A Parliamentary Committee on finance has requested the Reserve Bank of India (RBI) to relax its norms on capital requirements for public-sector banks in the country. The committee has also asked the RBI to review its framework for the prompt corrective action (PCA) imposed on banks that do not adhere with the capital adequacy norms. The RBI, however, maintained that these stringent norms have helped banks fortify themselves against the risk of failure.
The report submitted by the committee in the Parliament stated that the stringent norms imposed by the RBI are both unwarranted and unrealistic. In India, banks are required to maintain their capital to risk-weighted asset ratio (CRAR) at 9%, which is higher than the Basel-III requirement of 8%.
The government and a few board members of the RBI have questioned why the central bank’s capital adequacy norms are higher than the norms prescribed at the global level. By relaxing these norms, they believe that the country’s economic and credit growth can be improved. However, the RBI has opposed the need to relax capital adequacy norms as these strict requirements will help banks offset unexpected risks.
If the capital requirements are relaxed by the RBI, an additional $76 billion will be released into the economy for lending. There are many public sector banks that are under the RBI’s PCA framework. If the capital adequacy requirements are relaxed for these banks, it could release a huge amount of capital that could be used for various purposes. Through this credit growth, banks could also earn interest income much higher than what they are making now.
As per the previous estimates put forth by Fitch, Indian banks need an additional $65 billion in capital by the end of March 2019 to comply with the Base-III norms. However, many rating agencies including Fitch noted that any relaxation in capital requirements will be detrimental to banks and their ability to take losses.
Source: The Economic Times, The Hindu Business Line