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Lowering capital buffer detrimental to banks, economy: RBI report

The current levels of provisions maintained by banks may not be enough to cover expected losses, the report said

Press Trust of India  |  Mumbai 

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Friday warned that with high and inadequate provisioning to cover the same, any relaxation in the or risk-weights could be detrimental to in particular and the in general.

The Basel III norms recommend risk-weights for various credit exposures, based on cumulative default rates (CDR) and recovery rates observed internationally. However, CDRs and the (LGD) rates observed here are much higher than international average, RBI said in its annual report on 'Trends & Progress of '

"Therefore, applying the Basel-specified risk-weights would understate the true riskiness of loan assets carried on the books of our banks," the report warned.

The current levels of provisions maintained by may not be enough to cover expected losses, it said and added that adequacy of buffers becomes an important issue to absorb expected losses but not adequately provided for, if and when they materialise.

The report also underlined the need for recognizing that the domestic system has a high proportion of un- provided for NPAs vis--vis the capital levels although after IBC and RBI's revised framework for resolution of stressed assets, there have been some improvements in the default and recovery rates.

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Further, the report also noted the calls for reducing the from bankers and a section in the ministry, which was one of the contentious issues between government and the past and sudden exit from the central early this month.

"The case for a recalibration of risk-weights or minimum capital requirements would need to be carefully assessed-frontloading of regulatory relaxations before the structural reforms fully set in and conclusive evidence on sustained improvement in CDRs and LGDs is observed-could be detrimental to the interests of the economy," the central said.

First Published: Fri, December 28 2018. 20:25 IST