The Reserve Bank of India is examining whether a part of banks’ investment in government securities can be considered for compliance under Basel III norms for capital requirement, said Anand Sinha, Deputy Governor, RBI.
Banks’ investment in government securities is classified as statutory liquidity ratio (SLR). Under the SLR, banks are required to park 23 per cent of their deposits in Central and State government securities.
A portion of the SLR investment will be carved out for the purpose of calculating capital requirement under Basel III, he said.
According to the RBI’s estimates, public sector banks would require common equity to the tune of Rs 1.4-1.5 lakh crore on top of internal accrual. This is in addition to Rs 2.65 -2.75 lakh crore as non-equity capital over a five-year period.
According to Sinha one of the major shortcomings (currently) is that due to inadequacy of capital requirement which is at 8 per cent minimum, the real loss absorbing capital is 2 per cent. Therefore, there is greater reliance on non-equity capital and when it comes to the crunch, it could not absorb losses.
On fears of the impact of the Basel III regulations, Sinha said, “Our calculations show that...the incremental capital required on account of Basel III is less intimidating than the (overall) figure of Rs 1.4 - 1.5 lakh crore (which the RBI has calculated).”
Banks would anyway have to raise capital to support growth and capital requirement under Basel-III should be treated only as incremental requirement, he added. “The issue of model error that underestimated the risks and the question of assigning lower capital during boom period are issues being tackled in Basel III regulations,” Sinha said. Despite a significant increase in total assets of the banking system, the risk rating did not capture the real picture, he added.