House Panel recommends to ease capital requirements for banks
04, Jan 2019
Prelims level : Economy - Banking Mains level : Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment
- A parliamentary panel asked the central bank to ease its rules on capital requirements for banks so that they can increase lending.
- In a hard-hitting report, a parliamentary panel has asked the Reserve Bank to ease capital adequacy norms for banks, review supervisory framework PCA, and urged the government to set up a committee to look into issues concerning accountability of the central bank as a regulator.
- With regards to spurt in frauds in banking system, the panel asked the RBI to look into and review the role and effectiveness of various types of audit conducted in banks and its inability so far to mitigate incidence of frauds in banks.
- The report comes after the government and some of the board members of the RBI have put pressure on the central bank to relax capital requirements for banks as they seek to boost credit and economic growth.
- Former RBI governor Urjit Patel, who quit last month, opposed the government’s demand for lowering capital requirements and warned about the need for a cushion to offset unexpected risks. Any relaxation could prove detrimental to banks and their ability to absorb unexpected losses. Indian banks are required to maintain a minimum capital to risk weighted asset ratio (CRAR) at 9%, against the global Basel-III requirement of 8%. On top of that, they have to keep a capital conservation buffer that is supposed to climb to 2.5% by March 2019.
- Questioning the RBI’s decision to keep capital adequacy norms higher than prescribed under global framework of Basel III, the lawmakers said the central bank has restricted lending capacity of banks and increased the burden on the government for recapitalisation of PSBs. The parliamentary panel said the stipulated additional capital requirement for these nine banks (who are already under RBI’s PCA framework with lending restrictions),if the norms are relaxed it would provide additional capital requirements and could release about ₹34 trillion ($76 billion) into the economy by releasing capital for lending. On Friday, the RBI, in a report, opposed the call to relax current risk weighting rules used to calculate capital requirements, saying they fortified banks against the risk of failure. However, it did announce its intention to review capital regulations.
- The committee also desired that RBI as regulator should consider separate treatment of NPAs due to wilful defaulters and those where defaults are because of extraneous reasons such as cancellation of coal blocks and policy interventions by the judiciary and general policy changes in various sectors such as coal, power, steel, telecom, roads.