Mumbai: The Reserve Bank of India on Wednesday announced measures to ease capital requirements for banks and free up capital for lending and other productive activities.
These measures aim to make it easier to compute or add quarterly profits to the bank’s capital calculation, as well as to do away with the mandate to maintain an investment fluctuation reserve (IFR).
Currently, banks are permitted to include their quarterly profits in the computation of their capital-to-risk-weighted assets ratio (CRAR). However, this is subject to incremental provisions for non-performing assets (NPAs) at the end of any of the four quarters of the previous financial year, not having deviated more than 25% of the average of the four quarters.
“On a review, it is proposed to dispense with this condition,” RBI governor Sanjay Malhotra announced today as part of his monetary policy statement. The monetary policy committee on Wednesday kept rates unchanged at 5.25% while maintaining a ‘neutral stance’, citing extreme uncertainty due to disruptions in West Asia.
RBI will soon issue a draft circular seeking public comments on the proposal to ease the computation of banks’ capital adequacy ratios.
In addition, the RBI chief today also announced that the central bank has proposed doing away with the mandate to maintain an IFR as an additional buffer against depreciation in the value of its investments, subject to mark-to-market (MTM) requirements.
Malhotra said that banks already maintain a capital charge for market risk and also follow revised norms on classification, valuation, and the operation of investment portfolios, which warrant a review of the need for such a reserve.
“In consideration of these applicable prudential requirements, it is proposed to dispense with the IFR requirement for such commercial banks,” Malhotra said, adding that existing guidelines for other bank categories such as small finance banks and regional rural banks will also be revised to address their operational challenges in complying with the regulatory thresholds on IFR and to harmonise instructions across bank categories.
This will help enhance regulatory clarity and consistency, RBI said, adding that it will soon issue draft instructions for stakeholder consideration.
RBI said it also plans to undertake a review of the norms on matters to be placed before the boards of banks. While these matters, along with their periodicity, are typically determined by the boards themselves, RBI has also mandated certain policies and matters to be placed before the board for approval, review, or information.
“…to enable boards to utilize its time effectively, and to facilitate a more focused and qualitative engagement on strategy and risk governance, the Reserve Bank has undertaken comprehensive review and rationalization of all such instructions,” it said in the statement on developmental and regulatory policies released along with the monetary policy statement.
