RBI to sound out banks before roll out of Basel-III

Emerging market economies (EMEs) such India and China have high proportion of public sector banks. Governments in EMEs will have to contribute high additional equity capital in public sector banks to meet the Basel-III requirement. This may impact the fiscal positions and,in some cases,delay the achievements of fiscal prudence targets already set by them under the fiscal management programmes, cautioned Sinha.

He was delivering the keynote address at a meet organised by Bank of Maharashtra (BoM) on Basel III: Implementation and challenges in Banks.

The RBI has come out with a draft circular on Basel-III on December 30,2011 and is planning to hold several seminars so that banks understand that the requirements are more stringent,he said.

There are restrictions on exposure to complex activities and products in India. The RBI has often been criticised for being conservative. I dont know whether that criticism is justifiable or not but one thing I can certainly say that we have been cautious about allowing the entry of complex activities and products.We first try to assess how ready the system is and then allow some liberalisation.

The reason is cost of misadventure to our countries can be huge. We are a developing country and we dont have any social safety nets. Therefore we cannot indulge in too much of bravado. And that is why RBI has been cautious in dealing with financial innovation. he maintained.

Countries need to determine what level of sophistication of financial markets is appropriate for them socially and economically sub-optimal financial innovation needs to be shunned. The structured and derivatives products may need to be carefully evaluated in terms of pace of introduction and suitability and appropriateness for customers, he said.

Sinha said that a close coordination is required between monetary policy and macro prudential authorities to decide the appropriate mix. Central banks are better positioned to manage the conflicts between monetary and macro prudential policies. There is a need for clear communication, he said.

There are increased capital requirements under Basel III wherein the Tier I raised to 6 per cent out of 8 per cent minimum capital to risk (weighted) assets ratio (CRAR),equity in tier I has been raised from 2 per cent to 4.5 per cent,a capital conservation buffer 2.5 per cent needs to be maintained by banks and the equity capital has been enhanced from from 2-7 per cent in addition to counter cyclical capital 0-2.5 per cent,he said.