Govt May Request RBI to Reduce Banks' Minimum Capital Requirement
A relaxation in the controls will assist smaller banks, which are preceding fresh lending, to meet the RBI’s capital adequacy ratio.
The Centre is preparing to dilute capital criteria for banks, as laid down in the Basel III guidelines, to loosen up capital and push economic activity. It is supposed to quickly meet up with Reserve Bank of India (RBI) administrators to present a light harsh Basel III framework for cash-strapped banks, according to a report.
Basel III norms point to the administrative accord about enhanced risk management and administration within the banking sector. The 1st version of the Basel III guidelines was issued in 2009 by the Basel Committee on Banking Supervision following the 2008 financial crisis. Under the new standards, banks the world over will have to reach the minimum capital provision and keep leverage ratios within the range defined in the regulatory framework.
Banks have made risk against given the increase in the number of bad loans, compelling the government to inject capital for stabilizing up the balance sheet. An action to ease the regulatory guidelines would clear up as much as Rs 60,000 crore with public sector banks and reduce the purse strings of bankers. Greater lending could lead to the robust economy in the run-up to general elections in 2019.
The RBI’s explication of Basel III norms requires banks to maintain minimum common equity (CET) Tier-I ratio of 5.5 percent of risk-weighted assets. Under the primary Basel III guidelines, banks are required to set aside a minimum of 4.5 percent of their assets. Decreasing the minimum CET requirement will increase liquidity in the economy without the need for additional provisioning.
The NITI Aayog was among the stakeholders apprised of the government’s decision to approach the RBI in this regard. Rajiv Kumar, the Vice-Chairman of the government's policy think tank, told the newspaper that the central bank was being overly cautious by setting minimum capital requirements over and above Basel III’s recommendations.
He stated that almost 70 percent of banks in India are state-owned, making a default highly unlikely as the sovereign was the principal guarantor. A circular issued in February suggested that the RBI was open to diluting the rules since asset recognition norms were more stringent. The new rules state that if loan repayment is delayed even by a single day, the RBI will consider it as a default.
A relaxation in the rules will help weaker banks, which are preceding new lending, to meet the RBI’s capital adequacy ratio. Recoveries through the Insolvency and Bankruptcy Code (IBC) route have also picked up, easing pressure on banks.