RBI Tightens Prudential Norms

IE 26 June 2014

The Reserve Bank of India on Thursday indicated that big banks — to be classified as domestic systemically important banks (D-SIBs) — will be asked to bring more capital and brought under stringent supervision from August 2015.

The RBI’s bi-annual Financial Stability Report (FSR) also highlighted the need to assess the collective size and profile of activities of the large number of non-bank financial entities functioning in the organised as well as the unorganised sector, including unincorporated entities which are outside the purview of the regulatory perimeter, or collectively called shadow banking.

Based on their systemic importance scores, banks will be plotted into different buckets and D-SIBs will be required to have an additional common equity Tier 1 capital requirement ranging from 0.20 per cent to 0.80 per cent of the risk-weighted assets.

“D-SIBs will also be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks that they pose to the financial system. The names of the banks classified as D-SIBs will be disclosed in August every year starting from 2015,” it said.

The RBI said a preliminary study carried out by the Shadow Banking Implementation Group (SBIG) comprising of members from all financial sector regulators, concluded that there was a high degree of heterogeneity in business models and risk profiles across various non-bank financial entities in the organised (including the entities not ‘registered’ with any of the regulators) as well as the unorganised sector.

Apart from such NBFCs, SBIG has also identified ‘exempted’ provident funds, unregulated chit funds, co-operative and credit societies and primary agricultural credit societies as groups of institutions that need a greater degree of oversight.

“Also, government-owned entities discharging the functions as special NBFCs which are exempt, by statute, from adherence to prudential regulations and given their systemic significance, are an area of concern. Certain other entities such as special purpose vehicles (SPVs) are not regulated and can cause overleveraging and risks to the financial system,” the FSR said.

While the FSR mentioned the formation of a stable government at the Centre has ameliorated political risk and has led to expectations of better policy coordination and implementation, it also said the risks to the banking sector have increased with concerns over liquidity and profitability continuing.

Despite marginal improvements in the soundness and asset quality, the level of gross non-performing advances as percentage of total gross advances of public sector banks was significantly higher as compared to the other bank groups, it said.

In his foreword to the report, RBI Governor Raghuram Rajan said, “India’s financial system remains stable, although the public sector banks face challenges in coming quarters in terms of their capital needs, asset quality, profitability and more importantly, their governance and management processes.”

While India remains committed to implement global regulatory reforms, priorities may differ as the Indian financial system faces a different set of challenges as compared to those jurisdictions which faced financial / banking crises, he said. While “the country has chosen a politically stable government”, Rajan said markets expect more decisiveness in policy formulation.