The Reserve Bank of India on Monday designated State Bank of India and ICICI Bank as Domestic Systemically Important Banks (D-SIBs), which will put them under tougher monitoring to avoid any collapse. SIBs are perceived as banks that are ‘Too Big To Fail’
The RBI said the two banks have been selected due to their size, cross-jurisdictional activities, complexity, lack of substitutability and interconnectedness. SBI alone accounts for a fifth of the banking business in India.
“The disorderly failure of these banks has the potential to cause significant disruption to the essential services they provide to the banking system, and in turn, to the overall economic activity. Therefore, the continued functioning of SIBs is critical for the uninterrupted availability of essential banking services to the real economy,” RBI said while announcing the framework for dealing with D-SIBs.
Following their designation as D-SIBs, SBI and ICICI Bank must meet additional Common Equity Tier 1 (CET1) requirements from April 1, 2016, in a phased manner. The CET1 requirements will be fully effective from April 1, 2019. This means the banks will have to set aside more funds at a time when banks are battling a huge bad debt burden.
The additional requirement as a percentage of Risk Weighted Assets (or loans) for SBI and ICICI Bank have been set at 0.60 per cent and 0.20 per cent, respectively. This will be in addition to the extra capital buffers already in place under Basel-III guidelines.
Both banks said their capital base was higher than mandated. Arundhati Bhattacharya, Chairman, SBI, said, “SBI currently has a much higher level of Tier-I at 9.62 per cent as opposed to 7 per cent required under the current guidelines. We will adhere to the additional requirements as and when they become applicable.”
Chanda Kochhar, MD and CEO, ICICI Bank, said, “ICICI Bank’s capital adequacy is well in excess of regulatory requirements and the Bank is not expected to require fresh equity capital for the next couple of years."
If a foreign bank, having a presence in India, has been notified as Global Systemically Important Bank (G-SIB), it has to maintain the additional capital surcharge in India, proportionate to its Risk Weighted Assets in India. HSBC, JP Morgan Chase, Barclays and BNP Paribas are among the G-SIBs in India as per the Financial Stability Board’s list of November 2014.