RBI proposes norms for banks

31 December 2011: 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. According to RBI’s Basel-III draft norms, banks will need common equity tier-1 capital equal to 5.5 per cent, up from 3.6%, of their risk-weighted assets (RWAs), and overall tier-1 capital of 7 per cent 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 per cent of RWAs.

Overall, banks will need to have a total capital of 9 per cent of their RWAs, RBI said. Banks also need to maintain a capital conservation buffer in the form of common equity of 2.5 per cent 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 2012 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. 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.

Source: Livemint