RBI’s capital buffer norms good for banks, says Moody’s Credit Outlook

This will compel banks to conserve capital and moderate their balance sheets during periods of fast credit growth, feels the rating agency

GN Bureau | February 12, 2015


#reserve bank of india  

Last week’s guidelines on maintaining a countercyclical capital buffer (CCCB) by Reserve Bank of India has been hailed by the global credit rating agency Moody's .

The guidelines are credit positive for Indian banks because they make clear that banks will be required to hold the additional capital amid periods of rapid credit growth, according to an article in Moody's Credit Outlook.

The guidelines maintaining CCCB is not expected to get activated in 2015 but "nevertheless, these guidelines provide the RBI with a tool to compel banks to conserve capital and moderate their balance sheets during periods of fast credit growth, which would benefit the banks' credit quality," the Moody's said.

According to Moody's, India's domestic credit/gross domestic product (GDP) ratio has consistently increased over the years.

The level at the end of March 2014 stands at 80.2 percent, which remains within the three percentage point acceptable range of the five year average of 78.2 percent, according to an article in Moody's Credit Outlook.

The guidelines on CCCB act as an additional layer of loss-absorbing capital on top of the banks' increased minimum capital requirements under Basel III.

Basel III gives regulators in individual jurisdictions the discretion to implement a CCCB of up to 2.5 percent of risk weighted assets when they see fit, to offset pro-cyclicality by requiring banks to hold more capital at times when the regulator judges that the macro-financial environment could encourage excessive risk-taking.

According to Moody's, corporate loans, which account for about 80 percent of Indian banks' loan exposure, have negatively affected banks' asset quality owing to high corporate leverage, and the asset quality of loans to households have been relatively stable.

Thus, the RBI has focused its triggers on overall domestic credit and the health of banks and corporates to sustain the increase in credit.

According to the RBI's guidelines, the key trigger for activating the CCCB will be when the credit/GDP ratio has risen relative to its long-term trend.

The RBI said it will require banks to hold the full 2.5 percent buffer when the gap between the credit/GDP ratio and the long-term trend exceeds 15 percentage points.

The central bank will implement a CCCB of less than 2.5 percent when the gap is between three and 15 percentage points, with the size of the required CCCB increasing on a graduated scale.

Although the credit/GDP ratio will be the key trigger, the RBI said it will maintain its discretion when reducing the CCCB, and will also look at other indicators, including banks' ratios of loan to deposits, non-performing assets and interest coverage.
 

Comments

 

Other News

Modi inaugurates, lays foundation stone of Pune Metro projects

Prime minister Narendra Modi inaugurated and laid the foundation stone for Pune Metro projects worth around ₹21,800 crore on Tuesday through video conferencing. Addressing the gathering on the occasion, the PM extended warm Diwali greetings to the people of Pune and Maharashtra and remarked that f

Wired for good: Building sustainable cities with AI

The First Industrial Revolution in the 18th-19th centuries ushered in a paradigm shift in how cities were imagined. Fueled by railways, factories and grids, and obsessed with speed and scale, it was an ode to efficiency, which spurred unprecedented economic growth. Now, as the Fourth Industrial Revolutio

How social media is reshaping elections

Since Brazil’s return to direct presidential elections in 1985, no candidate who finished second in the first round of polling had ever won the presidency. Luiz Inácio Lula da Silva, now 81, has just done it. What explains the comeback, and what changed in Brazilian politics to make it possi

Cabinet approves Dearness Allowance, Dearness Relief

The union cabinet chaired by prime minister Narendra Modi on Wednesday approved the release of an additional instalment of Dearness Allowance (DA) to central government employees and Dearness Relief (DR) to pensioners with effect from 01.07.2026 representing an increase of 3% over the existing rates of 6

Cyclone Arnab strikes Andhra as warming oceans amplify storm risks

Cyclone Arnab made landfall along the Andhra Pradesh and Yanam coasts in the early hours of Wednesday as a very severe cyclonic storm, with maximum sustained wind speeds of 125–135 kmph and gusts reaching 150 kmph. Its rapid intensification has raised concerns about how warmer oceans, global warmin

Counting matters but which ones?

The first instinct of public policy is to count. Its harder task is to count what counts. We have become remarkably good at measuring the reach of the welfare state vis-à-vis beneficiaries covered, rupees transferred, houses built, connections installed and services delivered. But some of the most

Upcoming Conferences



-->

Archives

Current Issue

Opinion

Facebook Twitter Google Plus Linkedin Subscribe Newsletter

Twitter