The Reserve Bank of India (RBI) Governor, D. Subbarao, on Tuesday, said that the Basel Committee was working on establishing a minimum set of principles for domestic systemically important banks (D-SIBs), including some large banks in India.

This committee will also prescribe norms for higher loss absorbency (HLA) capital standards for them as also evolve a sound resolution mechanism for D-SIBs.

“The moral hazard relating to too-big-to-fail institutions which encourages risky behaviour by larger banks has been a huge issue on the post-crisis reform agenda,” said Dr. Subbarao while inaugurating the annual FICCI-IBA Banking Conference here.

Basel III seeks to mitigate this externality by identifying global systemically important banks (G-SIBs) and mandating them to maintain a higher level of capital dependent on their level of systemic importance. The list of G-SIBs is to be reviewed annually. At present, no Indian bank appears in the list of G-SIBs.

Dr. Subbarao said that effective implementation of Basel III was going to make Indian banksstronger, more stable and sound so that they could deliver value to the real sectors of the economy.

“By far, the most important reform is that there should be a radical change in banks’ approach to risk management. Banks in India are currently operating on the Standardised Approaches of Basel II,” said Dr. Subbarao.

The larger banks needed to migrate to the Advanced Approaches, especially as they expanded their overseas presence. The adoption of advanced approaches to risk management would enable banks to manage their capital more efficiently and improve their profitability, he said.

This graduation required three things, according to the RBI Governor. First and most important, a change in perception from looking at the capital framework as a compliance function to seeing it as a necessary pre-requisite for keeping the bank sound, stable, and, therefore, profitable; second, deeper and more broad-based capacity in risk management; and finally, adequate and good quality data.

The RBI estimates that Indian banks need an additional capital requirement of Rs.5 lakh crore, of which, non-equity capital will be of the order of Rs.3.25 lakh crore while equity capital will be Rs.1.75 lakh crore.

The RBI Governor said that the amount the market would have to provide would depend on how much of the recapitalisation burden of public sector banks (PSBs) the government would meet.

However, he said that the amount that the market would have to provide would be in the range of Rs.70,000 crore to Rs.1 lakh crore depending on how much the government would provide.

Over the last five years, banks had revised equity capital to the tune of Rs.52,000 crore through the primary markets. “Raising an additional Rs.70,000 crore to Rs.1 lakh crore over the next five years from the market should, therefore, not be an insurmountable problem,” he said.