Keep more capital buffer for times of crisis: RBI ED to banks

RBI Executive Director Sudarshan Sen has warned of punishment to those banks who fail to maintain the capital buffer.

Published: 07th December 2018 12:48 PM  |   Last Updated: 07th December 2018 12:48 PM   |  A+A-

RBI logo

Image of RBI logo for representational purpose only. (Photo | Reuters)

By PTI

MUMBAI: 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 per cent of risk-weighted assets or 9 per cent, 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 the minimum capital level as the "poverty line", he said there is a need to aspire to be well above that.

"We shouldn't really be debating whether the poverty line should be 8 per cent or 9 per cent 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 per cent and added that banks in jurisdictions that mandate the minimum capital to be at 8 per cent actually operate at a much higher 14 per cent 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 per cent, 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 per cent," 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.

Stay up to date on all the latest Business news with The New Indian Express App. Download now
(Get the news that matters from New Indian Express on WhatsApp. Click this link and hit 'Click to Subscribe'. Follow the instructions after that.)

Comments

Disclaimer : We respect your thoughts and views! But we need to be judicious while moderating your comments. All the comments will be moderated by the newindianexpress.com editorial. Abstain from posting comments that are obscene, defamatory or inflammatory, and do not indulge in personal attacks. Try to avoid outside hyperlinks inside the comment. Help us delete comments that do not follow these guidelines.

The views expressed in comments published on newindianexpress.com are those of the comment writers alone. They do not represent the views or opinions of newindianexpress.com or its staff, nor do they represent the views or opinions of The New Indian Express Group, or any entity of, or affiliated with, The New Indian Express Group. newindianexpress.com reserves the right to take any or all comments down at any time.

flipboard facebook twitter whatsapp