Rebuffing demands for easing regulatory norms for banks, the Reserve Bank of India on Friday warned that haste to relax rules for capital adequacy and risk weights when defaults are high and provision are low to cover losses is harmful for economy.
The Basel III norms recommend risk weights for various credit exposures, based on cumulative default rates (CDR) and recovery rates observed internationally. However, the CDRs and Loss Given defaults (LGD) rates observed in India are much higher than observed internationally. Therefore, applying Basel specific risk weights would understate the true risk of loans carried on the books of the Indian banks, the banking regulator said in its annual report on trends and progress of banking in India (2017-18).
Moreover, the current levels of the provisions maintained by banks may not be enough to cover the expected losses. In particular, the adequacy of buffers becomes an important issue in order to absorb the expected losses which have not been provided for, if and when they materialise.
RBI said it also needs to be recognised that the Indian banking system has high proportion of un-provided bad loans vis-à-vis the capital levels although after the IBC and revised framework for the resolution of assets, there are signs of improvement in the defaults rates and recovery rates. Citing this there have been calls for reducing the regulatory capital requirements.
Against the foregoing however, the case for recalibration of risk weights or minimum capital requirements would need to be carefully assessed – frontloading of regulatory relaxations before the structural reforms fully set in and conclusive evidence on CDRs and LGDs is observed – could be detrimental to the interests of the economy, RBI asserted.
The government has infused capital in Public Sector Banks intermittently. In the last three years (2015-18), however, more than 70 per cent of the infused capital was absorbed into losses incurred by them. This suggests that only if the recapitalisation amount was large enough relative to the total capital base, can it make a perceptible impact on credit growth, it added.
The Basel III norms recommend risk weights for various credit exposures, based on cumulative default rates (CDR) and recovery rates observed internationally. However, the CDRs and Loss Given defaults (LGD) rates observed in India are much higher than observed internationally. Therefore, applying Basel specific risk weights would understate the true risk of loans carried on the books of the Indian banks, the banking regulator said in its annual report on trends and progress of banking in India (2017-18).
Moreover, the current levels of the provisions maintained by banks may not be enough to cover the expected losses. In particular, the adequacy of buffers becomes an important issue in order to absorb the expected losses which have not been provided for, if and when they materialise.
RBI said it also needs to be recognised that the Indian banking system has high proportion of un-provided bad loans vis-à-vis the capital levels although after the IBC and revised framework for the resolution of assets, there are signs of improvement in the defaults rates and recovery rates. Citing this there have been calls for reducing the regulatory capital requirements.
Against the foregoing however, the case for recalibration of risk weights or minimum capital requirements would need to be carefully assessed – frontloading of regulatory relaxations before the structural reforms fully set in and conclusive evidence on CDRs and LGDs is observed – could be detrimental to the interests of the economy, RBI asserted.
The government has infused capital in Public Sector Banks intermittently. In the last three years (2015-18), however, more than 70 per cent of the infused capital was absorbed into losses incurred by them. This suggests that only if the recapitalisation amount was large enough relative to the total capital base, can it make a perceptible impact on credit growth, it added.
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