RBI warns of 'tough times' ahead

Says government, regulator's role in managing crisis will be tested

The top brass of the Reserve Bank of India (RBI) today said the government and the regulator's role in managing crisis is likely to be tested as "tough times" may continue for the Indian banking industry.

"It will be tested over time," a top RBI official told bankers. RBI's top executives met bankers at a meeting organised by the Bankers' Club here today.

According to bankers, while RBI governor D Subbarao maintained that most Indian banks were adequately capitalised he said meeting the new Basel III capital norms may pose challenge for domestic lenders.

There were concerns that the central government may find it difficult to capitalise public sector banks.

As per Basel III norms, Indian banks need to maintain a minimum capital adequacy ratio of 9% in addition to a capital conservation buffer, which will be in the form of common equity at 2.5% of the risk-weighted assets.

In other words, banks' minimum capital adequacy ratio must be 11.5% as per Basel III norms. Indian banks are currently required to have a capital adequacy ratio of at least 9%.

The common equity in tier I capital must be 5.5% of risk-weighted assets and the minimum tier I capital adequacy ratio must be 7% instead of 6%. The new rules will come into effect from January, 2013 and banks will have to implement them by March, 2018.

"RBI also hinted that there were concerns that the regulator's role may get diluted if there is excessive interference from the government," a banker with a city-based state-run bank said requesting not to be named.

Bankers said Subbarao also expressed concerns on the mushrooming of cheat funds and was worried about the safety of public deposits parked with many of the chit fund companies.