State coffers will have to inject billions of rupees to state-owned banks in ensuing 5-years to meet the increased capital requirements under BASEL III rules which are forthcoming, according to a global consultancy firm.
Deloitte Touche Tohmatsu Limited India (Deloitte) Director Dr. Lakshmi Narasimhan said Tier I capital level would increase by at least 2.5 percent with additional capital buffers under BASEL III which is expected to be implemented from early 2015 in Sri Lanka.
Currently the regulatory minimum Tier I Capital Adequacy Ratio (CAR) stands at 5 percent while Tier II CAR at 10 percent.
“The challenge will come when you have to raise money through equity, which means BASEL III is going to directly impact the financial sector. So, if we are going to have 2.5 percent addition, imagine how much of money the government of India will have to bring, and I am sure there are number of banks and financial institutions in Sri Lanka which are government owned, “Dr. Narasimhan said.
Deloitte is one of the ‘big four’ professional services firms which provide audit, consulting, financial advisory, risk management, tax and related services to select clients.
Meanwhile, Deloitte Manager Padmaja Mishra putting this huge additional capital requirement into perspective said India and China alone require as much as US $ 425 billion of Tier I and Tier II capital within the next 5-years.
“This represents 22-times the capital already raised. India and China has raised only US $ 18 billion. They have to go all the way from US $ 18 billion to US $ 425 billion. Since lot of the banks in India is government owned, there is a big discussion going on in the Finance Ministry to find this equity capital,” she said.
Capital infusion of Rs.10 billion from the treasury to state-owned bank, Bank of Ceylon (BoC) before the end of this year to support Tier I capital is currently being discussed.
Tier I capital composed of shareholder funds (equity) and the reserves.
Under BASEL III, both Tier I and Tier II ratios are set at 6 percent and 8 percent respectively – barring additional capital buffers—from 2015 with a 5-year transition period.
In India, Tier II CAR under BASEL III – introduced in April 2014—is set at 9 percent without additional buffers and Dr. Narasimhan thinks Sri Lanka might also set the ratio at the same levels taking a more conservative approach.
However, the need for additional capital will equally impact private sector commercial banks but raising equity by them will be more challenging for them than for state banks.
Meanwhile, Mishra said that Sri Lankan banks had so far not issued any instrument to raise Tier I capital.
“All the banks will need a lot more capital at the same time and the market is not ready for it. So, where does it leave the banks?
In India, lot of banks tried to raise BASEL III capital but investors rejected them. In some cases (for example) very large public sector banks when they raised the capital, investors gave no response to it and hence they had to convert it to a BASEL II instrument,” Mishra said.
Meanwhile, Deloitte Senior Advisor Shrikant Rege suggested the possibility of divesting government stakes in state banks as it will strain less on government coffers.
However, Sri Lanka’s two biggest commercial banks – BoC and People’s Bank with combined assets over Rs.2 trillion and National Savings Bank are fully owned by the government, and it is unlikely that the state would dilute its shareholdings in these banks.
Speaking at an event titled ‘surging capital requirements at the time for growth’ organized by SJMS Associates, Dr. Narasimhan however said the wait and see approach was not going to work and urged the banks to step up equity raising now onwards and reminded the banks of the famous quote ‘ Money is available when it is available’.
Despite limited progress made on the Tier I capital front, Sri Lankan banks are now in a debenture rush to strengthen their Tier II CARs among other needs.
Nevertheless, most commercial banks in Sri Lanka are currently well capitalized to meet the BASEL III requirements and by end 2013, the Tier I and Tier II CARs stood at 13.7 percent and 16.3 percent, respectively. Pix by : Kithsiri De Mel