The Reserve Bank of India on Tuesday said it is not necessary to activate countercyclical capital buffer (CCyB) for scheduled commercial banks at this point in time.
The central bank came to the aforementioned conclusion based on a review and empirical analysis of CCyB indicators.
CCyB indicators include credit-to-GDP gap, incremental credit-deposit ratio for a moving period of three years (along with its correlation with credit-to-GDP gap and gross non-performing asset/GNPA growth), industry outlook assessment index (along with its correlation with GNPA growth) and interest coverage ratio (along with its correlation with credit-to-GDP gap).
Buffer of capital
CCyB requires banks to build up a buffer of capital in good times which may be used to maintain flow of credit to the real sector in difficult times.
Secondly, it achieves the broader macro-prudential goal of restricting the banking sector from indiscriminate lending in the periods of excess credit growth that have often been associated with the building up of system-wide risk.
The framework on CCyB was put in place by RBI in terms of guidelines issued on February 5, 2015 wherein it was advised that the CCyB would be activated as and when the circumstances warranted, and that the decision would normally be pre-announced.
According to RBI, CCyB may be maintained in the form of Common Equity Tier 1 (CET 1) capital or other fully loss absorbing capital only, and the amount of the CCyB may vary from 0 to 2.5 per cent of total risk weighted assets of the banks.