Higher capital buffer lowers liability cost for banks, pushes credit growth, says RBI paper

The presence of higher capital buffers at banks lowers their cost of liabilities and gives a push to credit growth, according to a working paper published by the Reserve Bank of India (RBI) on 11 June.

“It is argued that higher CRAR (capital to risk-weighted assets ratio), by improving the financial health of banks, reduces their cost of borrowing, which in turn helps them to supply more loans at a cheaper price,” Ranajoy Guha Neogi and Harendra Behera wrote in the paper.

Similarly, the lending rate of banks was also found to be lower for banks with higher capital ratios. An increase in the capital position of banks helps them to not only access funds at cheaper costs but also increase credit as they reduce their lending rate, the paper said.

At the aggregate level in India, non-food bank credit growth has decelerated, despite the increase in capital ratio. The researchers said that the elevated level of gross non-performing assets (GNPA) has impacted the credit growth of banks negatively while high CRAR has contributed positively.