Reserve Bank of India (RBI) has opposed government calls to relax the rules for risk weights and capital requirement for Indian banks.
Click here to know more on government's proposal on capital requirements.
What is RBI's rationale?
At present, the capital adequacy norms for Indian banks are higher than those recommended under Basel.
Government now calls for aligning the capital adequacy norms of Indian banks with those of Basel III to allow Indian banks to lend more.
But RBI says that applying Basel-specified risk weights would understate the “true riskiness” of loans on the books of these banks.
Relaxing the current risk-adjusted capital norms (Basel-III-plus norms) could hit the economy at a time when defaults are high and provisions low.
Indian banking system has a high proportion of nonperforming assets (NPAs) that are not provided for in relation to capital levels.
Introducing regulatory relaxations before bringing in structural reforms and with inadequate understanding of defaults could be detrimental to economy's interests.
So the case for a recalibration of risk-weights or minimum capital requirements would need to be carefully assessed.
What are RBI's proposals?
Capital norms - RBI proposes to take a fresh look and intends to issue revised prudential regulations, including guidelines on -
exposure and investment norms
risk management framework
select elements of Basel III capital framework
Board - RBI called for legislative changes to do away with the need to nominate the central bank’s officials as nominee directors on the boards of public sector banks.
Former RBI governor Urjit Patel had suggested withdrawal of these nominee directors from the boards to avoid any conflict of interest.
PCA - RBI also upheld the prompt corrective action (PCA) framework for weak banks, another point of contention with the government.
RBI said that weak banks under the PCA framework have shown improvement in deposits.
They have also shown lower growth in gross NPAs, relative to non-PCA public sector banks.
Besides, the RBI is also looking at reviewing the guidelines for compensation for private sector banks.
This follows a demand by banks for an objective assessment of remunerations for whole-time directors.
