Raising capital to meet norms would challenge banks: Gokarn MDT/PTI | 09/10/2012 02:02 PM | Raising fresh capital to meet the higher capital requirement under Basel-III may pose challenges to banks, especially under an environment characterised by moderating growth and worsening financial conditions, says the RBI deputy governor
"... but of course many challenges lie ahead. For example, raising fresh capital to meet the higher capital requirement under Basel-III may pose challenges, especially under an environment characterised by moderating growth and worsening financial conditions," he said at a ICRIER conference here.
He, however, said, "the Indian banks' current capital base and the liquidity position are broadly comfortable as a starting point vis-a-vis the Basel III guideline."
"Both the capital to risk assets -- risk weighted asset ratio CRAR (capital to risks asset ratio) and core CRAR -- of Indian banks at 13.5% and 9.6% at the end how global and domestic economic situation evolve in coming year of September last year remain well above regulatory requirement of 9% and 6% under Basel II.
Leverage ratio continues to hover around 5% as against Basel-III requirement of little more over 3.0%, he said while talking about the fiscal soundness of Indian banks. Gokarn further said in this context, how global and domestic economic situation evolve in coming years would be very important.
"(Whether) It can sustain turnaround in the global conditions is key to supporting this drive, requirement of banks to raise new capital, raise more capital, in turn, helping sustain credit growth and real economy," he said.
Gokarn said India has been fully compliant with the whole Basel process.
"Based on the Basel III announcement RBI had announced draft guidelines under Basel III as of 30th December of the last year and the final guidelines issued subsequently in May this year," he said.
These guidelines would become effective from 1 January 2013 in phased manner as envisaged by he global system, he said.
Basel III capital ratios would be fully implemented by 31 March 2018 in order to strengthen risk management mechanism.
As per the final guidelines, the capital requirements for the implementation of Basel III guidelines may be lower during the initial periods and higher during the later years. While undertaking the capital planning exercise, banks should keep this in view.
The guideline envisages banks to maintain a minimum total capital (MTC) of 9% against 8% prescribed by the Basel Committee of total risk weighted assets.
"As a matter of prudence, it has been decided that scheduled commercial banks (excluding LABs and RRBs) operating in India shall maintain a minimum total capital (MTC) of 9% of total risk weighted assets (RWAs) as against a MTC of 8% of RWAs as prescribed in Basel III rules text of the BCBS (Basel Committee on Banking Supervision), the guidelines said.
Of this, it had said, Common Equity Tier 1 (CET1) capital must be at least 5.5% of RWAs.
In addition to the minimum Common Equity Tier 1 capital of 5.5% of RWAs, banks are also required to maintain a capital conservation buffer (CCB) of 2.5% of RWAs in the form of Common Equity Tier-I capital, it had said.
The CCB is designed to ensure that banks build up capital buffers during normal times (i.e. outside periods of stress) which can be drawn down as losses are incurred during a stressed period.
The requirement is based on simple capital conservation rules designed to avoid breaches of minimum capital requirements.
Outside the period of stress, banks should hold buffers of capital above the regulatory minimum.
When buffers have been drawn down, one way banks should look to rebuild them is through reducing discretionary distributions of earnings. |
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