Carbon-spewing industries may have to pay more on loans as higher risk weights could be attached to them, which would also lead to higher provisioning for the banks, Reserve Bank Deputy Governor S S Mundra said today.
Carbon-spewing industries may have to pay more on loans as higher risk weights could be attached to them, which would also lead to higher provisioning for the banks, Reserve Bank Deputy Governor S S Mundra said today. “There is a possibility that the industries which are adding to the carbon emission and financed by the banking system, (the) banking system may be asked to assign more risk weight to them which will translate into requirement for more capital,” Mundra said at an event here.
The increase in risk weight will lead to higher provisioning and the borrowers will have to pay for it through higher lending rates, thus acting as a disincentive.
Mundra was, however, quick to add that this idea being discussed as part of the climate change protocol is very nascent and may also sound to be “abstract” at present.
The deputy governor included the increase in risk weights among a slew of other factors which will lead to higher provisioning in the future, that will have a bearing on the banks’ capital requirements.
With the banks continuing to be affected by asset quality troubles, it is unlikely for the provisions to go down unless the recoveries and upgrades increase, he said, adding a bulk 59 per cent of the NPAs are classified as ‘doubtful’, 36 per cent were sub-standard and 5 per cent were categorised as a loss.
“As the migration happens from sub-standard to doubtful the provisioning requirement would go up,” he said.
Mundra also said there is a move to have some risk weights on exposures to sovereigns. The RBI is opposing it at international fora, but if a 5 per cent risk weight for state bond holdings and 2 per cent for central government ones comes in, banks’ provisions will go up by up to Rs 7,000 crore.
Further, the large exposure framework to be introduced soon may also entail an increase in provisions as borrowers get classified differently, he said.
Mundra also flagged the issue of pensions, saying it is something which the banks have overlooked till now and requires attention.
He said the migration to the IFRS system of accounting may also lead to a jump in provisioning, thus increasing the capital requirements.
An increase in provisioning due to such factors will put a further stress on the banks, which are anyways adding to their buffers as part of the migration to the Basel-III framework. Global ratings agency Fitch estimates Indian banks’ requirements at USD 90 billion of fresh capital till March 2019 as part of the migration.
Mundra today said the overall capital adequacy of the system is “adequate” even though the state-run lenders have lower buffers.