Letter to BS: Diluting capital adequacy norms in banks imprudent

This refers to “Don’t ignore risk” (August 10). I agree that diluting capital adequacy norms for Indian banks is imprudent. The government's endeavour to pressurise the Reserve Bank of India (RBI) to lower the capital adequacy norms amounts to shifting the goal post in a football field to facilitate a weak and losing team to score a goal. The decision of the RBI to keep the Common Equity Tier of capital adequacy for banks at 5.5 per cent rather than at 4.5 per cent was a wise decision based on the shrewd understanding of the banking system and its problems. 

Most banks often gloss over many non-performing assets (NPAs), giving a skewed picture of the capital required to be maintained against these problematic assets. The wrong application of standardised risk weights is another issue. All this necessitates keeping a buffer of additional capital (more than the Basel norms).

While the world over central banks are directing banks to maintain capital adequacy above the Basel norms to cushion them against future shocks, in India, the government is trying to pressurise the RBI to lower these standards, so that its short-term objectives of coughing up less money for re-capitalisation of PSBs are met. If the RBI caves in under government pressure, it will be sad.  

Arun Pasricha  New Delhi

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