RBI-Govt truce: Easier norms free up Rs 35,000 crore capital, allow Rs 3.5 lakh crore loans

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New Delhi | Updated: November 21, 2018 7:24:29 AM

The Reserve Bank of India’s (RBI) decision to extend the timeline for the implementation of the capital conservation buffer (CCB) norm by a year to March 2020 could reduce banks’ capital requirements by around Rs 35,000 crore for the current fiscal, government officials said.

RBI Monetary Policy, Bank base rates, MCLR, MCLR system, RBI, Reserve Bank of India Banks, which offer advances using money deposited with them by public, can lend roughly 10 times of the capital at their disposal as per existing capital adequacy norms, said the bankers.

The Reserve Bank of India’s (RBI) decision to extend the timeline for the implementation of the capital conservation buffer (CCB) norm by a year to March 2020 could reduce banks’ capital requirements by around Rs 35,000 crore for the current fiscal, government officials said. Theoretically, this in turn could allow the banks to lend an additional Rs 3.5 lakh crore this fiscal, they said. However, bankers who FE spoke to said actual credit disbursement may not be as high as most banks are capital-constrained. Also, lending decisions do take time to be made and implemented.

Banks, which offer advances using money deposited with them by public, can lend roughly 10 times of the capital at their disposal as per existing capital adequacy norms, said the bankers. Typically, a bank’s capital is made up of its equity and certain loss-absorbing bonds. These bonds include additional tier 1 bonds and tier 2 bonds, which have equity-like features. So, even if a bank has funds (from public deposits) to lend, it can’t do so if its capital base is eroded below the regulatory requirement.

State-run banks, already starved of capital and rely on further infusion from the government, will be the biggest beneficiaries of the RBI’s latest move, taken after the Centre’s prodding at Monday’s board meet. According to the RBI’s capital adequacy norms, banks are required to maintain the minimum capital-to-risky-asset ratio (CRAR) at 9% (higher than the Basel-III requirements of 8%). On top of this, they were mandated to have a capital conservation buffer of 2.5% in phases by March 2019. The last phase of the buffer requirement·0.625% in 2018-19·has now been deferred by a year.

This means the capital that would have been locked to meet the regulatory requirements on buffer will be freed up now. This, in turn, will enable banks to boost lending. Moody’s Investors Services, however, cautioned on Tuesday that the relaxation is a credit negative for Indian banks. During Monday’s nine-hour marathon meeting, the RBI board advised the central bank to act to support small businesses and give banks more time to meet the capital conservation buffer norms.

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The idea behind making its mandatory to have a buffer over and above the usual CRAR was that when the going is good, banks must save some capital for troubled times. However, while the economy is expanding at a decent pace and credit growth touched 11.3% as of September 2 from a year before, many state-run banks (11 of which are under the central bank’s corrective regime for strained finances) are starved of capital. This constrains their ability to lend further to spur growth, apart from enhancing the need for infusion by the government. The RBI board perhaps recognised this fact and while retaining the CRAR limit at 9%, it agreed to relax the conservation buffer norm.

“This (relaxation of the buffer norm) will provide some breathing space to capital-starved PSBs,” said Krishnan Sitaraman, senior director at CRISIL Ratings. “As per our earlier estimates, they (banks) needed Rs 1.2 lakh crore over the next five months up to March 2019 to meet tier 1 capital stipulated under Basel III norms. Now they would need only Rs 85,000 crore on implementation of deferral of the last tranche of CCB,” he added.

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