Though the domestic banks are well placed to implement the Basel-III capital norms, higher requirement of liquidity and equity capital will have some adverse impact on their profitability, a study by rating agency Crisil has said. According to Crisil, return on equity for the domestic banks is likely to fall by two per cent to 12-13 percent from 14-15 percent now after implementation of Basel-III norms.
However, the agency is of the opinion that the domestic banks are well capitalised for Basel-III transition. "(There will be) likely pressure on profitability given higher core equity capital and liquidity requirements as per the Basel-III norms," the study said here today. Basel III is the new regulatory framework designed to amend the deficiencies in the regulatory framework that led to the 2008 global financial crisis, following low capital reserves among others due to excessive leveraging. The new guidelines are proposed to be implemented in a phased manner between 2013 and 2019 in the domestic banking sector, which had a profit of around Rs 70,000 crore last fiscal. As per Basel-III norms, there will be an increase in the total capital adequacy ratio to 10.5 percent from the present 8 percent of risk-weighted assets or CAR for the domestic banks. Globally, these norms demand banks to significantly enhance their equity capital (equity and reserves) requirements to 7 percent from the present 2 percent. "Domestic banks are well-capitalised and will be able to meet the leverage and liquidity requirements," the firm said, adding banks would require around Rs 8 lakh crore of capital to maintain the current credit growth rate along with compliance to Basel-III norms by 2019. While public sector banks, which enjoy over 75 percent of the business, require around Rs 6 lakh crore of capital, private sector lenders will require around Rs 2 lakh crore by 2019, the firm said.
