Banks' capital adequacy ratio to fall 71 bps on higher risk weight: RBI

Higher risk weight to dampen growth exuberance, improve credit quality

The increase in risk weights for personal loans and loans to non-banking financial companies (NBFCs) may lead to a decline in the capital adequacy ratio of 71 basis points (bps) of the banking system, the Financial Stability Report said.

'Adjusting for the increase in risk weights, the capital to risk-weighted assets ratio (CRAR) of the banking system (public sector banks + private sector banks) is estimated to decline by 71 bps to 16.0 per cent and the common equity tier 1 (CET1) may fall by 58 bps to 13.2 per cent. The impact, however, varies among banks,' the report said.

The CRAR and the CET1 ratio of scheduled commercial banks (SCBs) stood at 16.8 per cent and 13.7 per cent, respectively, in September 2023.

The decision to increase risk weights is both stability enhancing and credit positive, it said.

The report said the increase in risk weights addresses growth exuberance among lenders. Risk weights for NBFCs’ unsecured loans were also increased.

'Banks and NBFCs will be required to allocate higher capital for unsecured retail loans, which will improve their loss-absorbing buffers; and second, it will dampen growth exuberance among lenders and improve credit quality.'

The report also said a prolonged period of high interest rates could test the resilience of the banking sector, through valuation losses in their investment portfolios.

Banks hold 63.6 per cent of their investments in the held-to-maturity (HTM) category, which are not marked to market.

'An assessment of unrealised losses on securities held in the HTM portfolio shows that losses have reduced relative to the March 2023 position, and the impact on their CET1 ratio is limited for most banks. The median impact of unrealised losses on the CET1 ratio of select banks is 62 bps, with 5 per cent of banks registering a sizeable impact of 160 bps or more,' the report said.