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Onerous task for banks to be Basel-III compliant

Indian banks will be required to raise Rs 3 lakh crore in non-equity debt over the next three years in order to migrate to the Basel-III framework, says ratings agency Icra. Public sector banks would account for over two-thirds of these bond issuances, while private banks would account for the rest, Icra said, adding around 40% of this amount would be in tier-II capital bonds, while the remaining 60% would be in additional tier-I capital bonds. The agency felt there would be low investor appetite for tier-1 bonds as this instrument is a bit risky. . It explained that additional tier-I investors could incur a loss on the coupon if the common equity falls below 8%, and even the principal could be at risk if common equity tier-I drops below 5.5%. So far, there has been no issuance of an additional tier-I instrument by any state-run banks, while Basel-III compliant tier-II bonds are subscribed to only by a government-run insurer. Banks are required to have 1.5% in additional tier-I bonds and the requirement of additional tier-I capital remains very high because they have negligible levels of additional tier-I at present, the agency said. The total tier-I capital, including equity and non-equity portions, to be raised by state-run banks in their efforts to be Basel-III compliant would be around Rs 3.9 lakh crore to Rs 4.2 lakh crore.

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