RBI may tighten capital adequacy norms

The Reserve Bank of India may tighten prudential norms for banks to provide a cushion for financial soundness when the economy faces turbulent times.

To this end, the central bank is considering suggestions to increase the capital adequacy ratio from the present 9 per cent. The additional capital or “capital buffer” will be used by banks to tide over a financial crisis or other eventualities during an economic downturn.

Another option under consideration is to ask banks to make additional provisions during good times. This could mean provisioning of, say, 120 per cent of risk weightage when the actual requirement may be 100 per cent. This capital can take care of losses if the dues are written off for any reason. Provisioning refers to the allocation of capital towards an asset in proportion to its risk assessment.

RBI is also in talks with the Institute of Chartered Accountants in India for streamlining the revenue recognition norms to accommodate the “capital buffer” that may not be used in the year in which it is set aside but will act as a cushion during a slowdown or a crisis.

Officials said current guidelines are being fine-tuned in line with the recommendations of the G-20 working group on enhancing sound financial regulation and strengthening transparency. The working group was formed in response to the global financial crisis to work out measures for robust regulation of banks and financial institutions to ensure sustained financial stability.

The RBI may also stipulate a leverage ratio for banks to prevent excess strain on capital. At present there were no leverage ratios. However, in India, banks operated on a leverage ratio of 10-15, which means, on capital of Re 1, a bank could borrow or raise deposits of around Rs 15. Essentially, the leverage ratio would peg the amount of external liabilities for the banks, primarily deposits in any form, to the bank’s total capital base. This ratio would be made applicable for internal and external operations of the bank.