New counter-cyclical capital buffer norms for banks

The Reserve Bank of India (RBI) has issued norms for banks to build capacity, to ensure they have a capital buffer for difficult times and reining them from indiscriminate lending during periods of excess credit growth.

The Countercyclical Capital Buffer (CCCB), it said, may be maintained in the form of common equity tier-I capital or other loss-absorbing capital. The framework takes immediate effect and activation of CCCB takes place when circumstances warrant it. Activation isn't warranted now, it told banks.

The guidelines said the amount may vary up to 2.5 per cent of the total risk-weighted assets. A CCCB decision would normally be pre-announced, with a lead time of four quarters. If needed, banks may be advised to build up the needed buffer in a shorter span.

An internal group of RBI had given a final report on this subject last July. It recommended the indicators for CCCB decisions, thresholds for activating one and lead time for announcement.

“The credit to GDP (gross domestic product) gap shall be the main indicator in the CCCB framework. However, it shall not be the only reference point and shall be used in conjunction with GNPA (gross non-performing advances) growth,” RBI said.