Govt to press hard to align RBI regulations with international norms

Govt to press hard to align RBI regulations with international norms

New Delhi, Nov 14: The Union government will continue to push the Reserve Bank of India (RBI) to align its regulatory capital norms and the prompt corrective action (PCA) framework with Basel-III guidelines, an international regulatory framework for banks, in a crucial meeting next week.
In the regulator’s central board meeting, it will ask the RBI to ease provisioning norms for micro, small and medium enterprises (MSMEs) to bring them in line with the Basel framework. Government representatives will also be present in the meeting on Monday.
The government has argued while the Basel framework requires the application of minimum capital norms to internationally active banks but the RBI has applied the norms to all scheduled commercial banks in India, irrespective of their global presence.
The government has based its argument on the Basel Committee on Banking Supervision’s (BCBS’s) assessment report on Basel-III regulations in June 2015 that observed “several aspects of the Indian framework are more conservative than the Basel framework”.
However, two RBI Deputy Governors publicly reasoned last month why India required a stricter regime than the Basel framework.
Basel-III, which provides minimum standards to be met by banks, is being implemented in India in phases since April 2013, and will be fully implemented by March 2019. Sources said India had four internationally active banks, including State Bank of India, Bank of Baroda and ICICI Bank, citing the BCBS report. These are banks with more than 10 per cent assets on their international books.
However, the RBI’s perspective is that it wants all commercial banks to have the same set of standards in a bid to prevent any potential build-up of risk in the banking system.
The government is in favour of adopting the international guidelines (Basel-III norms), to be implemented ideally in the case of four banks in India as a stricter regime followed by the RBI has a “significant impact on capital requirements of banks”, sources said. In addition, the government has flagged how countries like the US, Peru, Japan, the Philippines, along with the European Union, do not use net non-performing assets (NPAs) and profitability, in the form of return on assets, as additional parameters to put banks under their early intervention regimes (known as the PCA framework in India).
Another critical issue bothering the government is that the capital requirements set by the RBI are higher than the international standards. According to the regulator, common equity tier 1 (CET-1) of banks must be at least 5.5 per cent of its risk-weighted assets and Tier-I capital 7 per cent — 1 percentage point higher than the Basel-III norms.
“A higher capital norm leads to additional capital requirement, restricting lending ability and income generation,” a government source said.
Banks are required to maintain a minimum capital, in terms of capital-to-risky asset ratio (CRAR) and common equity tier (CET)-1, to ensure they do not lend all the money they receive as deposits and keep a buffer to meet future risks. The capital adequacy ratio of banks is considered to be one of the key indicators of banks’ health.
However, during a lecture at the Indian Institute of Technology Bombay last month, RBI Deputy Governor Viral Acharya had said Basel norms were only a floor and after the global financial crisis, many countries required their banks to hold capital at higher levels. These include Brazil, Mexico, China, Singapore, South Africa, Turkey and Switzerland.
In addition, the government wants the RBI to do away with the need for maintaining a capital conservation buffer (CCB) — an additional layer of common equity — for the present financial year. Basel-III requires the CCB to be maintained “during normal times (i.e. outside periods of stress)” at 2.5 per cent of risk-weighted assets by March 2019.