Smaller banks challenged by Basel III and minimum requirements

Raising equity capital has been on cards for a considerable time for commercial banks with the Central Bank ( CB) issuing the new directions in December last year, but smaller banks will be challenged, analysts say.

Banks such as Union Bank, Pan Asia and Nation's Trust Bank ( NTB) haven't cleared these thresholds. Out of these three, NTB is likely to reach the limits with this year's profits, the analysts say. The other two will need to bring capital in.Commercial banks with an asset base over Rs. 500 billion are required to maintain certain capital levels. They have to maintain a minimum tier 1 ratio of 7.75 per cent, 8.875 per cent and 10 per cent by July 2017, January 2018 and January 2019 respectively. This is stipulated as per Basel III requirements which are a comprehensive set of reform measures, developed by the Basel Committee on banking supervision, to strengthen the regulation, supervision and risk management of the banking sector. Also the CB has increased the minimum capital requirement of banks to Rs. 20 billion, from a current Rs. 10 billion, by next year.

Analysts said that with this mandatory capital, financial institutions are required to hold in addition to other minimum capital requirements, the smaller banks will go for rights issues or debentures this year. Analysts say that while the top five hanks (Commercial, HNB, Sampath, Seylan and NDB) have cleared these thresholds. HNB last month announced that it was issuing up to 70,082,228 new ordinary shares comprising 55,995,792 ordinary voting shares and 14,086,436 ordinary non-voting shares by way of a rights.

The purpose of the share issue is to strengthen the capital base/balance sheet of the bank and to support the overall business growth of the bank, it said in an announcement to the Colombo Stock Exchange.