‘When the going gets tough, banks with capital get going’
Reserve Bank ED tells banks to maintain higher capital levels
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.