Capital Adequacy Norms: RBI is ‘unrealistic’, says Moily panel; Congress, BJP on same page

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Published: January 4, 2019 2:56:24 AM

Contrary to his party’s public posturing, the panel headed by the Congress leader on the same page with govt

Already, the government has announced an extra infusion of Rs 41, 000 crore in the current fiscal, over and above the budgeted Rs 65,000 crore, into state-run banks

The Congress’s mordant commentary on the Narendra Modi government’s perceived incursions into the Reserve Bank of India’s (RBI) autonomous regulatory space notwithstanding, a House panel headed by senior party leader Veerappa Moily has come down heavily on the RBI’s ultra-stringent capital adequacy norms for banks, which the government too has been critical about.
A waiver of the extra, Basel III-plus capital stipulation for nine internationally-inactive public sector banks will release funds to the extent of `5.34 lakh crore, representing 51% growth in their loan books , generating extra interest income of about `50,000 crore a year, the standing committee on finance, said.

In a report tabled in Parliament on August 31, 2018, the committee called the RBI norms “unrealistic and unwarranted” and called for keeping them under suspension in the light of the challenges faced by the banking sector, particularly the PSU banks. It sought extension of the time-frame for full implementation of Basel III norms and setting up of a panel to study with Indian perspective “as to how the other signatory countries to Basel III/ IFRS have implemented the norms”.

The additional capital requirement for Indian banks, over and above the global norms, 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.

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 keep a capital conservation buffer of 2.5% in phases by March 2019 (The implementation of the last phase of the buffer requirement — 0.625% in 2018-19 — has now been deferred by a year following a decision of the RBI board in November 2018).

The high CRAR norms and the stringent Prompt Corrective Action (PCA) framework has been a bone of contention between the government and the RBI, which is believed to have contributed to Patel’s resignation (although Prime Minister Narendra Modi made it clear in a recent interview that Patel wanted to quit months earlier citing personal reasons). In November, the RBI board decided that the PCA framework be examined by an RBI panel under the governor.

The nine globally-inactive banks referred to by the standing committee are Central Bank of India, Andhra Bank, OBC, Corporation Bank, Vijaya Bank, Bank of Maharashtra, United Bank of India, Dena Bank and Punjab and Sind Bank. These banks had aggregate risk-weighted assets of Rs 9.93 lakh crore as of March 2018.

The House committee comprises 21 Lok Sabha and 10 Rajya Sabha members. Of course, the ruling dispensation has a lager representation in the panel, with 13 members from the BJP alone versus just 4 from the Congress.
The capital norm is important as 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 rule, bankers said. 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.
Saddled with bad loans, state-run banks have been relying on further infusion from the government to shore up their capital base so that they can lend more. Already, the government has announced an extra infusion of Rs 41, 000 crore in the current fiscal, over and above the budgeted Rs 65,000 crore, into state-run banks.

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The House panel further said RBI’s extra stipulations on capital would actually require our banks “to needlessly maintain a much higher capital base and baggage, which is uncalled for, particularly at this critical juncture, when our banks are short of capital and their provisioning requirement is also growing higher”.

The RBI, however, believes that credit growth higher than nominal GDP expansion due to supply push could result in a sharp rise in bad loans. With the insolvency regime in the country still to mature, lower capital norms will create a false notion of banks being strong, it views. RBI deputy governor NS Vishwanathan recently earlier said: “We must guard against any push for dilution of standards in the name of aligning them with international benchmarks because that will be cherry-picking and will result in our banks being strong in a make-believe sense and not in reality.”

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