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.
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.
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
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
not just expediency, he said.
Sen cited studies which have suggested that the
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
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 a need to increase bad asset provisioning to above the
present 50 percent, he said.
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.)