Reserve Bank Deputy Governor Anand Sinha today allayed fears that the Basel III implementation will seriously hit the domestic banks. "The estimate RBI has done is that transition to Basel III would not be much of an issue for our banks as all the capital ratios of our banks are at about the minimum requirement of Basel III. Moreover, capital requirement on increased covering of risks would not be applicable to our banks as either those activities are not allowed or the magnitude is quite small," Sinha told a session on the topic at the Ficci-IBA banking summit here. The Basel III kicks in from January 1, 2013 and has to be completed by January 1, 2019. However, Crisil Ratings director Ramaraj Pai said the public sector banks would need a whopping Rs 8 trillion in core capital by 2019, when the Basel III norms will be implemented. As of FY2010, these banks had a core (Tier I) of capital of only Rs 70,000 crore, well above the Basel II requirements. Explaining further, Sinha said resecuritisation is not allowed in the country and there is a whole lot of capital load that we don't have, similarly our trading books are much smaller. The stress point for our banks would be to adjust to the amortised portion of pensions and gratuity liabilities in opening balance sheet on April 1, 2013, while transitioning to the international financial reporting standards or IFRS. Sinha also pointed out that going forward the capital requirements, including core equity capital, are likely to be substantial for supporting high GDP growth, and the credit to GDP ratio, at 55%, is currently lower than some of the Asian countries. But he warned that this ratio is bound to jump as arapidly growing and structurally changing economy will demand more funds. He said initiatives like financial inclusion, and rising loan demand from more credit intensive sector like manufacturing and infrastructure, would pose challenges. "So in our estimate, the Basel III transition is not a problem, but going ahead there would be large capital requirements and that has to be managed," Sinha said, adding "we are in the process of drafting the Basel 3 guidelines after which we will request the banks; and RBI also would separately estimate what is the capital requirement so that you have the adequate time frame to plan for that". The RBI is also looking at to what extent banks' holdings under the statutory liquidity ratio (SLR) provisions will be eligible as liquid funds under the Basel III norms, Sinha said. Currently, the 24% mandatory SLR exposure of banks is not a readily available liquid asset. However, he admitted that "the definition of liquid assets is very stringent under Basel II and strictly speaking SLR requirements would not qualify as liquid assets under it, because SLR need being mandatory has to be complied with at all times." "Our dilemma is asking banks to maintain more liquid assets over and above SLR, as it would put them in a competitively disadvantageous position. Therefore we are considering to what extent the SLR can be reckoned towards Basel 3 requirement for holding big assets or if there is any other way," he said. He further said as the capital requirement both equity and non-equity are likely to be substantial, there will be pressure on financial markets to increase the cost of capital. "But of course the government will have to find the sources to infuse capital in public sector banks." Under Basel III, capital requirement, especially the equity component, will be much larger. So far the capital requirement was 8 percent of which equity requirement was 2% , he noted. Though now it remains at 8 percent, the equity component is now 4.5%.On top of that there is another capital conservation buffer of 2.5%, which has to be composed of equity and therefore the capital requirement is 10.5%, of which equity has to be 7%. So a banks' equity requirement from goes up from 2 to 7% at one shot, he pointed out. Quoting an analysis done by the BCBS (Basel Committee on Banking Supervision) in 2010 of 94 large banks, including three domestic ones, Sinha said there is a shortfall of 165 billion euro and 577 billion euro in equity component against the measure of 4.5%of equity and 7 percent of equity, respectively. On the projected dent in annual GDP growth due to Basel III implementation, Sinha said according BCBS, the maximum decline in GDP is baseline annual forecast of 0.22% after 35 quarters or roughly nine years; after that there will be a recovery. "Of course the private sector's estimate is much higher, in fact many times higher. Obviously we have to give more credence to the BCBS estimate."
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