RBI may up capital ratio for banks

Senior official says the enhanced requirements may be rolled out in phases.

The Reserve Bank of India (RBI) was likely to prescribe a higher capital requirement for banks from financial year 2012-13, one of its senior officials said here on Wednesday.

A committee of the Bank for International Settlements (BIS) was working on revision of Basel-II norms in the light of the global financial crisis, said Anand Sinha, an RBI executive director, while addressing a workshop on a related subject.

“The financial crisis has changed the approach towards capital adequacy. It is better to have a little extra capital than a little less,” he said.

He mentioned that the enhanced requirements would be rolled out in phases.

RBI currently prescribes a minimum capital adequacy ratio of nine per cent of risk-weighted assets, higher than the eight per cent prescribed internationally. Most banks in India have capital adequacy of more than 12 per cent.

“Many banks have a core capital, a part of the capital adequacy, in excess of nine per cent, and this is way above international norms. Europe has seen core capital of four to five per cent while the ratio in the US is eight per cent,” a senior executive of a leading consultancy said.

Tier-I capital is the core measure of a bank’s financial strength from a regulator’s point of view. Tier-II typically comprises subordinated bonds and hybrid financial instruments.

Banks aiming to raise their capital adequacy may have to plan a rights issue or a follow-on issue if they want to ensure that the government stake is not diluted, according to a merchant banker.

As a step towards ensuring public sector banks are adequately capitalised, the government has decided to infuse Rs 15,000 crore in the financial year to March 31, 2011. The move will increase their lending capacity by Rs 1.85 lakh crore.

The government has stipulated certain conditions as part of this capital infusion. It plans to inject Rs 6,211 crore into Bank of Maharashtra, Central Bank of India, IDBI Bank, UCO Bank and Union Bank of India.

The government will infuse Rs 590 crore into Bank of Maharashtra, Rs 2,016 crore in Central Bank of India, Rs 3,119 crore in IDBI Bank, Rs 375 crore in UCO Bank and Rs 111 crore in Union Bank of India.

The government has decided to take a $3.1 billion (Rs 14,500 crore) loan from the World Bank for infusing capital in public sector banks.