Govt to Hold Talks with RBI to Leave More Capital with Banks

Following Basel III norms would free up about Rs. 60,000 crore of capital for lenders

The government will hold talks with the Reserve Bank of India (RBI) on relaxing capital norms for banks and bringing them in line with less stringent Basel III guidelines, said a senior government official. Such a move would free up an estimated Rs.60,000 crore of capital at state-owned lenders, allowing them to step up lending to fuel the reviving economy, bolster weaker banks and reduce pressure on the government to provide capital. This follows discussions by the finance ministry with Niti Aayog and other stakeholders.

The minimum common equity (CET) Tier-I ratio as prescribed by RBI — money that banks need to set aside — stands at 5.5% of riskweighted assets against 4.5% under Basel III norms. There is a need to lower this to the level stipulated by the Basel Committee on Banking Supervision, said the official cited above. By freeing up capital, around Rs.6 lakh crore of lending can be achieved without any additional requirement for provisioning, the official said.

‘No Need to Exceed Basel III Norm’

Niti Aayog vice chairman Rajiv Kumar told ET that there was no need to exceed the Basel III norm as 70% of the Indian banking system is state-owned and therefore implicitly backed by a sovereign guarantee. “Moreover, the depositor is well insured by the government against any insecurity,” he said. The official cited above said that a February circular issued by the central bank allowed for an easing of the rules.

“The RBI has so far argued that this extra requirement is necessary because the asset-recognition norms were not stringent but now with the February 12 circular that also has been taken care of,” he said, adding that a robust mechanism had been established through the Insolvency and Bankruptcy Code to resolve bad loans. Under the new rules announced by RBI in February, even a oneday delay in loan repayment will be considered a default. “This relaxation will immensely help weaker banks which are finding it difficult to meet the regulatory capital adequacy ratio under the current dispensation,” said Krishnan Sitaraman, senior director, Crisil Ratings, adding that the banking landscape had undergone a number of structural changes.

The recognition of stressed assets as non-performing ones has increased significantly as have recoveries from resolution through the IBC process. According to a recent Crisil report, given the higher-than-expected losses in the last financial year, more losses likely in the current fiscal and recall of additional tier-1 instruments by a few state-owned banks, the Rs 2.1 lakh crore recapitalisation programme announced in October 2017 may be insufficient to meet capital requirements by the end of this fiscal.

The Economic Times, 07th August 2018