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Basel-III: Banks' earning to come under pressure

April 23, 2012 15:11 IST

RBIEarnings of banks are likely to come under pressure due to the higher capital requirements for the implementation of Basel-III norms, Reserve Bank of India Deputy Governor Anand Sinha said in Mumbai.

"There is going to be pressure on banks' earnings, not only in India but across the world. That's why, Basel-III implementation has been made longer, so that there will be least disruption.

"However, if you have to do the same activity with significantly higher capital, there will be pressure on return on equity," Sinha told reporters on the sidelines of a workshop on `Strengthening Microfinance Institutions' in Mumbai.

He also said the banks would have to increase productivity in order to protect their RoE.

Basel-III norms, proposed to be implemented from the beginning of 2013 till 2017, require the equity capital of a bank to be not less than 5.5 percent of risk-weighted loans, as per the draft guidelines issued by Reserve Bank of India.

Sinha also said the central bank is not in favour of allowing MFIs to take small deposits. "After all, whatever legislation passes, we have to work with that.

"But, RBI's position has been that deposit-taking should be limited to banks," Sinha said.

The Parliament is considering the draft Microfinance Institutions Bill, which allows MFIs to accept micro deposits.

Sinha further said that MFIs will have to take care of the issues like concentration risk, reduction of operational costs and corporate governance to overcome problems of the fledgling industry.

"Southern region has seen major concentration of MFIs, both in terms of borrowing and number of clients. I think, they have to go to other regions of the country in order to diversify," he said.

He further said that MFIs must reduce the operational costs for long-term sustainability.

The Deputy Governor stressed the importance of balancing financial and social objectives.

"MFIs have to balance between financial and social objectives and have to maintain appropriate corporate governance for customer protection."

The MFIs must measure and disclose performance apart from changing the governance practises, he added.

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