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.

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