Not just capital, banks must improve mkt perception too: FSR

Banks need go beyond the regulatory perspective based on numerical compliance on capital adequacy and focus on improving market perception, Financial Stability Report released by RBI said today.
"There is a need to go beyond regulatory perspective based on numerical compliance on the capital requirements and capital adequacy, as the perception of the 'market' about banks' capital levels may be equally important consideration, especially with respect to the public sector banks," the FSR said.
It said meeting regulatory prescriptions on capital adequacy is to take care of the current business portfolio, whereas markets with their forward looking bias look at capital planning in a way that is an indication of the future growth planning of a bank.

The report said that in a stressed scenario capital constraints along with a need to protect margins may even impair banks' abilities to transmit policy rate signals.
A significant gap in capital to risk-weighted ratios (CRAR) of two sets of banks with fairly divergent financial performances gives the 'impression' of a dualistic approach to capital adequacy and might be seen by the market as a sign of weakness rather than strength of the public sector banks, it said.
While regulatory capital adequacy represents the floor, the actual assessment of capital adequacy should also include the capabilities of banks for opportunistic fund raising according to market conditions and their needs which in effect will require proactive capital planning and management.

The report said since capital infusion for PSBs is also about committing tax payers' money, this calls for enhanced efficiency and capital conservation rather than an equitable distribution of scarce capital.
"While there is no dispute over the need for buffering banks with adequate capital, this may not ensure asset quality and hence the overall strength of the balance sheet," the report concluded.