RBI relaxes leverage ratio for banks to increase their loaning capacity

Chennai: The Reserve Bank has relaxed the leverage ratio (LR) for banks in a bid to help them boost their lending activities.

The leverage ratio stands reduced to four per cent for Domestic Systemically Important Banks (DSIBs) and 3.5 per cent for other banks effective from the quarter commencing 1 October, the Central bank said in a notification.

“Both the capital measure and the exposure measure along with Leverage Ratio are to be disclosed on a quarter-end basis. However, banks must meet the minimum Leverage Ratio requirement at all times,” RBI said.

The leverage ratio, as defined under Basel-III norms, is Tier-I capital as a percentage of the bank’s exposures. The framework is designed to capture leverage associated with both on- and off-balance sheet exposures.

Earlier this month, RBI had said it has decided to harmonise LR in line with Basel III standards keeping in mind financial stability of financial firms.

In order to mitigate risks of excessive leverage, the Basel Committee on Banking Supervision (BCBS) designed the Basel III Leverage Ratio as a simple, transparent, and non-risk-based measure to supplement existing risk-based capital adequacy requirements, RBI had said in its June statement on Developmental and Regulatory Policies.

‘In terms of the framework on LR put in place by the Reserve Bank, banks have been monitored against an indicative LR of 4.5 per cent. These guidelines have served the purpose of disclosures and also as the basis for parallel run by banks,’ it had said.

The final minimum LR requirement was to be stipulated taking into consideration the final rules prescribed by the Basel Committee by end 2017, it had said.

During the first week of this month, the RBI announced that it has relaxed LR. The relaxation was announced in the accompanying statement on developmental and regulatory policies.

“Keeping in mind financial stability and with a view to moving further towards harmonization with Basel III standards, it has been decided that the minimum LR should be four per cent for Domestic Systemically Important Banks (DSIBs) and 3.5 per cent for other banks,” RBI said in its statement then.

According to reports, the government is to infuse Rs 40,000 crore into State-owned banks in this financial year to strengthen their balance-sheets and support credit growth.

What is it?
Leverage ratio is also one the four indicators under the RBI’s prompt corrective action framework. Relaxation of it could potentially help a few banks currently under prompt corrective action (PCA) that comply with the leverage framework. But, experts state that banks also need to see an improvement in net non-performing assets and capital adequacy ratio to come out of PCA.

As on March, the banks which are under PCA include United Bank of India which has a leverage ratio of 3.98 per cent, Indian Overseas Bank whose ratio stands at 3.89 per cent, Central Bank of India (3.33 per cent) and IDBI Bank (4.69 per cent). For UCO Bank, leverage ratio stands at 3.38 per cent as on December last year.

NT Bureau