The building blocks of Basel III are by now quite well known: higher and better quality capital; an internationally harmonized leverage ratio to constrain excessive risk taking; capital buffers which would be built up in good times so that they can be drawn down in times of stress; minimum global liquidity standards; and stronger standards for supervision, public disclosure and risk management.
The Basel III package includes capital buffers to contain the pro-cyclicality of the financial sector. Building capital buffers will entail additional costs for banks with consequent implications for investment and hence for overall growth.
To effectively deploy countercyclical measures, we also need to improve our capabilities to predict business cycles at the aggregate and sectoral levels, and identify them in real time. This will require better quality of economic and financial data as well as improved analytical capabilities.
Estimates show that the leverage in the Indian banking system is quite moderate. Notwithstanding the fact that the SLR portfolio of our banks will be included in computing the leverage ratio, Indian banks will not have a problem in meeting the leverage ratio requirement since the Tier 1 capital of many Indian banks is comfortable (more than 9%) and their derivatives portfolios are also not very large
The second issue I want to address is one that comes up frequently - that Indian banks should aim to become global. Most people who put forward this view have not thought through the costs and benefits analytically; they only see this as an aspiration consistent with India’s growing international profile.
As per the current global league tables based on the size of assets, our largest bank, the State Bank of India (SBI), together with its subsidiaries, comes in at No.74 followed by ICICI Bank at No.145 and Bank of Baroda at 188. It is, therefore, unlikely that any of our banks will jump into the top ten of the global league even after reasonable consolidation.
Opinion on this is divided. Those who argue that we must go global contend that the issue is not so much the size of our banks in global rankings but of Indian banks having a strong enough global presence. The main argument is that the increasing global size and influence of Indian corporates warrant a corresponding increase in the global footprint of Indian banks.
The opposing view is that Indian banks should look inwards rather than outwards, focus their efforts on financial deepening at home rather than aspiring to global size
Requirement of minimum paid up capital and reserves, restrictions on payment of dividend, transfer of a percentage of profits to reserves, maintenance of SLR, restrictions on connected lending, maintaining a percentage of domestic liabilities as assets in India have all helped the Reserve Bank in preventing crises and maintaining financial stability.
There has been a particularly discernible improvement in banks’ operating efficiency in recent years owing to technology upgradation and staff restructuring
He advised the banks to raise the interest rates offered to depositors and reduce the lending rates charged on borrowers - in other words, reduce their intermediation costs, or in technical terminology, reduce the net interest margin (NIM).