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PTI mumbai India
Updated: 02-11-2018 22:47 IST

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 system.

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

consequent NPAs.

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

with defaults.

The Basel III framework, which was put in place after

the 2008 global financial crisis, mandates only 7 percent core

capital buffer.

"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.)