This is a blog created specially for the readers of the book Indian Economy Key Concepts. This is mostly to provide Indian Economy related news that is published in various newspapers under one umbrella. My own write ups will be posted very rarely.
The Reserve Bank of India (RBI) revised norms on capital recognition, making available an additional Rs.40,000 crore to Indian banks. The move comes at a time when public sector banks are facing pressure on their profitability due to a sharp rise in non-performing assets, which is eroding their capital base.
The announcement is a big relief for, mainly, public sector banks, after finance minister Arun Jaitley on Monday announced in his budget speech a capital infusion of Rs. 25,000 crore for the fiscal year starting in April. The minister did not make any increases to the capital infusion amount that was decided in August 2015. Many public sector banks reported huge losses for the quarter ended December 2015after the RBI asked lenders to identify several accounts as non-performing. Banks are expected to post weak earnings in the current quarter too.
“The RBI has made some amendments to the treatment of certain balance sheet items for the purposes of determining banks’ regulatory capital,” the central bank said in a press release on Tuesday. “The review was carried out with a view to further aligning the definition of regulatory capital with the internationally adopted Basel III capital standards.” The revisions introduced include recognition of revaluation reserves arising from change in the carrying amount of a bank’s property consequent upon its revaluation as common equity tier—I capital instead of the earlier tier 2 capital, the central bank said, adding that these would continue to be reckoned at a discount of 55 per cent. The move will unlock Rs 35,000 crore capital for public sector banks and Rs 5,000 crore for private sector banks, industry sources said.
RBI said banks can recognise foreign currency reserves arising due to translation of financial statements of foreign operations to the reporting currency as common equity tier-I (CET1) capital. Deferred tax assets arising due to timing differences may be recognised as CET1 capital up to 10 per cent of a bank’s CET1 capital, it added.