SME Times News Bureau | 20 Aug, 2019
RBI Deputy Governor N S Vishwanathan said that
India’s banking reforms will be globally compliant, yet tailored to local needs.
He said this while delivering a special address on the
concluding day of 'FIBAC 2019', India's annual banking conference
organised by FICCI and IBA.
Vishwanathan discussed the way forward for banks in
light of the global banking regulations. Post the global financial crisis
(GFC), the Basel Committee set in motion a series of regulatory reforms
intended to address the fundamental flaws that were present earlier.
The loss absorbency of capital needed to be improved, Mr
Vishwanathan said. "It's not sufficient for capital to deal with normal
times; there must be capital to deal with problem times in future.
Build capital when you are in good times." Banks
are therefore required to build a capital conservation buffer of 2.5 per cent
over and above the regulatory capital requirements.
There is a need for banks to increase their resilience. The risk weighted
capital framework had to capture the risks better. The standard rating approach
of Basel 2 revealed certain inconsistencies. Hence the framework had to be
There were also changes to the market risk framework and
the securitisation framework. Thus, emerged the concept of the 'too big to
"It is not just sufficient to have individually
strong entities," Vishwanathan said.
For a financially strong system the Basel Committee
recommended, apart from a capital conservation buffer, a large exposure
framework and additional capital for systemically important banks. Such banks
need to have more capital than others.
The intent is to make them self sufficient and not
dependent on state support for continuance just because they are too big to
The capital risk weighted asset ratio system enabled
banks with low capital to build large balance sheets.
"But low density of risk weights is a function of
how good the ratings are," he pointed out. It can result in shortage of
capital over time. It was therefore necessary to prevent unbridled growth in
the balance sheet. This came in the form of leverage.
leverage ratio is a binding requirement to prevent the CRAR-based capital
resulting in over-leverage of the balance sheet." He revealed that there
were a lot of discussions around this issue.
"One of the most important lessons of the crisis
was that liquidity is an important requirement for a bank." Vishwanathan
said that Indian lawmakers had already seen this as a very important
requirement. They had already prescribed the statutory liquidity ratio as an
important requirement for banks. Post the crisis, banks are expected to
maintain a liquidity ratio of 30 days under stressed conditions.