RBI, Sebi should monitor i-banks

For the first time, the Reserve Bank of India (RBI) said it should be privy to information on activities of investment banks (i-banks) in the country to ensure they did not become a potential cause of financial vulnerability.

At present, investment banks registered in India are solely regulated by capital markets regulator Securities and Exchange Board of India (Sebi).

“In order that investment banks are not considered a potential source of financial vulnerability, it would be necessary for RBI and Sebi to have access to information on their activities, together with a higher level of risk transparency in case of financial products issued or brokered by them,” RBI said in the Financial Stability Report released today.

While acknowledging the limited leverage capacity of investment banks in India, RBI said the risk arose from linkages of these banks with other financial institutions, including group companies.

It added that any instance of regulatory arbitrage must be dealt with. However, the leverage of the country’s commercial banks was not a concern, the report said.

The leverage of the Indian banking system, measured as the ratio of assets and off-balance sheet items to capital, stood at 16.3 times at September-end 2009 and decreased marginally to 16.1 at December-end 2009. Adjusting for the mandatory 25 per cent investment of banks’ deposits in government and other approved securities, the leverage ratio was considerably lower at 12.9 times at December-end 2009.

An analysis of the capital adequacy ratio (CAR) and leverage of the top 60 banks in India showed most banks were concentrated in the range of a CAR of 12-16 per cent and leverage of 13-20 times as of the end of September 2009. There was only one bank with a relatively high leverage and low CAR which accounted for just 0.2 per cent of total bank assets and, hence, was a source of significant risk or concern to stability. As on December 31, 2009, no bank was in the high-risk category of low CAR and high leverage.