The modular multilevel converter (MMC) is emerged as the most favourable multilevel converter topology for medium to high-voltage applications. Reliability is one of the major concerns in an MMC due to high fragile component count. Due to low-cost and high energy density, electrolytic capacitors (ECs) are usually preferred as floating capacitors in the MMC. However, the ECs are gradually degraded over the time due to inherent chemical processes, which results in a decrease in capacitance value. This results in an increase in voltage ripple across the SM capacitors and would distort the output waveforms. Moreover, the prolonged use of these aged capacitors could disrupt the MMC operation. Therefore, monitoring and failure detection of submodule (SM) capacitors in an MMC are pivotal to enhance the reliability. This paper presents an SM capacitance estimation strategy for an MMC using nearest level modulation (NLM). A modified voltage balancing control structure with NLM is presented to reduce the unbalance in the capacitor voltages. The proposed approach uses available hardware for converter control with easy implementation in the same controller. Extensive studies are conducted on a three-phase MMC in PLECS simulation platform. Furthermore, experimental results are presented to substantiate the effectiveness of the proposed approach.