RBI includes HDFC Bank in ‘too big to fail’ lenders list

Mumbai: Private sector lender HDFC Bank Ltd has been declared a domestic-systemically important bank (D-SIB), the Reserve Bank of India (RBI) said on Monday. With this, the bank has joined State Bank of India (SBI) and ICICI Bank Ltd, which have been tagged as D-SIBs, or “too-big-to-fail” for the third consecutive year.

Such classification means the collapse of these lenders could have a cascading impact on the entire financial system and the economy. Considering their status, D-SIBs are mandated to maintain a progressively higher share of risk-weighted assets as tier-I equity, which is a measure of the bank’s core capital.

In case of HDFC Bank, the additional capital surcharge will be applicable from 1 April 2018.

The additional capital requirement for D-SIBs have kicked in phase-wise since April 2016 and will be fully effective from April 2019, according to the RBI framework.

RBI declares a list of D-SIBs every year. The first list was released in 2015, in which SBI and ICICI Bank were named systemically important. Both these lenders have been designated on the basis of a systemic importance score, arrived at after an analysis of the banks’ size as a percentage of annual gross domestic product (GDP). Banks with assets that exceed 2% of GDP will be considered part of this class of lenders.

The selected lenders are then assessed on the four systemic importance buckets—size, interconnectedness, substitutability and complexity.

Out of the four systemic importance buckets, SBI falls in bucket three, while ICICI Bank and HDFC Bank are in bucket one.

According to the D-SIBs framework, released in August 2014, banks under bucket one will need to maintain an additional 0.15% of additional tier-I capital from April 2018, which will increase to 0.2% in the following year. In case of bucket three, the additional requirement of 0.45% is to be maintained from the start of next fiscal and will rise to 0.6% from April 2019.

“For D-SIBs, while there are additional capital requirements, there is advantage in the form of lower borrowing costs. This is because the overall perception of the bank should improve on account of the regulatory tag of being a systemically important bank, creating an expectation of government support in times of financial distress” said Udit Kariwala, senior analyst at India Ratings.