Mumbai: “Indian banks maintain capital well above regulatory requirement now, but their needs are expected to increase with the full implementation of the Basel II framework, said Reserve Bank of India (RBI).
“Banks have been maintaining capital at a level well above the capital regulatory requirements, which implies that the safety of Indian banking system has improved,” the bank said in its 2006-08 report on currency and finance.
The Basel II regulations, drafted by the Bank for international settlements, seek to align regulatory capital requirements more closely with risks faced by banks globally.
Indian banks with offshore branches and foreign banks in the country moved to Basel II requirements from 31 March, the end of the 2007/08 financial year. Other banks have until March 2009 to start complying with the Basel II norms.
The central bank said the capital adequacy estimates have been made under two scenarios. In the baseline scenario, it is assumed banks would maintain the overall minimum capital ratio of 9% of risk-weighted assets and a Tier-I capital at 4.5%.
In the second scenario, bank would maintain capital adequacy ratio at 12%, with Tier-I capital at 6% of the risk weighted assets.
“At a 12% capital adequacy requirement, the capital needs for the banking sector were projected to rise to Rs8.6 trillion at the end of March 2012, from Rs4.08 trillion at end-March 2008 and Rs2.96 trillion in the previous year,” it said.
“The capital requirements decline significantly if CRAR (capital to risk-weighted assets ratio) is to be maintained at 9%,” the report said.
The central bank said that the post-Basel phase might lead to assymmetry in the regulatory regime among the three broad segments in the financial sector — banking, securities and insurance.
“With the commercial banking sector on Basel II, some scope for regulatory arbitrage amongst the three broad segments, especially between banking and insurance would exist,” the report said.