Capital conservation for banks important as moratorium ends on August 31: SBI report

State-owned banks need to be recapitalised or given the alternative of capital conservation as one-year suspension under insolvency and bankruptcy code (IBC) provisions will affect the resolution of stressed accounts, says an SBI research report.

It said while raising capital is important for banks, capital conservation will also be crucial as the moratorium ends on August 31 and banks will start recognising stress.

“The problem is given the one-year freeze in IBC, resolution cannot happen at the same time and it is thus imperative that public-sector banks (PSBs) are either recapitalised or given the alternative of capital conservation, as it is not certain how much fiscal space the government might have for recapitalisation,” the SBI report- Ecowrap said.

Earlier this month, Reserve Bank of India (RBI) Governor Shaktikanta Das had said both public and private sector banks need to raise capital on an anticipatory basis to build up adequate capital buffers to mitigate risks arising out of the outbreak of coronavirus.

“In such a situation, it has become a lot more important that the banks have to improve their governance, sharpen their risk management skills and banks have to raise capital on an anticipatory basis instead of waiting for a situation to arise,” Das had said.

The SBI report said as per the regulatory requirement, banks in the country need to have a regulatory capital of 9 per cent of risk weighted assets (RWA) along with additional Capital Conservation Buffer (CCB) of 1.875 per cent, which was slated to increase to 2.5 per cent by March 20.

Considering the potential stress on account of COVID-19, RBI correctly deferred the implementation of the last tranche of 0.625 per cent of the CCB from March 31, 2020 to September 30, 2020, it said.

The report has given three suggestions for capital conservation that can help the banking system potentially save close to Rs 3 lakh crore.

“Firstly, given the financial stress of financial institutions this year, relaxations in Basel norms as presently adopted by India may be done in a way that ultimate restoration to the currently given norms may be achieved by the end of the FY22. This could free up Rs 1 lakh crore of capital,” the report stated.

A relaxation of the countercyclical buffer could free up to Rs 1.87 lakh crore of capital for the banking system, it added.

“Thirdly, the threshold limit of Rs 5 crore for retail exposure to one counterpart, to qualify as Regulatory Retail Portfolio (RRP), could be increased to Rs 8.5 crore for attracting 75 per cent risk weight. Banks can save capital of around Rs 5,000 crore,” it said.

The report further said extending blanket moratorium further may not resolve the issue and “we must evaluate borrower specific requirements for the same and accordingly explore sector specific restructuring options.”

“For example, borrowers whose credit profile was sufficiently adequate in the pre COVID-19 era (say December 2019) and who have been significantly impacted by the lockdown must be given a system of regulatory forbearance / one-time restructuring of only such accounts,” it said.

According to the report, bank ratings will stay largely resilient for two primary reasons this time: strong capital and unprecedented liquidity support , as opposed to the 2008 crisis.