RBI's relaxation for banks to lend Rs 3.5 trillion extra set to end

The Reserve Bank of India (RBI) may not extend the relaxation given last year to banks to comply with its capital conservation buffer (CCB) norm of 2.5 per cent by the end of 2019-20 (FY20). The Centre has to take this aspect into account when it pencils in the recapitalisation amount for state-run banks for FY21. The amount was about Rs 70,000 crore in FY20.

The buffer, introduced after the global financial crisis of 2008, is the amount banks have to set aside to absorb losses during times of stress. The deferment of the CCB’s last tranche of an additional 0.625 per cent from 1.875 per cent in March 2019 to 2.5 per cent in March 2020 had left banks with Rs 37,000 crore of extra capital, on the back of which they could have increased lending by Rs 3.5 trillion. This headroom will not be available in FY21, unless public sector banks (PSBs) are adequately recapitalised.

The CCB easing had broken the transitional sequence for capital ratios from April 1, 2013 onwards. It can be expected to figure in the pre-Budget talks for FY21 between the RBI and North Block. The subject is also linked to the higher provisioning call on banks due to the central bank’s June 7 circular and telecom loan pains following the Supreme Court’s order on the adjusted gross revenue, which entails a payout of Rs 1.33 trillion to the Centre, inclusive of interest and penalties.

The RBI made a special mention of the CCB go-easy in its report on the Trend and Progress of Banking in India (2017-18), and observed that while the government had been infusing capital into PSBs, this had been just enough to meet the regulatory minimum, including the CCB. 

“The deferment of the implementation of the last tranche of the CCB till March 31, 2020, offered some breathing space to these banks. Their capacity to sustain credit growth in consonance with the financing requirements of the economy will, however, warrant that capital is maintained well above the regulatory minimum, providing these banks confidence to assume risk and to lend,” the report said.

The CCB of 2.5 per cent comprises common equity tier-1 capital, above the minimum capital adequacy norm of 9 per cent.

A key aspect to also look out for is the dividend payout by PSBs for FY20. The RBI’s master circular on Basel-III capital regulations of July 2015 is categorical that “when buffers have been drawn down, one way, banks should look to rebuild them is through reducing discretionary distributions of earnings. This could include reducing dividend payments, share buybacks and staff bonus”. It is surmised that the non-extension on the front may help take care of the dividend payout by PSBs.

The CCB deferment was among the key decisions taken at the central bank’s board meeting on November 19, 2018 under then governor Urjit Patel.

The run-up to the meeting saw relations deteriorate between the RBI and the finance ministry, in particular over the former’s capital adequacy norm of 9 per cent, which is higher than the global 8 per cent. The central bank board did not budge on the issue, but had agreed to extend the transition period for implementing the last CCB tranche of 0.625 per cent. Subsequently, this, in part, also helped five of the 11 state-run banks come out of the RBI’s Prompt Corrective Action framework.

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