RBI says no to di­lu­tion of bank cap­i­tal norms

Mint Asia ST - - News - BGY OPIKA G OPAKUMAR

The

Re­serve Bank of In­dia (RBI) on 28 De­cem­ber op­posed gov­ern­ment calls to re­lax the rules for risk weights and cap­i­tal re­quire­ment for In­dian banks, while si­mul­ta­ne­ously an­nounc­ing its in­ten­tion to re­vise ex­ist­ing pru­den­tial reg­u­la­tions.

The RBI warned that re­lax­ing the cur­rent risk-ad­justed cap­i­tal norms, of­ten termed as Basel-iii-plus norms, could hit the econ­omy at a time when de­faults are high and pro­vi­sions low.

In­stead, the cen­tral bank now pro­poses to take a fresh look at ex­po­sure and in­vest­ment guide­lines, and the ex­ist­ing risk man­age­ment frame­work.

In its Trends and Progress Re­port pub­lished on 28 De­cem­ber, the cen­tral bank said that ap­ply­ing Basel-spec­i­fied risk weights will un­der­state the “true risk­i­ness” of loans on the books of th­ese banks.

At present, the cap­i­tal ad­e­quacy norms for In­dian banks are higher than those rec­om­mended un­der Basel.

“The case for a re­cal­i­bra­tion of risk-weights or min­i­mum cap­i­tal re­quire­ments would need to be care­fully as­sessed—front­load­ing of reg­u­la­tory re­lax­ations be­fore the struc­tural re­forms fully set in and con­clu­sive ev­i­dence on sus­tained im­prove­ment in CDRS (cu­mu­la­tive de­fault rates) and LGDS (loss given de­fault) is ob­served could be detri­men­tal to the in­ter­ests of the econ­omy,” said the re­port.

The RBI state­ment fol­lows calls by the gov­ern­ment for align­ing the cap­i­tal ad­e­quacy norms of In­dian banks with those of Basel III to al­low In­dian banks to lend more.

This had be­come a bone of con­tention be­tween the RBI and the gov­ern­ment, with the lat­ter ini­ti­at­ing dis­cus­sions un­der Sec­tion 7 of the RBI Act.

Un­der Sec­tion 7 (1) of the RBI Act of 1934, “the cen­tral gov­ern­ment may from time to time give such di­rec­tions to the bank as it may, af­ter con­sul­ta­tion with the gov­er­nor of the bank, con­sider ne­c­es­sary in the pub­lic in­ter­est”.

Sec­tion 7 (2) also gives the gov­ern­ment the power to en­trust the busi­ness of the RBI to its cen­tral board of di­rec­tors.

The RBI re­port fur­ther ar­gued that ap­ply­ing Basel-spec­i­fied risk weights will un­der­state the “true risk­i­ness” of loans on the books of In­dian banks.

At present, In­dian banks carry a high pro­por­tion of non-per­form­ing as­sets (NPAS) that are un­pro­vided for, vis-à-vis their cap­i­tal lev­els, the re­port noted.

In­stead, the cen­tral bank sug­gested that it in­tends to is­sue re­vised pru­den­tial reg­u­la­tions, in­clud­ing guide­lines on ex­po­sure and in­vest­ment norms, risk man­age­ment frame­work and se­lect el­e­ments of Basel III cap­i­tal frame­work to All In­dia Fi­nan­cial In­sti­tu­tions—in­vest­ment and de­vel­op­ment in­sti­tu­tions that are cru­cial to the econ­omy.

The RBI also re­it­er­ated that leg­isla­tive changes should be made to do away with the need to nom­i­nate the cen­tral bank’s of­fi­cials as nom­i­nee di­rec­tors on the boards of pub­lic sec­tor banks.

For­mer gov­er­nor Ur­jit Pa­tel had sug­gested with­drawal of th­ese nom­i­nee di­rec­tors from the boards to avoid any con­flict of in­ter­est.

The cen­tral bank is dis­cussing the mat­ter with the fi­nance min­istry, Pa­tel had in­formed the par­lia­men­tary stand­ing com­mit­tee on fi­nance.

The RBI is also look­ing at re­view­ing the guide­lines for com­pen­sa­tion for pri­vate sec­tor banks, fol­low­ing a de­mand by banks for an ob­jec­tive as­sess­ment of re­mu­ner­a­tions for whole-time di­rec­tors, the re­port said.

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