Dr C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, has hinted that there is a proposal to set a limit on the leverage ratio.

Speaking at Bancon-2011 here, he said that excessive leverage in banks may be contained through additional supplements to the risk-based capital ratio.

Institutions may be required to set up buffers in good times to be drawn down in bad times.

This may entail varying capital adequacy and provisioning requirements according to the phase of the business cycle. They may be allowed to rise and fall with the business cycle. With specific reference to the need for regulation, he said that there is a degree of consensus on how the regulatory framework should be reshaped.

The regulatory framework should cover all segments of the financial markets. The rigour of regulation must be uniform among all segments to avoid regulatory advantage.

The new capital rules as and when they come into effect will increase the cost of operations. With the deregulation of interest rates on savings deposits, the cost of raising funds will go up. Financial inclusion agenda will also have its own impact.

“In this context, apart from improving operational efficiency, greater attention needs to be paid to improving the recoveries of non-performing assets (NPAs) and on removing the regulatory and procedural bottlenecks that come in the way,’’ Dr Rangarajan said.

Banks would need to watch out as well for liquidity risk which will increase because of maturity mismatches. Increased exposure to real estate and infrastructure will lengthen the maturity of the banks assets.

“The dexterity of the bank management lies in managing risks both in the upswing and downswing,’’ he said.

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