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Govt in favour of alignment of capital adequacy norms with Basel III norms

Instead of present stricter guidelines which restrict the lending capacity of lenders, the government is of the view that the Reserve Bank of India (RBI) should resort to Basel III norms for capital adequacy in banks. Currently, the RBI applies stricter norms and not those specified under Basel III for capital adequacy, leading banks to set aside higher capital for loans. Besides, the RBI has fixed March 2019 as the deadline to meet capital requirements under the Basel III norms for banks.

The government has been in favour of alignment of the capital adequacy norms with Basel III norms. This assumes significance amidst growing tensions between the RBI and the government, with the Finance Ministry initiating discussion under the never-used-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI Governor.

According to the Basel Committee on Banking Supervision (BCBS) report, core capital requirement for banks as prescribed by the RBI is 1% higher than what Basel III norms recommend. Indian banks as per RBI direction are required to maintain 5.5% Common Equity Tier 1 (CET 1) as against 4.5% required under the Basel III framework. The BCBS report said these higher capital norms translate into additional capital requirement, restricting lending potential and income generation.

As per the report, while the Basel framework requires the application of capital standards to all internationally active banks, these have been made applicable in India to all scheduled commercial banks, including banks which are not internationally active. Meanwhile, India has only four internationally active banks, which have more than 10 per cent of their assets in their overseas book.

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