The Basel Committee had resolved that the loss-absorbing capacity of banks should be increased and a capital conservation buffer be put in place to tide over periods of liquidity stress.
The June 7 circular issued by the Reserve Bank of India (RBI) allows banks greater flexibility to resolve stressed assets and delays in resolution will turn out to be costly for lenders, deputy governor (DG) NS Vishwanathan said on Tuesday. He also said the central bank has allowed some breather to Indian banks for implementing Basel III norms and remuneration for bankers should be aligned to global guidelines.
Emphasising the importance of credit discipline, Vishwanathan observed that credit discipline leads to credit growth. “I think in sync with the earlier approaches, this (June 7 circular) also exposed one very important thing, which is timely resolution,” he said, adding, “I would therefore urge you that resolutions are done on time, not just to meet regulatory requirements, but also because it will result in better value creation, going forward.”
The DG said under the new circular, which replaced the erstwhile February 12, 2018, circular, the regulator has given a lot of freedom to banks on how to determine the contours of the resolution. “One of the things that this framework requires is that the banks should sign an inter-creditor agreement (ICA), which will determine how they will deal with the stressed assets. The framework is getting less intrusive,” Vishwanathan said at Fibac 2019, an annual event organised by the Federation of Indian Chambers of Commerce & Industry (Ficci) and Indian Banks’ Association (IBA).
Vishwanathan invoked the Basel Committee’s regulations adopted after the global financial crisis to state that a set of financially strong individual entities does not result in a financially strong system and the time taken for liquidity risk to turn into solvency risk in the banking system is very little.
The Basel Committee had resolved that the loss-absorbing capacity of banks should be increased and a capital conservation buffer be put in place to tide over periods of liquidity stress. While implementing Basel regulations in India, the RBI has also tried to calibrate some of them in line with local requirements, the DG said.
For instance, it has deferred the implementation of the net stable funding ratio to April 1, 2020. Similarly, when RBI brought in the large exposures framework (LEF), one of the requirements was to identify economic interdependence in all cases where the sum of all exposures to one individual counterparty exceeds 5% of the eligible capital base of a bank.
This requirement, too, has been deferred to April 1, 2020, even as other features of the LEF have been implemented in April 2019. Banks have also been given more time for the implementation of the capital conservation buffer requirement.
The DG said the central bank is on track to finalise fresh guidelines with respect to compensation of top bankers. “In 2012, the RBI had issued the first set of guidelines on compensation. We found there was need for some review thereof. So, last year, we had issued draft guidelines on revised compensation policy, aligning it with global guidelines,” Vishwanathan said. He added: “We have got excellent comments from the market, bankers and HR (human resources) practitioners and we will soon come out with final guidelines on the revised compensation policy.”