RBI rejected govt proposal to apply Basel-III guidelines to four banks

The Reserve Bank of India (RBI) declined a request from the government to apply Basel-III guidelines, an international regulatory framework for banks, to just four lenders in the country, in the central board meeting on Monday.

The Board of Financial Supervision (BFS) of the RBI will now examine the government’s proposal to review the Prompt Corrective Action (PCA) framework by re-looking at two additional parameters — non-performing assets (NPAs) and profitability, in the form of return on assets.

“The RBI did not agree to the request of applying Basel-III norms to four lenders instead of all,” said a senior government official, requesting anonymity.

Another source said the RBI has not acceded to the government’s demand of altering the risk weights assigned to the Micro, Small and Medium Enterprises (MSMEs) at the time of availing loans.

The government had based its argument on the fact that while the Basel framework requ­ires the application of mi­nimum capital norms to internationally active banks, but the RBI has applied the norms to all scheduled commercial banks in India, irrespective of their global presence.

The government had cited the Basel Committee on Banking Supervision’s (BCBS’s) assessment report on Basel-III regulations in June 2015 to say that the international guidelines should be applicable to four “internationally active” banks, including State Bank of India, Bank of Baroda and ICICI Bank. These are banks with more than 10 per cent assets on their international books.

“The RBI wanted the implementation of capital adequacy norms to all commercial banks in a bid to maintain the same set of standards to prevent build-up of risk in the banking system,” said another person aware of the development. The government’s view was that the “stricter-than-Basel Indian norms had a significant impact on capital requirements of banks”.

The RBI’s central board had also declined the government’s request to decrease the capital to risk-weighted assets ratio (CRAR) to 8 per cent from the current 9 per cent. The government had requested the RBI to align the capital adequacy norms with the Basel framework followed globally. “The RBI felt the loan default ratio for Indian banks were higher than what is observed globally so it decided to retain the CRAR at 9 per cent,” the official said.

The RBI’s BFS is supposed to meet on December 6 to discuss the PCA framework and whether some banks can be brought out of it, based on certain capital infusion commitments from the government.

“The exit route of PCA is not defined by the RBI for now. Banks are put under the PCA framework for breaching two of three parameters set by the RBI. If banks follow the present regime, it will take them years to move out of the PCA,” the official said.

The RBI’s BFS will deliberate upon the ways at which it will bring banks out of PCA. In Monday’s meeting, the RBI clarified to the government that banks may be brought out of the PCA framework, according to present rules, after registering an annual profit. The government had interpreted the RBI’s April 2017 revised framework in a way that banks need to register at least two years of profit to come out of the PCA, sources said.

The BFS may consider a request from the government to bring 2-3 banks out of the PCA in a bid to boost lending. “Some banks may come out of PCA based on the capital required to be maintained as prescribed by the RBI to the government,” another person, aware of the deliberations between the government and the RBI, said.

Currently, any of the two scenarios — banks registering net NPA level of 6 per cent, two consecutive years of negative return on assets, defined as a percentage of profit to average total assets, or the capital adequacy ratio falling below the regulatory requirement — can prompt the RBI to put a bank under the PCA. The PCA framework, introduced in 2002, was tightened by the RBI in April 2017, following consultations with the government.

The government had flagged how countries such as the United States, Peru, Japan, Philippines, along with the European Union, do not use net NPAs and profitability, in the form of return on assets, as additional parameters to put banks under their early intervention regimes (known as the PCA framework in India).