Banks not to be impacted by tougher Basel-III: Subbarao

Counterparty credit risk framework may have capital adequacy implications.

Indian banks would not be impacted significantly by the higher capital norms being contemplated by the Basel Committee on Banking Supervision (BCBS), Reserve Bank of India (RBI) Governor Duvvuri Subbarao said on Tuesday.

BCBS, engaged in discussions to chalk out the agenda for a fresh round of reforms in the financial sector, released a discussion paper recently. 

This round, known as Basel-III, broadly asks banks to hold more and better quality capital as well as more liquid assets. It also proposes to limit banks’ leverage, besides mandating building up of capital buffers in good times for use during periods of high stress.

Subbarao said Indian banks were well capitalised and the Basel-III norms were unlikely to prescribe higher capital than what they were maintaining. “Indian banks are not likely to be significantly impacted by the new capital rules. As such, we do not expect our banking system to be significantly stretched in meeting the proposed new capital rules both in terms of the overall capital requirement and the quality of capital,” Subbarao said in his address at the Ficci-IBA banking conference.

As on June 30, the capital adequacy ratio of the banking system stood at 13.4 per cent, of which Tier-I capital accounted for 9.3 per cent, he said. 

However, the proposed changes in capital rules regarding counterparty credit risk framework may have capital adequacy implications for some Indian banks with large over-the-counter bilateral derivatives positions. “This underscores the importance of enlarging the derivatives transactions coming within the scope of a multilateral settlement mechanism through central counterparties,” Subbarao said.

The Basel committee has also proposed lower financial leverage of banks, as the global financial crisis was accentuated by high leverage by some banks. According to the BCBS proposal, no asset, including cash (which obviously has the least risk) should be excluded from leverage ratio.

According to RBI, Indian banks’ leverage ratio is quite moderate, and along with adequate Tier-I capital and limited derivatives activities, leverage ratio norms will not be a constraint. Regarding the proposal for levying systemic risk capital and liquidity charge to systemically important financial institutions, Subbarao said a few Indian banks might be called upon to maintain additional capital and liquidity charges. The governor also pointed that the government’s fiscal position would not come under stress if it had to infuse more capital into banks.

“In case of public sector banks, the government, as the owner, will have to contribute to building capital buffers so as to maintain the floor of 51 per cent in ownership. This is unlikely to put undue pressure on the government’s fiscal position, as it will happen during the cyclical upturn, when banks’ profits and the government’s revenues will be buoyant,” he said.