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PTI Mumbai
Updated: 07-12-2018 12:02 IST

Reserve Bank executive director

Sudarshan Sen has exhorted banks to maintain higher capital

levels than the regulatory mandate to see through business

cycles and crises, warning those failing to have adequate

buffers will get punished by the system itself.

There is a need to look beyond numbers like 8 percent

of risk weighted assets or 9 percent, he said.

"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," Sen told an event organised by the

Business Standard newspaper late Thursday.

"Business cycles and financial crisis are old

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

Terming the regulatory mandate on minimum capital

level as the "poverty line", he said there is a need to aspire

to be well above that.

"We shouldn'tt really be debating whether the poverty

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

where we want to be," he said.

The meaningful debate should be around what is the

optimum level of capital given the ground realities in our

country, including low recovery and high default rates, and

not just expediency, he said.

Sen cited studies which have suggested that the

minimum capital ratio should be between 9 and 53 percent and

added that banks in jurisdictions that mandate the minimum

capital to be at 8 percent actually operate at a much higher

14 percent buffer levels.

"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.

He also said that in our country, banks do not set

aside any pillar-2 (tier 2) supervisory capital, and the

countercyclical capital buffer is the only cushion which is

helpful to absorb shocks.

The central banker said studies on the supervisory

capital suggest domestic banks will be needing upwards of Rs 2

trillion in capital towards this.

"It is possible in times to come that banks will be

required to hold supervisory capital," he said.

Sen said our banking system follows a standardised

approach of computing the capital that needs to be set aside,

which depends on external ratings rather than the system of

historical losses followed in other jurisdictions and added

that a shift in computation can result in a requirement of Rs

2 trillion in capital for the system.

He also said the Insolvency and Bankruptcy Code (IBC)

is unlikely to greatly improve loan recovery rates and there

is a need to increase bad asset provisioning to above the

present 50 percent, he said.

"Given the fact that recovery rates are so low I am

not sure we are going to see any great improvement in the

recovery rates if we continue in the same way as IBC has so

far been" Sen said.

"I think we have to be cognisant of the fact that the

level of provisions that we have for NPAs needs to be much

higher than the present level of 50 percent," he added.

As a final suggestion, Sen also laid down what should

be guiding the thinking for the bankers from here on.

"When we ponder that the worst is behind us, let us

spend some time discussing some time what we need to do in

terms of capital, competencies and corporate governance to be

better prepared for the next crisis when it comes. And come,

it will," he said.

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