Most Indian banks are sufficiently capitalised and unlikely to need additional capital in the near term to meet the Basel-III norms approved by the Basel Committee on Banking Supervision (BCBS). But emphasis on core capital and a conservation buffer could put pressure on banks’ return on equity, said BCBS recommended that Tier-I capital, which includes common equity and other financial instruments, will have to be increased to six per cent from four per cent. It suggested raising the minimum common equity capital requirement from two per cent to 4.5 per cent by January 1, 2015.
As on June 30, 2010, the aggregate capital to risk weighted assets ratio of the Indian banking system stood at 13.4 per cent, of which Tier-I capital was 9.3 per cent, according to the Reserve Bank of India (RBI) data.
This is well above the six per cent Tier-I capital ratio mandated in the Basel-III norms. However, the standards mandate a minimum common equity of seven per cent, including a capital conservation buffer of 2.5 per cent. This may be a challenge, especially for public sector banks, which rely more on perpetual debt instruments to shore up their Tier-I capital, say analysts.
