As per the leading business daily report, the government will engage in discussion with the RBI to reduce and relax capital requirements currently stipulated for banks so as to align them to less-strict Basel III norms.
The proposal comes after a discussion that involved finance ministry, central think-tank NITI Aayog and other stakeholders. If implemented, the move will free up capital worth Rs. 60,000 crore for state-run banks, which will then be able to prop up their lending activity, strengthen weaker counterparts as well as reduce pressure of infusing capital on the exchequer.
Also as per the senior official cited in the report, with no new provisions being made, the total lending of Rs. 6 lakh crore can be realized by freeing up the capital.
Under the current regime, banks need to keep aside a portion as minimum common equity tier-I (CET) ratio which is stipulated by the RBI as 5.5 percent of their respective risk-weighted assets. But under the previous Basel II norms, this requirement stood at 4.5%.
The return to the earlier Basel III norm was justified by the NITI Aayog Vice Chairman Rajiv Kumar who suggested that there stands no requirement to exceed the previous Basel III norms as 70% of the India's banking system is state-run. Also, he was quoted as saying, "Moreover, the depositor is well insured by the government against any insecurity".
He added, "The RBI has so far argued that this extra requirement is necessary because the asset-recognition norms were not stringent but now with the February 12 circular that also has been taken care of." The circular said that the borrower should be classified as the defaulter even in a case if the repayment fails by even a single day.
It is suggested that through the initiative weaker banks will be able to meet the regulatory capital needs.