Enough funds in banking system, says Subir Gokarn
K.R. SRIVATS
( collected from the newspaper Hindu Business Line )
NEW DELHI, SEPT 10:
The liquidity condition in the banking system is comfortable with no signs of stress in the money market, Reserve Bank of India Deputy Governor Subir Gokarn has said.
“We have not for quite some time felt that there was stress in the market both in terms of quantity of LAF (liquidity adjustment facility) borrowing and in terms of behaviour of call rate,” Gokarn told newspersons on the sidelines of a National Finance Symposium, organised by the Indian Institute of Foreign Trade (IIFT) here.
The overall LAF borrowing by banks was well within the RBI’s comfort zone of 1 per cent of net demand and time liabilities, he added.
On whether the RBI was comfortable with the current level of foreign exchange reserves, Gokarn said the apex bank has “never been uncomfortable with the level of reserves”.
“I think the dollar reserve is a strategic resource. It is something that we have to measure against potential short-term liability. That is something we have been benchmarking consistently,” he said.
Gokarn, however, declined to comment on the inflation situation or his expectations. The Government is likely to come up with inflation data for August on September 14.
On rupee movement, he said the local currency had over the last several weeks been relatively stable and that would suggest that there has been more or less a balance between inflows and outflows. “We are obviously monitoring the situation and will react to it as appropriate”.
Earlier, in his opening remarks at the event, Surajit Mitra, Director, IIFT, said there was need for quick and effective banking reforms. He suggested that product innovation (in the financial sector) should be incentivised. He also stressed the need for an effective regulator in insurance.
‘CRR cut could bring down banks’ fund costs’
Collected from the newspaper Business Line / The Hindu 07.09.2012
MUMBAI, SEPT. 5:
The Reserve Bank of India could give support to the banking system either through a cut in cash reserve ratio or by reducing the amount of investment banks need to make in government securities, said the Indian Overseas Bank Chairman and Managing Director, M. Narendra.
Such a move could bring down the cost of funds for banks. In turn, lending rates could come down.
Cash reserve ratio is the slice of deposits banks have to park with the RBI.
Currently, it is at 4.75 per cent of deposits. The level of investment banks need to make in government securities (or statutory liquidity ratio) is pegged at 23 per cent of deposits.On the requirement of capital as per Basel III norms, the Indian Overseas Bank Chairman said: “We are comfortable in the first two years. From the third year onwards, we need cumulatively Rs 22,640 crore till 2018 with a credit growth of around 18-20 per cent.”
CRR, a tool for rare use: Rangarajan
The country needs to move towards a situation where Cash Reserve Ratio (CRR) level comes down and that it is used as an instrument of “credit control” only in extraordinary conditions, said C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister, on Thursday.
As “Open market operations (OMOs) became increasingly major instrument….The role of CRR, as credit control, will come down,” said Dr. Rangarajan while talking to presspersons on the sidelines of the FICCI-IBA banking conference here.
CRR is the proportion of deposits banks must set aside with the Reserve Bank of India (RBI).
Last month, State Bank of India had sought scrapping of CRR, which stands at 4.75 per cent.
While talking on CRR as a monetary instrument, he said that prior to 1991 CRR was the major instrument of credit control because interest rate was administered and, therefore, OMOs could not be conducted and, therefore, CRR remained the major or the only instrument of credit control available with the RBI.
In fact, at that time, CRR continued to be raised to very high levels because the budget deficits were high and it was being financed by the RBI and, therefore, to contain liquidity growth, CRR needed to be raised to very high levels.
However, said Dr. Rangarajan, “at the time of the banking sector reforms, we took a conscious view to reduce the CRR and, therefore, it has been progressively brought down.”
While speaking on the topic ‘The Indian banking system — some issues’, Dr. Rangarajan said that if the Indian banking system was to remain competitive over time, there should be periodic entry of new banks . “A closed system can only become oligopolistic. The ‘threat’ of entry should not, therefore, be eliminated, and the central bank should lay down entry norms as also decide on who satisfies the criterion of fit and proper,’’ he said
“It must be noted that new banks take about two decades to achieve a sizable level”, said Dr. Rangarajan, adding, “Our decision on how many new banks to be licensed must be based on what the economy will need - not today but over the next several decades.” Further, he said that banks needed to watch out for liquidity risks which would increase because of maturity mismatches. “Increased exposure to real estate and infrastructure will lengthen the maturity of bank assets.” He said that Indian banking system was also exposed in a big way to certain sectors such as power and aviation which were not doing well.
“The challenge for banks lies in efficiently managing risks both in the upswing and downswing.”
Basel III to benefit Indian banking system: Subbarao
The Reserve Bank of India (RBI) Governor, D. Subbarao, on Tuesday, said that the Basel Committee was working on establishing a minimum set of principles for domestic systemically important banks (D-SIBs), including some large banks in India.
This committee will also prescribe norms for higher loss absorbency (HLA) capital standards for them as also evolve a sound resolution mechanism for D-SIBs.
“The moral hazard relating to too-big-to-fail institutions which encourages risky behaviour by larger banks has been a huge issue on the post-crisis reform agenda,” said Dr. Subbarao while inaugurating the annual FICCI-IBA Banking Conference here.
Basel III seeks to mitigate this externality by identifying global systemically important banks (G-SIBs) and mandating them to maintain a higher level of capital dependent on their level of systemic importance. The list of G-SIBs is to be reviewed annually. At present, no Indian bank appears in the list of G-SIBs.
Dr. Subbarao said that effective implementation of Basel III was going to make Indian banksstronger, more stable and sound so that they could deliver value to the real sectors of the economy.
“By far, the most important reform is that there should be a radical change in banks’ approach to risk management. Banks in India are currently operating on the Standardised Approaches of Basel II,” said Dr. Subbarao.
The larger banks needed to migrate to the Advanced Approaches, especially as they expanded their overseas presence. The adoption of advanced approaches to risk management would enable banks to manage their capital more efficiently and improve their profitability, he said.
This graduation required three things, according to the RBI Governor. First and most important, a change in perception from looking at the capital framework as a compliance function to seeing it as a necessary pre-requisite for keeping the bank sound, stable, and, therefore, profitable; second, deeper and more broad-based capacity in risk management; and finally, adequate and good quality data.
The RBI estimates that Indian banks need an additional capital requirement of Rs.5 lakh crore, of which, non-equity capital will be of the order of Rs.3.25 lakh crore while equity capital will be Rs.1.75 lakh crore.
The RBI Governor said that the amount the market would have to provide would depend on how much of the recapitalisation burden of public sector banks (PSBs) the government would meet.
However, he said that the amount that the market would have to provide would be in the range of Rs.70,000 crore to Rs.1 lakh crore depending on how much the government would provide.
Over the last five years, banks had revised equity capital to the tune of Rs.52,000 crore through the primary markets. “Raising an additional Rs.70,000 crore to Rs.1 lakh crore over the next five years from the market should, therefore, not be an insurmountable problem,” he said.
Govt should draw up long-term capital infusion plan: Rangarajan
MUMBAI, SEPT. 6
The Government should draw up a long-term programme for capital infusion in public sector banks. Otherwise, their market share will come down, cautioned C. Rangarajan, Chairman, Economic Advisory Council to the Prime Minister.
Capital is needed by banks to not only back up the loans they make but also implement Basel III guidelines.
Basel III guidelines are aimed at improving banks’ ability to absorb shocks arising from financial and economic stress by raising both the quality and quantity of the regulatory capital base.
To achieve full Basel implementation by March 31, 2018, the Reserve Bank of India has estimated that public sector banks (PSBs) will require common equity to the tune of Rs 1.4-1.5 lakh crore on top of internal accruals.
Further, PSBs will require Rs 2.65-2.75 lakh crore in the form of non-equity capital.
Major private sector banks will require common equity to the tune of Rs 20,000-25,000 crore on top of internal accruals. In addition, they will require Rs 50,000-60,000 crore in the form of non-equity capital.
CAPITAL INFUSION BY GOVT
Rangarajan said “While several innovative suggestions have been made for raising capital, it is quite evident that the capital infusion by the Government (in PSBs) will remain large and has to be a continuous process.
Currently, public sector banks account for about 74 per cent each of aggregate deposits and credit in the banking system.
Rangarajan observed that the estimates for common equity (pegged at 1.4-1.5 lakh crore for PSBs and Rs 20,000-25,000 crore for private sector banks) may turn out to be an underestimate.
“While the private sector banks will have to meet their capital requirements by accessing capital markets, public sector banks will require additional budgetary support,” said Rangarajan at the FICCI-IBA banking summit.
Under the present dispensation, about 50 per cent of the additional capital requirement in the case of PSBs will have to come from the government, he added. Analysts say given that the government is facing twin deficits – fiscal and capital account, it may find it difficult to stump up resources to support PSBs.
NEW BANKS
Rangarajan felt that there should be periodic entry of new banks if the Indian banking system is to remain competitive over time.
Pointing out that a closed system can only become oligopolistic ( a market condition where there are few sellers), the former RBI Governor said, the ‘threat’ of entry should not, therefore, be eliminated and the central bank should lay down entry norms as also decide on who satisfies the ‘fit and proper’ criterion.
“New banks take about two decades to achieve a sizeable level. Our decision on how many banks to be licensed must be based on what the economy will need not today but over the next several decades,” said Rangarajan.
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