Indian government eyes reforms unleashing $8.72b in banking capital

Lowering the CET Tier-I ratio from 5.5% to 4.5% is expected to boost lending.

The Indian government is planning to hold talks with the central bank to relax certain capital requirements that will unleash an estimated $8.72b (Rs 60,000 crore) of capital for the country’s embattled state-owned lenders, reports The Economic Times. 

The minimum common equity (CET) Tier-I ratio, as prescribed by the Reserve Bank of India, stands at 5.5% of the bank’s risk weighted assets. However, this is is actually more stringent than prescribed Basel III norms of 4.5% CET ratio.

If banks were required to set aside less money in compliance with Basel standards, lenders may be able to eke out more gains without any additional requirement for provisioning, a government official told ET.

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Indian public banks have been hammered by a slew of problems from a massive $3.81b loss in 2017-18 due to fraud as well as ballooning bad debt burden due to rising slippages in the power and metal sector. 

There is also no need for capital norms to exceed those of Basel as the Indian banking system is implicitly backed by a sovereign guarantee due to the proliferation of public sector lenders that account for around 70% of the banking system, Niti Aayog vice chairman Rajiv Kumar told ET.

Also read: India needs to trim its bloated banking sector

“This relaxation will immensely help weaker banks which are finding it difficult to meet the regulatory capital adequacy ratio under the current dispensation,” Krishnan Sitaraman, senior director, Crisil Ratings told ET.

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