Govt may ask RBI to relax capital norms for banks: Report

The government will hold talks with the Reserve Bank of India about relaxing capital requirements for banks and bringing them in line with the less-stringent Basel-III norms, according to a report by The Economic Times.

This comes after discussions by the finance ministry with central think tank NITI Aayog and other stakeholders, a senior government official told the paper.

The move is likely to free up an estimated Rs 60,000 crore of capital for state-owned lenders. It would allow banks to increase lending in order to fuel the reviving economy, bolster weaker banks and reduce pressure on the government to provide capital.

Around Rs 6 lakh crore of lending can be achieved by freeing up capital without any new provisions being made, the official said.

Currently, the money that banks need to set aside, or the minimum common equity tier-I (CET) ratio as prescribed by RBI, is 5.5 percent of their respective risk-weighted assets, as against the required 4.5 percent under Basel-III norms.

There is a need to lower Indian banks' CET to the level stipulated by the Basel Committee on Banking Supervision, the official told the paper.

NITI Aayog Vice Chairman Rajiv Kumar told the news daily that there was no need to exceed the Basel-III norm as 70 percent of the Indian banking system is state-owned.

He added that these banks are implicitly backed by a sovereign guarantee. "Moreover, the depositor is well insured by the government against any insecurity," Kumar said.

The official also pointed out that a circular issued by the central bank in February allowed for an easing of the rules.

Stating that a robust mechanism had been established through the Insolvency and Bankruptcy Code (IBC) to resolve bad loans, Kumar said, "The RBI has so far argued that this extra requirement is necessary because the asset-recognition norms were not stringent but now with the February 12 circular that also has been taken care of."

The circular passed by the RBI in February mandates that borrowers must be classified as defaulter if the loan repayments are late by even a day.

Experts believe that the move will help weaker banks to meet the regulatory capital requirements.

"This relaxation will immensely help weaker banks which are finding it difficult to meet the regulatory capital adequacy ratio under the current dispensation," Krishnan Sitaraman, Senior Director, Crisil Ratings, was quoted as saying.

Stating that the banking sector had witnessed a number of structural changes, Sitaraman said the recognition of stressed assets as non-performing ones has increased significantly, as have recoveries from resolution through insolvency proceedings.