Political expediencies can’t dictate capital buffer: RBI official

Chennai: Attacking the government’s demand for liberalising capital norms for banks, a senior Reserve Bank official has said lenders aspiring to meet the bare minimum core buffers will be condemned to stay poor.

Executive director of RBI, Sudarshan Sen warned that banking regulations should not be based on political expediencies.

Sen said India’s banking system is short of at least Rs 4 trillion in capital “if we were to follow the global best practices even at an eight per cent capital buffer”.

In a short 12-minute speech, Sen also said the lenders will have to set aside up to Rs 2 trillion more in supervisory capital soon and doubted if the ongoing insolvency resolutions will yield good returns for banks. An additional Rs 2 trillion will be needed to make adequate provisions for dud assets as per global norms.

“We need to reflect that banks which choose to operate at this poverty line of minimum capital, would be condemned to stay poor,” Sen said, speaking at an event organised by the Business Standard newspaper.

“Do we really want our banks, particularly those owned by the sovereign, to live hand-to-mouth at the poverty line of minimum capital,” Sen said.

He also went to extremes and stated, “When the going gets tough, it is the banks with capital which will get going and those without it will be punished by the ecosystem.”

Meaningful debate

In the comments that come amid repeated demands from key Finance Ministry mandarins to lower the core capital requirements and align it to the global levels, Sen suggested that the debate over capital buffers itself is irrelevant, and the numbers eight or nine per cent does not matter.

The Basel III norms prescribe eight per cent core capital buffer for banks – something the government is basing its arguments on.

“The more meaningful debate, which really should be happening is what should be the optimum level of capital for our banks, given the ground realities and not just expediency,” Sen argued.

It can be noted that the lowering of the capital requirements will release more lendable funds for the banking system, which is very important for government headed to polls in a few months.

“We shouldn’t really be debating whether the poverty line should be eight per cent or nine per cent because that is not where we want to be,” Sen said.

The central banker said internationally, banks in jurisdictions that require eight per cent minimum capital effectively operates at around 14 per cent or even higher.

He also lashed out at the demand for making an exception for the State-run lenders on capital requirements because of the implicit government guarantee that they possess, describing it as “spurious reasoning” which has risks like moral hazard, losing market credibility and not allowing a level-playing field.

“A downturn in the business cycle is accompanied by not only in the financial sector but also on the fiscal front. In such a situation, a government would also face constraints in generously recapitalising banks leading to a situation where the government-owned banks will get driblets of capital which is just enough to meet the minimum regulatory capital but inadequate for growth,” Sen warned.

“Business cycles and financial crises are old companions and they are here to stay,” Sen added.

On the debate over the countercyclical capital buffers (CCB), where the RBI board had done some relaxations at its last meeting on 19 November, Sen likened our situation to travelling on a rickety public transport.

“For many banks, the CCB is the only capital that lies over the bare bones of minimum capital. That’s it and there is nothing more. Either you sit in a nicely cushioned Mercedes or you sit in a State transport bus with a bench seat. And most of us are on a bench seats today,” Sen said.

In other countries, the CCB sits over tier I and II capital and therefore, there is not much of a concern when there is a drawdown in cases of stress as the capital is meant to support in that situation.


Sen said India is one of the few countries which has the highest NPAs which are not adequately provided for, which calls for making more provisions beyond the mandated 50 per cent for NPAs at present.

“Given the fact that recovery rates are so low in our country even under the IBC, I am not sure whether we are going to see any great improvement in the recovery rates if what we see happening today continues,” he said.

There is a need to recognise the distinction between provisions and capital, even though there is an interplay between the two. While the former is the amount of money set aside for expected losses, the latter is the money set aside for unexpected losses, he explained.


NT Bureau