Rs 35,000 crore breather likely for PSBs from CCB tranche deferral

November 20, 2018 location

Mumbai

The Reserve Bank of India (RBI) Board’s decision to extend the timeline for implementation of the last tranche of capital conservation buffer (CCB) under Basel III capital regulations could reduce the burden of public sector banks (PSBs) this fiscal by Rs 35,000 crore.

On Monday, the RBI Board decided to extend implementation of the CCB norm of 0.625% of risk weighted assets (RWA) by a year to March 2020.

“This will provide some breathing space to capital-starved PSBs,” said Krishnan Sitaraman, Senior Director, CRISIL Ratings. “As per our earlier estimates, they needed ~Rs 1.2 lakh crore¹ over the next five months up to March 2019 to meet Tier 1 capital stipulated under Basel III norms. Now they would need only ~Rs 85,000 crore on implementation of deferral of the last tranche of CCB.”

CCB is the capital buffer that banks have to accumulate in normal times to be used for offsetting losses during periods of stress. It was introduced after the 2008 global financial crisis to improve the ability of banks to withstand adverse economic conditions.

Under the earlier RBI directive on Basel III norms, CCB was to be implemented in a phased manner over four years starting fiscal 2016 (an addition of 0.625% every year up to March 2019).

As on September 30, 2018, banks had to maintain Tier I capital adequacy ratio (CAR) including CCB of 8.875% (7% Tier I CAR + 1.875% CCB). The CCB portion was to have been further increased by 0.625% by March 2019 which will now be deferred by a year.

“However, despite the reduction, the government will still need to infuse the bulk of the ~Rs 85,000 crore needed by March 2019,” said Sitaraman. “That’s because, hobbled by legacy stressed assets and weak performance on profitability, PSBs have little ability to tap the capital market.”

Between April 2017 and September 2018, capital infused into PSBs has been Rs 1.12 lakh crore². As per the original recapitalisation plan announced by the government in October 2017, another Rs 99,000 crore³ needs to be raised by March 2019 of which Rs 53,000 crore is scheduled as equity to be infused by the government.

Bulk of the additional capital is required for PSBs under the Prompt Corrective Action (PCA) framework of the RBI. As of September 30, 2018, 13 out of 21 PSBs – mainly the PCA banks – had Tier 1 capital adequacy ratios (including CCB) below regulatory norms – or less than 8.875%.

Amid weak profitability and depleting capital cushion over the regulatory minimum, meeting the CCB requirement is becoming onerous for many PSBs. Already, those under PCA have had to recall their Additional Tier 1 bonds, which has impacted their capital adequacy.

In this milieu, the deferral of implementation of last tranche of the CCB will be a relief for PSBs.

¹ Refer to press release dated November 6, 2018 titled “PSBs need ~Rs 1.2 lakh cr in 5 months to meet Basel III norms”

² Rs 1 lakh crore government infusion + Rs 12,000 crore raised from the market

³ Rs 53,000 crore from the government and Rs 46,000 crore from the market

The Reserve Bank of India (RBI) Board’s decision to extend the timeline for implementation of the last tranche of capital conservation buffer (CCB) under Basel III capital regulations could reduce the burden of public sector banks (PSBs) this fiscal by Rs 35,000 crore.

On Monday, the RBI Board decided to extend implementation of the CCB norm of 0.625% of risk weighted assets (RWA) by a year to March 2020.

CCB is the capital buffer that banks have to accumulate in normal times to be used for offsetting losses during periods of stress. It was introduced after the 2008 global financial crisis to improve the ability of banks to withstand adverse economic conditions.

Under the earlier RBI directive on Basel III norms, CCB was to be implemented in a phased manner over four years starting fiscal 2016 (an addition of 0.625% every year up to March 2019).

As on September 30, 2018, banks had to maintain Tier I capital adequacy ratio (CAR) including CCB of 8.875% (7% Tier I CAR + 1.875% CCB). The CCB portion was to have been further increased by 0.625% by March 2019 which will now be deferred by a year.

“However, despite the reduction, the government will still need to infuse the bulk of the ~Rs 85,000 crore needed by March 2019,” said Sitaraman. “That’s because, hobbled by legacy stressed assets and weak performance on profitability, PSBs have little ability to tap the capital market.”

Bulk of the additional capital is required for PSBs under the Prompt Corrective Action (PCA) framework of the RBI. As of September 30, 2018, 13 out of 21 PSBs – mainly the PCA banks – had Tier 1 capital adequacy ratios (including CCB) below regulatory norms – or less than 8.875%.

Amid weak profitability and depleting capital cushion over the regulatory minimum, meeting the CCB requirement is becoming onerous for many PSBs. Already, those under PCA have had to recall their Additional Tier 1 bonds, which has impacted their capital adequacy.

In this milieu, the deferral of implementation of last tranche of the CCB will be a relief for PSBs.

¹ Refer to press release dated November 6, 2018 titled “PSBs need ~Rs 1.2 lakh cr in 5 months to meet Basel III norms”

² Rs 1 lakh crore government infusion + Rs 12,000 crore raised from the market

³ Rs 53,000 crore from the government and Rs 46,000 crore from the market

The Reserve Bank of India (RBI) Board’s decision to extend the timeline for implementation of the last tranche of capital conservation buffer (CCB) under Basel III capital regulations could reduce the burden of public sector banks (PSBs) this fiscal by Rs 35,000 crore.

On Monday, the RBI Board decided to extend implementation of the CCB norm of 0.625% of risk weighted assets (RWA) by a year to March 2020.

CCB is the capital buffer that banks have to accumulate in normal times to be used for offsetting losses during periods of stress. It was introduced after the 2008 global financial crisis to improve the ability of banks to withstand adverse economic conditions.

Under the earlier RBI directive on Basel III norms, CCB was to be implemented in a phased manner over four years starting fiscal 2016 (an addition of 0.625% every year up to March 2019).

As on September 30, 2018, banks had to maintain Tier I capital adequacy ratio (CAR) including CCB of 8.875% (7% Tier I CAR + 1.875% CCB). The CCB portion was to have been further increased by 0.625% by March 2019 which will now be deferred by a year.

“However, despite the reduction, the government will still need to infuse the bulk of the ~Rs 85,000 crore needed by March 2019,” said Sitaraman. “That’s because, hobbled by legacy stressed assets and weak performance on profitability, PSBs have little ability to tap the capital market.”

Bulk of the additional capital is required for PSBs under the Prompt Corrective Action (PCA) framework of the RBI. As of September 30, 2018, 13 out of 21 PSBs – mainly the PCA banks – had Tier 1 capital adequacy ratios (including CCB) below regulatory norms – or less than 8.875%.

Amid weak profitability and depleting capital cushion over the regulatory minimum, meeting the CCB requirement is becoming onerous for many PSBs. Already, those under PCA have had to recall their Additional Tier 1 bonds, which has impacted their capital adequacy.

In this milieu, the deferral of implementation of last tranche of the CCB will be a relief for PSBs.

1 Refer to press release dated November 6, 2018 titled “PSBs need ~Rs 1.2 lakh cr in 5 months to meet Basel III norms”

2 Rs 1 lakh crore government infusion + Rs 12,000 crore raised from the market

3 Rs 53,000 crore from the government and Rs 46,000 crore from the market

¹ Refer to press release dated November 6, 2018 titled “PSBs need ~Rs 1.2 lakh cr in 5 months to meet Basel III norms”

² Rs 1 lakh crore government infusion + Rs 12,000 crore raised from the market

³ Rs 53,000 crore from the government and Rs 46,000 crore from the market