The Reserve Bank of India's (RBI) board meeting on November 19 is expected to be a stormy affair in the backdrop of the ongoing tussle between the government and the central bank. Some members are likely to raise issues concerning capital framework, management of surplus and non-performing assets (NPA) norms for Micro, Small and Medium Enterprises.

It is also likely to discuss Basel III norms and prompt corrective action (PCA) framework.

According to the minimum capital requirements under rules made by global banks at the Swiss city of Basel in the 1990s, all banks have to keep minimum capital of 8 percent and also they have to keep 4.5 percent of this as common equity.

India requires 5.5 percent as common equity and 9 percent as overall capital, whereas Basel requires 8 percent. RBI's reasons for these over the years have been that in India losses for banks are higher when loans go bad because the judicial system is very time consuming.

RBI also says the capital requirements of countries such as Mexico, China, South Africa, Turkey and Singapore are between 9 and 11 percent which is higher than the required by Basel rules.

Latha Venkatesh caught up with Haseeb Drabu, economist and former finance minister of J&K; B Mahapatra former executive director, RBI and Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services to discuss the pros and cons of these issues.

Haseeb Drabu said, "The reason why the regulatory capital requirements are higher than Basel is because the prudential norm system is not as robust as elsewhere.

For instance, RBI has not still stipulated the basic issue of coverage ratio, said Drabu, adding that there are banks that are operating with 100 percent coverage ratio and banks that are operating with 30-35 percent coverage ratios.

"So, there is a link between the regulatory part and the prudential part. I think we need to look at strengthening the prudential part before we strengthen or weaken or reduce the regulatory capital requirement," Drabu added.

We are operating in an economy which has a large informal segment where credit flows are confidence based, relationship-based and not credit history based, he said.

B Mahapatra said, "This Basel norm of 8 percent came from the point of view of G10 countries. Actually, they were the only members of Basel committee till the global financial crisis of 2008 when it was expanded to G20 and India also became a member of the Basel committee and accepted the Basel rules."

So, Basel 8 percent is a calibration, it is an average concept, he said, adding that the calibration was done based on the data supplied by G10 countries and in those countries the interest rates are low, the volatility of the rates are low, the recovery procedures are very fast, the loss during default is low, so based on all these factors this 8 percent was calibrated.

"When the Basel 2 came it applied external rating agencies' rating to a loan. So, based on that rating the risk weights are calibrated. If it is AAA the risk weight will be 50 percent, if it is AA it maybe 75 percent, lower the rating higher is the risk weight," Mahapatra said.

These risk weight calibrations was drawn based on the ratings by S&P and Moodys, he added.

"Whereas, in our country, we depend on the rating of our domestic rating agencies which do not have that long history. So, the calibration could be different and it is very close to the reality and the 9 percent is good enough and it has stood the test of times for us," Mahapatra said.

Ashvin Parekh said, "I am entirely endorsing the view that the regulator has decided 9 percent for this market in comparison to Basel norms is better, then the regulator is all the justification in doing so."

Let us look at the leveraging of the balance sheet, at 8 percent you are leveraging 12.5 times, at 9 percent you are leveraging your balance sheet 11.1 times which means you are exposing your deposit holders more to the risk compared to what you would have done at 8 percent, for instance, Parekh said.

"The regulator has to look at two things. It has to protect the deposit holder's interest and to look at the stability of the banking system. I think from both perspectives and now with the NPA scenario and with the NCLT going so long, I would certainly say that even 9 percent could be reviewed to a higher percent," He added.

First Published:Nov 18, 2018 2:22 PM IST