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Capital deadline extension credit negative: Moody’s
Why is it in the news ?
- As per the Moody's investor services, RBI board’s decision to extend the timeline for banks to implement Basel 3 guidelines is “credit negative” for public sector lenders.
More in the news
Outcomes of Board meeting :
- Amid growing tension between the government and the central bank, the RBI board met on 19th of this month.
- It discussed issues to boost funding to MSMEs and ease capital pressure on banks.
- The board has advised RBI to let banks recast loans up to Rs.25 crore given to micro, small and medium enterprises (MSMEs).
- Also, in the Board meeting, the central bank decided to retain the CAR at 9%, But extended it by one year-up to March 2020.
Moody's Response :
- The decision to restructure stressed micro, small and medium enterprises (MSME) loans of up to Rs 25 crore also has the potential for having negative implications for the credit profiles of Indian banks.
- The decision to extend the timeline for the full implementation of Basel 3 guidelines by a year is a credit negative for Indian public sector banks.
- It expects that all public sector banks would have a core equity tier 1 (CET1) ratio of atleast 8 per cent by the end of March 2019.
Basel 3 guidelines
- These are common set of global standards to be implemented by banks across countries.
- After the 2008 financial crisis, need arose to strengthen the banking system further so that they could meet further risks.
- To meet these dangers, banks were asked to maintain a certain minimum level of capital and not lend all the money they receive from deposits.
- This acts as a buffer during hard times. The Basel III norms also consider liquidity risks.
- In India, lenders were expected to adhere to these regulations from 2019. But now it is extended to 2020.
Capital Adequacy Ratio (CAR)
- Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital in relation to its risk weighted assets and current liabilities.
- It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
- Capital Adequacy Ratio = (Tier I + Tier II + Tier III (Capital funds)) /Risk weighted assets
- The Basel III norms stipulated a capital to risk weighted assets of 8%.
- However, as per RBI norms, Indian scheduled commercial banks are required to maintain a CAR of 9%.
Source
The Hindu, Economic Times.