Banks may find it difficult to raise non-equity core capital

Crisil Ratings President Ramraj Pai opined that banks may find it difficult to raise Rs 1.4 trillion worth of non-equity-based tier-I capital, as mandated by Basel III norms, because of complexity involved in these debt instruments.

According to Basel III norms, banks will have to raise
1.3 trillion as equity capital and up to Rs 1.4 trillion as non-equity tier-I capital by March 2018.

The ratings agency feels that banks could find it hard to convince investors about the safety of the hybrid instruments to be issued for raising non-equity-based tier-I capital.

Therefore, the agency believes it is critical to develop bond markets to help banks raise the non-equity capital component. Moreover, banks will need to focus on conserving capital under Basel III, the agency said.

But according to RBI, both public and private banks together need an additional capital of Rs 5 trillion to comply with the Basel III (equity capital of around Rs 1.75 trillion and non-equity capital of Rs 3.25 trillion).

The most important challenge will be building investor confidence in the efficacy of these instruments, Pawan Agrawal, Senior Director of Crisil Ratings said.

These instruments will carry higher risks, given their equity-like features such as discretion on coupon payments, and the likelihood of coupon non-payment and principal loss if a bank’s equity capital falls below prespecified thresholds, Agarwal said.