At a time when public sector banks have been struggling with a low capital base, the Reserve Bank of India has allowed banks to beef up its capital adequacy by including certain items such as property value, foreign exchange etc for calculation of its tier-one capital.
The new norms revealed by the regulator suggest that now banks can include the value of the property while calculating its tier one or core capital base. However, not the entire value of the property will be included, instead only 45 per cent of the property value will be counted. But this comes with caveats. For instance, the regulator has stated that the property value will be counted only if the bank is able to sell the property readily at its own will and there is no legal impediment in selling the property. Apart from this it also mandates that, the valuation should be obtained from two independent valuers, at least once in every 3 years.
Analysts with credit rating agency said considering revalued assets (real estate) as part of common equity may only serve purpose of regulatory capital requirement. That hardly improves the credit profile of banks. The asset has to be ready (available) to absorb loss in times of need.
Foreign exchange, another item that was not included while calculating the capital base can now be included. "Foreign currency translation reserves arising due to translation of financial statements of a bank's foreign operations to the reporting currency may be considered as CET1 capital. These will be reckoned at a discount of 25 per cent," said the regulator,
Apart from these two, gains arising out of setting off the losses at a later date can also be counted as tier-1 capital upto 10 per cent.
This will be a breather for the lenders, especially the public sector banks that have been grappling with the issue of mounting bad loans and depleting capital base. As per the RBI sources, this move will help in unlocking Rs 30,000-35,000 crore of capital for PSBs and up to Rs 5,000 crore for private banks.
The government estimates that state-run lenders would require Rs 1.8 lakh crore over the next four years. Banks will have the onus to raise the balance Rs 1.1 lakh crore from the market. This is because the finance ministry has promised to pump in Rs 25,000 crore each in FY16 and FY17 and Rs 10,000 crore each in FY18 and FY19 in PSBs. As a result today's move by the regulator will serve in meeting the capital requirements.
A Philip Capital report believes that it will be a big positive for PSBs as it will evade risk of huge equity dilution. "SBI can gain Rs 20,000 crore from revaluation of property which can add 50 basis points to Tier-1 on account of revaluation reserves only," it added.
The new Basel III norms which kick in from March 2019, mandates Indian banks need to maintain a minimum capital adequacy ratio (CAR) of nine per cent, in addition to a capital conservation buffer, which will be in the form of common equity at 2.5 per cent of the risk weighted assets. In other words, banks' minimum CAR must be 11.5 per cent which is higher than the 9.62 per cent banks are required to currently maintain.
