Indian banks are scrambling to raise the massive capital needed to comply with both Basel III and their own expansion plans.
Global research firm Macquarie estimated that Indian banks will require some US$30 billion over the next five years. This will result in considerable equity dilution over that period since capital requirements to meet these twin demands will be very high. Basel III implementation starts on January 1, 2013.
State-owned State Bank of India, India’s largest banking and financial services company by revenue, assets and market capitalization, should need some US$18 billion to grow its loan portfolio by 20%. It is expected to do so after 2015, however.
India’s better capitalized private sector banks are somewhat better placed than public sector banks to meet the requirements of Basel III.
Basel III strengthens bank capital requirements and introduces new regulation on bank liquidity and bank leverage. It is a global regulatory standard on bank capital adequacy, stress testing and market liquidity risk.
Basel III was agreed upon by the members of the Basel Committee on Banking Supervision in 2010-11 in response to the deficiencies in financial regulation revealed by the financial crisis in the last decade.
The new Basel III norms require banks to maintain a minimum 5.5% in common equity by March 31, 2015 against 3.6% today, apart from creating a capital conservation buffer consisting of common equity of 2.5% by March 31, 2018. It also hiked the minimum overall capital adequacy to 11.5% by March 31, 2018 against today’s 9%.
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