Social Media

Recapitalisation to Restore Banks’ Health & Revive Economy

The Centre’s move to infuse Rs. 2.11 lakh crore capital into public sector banks over the next two years, through a blend of financial mechanisms, is expected to help revive the economic growth momentum, after short-term disruptions caused by structural reforms. Infusion of capital Rs. 1.35 lakh crore will be through recapitalisation bonds, Rs. 18000 crore through budgetary provision and the remaining Rs. 58000 crore shall be raised through share sales. Urjit Patel, Governor, Reserve Bank of India, welcoming this decision said a well-capitalised banking system was a pre-requisite for stable economic growth and this package to restore the health of the banking system was a monumental step forward in safeguarding the country’s economic future. He added that the recapitalisation bonds will be liquidity-neutral for the government, as only interest expenditure will contribute to annual fiscal deficit.

Saddled with bad loans and stressed assets of close to Rs.10 lakh crore, India’s banking sector has been reluctant in extending fresh loans, as reflected in bank credit growth slipping to a 60-year low of just 5% this April. The move is expected to help banks make provisions for potential losses from the stressed assets, the Non-Performing Asset, and will strengthen the banks’ ability to extend credit at a faster clip and bolster the economy.

According to Banks Board Bureau Chief Vinod Rai, the government’s move to recap banks is very timely and progressive as, “We could not have waited endlessly for banks to resolve stressed assets before capitalising them, and the credit growth process would have been severely impacted. Already green shoots are visible in the economy, like manufacturing activity is picking up.” Indian Banks are facing double whammy in the form rising NPAs and stringent capital adequacy, provisioning and income recognition RBI guidelines based on Basel III regulatory framework.

This will also address the “twin balance sheet problem”, the country was facing. “There were losses which were sitting in the balance sheet of the corporates and there were losses which in turn got reflected in the bank’s balance sheets”.

Guidelines on Minimum Capital Requirement: Basel III Capital Regulations

Basel Committee on Banking Supervision (BCBS) released comprehensive reform package entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” in December 2010; to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spill over from the financial sector to the real economy. During Pittsburgh summit in September 2009, the G20 leaders committed to strengthen the regulatory system for banks and other financial firms and also act together to raise capital standards, to implement strong international compensation standards aimed at ending practices that lead to excessive risk-taking, to improve the over-the-counter derivatives market and to create more powerful tools to hold large global firms to account for the risks they take.

The final guidelines were issued by Reserve Bank of India for implementation of Basel III guidelines on 2nd May, 2012 that became effective from January 1, 2013 in a phased manner.  The Basel III capital ratios will be fully implemented as on March 31, 2018. The guidelines require banks to maintain a Minimum Total Capital of 9% against 8% (international) prescribed by the Basel Committee of total Risk weighted assets.  This has been decided by Indian regulator as a matter of prudence.

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Articles

Comodo SSL