Banks seek lower CAR at 8%

Banks want the Reserve Bank of India (RBI) to reduce the minimum capital adequacy ratio by one percentage point to 8 per cent, the level recommended under the Basel II capital adequacy norms.

Indian Banks' Association (IBA) has asked the RBI to reduce the minimum capital to risk-weighted assets ratio (CRAR) to 8 per cent as suggested under the Basel II capital norms.

RBI had stipulated that banks maintain a minimum CRAR of 8 per cent based on the Basel I norms, but decided to increase it to 9 per cent for banks in India from March 31, 2000.

After the Basel Committee on Banking Supervision (BCBS) issued revised capital adequacy guidelines retaining CRAR requirement at 8 per cent, RBI still decided to stick to its decision to have a higher capital adequacy requirement in India at 9 per cent.

Banks in India are worried that the capital requirements under Basel II, which requires capital to be allocated for market and operational risks apart from credit risk, are very stiff and would strain their ability to have capital in conjunction with the rapidly growing loan assets.

Banks in India are required to be prepared to implement Basel II capital norms with effect from March 31, 2007. They feel the capital requirements would substantially increase with the implementation of the new capital norms.

Basel II seeks to ensure capital allocation is more risk sensitive and separates operational risk from credit risk and quantifies both. In addition, there is capital allocation needed for market risks.

The revised capital guidelines""International Convergence of Capital Measurement and Capital Standards: A Revised Framework""were released in July 2004 and are commonly known as Basel II.