RBI for more Tier-I capital adequacy than Basel III norms

The Reserve Bank of India (RBI) on Thursday indicated it would prescribe higher capital adequacy norms than those proposed under the Basel III framework. This would help sustain the advantage of healthy financial profiles that Indian banks currently enjoy.

At the Risk and Compliance Summit on Thursday, Deepak Singhal, chief general manager, RBI, said, “A requirement of one per cent above the floor set under Basel III would not impact Indian banks. RBI would not like our banks to be seen as laggards.” The central bank, in its draft guidelines issued in December, had proposed that the common equity Tier-I capital should be at least 5.5 per cent of risk weighted assets (RWAs). Basel III norms prescribe minimum common equity of 4.5 per cent.

RBI has proposed Tier-I capital of at least seven per cent and said the total capital be kept at least nine per cent. It has also proposed a capital conservation buffer in the form of common equity of 2.5 per cent of RWAs.

According to RBI, Indian banks would not have a problem in adjusting to the new capital rules, both in terms of the quantum as well as the quality. Quick estimates suggest the capital adequacy of Indian banks under Basel III norms would be 11.7 per cent, compared with the required capital to risk (weighed) asset ratio of 10.5 per cent under the Basel III norms.

Singhal said many developed and emerging countries had stringent norms to maintain a higher capital base. In Sweden, banks have to maintain a capital adequacy ratio (CAR) of at least 15 per cent, while in Argentina, banks can pay dividend only when the CAR is 18 per cent or more.

Rating agency ICRA said public sector banks’ median capital adequacy levels declined from 13.4 per cent on March 31, 2011, to 12.1 per cent on December 31. Tier-I capital of these banks fell from 8.7 per cent to 8.3 per cent in the same period. The capital adequacy ratios of all large private banks remain comfortable. Their median capital adequacy stood at 16.3 per cent, while the Tier-I capital was 11.2 per cent in December.