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Basel breather for banks

Mumbai, March 27: The Reserve Bank of India (RBI) today extended the deadline for Indian banks to fully comply with the Basel III capital adequacy norms by a year to March 31, 2019.

The relaxation comes at a time banks are grappling with the problem of rising bad loans necessitating higher provisions, thus increasing their capital requirements.

With the domestic economy passing through a slowdown, lenders have seen not only a jump in bad loans but also a greater number of restructuring cases.

Most of the top bankers admit that though the growth of non-performing assets (NPAs) has peaked, it will show a secular fall only if there is a turnaround in the domestic economy.

The RBI introduced the Basel III norms from April 1 last year. These norms, which have been framed by the Basel Committee on Banking Supervision (BCBS), focus on improving the sector’s ability to face shocks emanating from financial and economic stress by increasing the level and quality of capital that a lender must deploy.

It may be recalled that the Reserve Bank had announced the final Basel III guidelines in 2012. To be implemented in phases, it was then proposed that the norms would be fully implemented as on March 31, 2018.

“Of late, industry-wide concerns have been expressed about the potential stresses on the asset quality and consequential impact on the performance/profitability of the banks. This may necessitate some lead time for banks to raise capital within the internationally agreed timeline for full implementation of the Basel III Capital Regulations. Accordingly, the transitional period for full implementation of Basel III Capital Regulations in India is extended up to March 31, 2019, instead of as on March 31, 2018,” the central bank said in a notification today.

The revised deadline will thus bring India closer to the internationally agreed date of January 1, 2019.

Bankers welcomed the extension given by the RBI. “As we will need more capital not only to meet Basel III but also for other purposes, the extension of the deadline is certainly a positive development as it will ease the pressure on the system,” a senior official from a public sector bank said.

In a recent note, IDFC Securities had forecast that Indian banks will need $140 billion till 2019 to meet Basel-III norms and other requirements like providing against bad loans and meeting credit demand.

According to the Basel III transitional arrangement put in by the RBI, banks should have a common Tier 1 equity capital of 5 per cent (as a percentage of risk weighted assets) by March 31, 2014, which will be raised to 5.5 per cent from March 31, 2015.

While the RBI had earlier proposed that banks must also create a capital conservation buffer in phases beginning March 31, 2015 and lasting till March 31, 2018, this has been extended by a year.

The central bank further clarified that banks will be permitted to pay dividends on common shares from the current year’s profits only.

 
 
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