Call For Stringent Imposition Of Capital Adequacy Norms

The Tarpore committee has recommended that the Reserve Bank of India (RBI) should consider the imposition of even more stringent capital adequacy standards than the Basle norms as the risks faced by the financial sector are much higher in developing countries. It noted prudential norms should be prescribed on the basis of an assessment of necessary safeguards to enable the financial system to attain international standards and not be prescribed with a view to enabling the weakest segment of the financial system a cushion for survival.

In addition, an effective supervisory regime is necessary for a successful move towards capital account convertibility, it stated.

 

At the same time the income recognition and asset classification norms should be tightened expeditiously. The tighter norms may be in the form of steeper capital requirements for banks with higher level of NPAs. The prescription of more stringent capital adequacy norms for banks with higher NPAs would imply that the weaker banks would be unable to increase their advances portfolio. It has suggested that the weakest segment would inexorably need to become narrow banks.

Commenting on the supervisory regime, it has pointed out that the problems related to insolvency have to be identified at the incipient stages itself. "Since most banking crises owe their origins to insolvency rather than illiquidity and since the former have a tendency to assume serious proportions only after a sufficient length of time, a vigilant and alert supervisory structure cannot lose sight of these problems at the incipient stage itself," is the observation made by the committee in its report.

It is important that the supervisory regime be able to pick up warning signals and the weaker entities will have to be monitored more closely and frequently.

The supervisory system should be in a position to take quick, strong and deterrent action in cases of inadequacies or deviations from norms. For this it should be supported by an efficient off-site surveillance mechanism monitoring the financial soundness of institutions through certain well-defined prudential parameters.