State-run banks will require up to Rs 5.87 trillion in core capital by March 2018 as they migrate to the capital intensive Basel-III framework, an RBI panel said today. The government may have to arrange Rs 3.50 trillion of this requirement, the panel on 'Governance of boards of banks' headed by former Axis Bank chairman PJ Nayak said.
"The capital needs of public sector banks, burgeoning because of loan loss provisions, could begin to affect the fiscal health unless an overhaul of bank governance can lead to the better management of public sector banks and thereby to lower capital needs," it said. The panel built three scenarios assuming various degrees of regulatory forbearance being granted to the banks, under which the requirement stretches from Rs 2.10 trillion to Rs 5.87 trillion.
The key constituent will be the amount of provision cover to be done on restructured assets. If the central bank decides to be prudent and goes ahead with its plan of insisting on a 70 per cent provision cover without any forbearance, and other standard assumptions like assets growing at 16 per cent per annum and 30 per cent of restructured assets turning bad every year, the requirement will be the highest. In the second scenario, the panel assumes provision cover will be 70 per cent but with some forbearance, to conclude that public sector banks will require Rs 3.19 trillion.
In this scenario, where the RBI is most liberal and lowers the provision cover to 50 per cent and throws in more on the forbearance front, the requirement goes down to Rs 2.10 trillion, but the panel makes its displeasure known at adapting this approach, saying this is the "least prudent" way of operating. The past RBI governor D Subbarao had in July 2013 said all the banks would require Rs 5 trillion in capital as they adopt the Basel-III framework.
The Basel-III norms have been evolved after close consultation between the global central banks, following the global financial crisis of 2008 which exposed voids on the capital front. The Reserve Bank introduced the Basel III capital regulations for banks effective April 1 this year, one -year later than previously envisaged. The capital requirements will be phased over a period, up to March 31, 2019.