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What RBI's capital adequacy move means for banks

Last updated on: November 21, 2018 17:04 IST

For banks, the package will limit the burden of provisioning for stressed loans. Besides, the proposed restructuring package for MSMEs with a credit of up to Rs 25 crore is expected to provide a breather to units from this sector.

Illustration: Dominic Xavier/

With the Reserve Bank of India (RBI) extending the deadline for banks to meet capital adequacy norms, lenders will be able to disburse additional loans in excess of Rs 3 trillion till the end of next financial year, sources aware of the matter said.


The government, too, will see a fall in the capital infusion requirement in public sector banks as a consequence of the relaxation in one component of the capital adequacy rule.

The saving for the government on this count is expected to be around Rs 35,000 crore in the current financial year.

Besides, the proposed restructuring package for micro, small and medium enterprises (MSMEs) with a credit of up to Rs 25 crore is expected to provide a breather to units from this sector, adversely affected by demonetisation and the transition to the Goods and Services Tax (GST) regime.

For banks, the package will limit the burden of provisioning for stressed loans.

The RBI, after a nine-hour board meeting on Monday, announced that it had extended the deadline for lenders to further lift capital conservation buffers by a year, even as it retained capital adequacy ratio at 9 per cent.

Now, banks have to build the last tranche of 0.625 per cent under the capital conservation buffer (CCB) by March 31, 2020.

An RBI board member explained that banks had adequate resources at command (deposits) to lend more funds but faced limitations as they had to build the CCB, which is the incremental addition to the capital adequacy ratio every year.

“Some flexibility in relaxing the ratio was possible without breaching rules for the central bank,” he added.

Now they would have room for lending at least Rs 3 trillion more at a time when demand for credit is growing in the busy season of the current financial year.

Also, the capital relief for the government on account of the CCB extension is pegged at Rs 35,000 crore, he said.

On capital savings for the government, Krishnan Sitaraman, senior director with rating agency CRISIL, said the capital requirement for public sector banks (PSBs) was pegged at Rs 1.2 trillion till the end of FY19.

“It will stand reduced by Rs 35,000 crore due to additional time given to meet capital ratios.

"This gives a breathing space to many PSBs, as they may find it very tough to raise capital from market given the stressed asset profile,” he said.

While the central bank and the government seem to see significant benefits for the credit-starved industry, banks and rating agencies are not much enthused with it.

V G Kannan, chief executive, Indian Banks’ Association (IBA), said the initial assessment indicated some relief for now.

“The government will have to provide less amount for capital infusion in PSBS this year, but will have to make a provision in 2019-20,” he added.

One whole-time director with a Mumbai-based mid-sized lender said while this step was positive, some banks might still not have enough capital to sustain as going concerns.

Banks will not have as much capital as envisaged earlier, which will limit their capacity to absorb further stress in future in case credit quality suffers.

Expressing disappointment with the RBI’s decision, global rating agency Moody’s said the decision to extend the deadline (for CCB) was credit negative for PSBs.

“It was expected that all PSBs would have a core equity tier 1 (CET1) ratio of at least 8 per cent by the end of March 2019.

"This was based on the government's commitment to capitalise these banks to a level sufficient to meet the minimum regulatory capital norms,” Moody's said.

ICRA, the Indian arm of Moody’s, sees very little benefit coming to banks from easing of capital norms.

Many banks are struggling to meet the basic capital ratios of 9 per cent.

Hence, the decision to extend the transition period is likely to benefit only a few banks.

Most PSBs are not maintaining the existing CCB requirement of 1.875 per cent, which they should have built over the last three years.

CARE Ratings said the two measures relating to debt restructuring scheme and capital adequacy would help the liquidity situation as banks would be able to lend more while restructuring stressed loans of SMEs.

On the issue of proposed recast package for MSMEs, Kannan said the benefits could be substantial if banks were allowed to treat such loans as standard asset which reduces burden for provisions.

However, Moody’s did not see any benefit from the recast package for MSMEs, given the unsatisfactory record of such schemes in the past.

“The track record of such dispensations on asset classification, when seen over the last few years in India, has shown that they have largely been unsuccessful in addressing the underlying stress,” it said.

Nikhat Hetavkar & Abhijit Lele in Mumbai
Source: source