RBI defends stiffer bank capital norms

Indian banks among most under-provisioned, says Dy. Governor Vishwanathan

Amid a raging controversy over capital levels of Indian banks with the government wanting lower capital requirement, Reserve Bank of India Deputy Governor N. S. Vishwanathan defended the central bank’s decision to stick to stiffer capital norms.

The government wants the capital adequacy ratio of banks to be at 8% as per Basel norms, but RBI has prescribed 9%. On complaints over ‘unnecessary’ high capital requirements, Mr. Vishwanathan said prudential capital regulations aim to enable banks to sustain unexpected losses without defaulting on its obligations, especially deposits, by maintaining adequate levels of bank capital.

Better credit appraisal

“Further, higher levels of capital increases the skin in the game for shareholders, thus potentially leading to better credit appraisal and screening,” he said in a speech on October 29, which was put up on the RBI website on Friday.

Though higher capital involves costs, the Deputy Governor argued that “there is no free lunch” but the costs to the economy are offset by the savings made in the form of potential losses avoided in averted banking crises.

“Unfortunately, banks in India remain one of the most under-provisioned ones, though there has been an improvement in this regard in the last few quarters,” he said. As the equity component in a bank goes up, the leverage goes down, and make banks safer, he said.

“The holy grail for banking regulators is to find the sweet spot for capital prescriptions for banks where the benefits are equal to or slightly outweigh the costs involved,” he said.

He said there was a misconception that capital was a pile of money stacked away as some sort of “rainy-day fund” and that the economy was deprived of that money.

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