India: Govt to hold talks with RBI to leave more capital with banks

• The government will hold talks with the Reserve Bank of India (RBI) on relaxing capital norms for banks and bringing them in line with less stringent Basel III guidelines, said a senior government official.
• Such a move would free up an estimated INR600bn of capital at state-owned lenders, allowing them to step up lending to fuel the reviving economy, bolster weaker banks and reduce pressure on the government to provide capital.
• This follows discussions by the finance ministry with Niti Aayog and other stakeholders. The minimum common equity (CET) Tier-I ratio as prescribed by RBI – money that banks need to set aside – stands at 5.5% of risk-weighted assets against 4.5% under Basel III norms.
• There is a need to lower this to the level stipulated by the Basel Committee on Banking Supervision, said the official cited above.
• By freeing up capital, around INR6tr of lending can be achieved without any additional requirement for provisioning, the official said.
• Niti Aayog vice chairman Rajiv Kumar told ET that there was no need to exceed the Basel III norm as 70% of the Indian banking system is state-owned and therefore implicitly backed by a sovereign guarantee.
• “The RBI has so far argued that this extra requirement is necessary because the asset-recognition norms were not stringent but now with the 12 Feb 18 circular that also has been taken care of,” he said, adding that a robust mechanism had been established through the Insolvency and Bankruptcy Code to resolve bad loans.
• Under the new rules announced by RBI in Feb 18, even a one-day delay in loan repayment will be considered a default.

External Link: https://economictimes.indiatimes.com/news/economy/finance/government-to-hold-talks-with-rbi-to-leave-more-capital-with-banks/articleshow/65300234.cms