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.)
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