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A Reserve Bank of India (RBI) panel has recommended banks set aside up to 2.5 per cent of risk assets as a counter-cyclical capital buffer (CCCB) to help remain solvent during times of stress. It is expected the onus of setting aside buffer capital will curb indiscriminate lending during spells of excessive growth.
B Mahapatra, RBI executive director and head of the panel, has linked the buffer capital to the credit-to-gross domestic product (GDP) ratio, which tends to rise during economic boom and fall during a downturn. RBI may also consider indicators such as growth in gross non-performing assets, the industry outlook assessment index and the interest coverage ratio for CCMB.
Comments and suggestions have been invited from all stakeholders by the end of this month. After a decision on CCCB is announced, it may be implemented within four quarters.
The RBI panel said when credit growth was high, banks would have to set aside more capital as buffer. The wider the gap between actual credit-to-GDP ratio and long-term credit-to-GDP, the higher will be the required buffer. The gap indicates the build-up of excessive credit growth in an economy and the system-wide risk. The CCCB should, therefore, be built when the gap exceeds a threshold.
The panel has suggested CCMB norms come into effect when the gap is three per cent. The panel said CCCB should range between zero and 2.5 per cent of risk-weighted assets, based on the gap between actual credit-to-GDP ratio and the long-term trend (which would range between three and 15 percentage points). If the gap exceeds 15 percentage points, the buffer would remain 2.5 per cent of risk-weighed assets and if it was less than three percentage points, there wouldn't be a need for CCCB, it added.
CAPITAL WALL
* The panel has recommended banks set aside a counter-cyclical capital buffer (CCCB) to help the lenders remain solvent during times of stress
* It is expected the onus of setting aside buffer capital will curb indiscriminate lending during spells of excessive growth
* RBI might consider indicators such as growth in gross non-performing assets, the industry outlook assessment index and the interest coverage ratio for CCMB
* Comments and suggestions have been invited from all stakeholders by the end of this month
