Citing a study by the Basel Committee, Reserve Bank of India (RBI) Deputy Governor Anand Sinha said that the growth in gross domestic product (GDP) would dip by 0.22 per cent if Basel III was fully phased in 35 quarters. He was, however, quick to add that the course of GDP growth would shift back to the original path after 35 quarters.
Basel is the international regulatory framework for banks.
Speaking at the 2nd Financial Times-Yes Bank International Banking Summit in Mumbai, Sinha said that the pursuit of financial stability could have implications on banks’ growth. “The concern often voiced is that the capital buffer on the back of much higher level of equity required in the capital structure as per Basel III, would leave banks with substantially lower return on equity and it would become difficult to retain investor's interest, rendering capital raising difficult,” said Sinha.
With lower leverage, banks would be much safer and, hence, investors would demand a lower return, said the RBI deputy governor. “Moreover, lower leverage would make the returns on banking stocks much less volatile. Studies in many cases show that the average return on equity in various segments over a longer period is in the same range,” said Sinha.
According to him, the trade-off from the pursuit of financial stability in Basel framework would be manageable in terms of growth as investors’ interest in banking stocks would possibly be retained.
Sinha said the monetary policy has a larger role to play. “The monetary policy has an expanded objective. It has a larger role than simple inflation targeting,” said Sinha. The central bankers now think that financial imbalances will also have to be considered before finalising the monetary policy, he added.
Calling for a closer coordination between the monetary and fiscal policies, Sinha said if they do not work in tandem, the economy will suffer.