Major public sector banks could see their capital adequacy ratio (CAR) increasing by 20 to 100 basis points after the Reserve Bank of India eased some rules to boost their capital.
Leading ones such as State Bank of India (SBI) and Bank of Baroda (BoB) could see their CAR increasing by 100 basis points.
Confirming it, SBI Deputy Managing Director and Chief Financial Officer Anshula Kant said the bank already had a comfortable tier-I capital of 9.64 per cent, much above regulatory minimum.
The Reserve Bank of India (RBI) allowed the banks to recognise some of their assets, such as a part of their real assets, foreign currency, and deferred tax, with suitable haircuts.
Banks can now account for 45 per cent of their revalued real estate assets in the common equity tier-1 (CET-1) - paid-up capital, reserves and provisions.
The move is aimed to boost the regulatory capital of banks and align it with the international Basel-III capital standards.
According to ICRA, an independent credit rating agency, public sector banks (PSBs) will now have to raise tier-I capital of Rs 1,60,000 crore to Rs 2,60,000 crore between the financial years 2016-17 and 2018-19. The earlier estimates of raising capital was between Rs 1,90,000 crore and Rs 3,00,000 crore.
Reacting to the move, bank shares led the stock market rally on Wednesday.
SBI, ICICI Bank and Punjab National Bank were the top three gainers in the Nifty. The Nifty Bank index, which comprises both private and public sector banks, was up 4.7 per cent while the Nifty PSU Bank index gained 9.9 per cent, its largest single-day gain since May 2009.
Executives of PSBs said the RBI's move comes as support at a time when raising equity capital from the market is tough, given low valuations.
PSBs' internal capital generation has been under severe pressure because of higher provisions for bad loans and reversal of interest income that was booked earlier.
Experts say the benefit from revaluation of real estate assets and the capital released from foreign currency translation reserves is clear, but the impact of deferred tax asset is a complex calculation. The benefit from foreign currency translation reserves will favour banks with international operations such as BoB, SBI and ICICI Bank.