RBI warns on easing banking norms in haste

The Reserve Bank of India (RBI) has said that any kind of decision to ease the regulations on capital adequacy and risk weights at a time when defaults are high and provision are low to cover losses is harmful to the economy.

 “The Basel III norms recommend risk weights for various credit exposures, based on cumulative default rates (CDR) and recovery rates observed internationally. However, the CDRs and the loss given default (LGD) rates observed in India are much higher than observed internationally. Therefore, applying the Basel specified risk weights would understate the true riskiness of loan assets carried on the books of Indian banks,” RBI said in a report.

The move comes at a time when the government has been wanting the apex bank to ease its norms on capital adequacy, driven from the thought that it is hampering the credit flow in the economy.

The RBI’s report comes at a time when the public-sector bank chairmen had pitched for tweaking in the prompt corrective action norms in their last meeting with the apex bank governor Shaktikanta Das. Out of 21 PSB’s, 11 are under the PCA framework as the central bank also justified its application of the PCA norms on the banking sector.

“The revised prompt corrective action (PCA) framework effected from April 2017 seeks to intervene early and take corrective measures in a timely manner so that the financial health of the banks is quickly restored. The early intervention framework varies across countries, based on supervisory tools, the range of powers of the regulatory/supervisory authority and degrees of restrictions,” the central bank said in its report on Trend and Progress of Banking in India 2017-18.

In fact, bankers and government, both saw former governor Urjit Patel as too strict on the banking sector, and thereby causing hinderance in the credit flow in the economy just before the general elections of 2019. This ultimately led to the unceremonious resignation by Patel, amid the turf-grab by the Narendra Modi led BJP government.