Given the low investor appetite and complex structure of the Basel III-compliant tier 1 bonds, banks are wary of issuing such products.
Taking into account industry concerns over potential stress to asset quality, the RBI last week had extended the transitional period for implementation of the stringent Basel III capital norms to March 31, 2019 from March 31, 2018 earlier.
Basel III reform measures, developed by the Basel Committee on Banking Supervision, aim at strengthening the regulation, supervision and risk management of the banking sector.
The postponement pushed up the Bank Nifty to a nine-month high on Friday, a day after the RBI decision.
In FY15, banks are required to issue Rs. 25,000-26,000 crore of hybrid Tier I bonds.
According to RBI's calculation, banks, led by PSBs, need a whopping Rs. 5 trillion in fresh capital, of which Rs. 1.75 billion in core capital alone to meet the Basel III norms.
It would not be possible for banks to raise this amount of capital through Basel III-compliant tier I bonds as market is not liquid.If the tier I bond issue does not get fully subscribed, there could be scrutiny by stakeholders and none of the banks would want it. Now, they have cushion of one year and they can plan it more safely.
India Ratings, in a recent report, said with addition of an extra year the total capital required during the migration to Basel III has gone up, and so capital infusion would remain a priority for banks going forward.
The report said as the government is committed towards maintaining its majority shareholding in state-run banks, they will keep steady equity infusion in these lenders.