The Reserve Bank of India (RBI) is working on a way to include liquidity held by banks under the current mandate to get eligibility under the Basel-III regime as well. This might involve bringing down the requirement of additional liquidity that banks need to provide as the new norms set in.
The set of rules under Basel-III prescribes banks to build a liquidity coverage ratio. However, banks in India are mandated to maintain the minimum liquidity at 23 per cent of net demand and time liabilities as the Statutory Liquidity Ratio (SLR) under RBI norms.
“We cannot add more liquidity over this (SLR) and we are working out a scheme under which part of SLR is treated as the Basel-III liquidity requirement,” said Anand Sinha, deputy governor at RBI. He was addressing the CARE Ratings Banking Summit on Monday.
For Indian banks, RBI has laid down phases in order to comply with the Basel-III norms within the transition period of January 2015-January 2018. Sinha said capital requirements will increase and might have an impact on banks’ profitability. He emphasised that there would have been the need to raise capital even if the Basel-III norms were not in place.
“The burden of Basel-III should be seen as net of what would have been required otherwise. Our calculations show that the incremental amount of capital required under Basel-III is less intimidating,” said Sinha.
He also pointed to the concern that banks might raise lending rates to compensate for the increase in cost of capital. “There have been studies by the Basel-III committee that the macroeconomic impact of new regulations are modest if the implementation is phased over a transition period,” said Sinha. Therefore, banks were given five years to comply, he added.
On whether the central bank’s monetary policy should turn to targeting inflation specifically, Sinha said regulators in advanced economies have also started taking cognisance of financial imbalances. “In my view, monetary policy should have a broader perspective,” he said.
RBI is scheduled to announce the second quarter review of monetary and credit policy on October 30. The central bank has been hesitant to cut policy rates due to concerns over high inflation.