Banks look to comply to Basel III guidelines

Banks will have to start finding ways to preserve capital and use it more efficiently, bankers and analysts said on Saturday, a day after the Reserve Bank of India issued draft guidelines on Basel III capital regulations.

On Friday, the RBI said banks should have minimum tier-I capital of 7 percent, while total capital must be at least 9 percent of risk-weighted assets under the Basel III draft guidelines.

Implementation of the minimum capital requirements will begin from January 2013 and should be fully implemented by March 31, 2017, it said.

"On credit risks, we have to do some things differently so that we continue to have an advantage on capital conservation," N. Seshadri, executive director of state-run Bank of India (BOI.NS) said. "We have to start working on it now so that, by the time we are there, our capital is utilised most efficiently."

Bank of India, which will need 40 billion rupees in equity over the next two years, will look at raising a part of that figure next year, Seshadri said.

Banks and analysts said quantification of the impact of Basel III norms on Indian banks and their capital requirements would be difficult at this stage, although India was on a better footing.

"Indian banks will start at a position of strength because we already have core tier I at above 6 percent," said Krishnan ASV, analyst at Mumbai-based brokerage Ambit Capital.

RBI governor Duvvuri Subbarao has also said Indian banks have sufficient capital to meet the new Basel III standard.

Banks across the world will have to follow Basel III accords for disclosing the size and quality of their capital safety buffers from 2013 to help reassure investors they are stable.

Indian banks whose Tier-I capital includes instruments, which no longer qualify as regulatory capital instruments, will be forced to raise funds over the next 2 years, banks said.

Going forward, cautious lenders will make it difficult for borrowers to raise cheap funds, they said, although good, high-rated borrowers may continue to get funds cheaper.

State-owned lender IDBI Bank (IDBI.NS) is looking at converting its Tier I bonds worth about 21 billion rupees into equity to comply with Basel III norms, a senior bank official said.

"Core equity, as Basel says, is always better than other instruments. So, one reason is to comply with Basel III and also to have more equity, which is a better capital," Executive Director RK Bansal said.

"It will also help us in saving interest on the capital which will be converted," he said.