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In the past 18 months the banking regulator has been fairly active. Number of constraints or disincentives have been imposed on banks; about a couple of months ago the savings rate was deregulated, recently the NRI interest rates have been deregulated, 14 months ago the regulator ensured that the banks set aside more NPLs.
In the past 18 months the banking regulator has been fairly active. Number of constraints or disincentives have been imposed on banks; about a couple of months back the savings rate was deregulated, recently the NRI interest rates have been deregulated, 14 months ago the regulator ensured that the banks set aside more NPLs.
In the first year the provisioning went up from 10-15%, in the second year it went up from 20-25% and so on. Now, the regulator has come with more stringent rules for capital. That is, the amount of shareholder capital that should come in against which banks can collect deposits and make loans. That shareholder capital is going to be increased under what are called Basel III norms.
Besides this, there is something called dynamic provisioning that also will kick in which means banks will have to set aside even larger proportions of their profits for a rainy day to back up potential losses, loans that are not being returned.
In an interview to CNBC-TV18, Anand Sinha, RBI deputy governor, shared his view on the initiative taken by the regulator in the banking space.
Below is the edited transcript of his interview to CNBC-TV18. Also watch the accompanying videos.
Q: You have packed in the last 15 months a whole host of conditions precisely at a time when both the global economy and the Indian economy is going through a rather serious slowdown, does not this bother you?
A: One has to look at it from a different perspective; there is no denying that we are in difficult times. All the measures are supposed to be implemented over a long period of time so that these activities create minimal disruption or little slow down of economic activity as possible. So, there is six years to implement in case of Basel III. Almost 100 simulations had been carried out to check its impact on growth. After completion of vigorous exercise the timeline has been decided.
Another angle to look at is that, how you put the economy back on rails? How you inspire confidence? If because of this stringent situation the banking system is left as it is. Although not in India, we are fairly safe but in the West, despite all these conditions if the banking system is not put back on rails then they will not be able to recover. So, this is the compulsion of the situation. The practicality of this situation demands elongated timeframe.
A: RoE will certainly come under pressure. You are supporting the same balance sheet with a higher level of capital. The banks can cope with this situation in several ways, but the two most important ways are that they will increase the lending rates and cut down lending and that indeed is bound to happen in the initial stages. But later on, as the banking system is seen to be more robust and moving along the required regulatory path it is hoped that the investor confidence will come back and the investors also look into risk return trade off so they might settle down or rather they would settle down for a lower return on equity.
In the West some banks had return on equity as high as 22% -25% which is unsustainable. This amount of return on equity was a problem at the same time a very depressed return on equity will also be a problem. With time, the banking system will be seen to be more robust. The equilibrium point will return and investor interest will also return. Long-term return on equity in the US and the UK is 8% and 10%. In Europe it is 4-6%. The US has been able to manage as they went in for corrective measures quite soon.
Q: What about the big shareholder, PSBs they are shareholder of the government? With respect to these increasing doses of capital that will be needed not just to support growth but to support the same amount of loans, higher capital are you in touch with the government on the matter and will so much of capital be forthcoming?
A: We have issued our guidelines. The government has also carried out the exercise. The government has to maintain 51% and they have to bring in capital. The FM has said many times that the capital required by public sector banks for implementing Basel III would be provided by the government.
Q: Is there any number with regards to calculations?
A: For public sector banks, equity requirement is up to Rs 143,000 crore till March 31, 2018 and the overall capital requirement is Rs 4,25,000 crore. But, this is a misleading figure as it gives an impression that this capital is required only on account of Basel III which is not correct, because otherwise also capital goods have been required under Basel II. The difference in amount between Basel II nad Basel III is a small figure of Rs 71,000 crore in common equity and the total capital requirement for public sector banks is Rs 1,65,000 crore.
Q: Is it a manageable figure?
A: It is manageable. In totality, it looks a big figure. But let us not only put everything on Basel III.
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