New Delhi: The government will confront the Reserve Bank of India (RBI) on its math to measure capital adequacy for state-run banks in the central bank’s board meeting on 19 November.
Govt to question RBI’s capital adequacy math at board meet
The government estimates that the capital norms—much stricter than what are mandated by Basel III norms—are restricting lending of more than ₹2.5 trillion of the capital of state-run banks and consequently shrinking their lending capacity. Mint could not independently verify this calculation.
“The government is of the view that there is no need for capital requirements that are stricter than the Basel norms. It is hindering the lending capacity of banks and the government’s effort of financial inclusion,” said a person familiar with the development.
The latest disclosure confirms the growing differences between the Reserve Bank and the Union government.
All of them point to an imminent confrontation on 19 November when the board of the central bank convenes.
Armed with a report of the Basel Committee on banking supervision, which lists out how RBI has mandated norms for state-run banks that are much more stringent across the board, the government is seeking to push for bringing them on par with other countries.
The report, published in June 2015, had pointed out that RBI has mandated the Basel framework for all banks rather than just internationally active banks (whose 10% of business comes from international operations).
ICICI Bank and Axis Bank are among private lenders and State Bank of India and Bank of Baroda among state-owned lenders qualify as internationally active banks.
Further, the risk weights assigned to loans to public sector enterprises, personal loans and credit card receivables as well as corporate papers rated AA and BB are much higher than Basel norms.
The government will also flag that rather than only using capital as a factor for early intervention, India is the only country that uses asset quality and negative return on assets as trigger for early intervention in banks.
Basel III norms have to be fully implemented by Indian banks by 31 March 2019.
An email sent to RBI remained unanswered till press time.
In a speech last week, RBI deputy governor N.S. Vishwanathan had dismissed the notion that RBI’s capital requirements for state-run banks are more onerous.
“…The current levels of provisions maintained by banks may not be enough to cover the expected losses, and hence adequate buffers have to be built into the capital maintained to absorb the expected losses which have not been provided for, if and when they materialise,” he had pointed out while conceding that there were signs of improvement in the default rates and recovery rates after the insolvency and bankruptcy code and RBI’s Revised Framework. “However, a recalibration of risk-weights or minimum capital requirements would need to wait till these trends are firmly entrenched in the economy. Frontloading of regulatory relaxations before the structural reforms fully set-in could be detrimental to the interests of the economy,” he had said.
The 19 November meeting comes at a time when the tensions between the central bank and the government have spiked over a host of contentious issues and the latter’s decision to initiate the process of beginning consultations under Section 7 of the RBI act on issues like the liquidity crunch, the 12 February stressed assets circular of the central bank and its impact on the power sector as well as the capital adequacy framework of state run banks.
Under Section 7 (1) of the RBI Act of 1934, “the central government may from time to time give such directions to the bank as it may, after consultation with the governor of the bank, consider necessary in the public interest”. Section 7 (2) also gives government powers to entrust the business of the RBI to its central board of directors.
RBI deputy governor Viral Acharya’s public speech batting for RBI’s autonomy as well as his suggestion to privatize state-run banks in the previous board meeting of RBI has further strained ties.
Defending the RBI’s stance on capital adequacy, a former banker said that Basel only sets the minimum capital requirements and every country has the freedom to decide what capital levels should be fixed by them.
“Banks see a fluctuation in businesses. India’s rating history is not very old and risk of defaults is high. Considering all this, it is prudent to have a capital adequacy above the bare minimum,” he said.
“The cumulative default rate and the provision coverage ratio are other things that need to be considered while deciding the capital levels,” he added.