Gradually build countercyclical buffers: RBI panel to banks

A report by a Reserve Bank of India (RBI) panel has recommended banks gradually build countercyclical capital buffers (CCCB) of up to 2.5 per cent of the risk-weighted assets to guard against losses resulting from periods of excess credit growth. The CCCB might be in the form of common tier-I equity, the panel said, adding for all banks operating in India, CCCB should be maintained on an individual as well as consolidated basis.

The report was prepared by an internal working group on implementing CCCB in India, headed by RBI Executive Director B Mahapatra.

The report said the credit-to-gross domestic product (GDP) ratio would be used to take decisions related to the CCCB. Factors such as growth in gross non-performing assets, incremental credit-deposit ratio for three years, interest coverage ratio and house price index also be considered.

The lower threshold at which the CCCB would be activated might be set at three percentage points of the credit-to-GDP ratio, while the upper threshold might be kept at 15 percentage points. For instance, CCCB requirement will increase from nil to 20 basis points when the credit-GDP gap increases from three to seven percentage points. When the gap exceeds 15 percentage points, the buffer will remain at 2.5 per cent of the risk-weighed assets. If the gap was below three percentage points, there wouldn't be any CCCB requirement, the report said.