Analysis of capital requirements for public sector banks in India due to rising provision for NPAs and additional capital requirements under Basel-III

Abstract

The Indian economy has been growing at a brisk rate of 7% on an average1 throughout the last decade. A strong and healthy banking sector is crucial for such growth in the economy. The approximate loan proportion supporting the Indian GDP is approximately 50%2 : a significant portion of which is from the Public-Sector Banks (PSB). However, in the recent past these PSBs have been ridden with problems of bad loans and Non-performing assets which has put substantial amount of stress on the banking sector. Apart from this more stringent capital requirements for Basel III has mandated a significant amount of capital requirement for these banks by 2019. The aim of this Contemporary Concerns Study (CCS) is to do an in-depth calculation of the amount of capital required by public sector banks due to rising provisions in banks on the account of rising NPAs and due to additional capital requirements under Basel-III. As PSBs have undergone the process of balance sheet clean-up, the amount of provision for bad assets has gone up very quickly. This creates a negative impact on bank’s growth as its lending prowess is reduced. As per RBI guidelines, banks in India must implement and confer with Basel-III guidelines by March 2019. As compared to Basel-II, Basel-III accord will fetch additional capital requirements in the form of tier-1 capital. PSBs in India coupled by rising provisions due to bad assets and due to Basel-III, need a major capital infusion. The government has recently proposed that capital infusion will happen in parts through budgetary accommodations, dilution of government’s share from existing level to 52% and raising of capital from the market in the form of perpetual bonds etc. The CCS aims to study the impact of the various capital infusion options in a macroeconomic context.