Ease capital requirements for banks: House panel

Ease capital requirements for banks: House panel

News:

Parliamentary panel asks RBI to ease bank’s capital requirements.

Important Facts:

• Aligning the capital requirements for Indian banks with global standards was a bone of contention between the government and the RBI.
• To address the conflict, an Indian Parliamentary panel, asked the RBI to ease its rules on capital requirements for banks so that they can increase lending to boost credit and economic growth.
• But RBI has decided to retain the capital to risk weighted asset ratio at 9 percent and extended the transition period to maintain capital conservation buffer by a year till March 31, 2020.
• RBI said the norms address many shortcomings in the pre-crisis regulatory framework and provide a foundation for a resilient banking system.
• The framework will also allow the banking system to support the real economy through the economic cycle.

Present requirement:

• Indian banks are required to maintain a minimum capital to risk-weighted asset ratio (CRAR) at 9 per cent, against the global Basel-III requirement of 8 per cent. On top of that, they have to keep a capital conservation buffer that is supposed to climb to 2.5 per cent by March 2019.
• The roll-back of additional capital requirements could release about $76 billion into the economy by releasing capital for lending
• Financial Ratings agency has said capital ratios for many banks were well below global standards, and any relaxation could prove detrimental to banks and their ability to absorb unexpected losses.

What is the Capital Adequacy Ratio – CAR?

• The Capital Adequacy Ratio (CAR) is a measure of a bank’s available capital expressed as a percentage of a bank’s risk-weighted credit exposures.
• The Capital Adequacy Ratio, also known as capital-to-risk weighted assets ratio (CRAR), is used to protect depositors and promote the stability and efficiency of financial systems around the world.

Why need BASEL norms?

• The BASEL norms have three aims: Make the banking sector strong enough to withstand economic and financial stress; reduce risk in the system, and improve transparency in banks.

BASEL III rules

• After the 2008 financial crisis, there was a need to update the BASEL norms to reduce the risk in the banking system further.
• Until BASEL III, the norms had only considered some of the risks related to credit, the market, and operations. To meet these risks, banks were asked to maintain a certain minimum level of capital and not lend all the money they receive from deposits. This acts as a buffer during hard times. The BASEL III norms also consider liquidity risks.

Implementation in India

• The Reserve Bank of India (RBI) introduced the norms in India in 2003. It now aims to get all commercial banks BASEL III-compliant by March 2019. So far, India’s banks are compliant with the capital needs.
• On average, India’s banks have around 8% capital adequacy. This is lower than the capital needs of 10.5% (after taking into account the additional 2.5% buffer). In fact, the BASEL committee credited the RBI for its efforts.

Challenges for Indian banks

• Complying with BASEL III norms is not an easy task for India’s banks, which have to increase capital, liquidity and also reduce leverage. This could affect profit margins for Indian banks. Plus, when banks keep aside more money as capital or liquidity, it reduces their capacity to lend money.
• Loans are the biggest source of profits from banks. Plus, India banks have to meet both LCR as well as the RBI’s Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) norms. This means more money would have to be set aside, further stressing balance sheets.