A security officer stands guard outside the Reserve Bank of India (RBI) headquarters in Mumbai, India. (Photographer: Adeel Halim/Bloomberg)

RBI Warns Against Easing Capital Buffer Norms For Banks 

The Reserve Bank of India warned that easing capital requirement norms for banks, one of the reasons for its differences with the government, could be detrimental to the interests of the economy.

Citing the recent improvement in recovery and resolution of stressed assets owing to the Insolvency and Bankruptcy Code and the RBI's newly introduced restructuring framework, there were calls to ease the capital norms, the central bank said in its annual trend and progress report on India’s banking system.

The case for a recalibration of risk-weights or minimum capital requirements would need to be carefully assessed, the RBI said. “Frontloading of regulatory relaxations before the structural reforms fully set in and conclusive evidence on sustained improvement in CDS (cumulative default rates) and LGDs (loss-given defaults) is observed could be detrimental to the interests of the economy,” the RBI said.

Basel recommended minimum capital adequacy ratios on the basis of default rates internationally, according to the RBI. In India, these rates were much higher, which forced the regulator to toughen its capital norms so that banks can be protected against rising bad loans.

Also read: Why RBI’s Capital Standard Must Remain Very High

RBI mandates common equity tier 1 capital at 5.5 percent compared with the Basel III requirement of 4.5 percent. And while the RBI board retains Basel III level of capital risk-weighted assets at 9 percent, the regulator agreed to extend the transition period for implementing the last tranche of 0.625 percent under the capital conservation buffer by one year till March 31, 2020.

In its report, the RBI also said that the current provisioning buffers created by banks for the non-performing assets on their books would not be adequate to cover future losses. Indian lenders have underrecognized bad loans on their books, it said. “In particular, the adequacy of buffers becomes an important issue in order to absorb the expected losses which have not been provided for, if and when they materialise.”

As many as 11 public sector banks are under the prompt corrective action framework of the RBI, which has forced them to cut down on capital-intensive businesses and focus on businesses that can conserve capital. On its part, the government has been regularly pumping capital into weak banks so they may meet their minimum regulatory ratios and are able to remain solvent. Since 2015, it has infused at least Rs 3 lakh crore worth of capital into state-run lenders.

Also read: Banks Show Drop In Stressed Assets Despite Stricter Deadlines, Says RBI