(Repeat for additional subscribers)
March 31 (The following statement was released by the rating agency)
Reserve Bank of India's (RBI) recent delay of Basel III
implementation offers Indian banks' more time to meet the minimum capital
requirements, Fitch Ratings says. This could particularly benefit some
state-owned banks facing capital pressure.
The main benefit from the one-year moratorium will be the delay in the phase-in
of the capital conservation buffer from end-March 2016 (FY16, which starts 1
April 2016), instead of FY15, as most other parameters remain the same. More
importantly, banks would get some crucial breathing space from the lower 5.5%
pre-specified capital trigger on additional Tier 1 (AT1) securities until FY19
when it reverts to 6.125%. The headroom of 0.625% will be particularly helpful
for mid-sized state-owned banks where capital buffers are particularly
We believe RBI's actions are a tacit recognition of the potential difficulty
state-owned banks would have faced in meeting full capital requirements under
the previous timelines. State-owned banks still need the lion's share of the
estimated total core capital requirement for the system, but have thus far
largely relied on the government for new capital because of low internal capital
generation and weak access to equity markets.
The RBI has also provided additional clarity on Basel III capital instruments
and their behaviour, particularly on the issue of loss absorbency. The
exclusion of temporary write-downs on Basel III capital instruments reinforces
the regulator's intent to ensure capital securities act like equity when
required under stress.
The flipside though is that greater loss absorbency would come at the cost of
being less investor friendly. AT1 securities are expected to shoulder a large
share of the capital burden and investor appetite is currently limited adding to
the capital raising challenges.
From a ratings perspective, with permanent write-off now a standard feature
across Basel III regulatory capital instruments, it is likely that Tier 2
subordinated debt will be notched twice from the relevant anchor rating because
recovery prospects would be poor under a permanent and full write-down scenario.
However, there would be no change to our stance on AT1 instruments, so notching
for these would be unchanged.