No systemic risks, but banks need capital for Basel III: RBI
Mumbai: The Reserve Bank Thursday said the strength and profitability of the banking system remained robust despite rising bad assets, but underlined the need to raise capital to meet the Basel III norms.
"A series of stress tests conducted by the Reserve Bank in respect of credit, liquidity and interest rate risks showed that banks remained reasonably resilient. However, under extreme shocks, some banks could face moderate liquidity problems and their profitability could be affected," says the annual RBI report `Trends and Progress of Banking in 2011-12.'
The report said "the financial system of the country remains robust, even though the risk to stability of the system is rising on the back of global and domestic macroeconomic factors".
But, despite the rising impairment of asset quality, "the resilience of the banking sector was manifested in an improvement in the capital base and maintenance of profitability", it said.
Led by the state-run banks, which together control 70 percent of the system, the net bad loan assets rose to 1.4 percent of the advances at the end of the past fiscal, up from 1.1 percent a year ago, says the report.
"The slippage ratio of the banking system, which showed a declining trend during 2005-08, increased during 2008-12."
The report said higher capital standards, stricter liquidity and leverage ratios and a more cautious approach to risk, are likely to raise funding costs of banks.
RBI, which last week increased the provisioning for restructured loans to 2.75 percent, and also flagged the rising NPA levels, also noted the lack of transparency in information sharing on rising default by borrowers.
On the Basel III capital needs, the central bank says banks will have to raise more money to meet higher capital standards, stricter liquidity and leverage ratios and adopt a more cautious approach to risk under the Basel III norms.
The apex bank pegged the additional capital needs of the public sector lenders to meet the Basel III guidelines at Rs Rs 75,000-80,000 crore by March 2018.
"Broad estimates, suggest that to achieve full Basel III implementation by March 2018, public sector banks would require common equity of Rs 1.4-1.5 lakh crore on top of internal accruals, in addition to Rs 2.65-2.75 lakh crore in the form of non-equity capital," says the report.
It said that banks would have continued to require additional capital to meet Basel II capital ratios, had Basel III capital ratios not been implemented.
"Therefore, in case of state-run banks, the incremental equity requirement due to enhanced Basel III capital ratios is expected to be Rs 75,000-80,000 crore.
Similarly, major private sector banks would require common equity of Rs 20,000-25,000 crore on top of internal accruals, in addition to Rs 50,000-60,000 crore in the form of non-equity capital," says the report.
"Meeting these capital requirements will entail the use of innovative and attractive market based funding channels."
But the report said that the country may require some changes in the BCBS guidance on the conduct of the countercyclical capital buffer, as the recommended metric of credit-to-GDP ratio could potentially impact the structural drivers underlying credit growth in the country.
"There may be a need for some adjustments to capital buffer guidance. The issue is being examined by an internal group in the Reserve Bank," says the report.
On financial inclusion, the report calls for evolution of sustainable business and delivery models for this to be meaningful as quantitative coverage has improved massively during the period.
On the operational and strategic responses front, the report notes that these pertained to policy initiatives with regard to enhancing co-ordination among regulators and positioning of banks to meet the needs of inclusive growth, besides a review of the regulatory framework for the micro-finance sector during the year.
The report concludes that the multi-pronged regulatory initiatives undertaken in the areas of prudential and capital requirements of banks along with a move towards greater convergence in banking regulation globally are likely to have a major impact on the functioning of banks.
"While banking has become global, banking regulation is national. Therefore, addressing the issue of regulatory arbitrage is at the centre-stage of policy concern," it concludes.