Cash surge may force banks to raise capital

the asian age  | Bijith R

Business, Economy

Experts hint smaller PSU banks will struggle to raise the additional capital following recent deposits.

Senior officials at SBI said that the bank’s cost of funds would come down in the coming days due the sudden spike in inflows into the current and savings account.

Mumbai: Banks would be required to raise additional capital to meet the capital adequacy requirement under the Basel III norms if lending picks up momentum amidst a sharp growth in deposits following the demonetisation of the high denomination currencies.

While large PSU banks such as SBI, PNB and BOB and private sector lenders are in a much better position to grow their business, experts said the small and medium PSU banks would have to raise additional capital.

Banks have witnessed a significant growth in deposits during the last few days with the largest state lender SBI receiving close to Rs 40,000 crore in just the first two days post the ban on Rs 500 and Rs 1,000 notes.     

Under the current Basel III norms, banks are required to maintain a minimum capital adequacy of 9 per cent and a Tier-I ratio of 7 per cent. Capital Adequacy Ratio (CAR) is the ratio of bank's capital to its risk.  

“The credit demand from corporates still remains subdued. So everything would depend on how credit appetite improves in the coming days. If the opportunity for loan disbursement increases, the bank will have to bring in additional capital to meet the CAR requirement,” said a senior executive director of a public sector bank.

Senior officials at SBI said that the bank’s cost of funds would come down in the coming days due the sudden spike in inflows into the current and savings account. This according to them would lead to a reduction in the deposit as well as lending rates.

Global rating agency Fitch in a recent report warned that the capital adequacy at India’s state banks remains a key theme against deteriorating asset quality and weak earnings, with some banks at risk of breaching their capital triggers.

Fitch estimates that Indian banks would require a fresh capital infusion of $90 billion to adhere to the Basel III norms and fulfil their ongoing capital needs.

“It would be the small and medium-sized PSU banks that would require additional capital if they want to grow their books,” noted Siddharth Purohit, senior research analyst at Angel Broking.

“Some of the large PSU banks are in a better position. Similar is the case with private sector banks. So I don’t think they will have many problems in growing their business in the event of a pick-up in credit demand,” he said.

While the credit dema-nd from corporates has failed to take-off amidst sluggish private CapEx, Mr Purohit pointed out the credit to the retail segment is growing steadily. “We will have to wait and watch if this move would impact demand from the consumer side.”

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