Mumbai: Continuing with the institutional push against government wishes, Reserve Bank deputy governor NS Vishwanathan on Friday dismissed calls for lowering capital adequacy norms for lenders and matching them with global levels.
One of the contentious issues behind the ongoing spat between the government and the central bank has been the Finance Ministry’s call for addressing the liquidity crunch by lowering the capital adequacy norms, which will push more money into the system.
Addressing a gathering in the prestigious B-school at Jamshedpur, Vishwanathan explained that the norms are high for domestic lenders because of the higher incidence of defaults and bad loans. “…We must guard against any push for dilution of standards in the name of aligning them with international benchmarks because that will be cherry-picking and will result in our banks being strong in a make-believe sense and not in reality,” he said in his speech, which was uploaded on the central bank’s website on Friday.
“It is by resisting such temptations, I believe, we will build a financial system that is lot stronger than today.” He also cautioned that ‘supply push’ approach to lending has led to higher corporate leverage and rise in bad loans in the past. The speech by Vishwanthan tried to put in perspective how the health of Indian banks needs to be improved through more co-ordinated efforts between the government and the RBI to clean up the banking system, and reducing risk on capital employed by lenders.
Only then, does he see a case for some relaxation in norms such as common equity tier-I capital which in India is at 5.5%, even as it is pegged at 4.5% under Basel III norms, which pushes up minimum capital adequacy requirement to 9% in India, versus 8% globally.He said that the higher capital requirements in India are meant to “buffer against unexpected loss”.
Vishwanthan pointed out that Indian banks remain among the most under-provisioned banks which would otherwise have helped them guard against unexpected losses, and so higher capital provides a cushion against any sudden issues. “A strong and stable banking system is essential for the development of the economy. This strength should be real and inherent.The real strength will come from recognising weaknesses in the balance sheet and making provisions for them rather than pretending to believe that the balance sheet is strong.”