital generation and enjoy better valuations, Tier I capital requirement looks less daunting at 25-30% of their current market capitalization. As for other changes, lowering of pre-specified trigger may lower probability of default in the transition period; while other restrictions could lead to better capital conservation in the event of stress,'' it added.
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