BIZ-RBI-BANK-CAPITAL

In a scathing attack on the

government demand for liberalising capital norms for banks, a

senior Reserve Bank official Thursday made it clear that

lenders aspiring to meet the bare minimum core buffers will be

condemned to stay poor and warned that banking regulations

should not be based on political expediencies.

Executive director Sudarshan Sen said our banking

system is short of at least Rs 4 trillion in capital if we

were to follow the global best practices even at an 8 percent

capital buffer.

In a short 12-minute speech, Sen also said the lenders

will have to set aside up to Rs 2 trillion more in supervisory

capital soon and doubted if the ongoing insolvency resolutions

will yield good returns for banks. An additional Rs 2 trillion

will be needed to make adequate provisions for dud assets as

per global norms.

"We need to reflect that banks which choose to operate

at this poverty line of minimum capital, would be condemned to

stay poor," Sen said, speaking at an event organised by the

Business Standard newspaper.

"Do we really want our banks, particularly those

owned by the sovereign, to live hand-to-mouth at the poverty

line of minimum capital," Sen wondered aloud.

He went to the extent of saying that "when the going

gets tough, it is the banks with capital which will get going

and those without it will be punished by the ecosystem".

In the comments that come amid repeated demands from

key finance ministry mandarins to lower the core capital

requirements and align it to the global levels, Sen suggested

that the debate over capital buffers itself is irrelevant, and

the numbers 8 or 9 percent does not matter.

The Basel III norms prescribe 8 percent core capital

buffer for banks-something the government is basing its

arguments on.

"The more meaningful debate, which really should be

happening is what should be the optimum level of capital for

our banks, given the ground realities and not just

expediency," Sen argued.

It can be noted that the lowering of the capital

requirements will release more lendable funds for the banking

system, which is very important for government headed to polls

in a few months.

"We shouldn't really be debating whether the poverty

line should be 8 percent or 9 percent because that is not

where we want to be," Sen said.

The central banker said internationally, banks in

jurisdictions that require 8 percent minimum capital

effectively operate at around 14 percent or even higher.

He also lashed out at the demand for making an

exception for the state-run lenders on capital requirements

because of the implicit government guarantee that they

possess, describing it as "spurious reasoning" which has

risks like moral hazard, losing market credibility and not

allowing a level-playing field.

"A downturn in the business cycle is accompanied by

not only in the financial sector but also on the fiscal front.

In such a situation, a government would also face constraints

in generously recapitalising banks leading to a situation

where the government-owned banks will get driblets of capital

which is just enough to meet the minimum regulatory capital

but inadequate for growth," Sen warned.

"Business cycles and financial crises are old

companions and they are here to stay," Sen added.

On the debate over the countercyclical capital buffers

(CCB), where the RBI board had done some relaxations at its

last meeting on November 19, Sen likened our situation to

travelling on a rickety public transport.

"For many banks, the CCB is the only capital that lies

over the bare bones of minimum capital. That's it and there is

nothing more. Either you sit in a nicely cushioned Mercedes or

you sit in a state transport bus with a bench seat. And most

of us are on a bench seats today," Sen said.

In other countries, the CCB sits over tier 1 & 2

capital and therefore, there is not much of a concern when

there is a drawdown in cases of stress as the capital is meant

to support in that situation.

Sen explained the tier 1 comprises supervisory

capital, which the RBI team computes, but do not enforce.

"If this were to be enforced, it would lead to

additional capital requirements north of Rs 2 trillion...it is

possible in times to come that banks will be required to hold

supervisory capital," Sen said.

The official also said we are one of the few countries

which has the highest NPAs which are not adequately provided

for, which calls for making more provisions beyond the

mandated 50 percent for NPAs at present.

He said given the progress on the cases under the

bankruptcy code, it is unlikely that the ongoing resolutions

will yield more than what the banks are getting at present.

"Given the fact that recovery rates are so low in our

country even under the IBC, I am not sure whether we are going

to see any great improvement in the recovery rates if what we

see happening today continues," he said.

There is a need to recognise the distinction between

provisions and capital, even though there is an interplay

between the two. While the former is the amount of money set

aside for expected losses, the latter is the money set aside

for unexpected losses, he explained.

Since our system goes by an external credit rating on

assets and is not based on past experience with recoveries,

Sen said to make a comment on the 8 percent versus 9 percent

is out of place.

If we were to elevate ourselves to the global

standards of setting capital aside as per the past experiences

and not as per external credit ratings, getting to the 8

percent mark will require another Rs 2 trillion, he warned.

Sen said there is a need to ponder over what we need

to do in terms of capital, competencies and corporate

governance to be better prepared for the next crisis when it

comes.

(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)