Indian Public-Sector Banks Will Need up to US$37B in External Capital for Basel III Compliance

Public-sector Indian banks rated by Moody's Investors Service could need up to US$37 billion in external capital as Basel III looms, assuming a moderate recovery in India's GDP growth, and a gradual decline in nonperforming loans from current levels.

More specifically, Moody's-rated public-sector banks in India will need to raise INR1.5 to INR2.2 trillion, or US$26 to US$37 billion between FY 2015 and the full implementation of Basel III in FY 2019, says Moody's.

Moody's rates 11 public sector banks, representing 62% of net loans in the Indian banking system.

"Indian 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," says Gene Fang, a Moody's Vice President.

Basel III raises the minimum required capital levels for both total Tier 1 to 7.0% and Common Equity Tier 1 (CET1) capital to 5.5%, and banks will also need to meet a Capital Conservation Buffer in order to pay dividends, says Moody's. That will pressure Indian public-sector banks, as low capital levels remain a key credit weakness, added the rating agency.

"Weak asset quality has depressed profitability and internal capital generation, leaving public-sector banks reliant on periodic capital injections from the government," adds Fang. "With Prime Minister Narendra Modi's new administration looking to reduce the country's budget deficit, the amount available for such injections is not likely to grow."

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

That's even with the recent rally in Indian stock prices, says the rating agency.

Moody's notes that a significant part of the required capital—around INR800 billion to INR900 billion, or US$13 to US$15 billion—could be in the form of Additional Tier 1 (AT1) capital.

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