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Capitalisation Of Mid-level PSBs A Worry
Jun 22, 2015

Much of the discussion around reviving the Indian economy out of the slowdown has been centered around interest rate cuts. The problem with popular public discussions is that they get more or less trivialized and oversimplified around one big topic. And it begins to appear as if rate cuts were all there was to firing up the economy.

We came across an interest article in Livemint that raises another major challenge in the banking sector. The issue of capitalization! As you would be aware, banks are required to follow certain minimum total capital requirements. In case, banks are not able to fulfill these requirements, their ability to lend gets curtailed.

As per the article, the RBI's timeline for implementing Base III norms requires banks to provide for a capital conservation buffer of 0.625% of risk-weighted assets by the end of financial year 2015-16 (FY16). As such, the minimum total capital requirement will increase to 9.625% in FY16. In FY17, this will increase by another 0.625%.

Are Indian banks ready for this? While large public sector lenders like State Bank of India, Bank of Baroda and Punjab National Bank are well-placed as far as capitalization is concerned.

But the mid-sized public sector banks (PSBs) are in a tricky spot. An important thing to consider is that the mid-level PSBs account for one-third of bank credit. And to meet the Basel III requirements, they need a massive capitalization of Rs 1.6 trillion over the next four financial years. This is certainly going to be a big challenge at a time when credit is not cheap and the economy is still sluggish.

The chart of the day shows the likely credit growth under different scenarios of capital infusion. Certainly, a matter of worry not only for the banks but for credit-starved sectors of the economy as well!

Data Source: India Ratings; Livemint

This Chart Of The Day was published in The 5 Minute WrapUp - Which type of investor are you: Noah or Nostradamus?

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