Chennai: Nearly half of the Indian banks run the risk of breaching the capital triggers owing to the progressive increase in minimum capital needs under Basel III norms, said credit rating agency Fitch Ratings.

According to Fitch Ratings, the government-owned banks are more at risk due to their poor existing capital buffers and weak prospects for raising capital from the market.

Analysing 27 Indian banks with outstanding hybrid capital instruments, Fitch Ratings said at the end of June, the total capital adequacy ratio (CAR) for 11 banks was at or lower than the minimum of 11.5 per cent required by end-March 2019 (FYE19).

‘Of these, six did not have enough capital to meet the minimum required by FYE17. The minimum total CAR is a prerequisite for payment of coupons on both legacy and Basel III perpetual debt capital instruments,’ it said.

According to the credit rating agency for Basel III perpetual instruments, coupon deferral is also linked to banks meeting both minimum regulatory common equity tier 1 (CET1) ratio and Tier 1 ratio. More than half of the banks currently have a CET1 ratio that is below the required eight per cent minimum that will be applied from FYE19.

Fitch Ratings estimates the Indian banks would need around $90 billion fresh capital by FYE19 to meet the Basel III standards, with the state banks accounting for about 80 per cent of the total.

The government has already earmarked Rs 700 billion ($10.4 billion) for capital injections into state banks through to FYE19 and in July, it announced that Rs.229 billion ($3.4 billion) was being frontloaded.

According to Fitch Ratings, capital injections may not be sufficient to address their ongoing capital needs to meet required provisions and to support balance sheet growth.

As it stands, state banks are heavily reliant on the government for new capital. Sharply deteriorating financial profiles have raised the standalone credit risks of state banks over the last year and equity valuations have suffered as a result. Most continue to trade at heavy discounts to their book value, which acts as a significant constraint on raising new core equity.

The State Bank of India’s proposed $1 billion issuance of dollar-denominated Additional Tier 1 (AT1) instruments will be the first cross-border deal, and Fitch Ratings believes the issuance will serve as a pricing benchmark for other banks keen to access the dollar AT1 market.

The Reserve Bank of India’s recent proposal to allow banks to issue ‘masala bonds’ - rupee-denominated bonds issued in offshore capital markets - could also help widen the investor pool and ultimately deepen the market for AT1 bond issuance, it said.