Banks’ capital adequacy ratio may fall to 13.3% in a baseline scenario: RBI report

Under the baseline scenario, three banks may have capital adequacy ratio under 9% by March 2021. (Reuters image)

The capital adequacy ratio of banks may fall 133 basis points (bps) to 13.3% by March 2021, in comparison to March 2020,  under a baseline stress test scenario, according to the financial stability report (FSR) by the Reserve Bank of India (RBI).

Under the very severe stress scenario, the capital adequacy ratio of banks may fall to 11.8%, it said. This ratio had already come down 20 bps from 15% in September 2019. Many banks had announced plan to raise capital, in a bid to provide themselves cushion from Covid-19 pandemic.

Under the baseline scenario, three banks may have capital adequacy ratio under 9% by March 2021. The report said five banks may fail to meet the minimum capital level in a very severe stress scenario. “However, it does not take into account the mergers or any further recapitalisation, which will further increase systemic resilience,” said the report.

An analysis of the impact of a fall in equity prices on bank capital and profits indicates that the system-level capital adequacy would decline by 57 bps in the baseline under a 55%  drop in equity prices.

“The impact of a drop in equity prices for the overall system is limited as banks typically have a low proportion of capital market exposures on their balance sheets due to regulatory limits,” the report said.

Many public and private banks announced to raise funds last month to maintain healthy capital ratios.  State Bank of India (SBI) chairman Rajnish Kumar declared that lender endeavors to maintain capital adequacy ratio of above 13.1% after October 1. “We will be endeavoring to maintain capital adequacy ratio 1% above regulatory requirement of 12.1% from October 1,2020” Kumar said. The capital adequacy ratio of SBI stood at 13.06% till March,2020. The bank took shareholders’ approval at its AGM for an enabling resolution to raise Rs 20,000 crore.

Similarly, second-largest public sector lender Punjab National Bank plans to raise Rs 10,000-crore capital. Private lender ICICI Bank has also announced to raise Rs 15,000 crore through share sale.