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A Move Towards Bolstering Capital of Banks...
Fri, 4 Mar Pre-Open

Banking is no easy business. At least, that can be said for the Indian banks that have been in the doldrums for quite a while now. The rising bad loans have dragged the Indian banking sector to a depressed state. The heat is being felt everywhere, across borrowers in various sectors, lenders in public and private banks and in the economy as a whole.

The RBI too is concerned about this. Accordingly, it has come up with few measures to pull the banks out of their misery. The Central bank announced three key changes to the capital adequacy norms for Indian banks. These were-

  • Revaluation reserve, which arises from revaluing banks' property, to be considered as common equity Tier-I capital, versus the earlier Tier-II classification.
  • Foreign currency translation reserves, at 25% discount, to be considered as Tier-I capital.
  • Deferred tax assets may also be recognized as Tier-I capital.

The above move was hailed by many banks. This is because it would lead to substantial unlocking of their resources.

As stated in Economic Times, the move is said to free up to Rs 400 billion that banks will be able to count as equity capital. It will free up to Rs 300-350 billion for PSU banks and Rs 50 billion for private banks.

The impact of the move will be different for different banks. Banks sitting on huge real estate will benefit the most. Those following the lease model obviously won't. Further, the impact of foreign currency translation reserves will depend on how big the foreign operations of a particular bank are.

The development comes at a time when banks are struggling to meet capital adequacy norms due to soaring provisions for bad loans. One shall note that the government had estimated last year that lenders would need to raise about US$ 17 billion from markets over four years to meet total funding requirements of about US$ 28 billion beyond projected profits.

However, after the above announcements, some relief is evident for most of the banks.

In all, these measures bode well for the banking industry. They will boost the capital requirement and can bring the much needed revival in banking sector in the coming days.

Having said that, investors can look out for investment opportunities in this sphere going forward (subscription required). And our research team at Equitymaster continues to remain dedicated to help you find these opportunities. So stay tuned!

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May 25, 2017 (Close)

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