An Indian parliamentary panel has recommended the central bank of the country to relax the capital requirements for banks to boost lending.
The Parliamentary Committee on Finance has tabled its report which has advised the Reserve Bank of India (RBI) to ease the ‘stringent norms’.
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Bank capital requirements revision: Background
Earlier, the government also advised RBI to lower the minimum capital requirements, which was opposed by the central bank citing that it serves as buffer against market shocks, reported Reuters.
All Indian banks are required to keep a minimum capital to risk weighted asset ratio (CRAR) at 9%. Additionally, they are directed to maintain a capital conservation buffer.
According to an estimate, relaxing of capital requirements will inject up to INR5.34 trillion ($76bn) into the economy.
Easing the requirements will enable the banks to increase lending as well as support economic growth.
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By GlobalDataHowever, analysts including global rating agencies have advised against the move as it will increase the vulnerability of the lenders to losses and failures.
Fitch Ratings financial institutions country director Saswata Guha told Reuters that the capital ratios of majority of the Indian banks are below the global Basel-III requirements. Also, the loan recovery ratios of the banks are historically low.
Guha added: “Given such low recovery ratio, any kind of dilution of capital norms will be credit negative for Indian banks.”
Last month, it was reported that India is planning to infuse an additional INR410bn ($5.87bn) into state-owned banks as a part of its recapitalisation plan to fulfil global requirements.
