MUMBAI: Higher capital requirement of Rs 2.6 trillion under the new international banking capital norms , popularly known as Basel III, is expected to increase the pressure on Indian banks to raise capital. This could lead to changes , according to a report by global ratings firm Standard & Poor's or S&P.
The S&P report said that banks face a constant need to replenish capital at regular intervals to support their high growth. Starting April 1, 2013, Indian banks will begin to implement the new Basel III capital requirement, which will increase their capital requirement in phases.
The ratings firm estimates that Indian banks will require minimum additional capital of about Rs 691 billion to meet the Reserve Bank of India's 8% requirement for the common equity tier 1 and capital conservation buffer ratio. The additional capital requirement could rise to Rs 2.6 trillion, given a tendency for banks to hold higher-than-minimum capital and the limited market for hybrid instruments in India.
Ttop-tier Indian banks are relatively well-placed to manage the transition toward Basel III and the demands of a high-growth banking system, according to S&P
"The biggest challenge for the Indian banking sector is the state of Indian public finances," said Standard & Poor's credit analyst Deepali Seth in a media release. "The government's large fiscal deficit will limit its ability to inject capital into government-owned banks, which currently have less capital adequacy than the private and foreign banks operating in India."
Some smaller banks may face difficulties on the path to achieving Basel III; the extent will vary from bank to bank. For some weakly capitalized banks, the capital requirement could go up to two to three times their current market capitalization, Ms. Seth said.
"As banks simultaneously tap the capital market, some may struggle to raise the necessary capital. A few of the smaller banks could become potential takeover targets, which could result in consolidation in India's currently fragmented banking sector," she added.