Continuing with the institutional
push against government wishes, Reserve Bank deputy governor
NS Vishwanathan Friday dismissed calls for lowering capital
adequacy norms for the lenders and match with global levels.
In what may ruffle the ministry mandarins further, he
also described the February 12 circular for NPA recognition as
a "landmark reform", just like the passage of the Insolvency
and Bankruptcy Code.
Two of the contentious issues behind the ongoing spat
between the government and the central bank which of late has
reached historic lows, has been North Block's call for
addressing the liquidity crunch and one way to address the
same that the finance ministry mandarins feel is lowering the
capital adequacy norms, which will push more lendable money to
The government has also been pushing for relaxing the
new NPA recongnition norms selectively. But the monetary
authority has so far been resisting any such push.
Addressing the prestigious B-school XLRI-Jamshedpur
Friday, Vishwanathan explained that the capital requirements
are high for domestic lenders because of higher defaults/bad
loans and warned that lowering capital merely for aligning
with global standards will create "make believe" strong banks.
"We must guard against any push for dilution of
standards in the name of aligning them with international
benchmarks because that will be cherry-picking and will result
in our banks being strong in a make-believe sense and not in
reality," he argued.
He also said that any special dispensation for state-
run banks towards lower core capital norms cannot be made
despite the sovereign support, because any such move will harm
their credibility in the international markets on one hand and
prove to be anti-competitive on the other.
The deputy governor further said the real strength of
banks will come from recognising weaknesses in their balance
sheets and making provisions for them rather than "pretending
to believe that the balance sheet is strong."
The speech comes exactly a week after his colleague
Viral Acharya made a strong pitch for regulatory independence
warning of the wrath of markets if it is not provided.
The government is unhappy with the Mint Road for not
diluting its February 12 circular on NPA recognition, denying
liquidity support to troubled NBFCs and not diluting the
prompt corrective action framework under which as many as 11
of the 21 state-run banks are placed now.
The speech also came on the same day when financial
services secretary Rajiv Kumar pitched for the need to align
banking regulations with the best global practices, terming
the domestic regulations as conservative and stringent.
"Nobody can stand on its leg if you ease anythingthus
what is being talked about is that our regulations are aligned
to the best global practices. Take it from the best, align it
to it, and don't keep it higher than that. So, there is no
relaxation of any norm," Kumar said when asked if government
has sought relaxation on the PCA framework from the RBI.
Such a suggestion of capital requirements being
onerous, Vishwanathan said, "is not correct at all" and
pointed out that globally, countries having high bank credit-
to-GDP ratio also have higher levels of bank capital.
Following a massive spike in their NPAs, as many as 11
of the state-run banks are placed under the PCA framework for
more than a year now, which prohibits these banks, which
collectively control a quarter of the system-wide liquidity,
cannot lend large sums or expand the branches.
The government wants the curbs to be lifted for easing
supply of credit to the economy which will aid growth.
In his speech, Vishwanathan used past experiences to
warn that high levels of credit growth due to 'supply push' in
the past have resulted in high corporate leverage and
The deputy governor also countered notions about the
higher capital requirements being a drain on the economy,
saying costs are offset by the savings made in the form of
potential losses avoided in "averted banking crises."
Vishwanathan said capital buffer of a higher than
global standard of 9 per cent has been based on our experience
The Basel III framework, which was put in place after
the 2008 global financial crisis, mandates only 7 percent core
"The cumulative default rates or CDRs and the loss
given default observed in the country are much higher than
that observed internationally, though there are signs of
improvement in these parameters after the enactment of the IBC
and RBI's revised NPA framework," he said.
Speaking to the students, the career central banker
explained how a bank faces a default situation. He said it
first dips into provisions made for future losses based on
past behaviour and then into the capital.
Vishwanathan warned the provisioning levels at
domestic banks may not be enough to cover the expected losses,
and hence adequate buffers have to be built into the capital.
"It is clear that the suggestion by some that our
capital requirements are more onerous than global standards is
not correct at all. As the need for repeated recapitalisation
has proved, our banks need to aspire to have higher capital
levels," he said.
In what may ruffle the ministry mandarins further,
Vishwanathan described the February 12 circular for NPA
recognition as a "landmark reform", just like the passage of
the Insolvency and Bankruptcy Code.
The new code demands NPA recognition even on a one-day
default. Government has also been seeking relaxation in this
to help save some sectors like the power generation industry.
Implementation of the two reforms is having a positive
impact and the trends are changing, he acknowledged but was
quick to add that we cannot be lenient as yet.
"Frontloading of regulatory relaxations before the
structural reforms fully set-in could be detrimental to the
interests of the economy," he said.
Corporates lobbying for relaxations were also targeted
by Vishwanathan, who asserted that there is nothing like a
"genuine" default and pitched for each case to be resolved
through the existing processes like IBC.
The February 12 circular has changed the nature of the
relationship between banks and their borrowers to make the
creditor stronger, he said.
"This changing debtor-creditor equation disturbs the
status quo and it is only natural that it is facing
resistance," the central banker said.
Without naming any entity, he said defaulting
promoters portray bank actions as a cases of 'ruthless big
bank' taking over the assets of a 'hapless borrower' and
reminded such people about it being public and taxpayers'
money which is at stake.
"A correct portrayal of the situation would be: public
interest (depositors and taxpayers) vs borrowers' interest,"
he made it clear.
He also advised banks to be wary of 'zero haircuts'
plans presented by borrowers without naming the Anil Ambani
group which has claimed that it presented such plans.
"The choice before banks is: 'illusory future
payments' vs 'upfront real cash'. Banks need to arrive at the
present value of 'illusory future payments' by discounting it
for time value of money and more importantly for the
uncertainty in receiving the payments taking into account the
existing management's past records," he said.
(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)