Panel Suggests Relaxing Capital Requirements For Banks To Boost Lending

A parliamentary committee suggested suspending the new international accounting standards for Indian banks and extending time to implement Basel-III norms.

The Parliamentary Standing Committee on Finance has said that the higher than global capital norms for Indian banks are unrealistic and unwarranted and an additional capital base required under the latest International Financial Reporting System’s norms for Indian banks may end up drastically reducing banks’ lending capacity.

“…the additional capital base further stipulated under the latest IFRS norms (beyond Basel III) for Indian banks may end up drastically reducing lending capacity of our banks and put greater pressure on their balance sheet which may accentuate matters and put more fetters on their already restricted lending and inherent lending capacity,” the panel said in its report.

The Reserve Bank of India had deferred implementation of IFRS by a year from April 1, 2018.

The committee suggested the RBI and government review higher capital requirements for Basel III and IFRS beyond global norms—9.5 percent in the case of IFRS and 10.5 percent for Indian banks. This percentage point difference would require banks to maintain higher capital base, when Indian lenders are short of capital and their provisioning requirement is growing, the report said.

Aligning the capital requirements for Indian banks with global standards was a bone of contention between the government and the RBI. The central bank had at its recent board meeting decided to retain the capital to risk weighted asset ratio at 9 percent but extended the transition period to maintain capital conservation buffer by a year till March 31, 2020.

On the panel’s query to extend the deadline for implementing Basel III norms, RBI said the norms address many shortcomings in the pre-crisis regulatory framework and provide a foundation for a resilient banking system. “The framework will also allow the banking system to support the real economy through the economic cycle,” RBI said in its written response to the committee.

As a leading and globally interlinked emerging market economy, India can ill-afford to be seen as lagging behind in implementation of globally accepted norms on banking regulation, the central bank said.

Monitoring Of PCA Banks

The panel has recommended that the RBI and the government constantly monitor each of eleven banks that come under RBI’s prompt corrective action framework and relax or review the framework in cases where even retail banking is prohibited.

“The recovery plans submitted by them to RBI should be finalised in a short time-frame so that they can resume their normal functioning without any delay,” said the report of the panel headed by Veerappa Moily.

As part of the committee’s deliberations, each bank has submitted a roadmap to emerge from the framework. For instance, Central Bank of India requires minimum capital infusion of Rs 10,855 crore from government in the form of Common Equity Tier capital. Allahabad Bank informed the panel that the central bank has asked it to improve its non-performing assets position after which it will reconsider its restriction on fresh loans.

More Powers To Regulate State-Run Banks

The standing committee has suggested that the government should constitute a high-powered committee to evaluate the role, powers and authority of RBI. The committee should also assess the economic impact of the various NPA resolution guidelines and schemes formulated by RBI from time to time. “The proposed Committee should look into those provisions of the RBI Act, Banking (Regulation) Act and other relevant statutes with a view to ensuring the accountability of RBI as the regulator of the banking sector including the matter of having RBI nominees on the Boards of banks,” the report said.

The suggestions come after RBI sought more powers to regulate state-run banks on par with their private-sector peers, after the emergence of the over Rs 14,000 crore fraud at Punjab National Bank involving Nirav Modi. It claimed that it sought amendments in the Banking Regulation Act to exercise effective control over state-run banks, as in the case of private banks on an “ownership neutral basis”.

“The Committee, however note(s) that under the omnibus Section 51 of the Act which applies to Nationalised Banks and SBI, the RBI enjoys the powers to inspect the bank, its books and accounts specifically under Section 35(1) and Section 35(3) of the Act. Thus, all the relevant information is already available with RBI concerning the banks including their forensic audit reports, if any,” the report said.

The committee was also informed that whenever RBI flagged a need for change in management of public-sector banks, the government has considered the same.

The panel also said resolution of certain large NPAs under the Insolvency and Bankruptcy Code has been unduly long, beyond the 270-day extended timeline. As timelines are integral to the legal architecture devised under the IBC, delays and circumventing the due process by some entities may derail a progressive legislation and render it “infructuous”, it said.