Regulator may ask banks not to reckon hybrid capital as part of Tier-I capital.
The Reserve Bank of India (RBI) today indicated that banks would have to deal with tighter capital and prudential norms in the months ahead.
To start with, the regulator may ask banks not to reckon hybrid capital as part of Tier-I capital.
Commenting that there was an emphasis on having pure equity capital in Tier-I capital adequacy ratio after the global financial crisis, RBI Deputy Governor Shyamala Gopinath said, “The hybrid capital, that depicts features of debt, can be maximum 15 per cent of Tier-I. It would not be considered as part of this capital base.”
Gopinath, who released the first Financial Stability report, however, said the new norms on capital requirements would be prescribed in a calibrated manner.
Once the proposal comes into force, banks will be required to raise further equity to meet the minimum Tier-I capital requirement, which is at present fixed at 6 per cent. In recent years, banks have resorted to using hybrid capital to shore up capital adequacy ratios.
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In the report, RBI said a counter cyclical provisioning policy, on which work was currently underway, would deal with building provisioning buffers and their utilisation.
The central bank’s move to ask banks to increase their provisioning coverage ratio to 70 per cent by September 2010 is part of the counter cyclical provisioning policy.
RBI has drawn upon the global discussions while asking banks to build buffers during good times that can be used in tough times.
It also reiterated its resolve to regulate private pools of capital such as venture capital arms and private equity funds floated by banks.
“Internationally, a view is emerging that large, systemically important banking institutions should be restricted in undertaking proprietary activities that present particularly high risks and serious conflicts of interest. Sponsorship and management of private pools of capital by banks should ordinarily be prohibited and large proprietary trading should be limited by strict capital and liquidity requirements,” said the report.
“Greater cognisance of the inherent risks in such activities, including reputational risks, is required along with norms to ensure that such exposures are commensurate with risk management capabilities and available capital,” it added.
In recent years, banks such as ICICI Bank, State Bank of India and Axis Bank have floated private equity funds, which will be affected by the proposed norms on private pools of capital.
RBI also said that financial services companies with interests in banks, asset management companies, insurance and pension funds, would be covered by an enhanced framework for regulation and supervision. RBI was in consultation with other regulators such as the Securities and Exchange Board of India and the Insurance Regulatory and Development Authority to finalise the implementation of the proposed framework, it said.
Besides, the regulator acknowledged that the shift to the International Financial Reporting Standard would put pressure on banks, though they were unlikely to be rolled out before 2011. Gopinath said several issues regarding accounting standards were yet to finalised.