Saturday, December 31, 2011

Banks have to meet the requirement for a capital conservation buffer between 31 March 2014 and 31 March 2017: The RBI
According to RBI’s Basel-III draft norms, banks will need common equity tier-1 capital equal to 5.5%, up from 3.6%, of their risk-weighted assets, and overall tier-1 capital of 7% of RWAs.
The Reserve Bank of India (RBI) on Friday proposed stricter norms for Indian banks as part of a plan to migrate to the Basel-III global regulatory framework to create a healthier banking system.
The central bank has suggested enhancing minimum capital standards, the creation of a capital cushion and better risk coverage mechanisms for domestic lenders.
While the proposed new standards will help build a stronger banking system in the long run, in the coming years, they are likely to put more pressure on most public sector banks to raise large amounts of capital in potentially tight cash conditions, bankers and analysts said.
According to RBI’s Basel-III draft norms, banks will need common equity tier-1 capital equal to 5.5%, up from 3.6%, of their risk-weighted assets (RWAs), and overall tier-1 capital of 7% of RWAs.
Tier-1 capital is the core measure of a bank’s financial strength and is composed of core capital, which consists of common stock and disclosed reserves and may include non-redeemable, non-cumulative preferred stock. The minimum tier-1 capital stipulated for Indian banks now is 6% of RWAs.
Overall, banks will need to have a total capital of 9% of their RWAs, RBI said. Banks also need to maintain a capital conservation buffer in the form of common equity of 2.5% of their RWAs, the apex bank said. According to experts, currently, Indian banks do not have an equivalent buffer mechanism.
Indian banks had met Basel-II norms by March 2009. While these norms required banks to put in place better risk management practices and, thus, improve their credit quality, Basel-III is the next level of compliance for banks and follows the 2008 global financial crisis.
RBI has given time until 15 February for banks to submit feedback on the Basel-III draft norms, including an implementation schedule. These guidelines are in response to a comprehensive reform package entitled “Basel-III: A global regulatory framework for more resilient banks and banking systems” of the Basel Committee on Banking Supervision (BCBS) issued in December 2010, the central bank said.
To facilitate the transition, the draft norms propose the implementation period of minimum capital requirements and deductions from common equity beginning from 1 January 2013 to 31 March 2017. Banks have to meet the requirement for a capital conservation buffer between 31 March 2014 and 31 March 2017, RBI said.
This, according to bankers, is earlier than the deadline given to banks in most countries, which have time until 2019 to migrate to Basel-III.
Senior bankers said RBI’s move to implement Basel-III earlier than most other countries could put pressure on public sector banks and some private banks. Indian banks are adequately capitalized and front-loading higher capital norms in a tight cash scenario could put immense pressure on them, they said.
“RBI, in line with its tradition, has been a bit conservative compared with its international counterparts, by front-loading the compliance deadline for Basel-III,” said S. Raman, chairman and managing director, Canara Bank. “Although this may help the system strengthen the banks, going ahead, this could put pressure on some of the state-run banks to raise adequate capital.”
RBI, however, said the indicative implementation schedules will be finalized taking into account the feedback from banks on the guidelines.
Further, instruments that no longer qualify as regulatory capital instruments will be phased out from 1 January 2013 to 31 March 31 2022, the apex bank said.
“It looks like most of the PSU banks and some of the private sector banks will have to go for large amount of capital raising. It will also be critical to see how much time they are given to comply with these norms in the final guidelines,” said Vaibhav Agrawal, vice-president of research, Angel Broking Ltd.
To enhance the risk coverage for Indian banks in over-the-counter (OTC) derivative transactions, RBI said that in addition to the capital charge for counterparty default risk under the current exposure method, banks will be required to compute an additional credit value adjustments risk capital charge.
Under Basel-II norms, banks had to compulsorily enhance their standards on operational risks, data collection, capital adequacy and credit risk management practices. This was perceived as a step for banks to progress to the advanced Basel-III approach, bankers said.
Last week, citing a series of stress tests conducted in the banking system, RBI said India’s banking system is strong, although the rising volume of bad loans poses a minor concern. Banks can handle shocks to the system even when bad debts rise 150% from current levels, the central bank had said.

Courtesy: Live mint

No comments: