SME Times News Bureau | 19 Oct, 2020
Non-performing assets (NPA) of a bank weakens the monetary policy
transmission and loan growth rate, said a recent working paper prepared
by the staff members of the Reserve Bank of India (RBI).
The
paper titled, 'Bank Capital and Monetary Policy Transmission in India'
shows the requirement of bank capital regulation in India.
The
study finds evidence on the existence of the bank capital channel of
monetary policy transmission for India. It said that that there is a
positive association between bank equity and credit growth.
"This
finding calls for the need for countercyclical capital buffer for the
Indian banks to protect their balance sheet against losses from changes
in economic conditions during the recessionary phase," it said. The
paper mentioned that the views expressed are those of authors and not
that of RBI.
The study revealed that banks with higher
Capital-to-Risk (Weighted) Assets Ratio (CRAR) face a lower cost of
funds. The pro-cyclical nature of leverage shows that banks lend during
economic boom by raising debt funds -- through deposits, borrowings --
rather than using their excess capital.
"Higher CRAR unlocks the
bank lending channel and helps in smooth transmission of monetary
policy. However, the magnitude of transmission of monetary policy was
found to be weak for banks with CRAR higher than a certain threshold
level," it added.
It noted that low level of CRAR not only hampers bank health but also restricts smooth transmission of monetary policy.
Injection
of capital by the Government of India in public sector banks is likely
to increase the credit flow to the real sector and help in smoother
transmission of monetary policy, it added.
