Public Sector Banks Likely to Revalue Their Real Estate Assets

Despite RBIs decision to hold policy rates for the public sector banks, the stocks of these institutions have shown an improvement. The reason behind this is governor Raghuram Rajan’s adept move to release regulatory capital for banks. The idea is to relax the regulations so that the banks can adhere to higher provisioning by revaluing the real estate they own.

Public Sector Banks Likely to Revalue Their Real Estate Assets

Public Sector Banks Likely to Revalue Their Real Estate Assets

The flats allotted to the employees of public sector banks, the guest houses and the branch offices all are owned by the respective banks and are still valued at nominal rates. Earlier they were allowed to revalue these real estate assets to strengthen their capital adequacy but only towards Tier II capital. When BASEL III norms were brought up in 2010, new capital adequacy norms put Tier I capital on the centerstage.

Hence, the banks own real estate whose market value runs in thousands of crores but the older conservative norms do not allow them to show these values in their balance sheets. The banks are only allowed to count a certain fraction of their assets as capital. But now the governor said that the RBI is looking forward to allowing a part of their revalued real estate as Tier I capital, thus improving their stock status in the market. This move to shore up their capital will increase confidence of public sector banks among existing and potential investors.

The idea is to be a little lenient and allow banks to use a little more room in order to make progress towards capital adequacy while remaining conservative at the same time.

Bankex is a group at BSE representing a broad category of bank stocks and lately it was recorded flat. Several private sector banks showed signs of decline in their stock values and PSU banks saw an improvement. Bank of Baroda, Punjab National Bank and State Bank of India were noted as the top gainers. Some private banks such as Axis Bank, HDFC Bank and Yes Bank also recorded an escalation in stock values.

RBI just came up with this reform but has not stated the exact value that can be included by the public sector banks to calculate the capital for BASEL III.

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