News Analysis

RBI’s relief on capital will benefit only a few PSU banks

Radhika Merwin BL Research Bureau | Updated on November 20, 2018 Published on November 20, 2018

Offers no big fillip to lending; leeway however gives Centre a relief of about ₹14,000 cr by way of capital infusion

By retaining the much-debated higher capital requirement of 9 per cent for banks and only tinkering with the capital conservation buffer (CCB), the RBI has handed little respite to capital-crunched public sector banks. This is because, nearly half the PSU banks are struggling to meet the minimum common equity Tier I (CET 1) plus CCB requirement as of September 2018.

Hence, the respite on CCB will only benefit very few banks that currently maintain CCB higher than the mandated requirement of 1.875 per cent. While a back-of-the-envelope calculation suggests that the move has eased the Centre’s pockets by about ₹14,000 crore, it is unlikely to offer a huge boost to lending by way of freeing up capital for PSU banks. For most private banks though, that maintain more than the mandated capital requirement, the leeway on CCB will offer some cushion.

Regulatory requirement

The RBI has prescribed that banks are required to maintain a minimum total capital of 9 per cent (CRAR) of total risk weighted assets (RWAs). Within this, banks have to maintain a minimum Tier-1 CRAR (essentially bank’s own equity) of 7 per cent with a minimum CET 1 of 5.5 per cent (the bare minimum capital under CRAR). As per Basel III guidelines, in addition to the minimum CRAR of 9 per cent, banks are also required to maintain a CCB, that moves up 0.625 per cent every year from March 2016 to March 2019. This implies that banks need to maintain CCB level of 1.875 per cent as on March 31, 2018, and 2.5 per cent as on March 31, 2019.

The RBI has extended the timeline to meet this last leg of CCB requirement—another 0.625 per cent by March 2019. While on the face of it, this may seem to free up notable amount of capital for banks, in reality the RBI’s respite on CCB only tinkers on the margins.

Little respite

CCB is essentially to ensure that banks build up capital buffers during normal times, (that is, outside periods of stress) which can be drawn down when losses are incurred during a stressed period. But given that most PSU banks have been under stress, they have either not been able to maintain the CCB or are having CCB less than the already required level of 1.875 per cent.

For instance, IOB in its September disclosure of Basel III requirements states that the bank is under stress, and hence, was not able to maintain the CCB as stipulated by the RBI. Bank of Maharashtra, as per its June disclosures, has a CCB of 1.064 per cent (lower than the 1.875 per cent requirement as of March 2018).

While not all banks disclose amounts specific to CCB, a look at CET 1 levels of banks against the mandated level (including CCB), suggests that nearly half of the PSU banks do not meet the regulatory requirement as of September 2018 (see Table). Hence the RBI’s leeway on CCB will benefit only a few banks (namely SBI, Vijaya Bank and Indian Bank) that have CET 1 well above the mandated requirement.

 

Therefore, at an aggregate level, the RBI’s move is likely to offer no big boost to lending, though well-capitalised private sector banks can see some respite.

Centre gains

The RBI’s move, however, has eased the pressure on the Centre by way of capital infusion. Earlier, with the CCB mandate of 2.5 per cent by March 2019, the Centre would have had to cough up an additional ₹36,000-odd crore for this by way of capital infusion (based on CET levels as of September 2018). This burden now reduces by about ₹14,000 crore, offering much-needed respite to the Centre’s fisc.

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