RBI Governor Urjit Patel and Finance Minister Arun Jaitley. (Photograph: PTI)

Government Pushing To Relax Capital Requirement Norms For Banks

The government will push for relaxing capital adequacy norms for Indian banks and align them with global practices, according to an official aware of the development.

The government wants the Reserve Bank of India to bring down capital to risk (weighted) assets ratio to 8 percent, in line with BASEL III norms, from 9 percent currently, the official said. The discussion, the official said, is expected to take place in the central bank’s board meeting on Nov. 19.

Lowering the CRAR—the ratio of a bank’s capital to its risk—to 8 percent will free capital of about Rs 55,000 crore for public-sector banks, said Anil Gupta, vice president of financial sector ratings at ICRA. Public-sector banks can additionally extend credit of Rs 5-5.5 lakh crore, considering the loan to capital ratio of 10 percent, Gupta told BloombergQuint.

The official cited earlier said that the RBI has adopted stringent norms for Indian banks than prescribed by the Basel, which have had a significant impact on their capital requirements.

Also read: Government Banks Need More Capital To Meet Basel III Norms, Says Crisil

The roadmap for the implementation of the Basel-III norms was adopted by India in 2013 and will be completed by March 2019. The RBI prescribed overall capital requirements of 9 percent of risk weighted assets, with the common equity tier-1 capital of 5.5 percent as against 8 percent and 4.5 percent, respectively, required under the Basel norms.

Explaining this in a recent speech, RBI Deputy Governor NS Vishwanathan said that India’s experience of higher cumulative default rates and loss-given-default rates led the regulator to prescribe higher capital requirements. As the need for repeated recapitalisation has proved, banks in India need to aspire to have higher capital levels, Vishwanathan had said.

The official cited earlier said that banks will have to build up a capital conservation buffer of 2.5 percent by March 2019.

RBI wanted banks to maintain a capital conservation buffer of 1.875 percent of risk weighted assets in the form of equity by March 31, 2018, and 2.5 percent by March 31, 2019. The buffer was designed to ensure banks build up capital buffers during normal times—and not during times of stress—to help during difficult times. The official said that RBI had asked banks to maintain the buffer from 2015-16 at a time when balance sheets of public sector banks were stressed.

Also read: Government Versus RBI: Dissent At The Podium

Relaxations For PCA Banks

The government wants the RBI to align its prompt corrective action framework with practices followed by other central banks, the official cited earlier said.

Most global central banks, according to the official, don’t follow asset-quality based triggers to put restrictions on banks, while one of the triggers for Indian banks to come under framework is net non-performing assets breaching 6 percent of total advances.

Most central banks don’t have tier-1 leverage ratio and a negative return on assets as a trigger for intervention by the central bank, the same official said.

The official also said that the Basel framework required application of capital standards to internationally active banks that have over 10 percent of their assets in overseas books. However, RBI has made these norms applicable for all scheduled commercial banks, including those that aren’t internationally active.

According to the Basel Committee on Banking Supervision’s assessment of Basel III risk based capital regulations in India, there are four internationally active Indian banks which have more than 10 percent of assets in overseas books.

Also read: RBI-Government Spat: Finance Ministry Seeks Review Of Central Bank Balance Sheet