RBI unveils countercyclical capital buffer norms for banks

MUMBAI: The Reserve Bank of India has set the credit-to-GDP ratio and banks' credit-to-deposit ratios as the benchmarks for mandating the so-called 'countercyclical capital buffers', the capital level required to prevent excessive lending during good times and create a cushion during times of economic stress.

The regulator, which is implementing strict rules based on Basel III guidelines for making the banking system sound, has not said when it would prescribe higher capital requirements since the credit-to-GDP ratio in India is lower than even some of the emerging peers. It has retained the right to restrict financial decisions of banks such as dividend payments if it believed that the capital situation of banks is weak.

“Banks will be subject to restrictions on discretionary distributions, which may include dividend payments, share buybacks and staff bonus payments, if they do not meet the requirement on countercyclical capital buffer, which is an extension of the requirement for capital conservation buffer, or CCB,“ said RBI.

If the long-term trend of India's credit-to-GDP ratio is at 40%, higher provisioning will begin when it crosses 43%, and would keep climbing. It would grow by 20 basis points linearly almost up to the time when the credit-toGDP ratio touches 58%. The buffer may vary from zero to 2.5% of the total risk-weighted assets of banks, said the central bank.Countercyclical buffers are additional provision that banks are expected to make during good times to provide for capital erosion during bad business periods.

Unlike many regulators, the RBI has also said it would prescribe these higher levels when it believes that gross bad loans are climbing and posing a threat to the financial system. But it did not provide a figure.