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Oct 22, 2012, 11.18 PM IST
RBI Deputy Governor Anand Sinha today said the central bank is looking at a move under which a part of banks' statutory liquidity ratio (SLR) holdings can be treated in a way that it complies with liquidity norms under the Basel III capital requirements.
RBI Deputy Governor Anand Sinha today said the central bank is looking at a move under which a part of banks' statutory liquidity ratio (SLR) holdings can be treated in a way that it complies with liquidity norms under the Basel III capital requirements. "We are thinking on to how to work out a scheme under which a part of the SLR is treated as Basel III liquidity requirement," Sinha said at an event organised here by Care Ratings.
He said the Basel III framework -- adopted in the wake of the 2008 global financial crisis to safeguard banks in case of stress -- asks for a liquidity coverage ratio that requires banks to hold marketable high quality liquidity assets. However, domestic banks can't be asked to hold it as they already have SLR holdings of 23 per cent, which are not marketable, Sinha said, adding that it necessitates change in the framework.
SLR holdings are investments by banks in government securities and other liquid assets, acting as a liquidity buffer. Many banks have excess SLR holdings with the average holding in the system standing at close to 28 per cent. Since October 2010, the RBI has twice reduced the SLR limits by 1 percentage point each with the latest being in July.
Sinha also tried to allay fears about the impact of the Basel III regulations requiring higher capital adequacies, saying it is a cost, that too in the short-term, to pay for overall stability. The net incremental capital requirement needed for the country's banks over the six-year transition period to adopt the Basel-III requirements in full is "less intimidating" than being discussed.
"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 trillion (which RBI has calculated)," Sinha said. Banks would anyway have had to raise capital to support growth and the Basel-III should be treated only as incremental requirement, he said.
This requirement, though having a short-term impact in through higher capital allotment in the short term, will only benefit the banks in the long-term as it brings in the element of stability, he said. To investors fearing a dent to the return on equity on banking stocks, Sinha said the stability being bought about will reduce the risk premia.
Additionally, to protect their margins, banks should work on various internal issues like cutting operational costs, managerial compensations and reduce dividends, Sinha suggested.
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