‘When the go­ing gets tough, banks with cap­i­tal get go­ing’

Re­serve Bank ED tells banks to main­tain higher cap­i­tal lev­els

The Hindu Business Line - - BANKING -

RBI Ex­ec­u­tive Di­rec­tor Su­dar­shan Sen has ex­horted banks to main­tain higher cap­i­tal lev­els than the reg­u­la­tory man­date to see through busi­ness cy­cles and crises, warn­ing that those who fail to have ad­e­quate buf­fers will get pun­ished by the sys­tem it­self. There is a need to look be­yond num­bers like 8 per cent of risk-weighted as­sets or 9 per cent, he said.

“When the go­ing gets tough, it is the banks with cap­i­tal which will get go­ing, and those with­out it will be pun­ished by the ecosys­tem,” said Sen at an event on Thurs­day.

“Busi­ness cy­cles and fi­nan­cial crises are old com­pan­ions and they are here to stay,” he added. Terming the reg­u­la­tory man­date on min­i­mum cap­i­tal level as the “poverty line”, he said there is a need to as­pire to be well above that. “We should not re­ally be de­bat­ing whether the poverty line should be 8 per cent or 9 per cent be­cause that is not where we want to be,” he said.

The mean­ing­ful de­bate should be around what is the op­ti­mum level of cap­i­tal, given the ground re­al­i­ties in our coun­try, in­clud­ing low re­cov­ery and high de­fault rates and not just ex­pe­di­ency, he said. Sen cited stud­ies that have sug­gested that the min­i­mum cap­i­tal ra­tio should be be­tween 9 and 53 per cent, and added that banks in ju­ris­dic­tions that man­date the min­i­mum cap­i­tal to be at 8 per cent ac­tu­ally op­er­ate at a much higher 14 per cent buf­fer lev­els.

“We need to re­flect that banks which choose to op­er­ate at this poverty line of min­i­mum cap­i­tal would be con­demned to stay poor,” said Sen.

He also said that in our coun­try, banks do not set aside any pil­lar-2 (tier 2) su­per­vi­sory cap­i­tal, and the coun­ter­cycli­cal cap­i­tal buf­fer is the only cush­ion that is help­ful to ab­sorb shocks.

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