India: RBI: Ahead Of The Game : Issues Draft Paper On Counter Cyclical Capital Buffer (CCCB)

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British Deputy High Commission Mumbai

December 2013

Summary 

 

RBI has released draft norms for implementing India’s Counter Cyclical Capital  Buffer (CCCB) under Basel  guidelines. The CCCB sets higher capital reserve levels for banks once a country’s credit-to-GDP ratio rises above certain thresholds, deviating from its long term trend.  It is intended to protect the stability of banks in times of cyclical fluctuation.  India  joins a handful of countries that are ahead of the game in finalising norms and introducing the CCCB.  The RBI sets its rules in India’s context as an emerging economy. All banks (Indian and foreign) will have to maintain capital in India under the CCCB framework  in line with their exposure to the Indian market.  

 

Detail

 

The Basel Committee, which sets international banking standards, has observed that excess credit growth builds up risk in financial systems.  A deviation of any country’s credit-to-GDP ratio from its long-term trend (a credit-to-GDP gap) indicates excessive credit growth and increased system-wide risk which could be a precursor to financial crisis.  The Committee has therefore recommended that when the credit-to-GDP gap exceeds a defined threshold, countries build up a counter cyclical capital buffer (CCCB). The threshold at which the buffer is triggered and the additional capital required are determined by the regulator in each country. 

 

In line with the Basel recommendations,  the RBI suggests that India’s credit-to-GDP gap be used as the basis for decisions on whether to activate the CCCB and what level of buffer to set. However the report notes  that the credit-to-GDP ratio may not be the only reference point for banks in India and that it will be used in conjunction with other indicators like growth in Gross Non-Performing Assets (GNPA). It argues that since credit penetration in India is low and the credit to GDP ratio only around 50% of GDP,  an increase in the ratio could reflect a structural shift attributable to growth rather than excessive risk, hence a multiple indicator approach is better suited to India.

 

The report recommends that the CCCB is activated when the credit-to-GDP gap reaches 3%. The size of the CCCB should increase gradually from an initial 0% to a maximum of 2.5 per cent of the risk weighted assets of a given bank once the credit-to-GDP gap reaches 15%.  It also recommends that the CCCB decision be pre-announced nearly a year ahead of implementation to allow banks to arrange their capital accordingly. Please see link for the full report : http://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/CCB021213FR.pdf

 

 

Separately, the RBI has also released the draft framework identifying domestic systematically important  banks, based on the framework prescribed by the Basel committee. Banks whose assets exceed 2% of GDP will be covered.  Foreign banks  will not qualify based on their size, however, since they are active in the derivatives market and their specialized services may not be easily substituted by domestic banks, a few large foreign banks will also be included in the sample of banks. Please see link for full report : http://rbi.org.in/scripts/bs_viewcontent.aspx?Id=2766

 

Comment

 

India’s emerging economy  context  and limitations have been taken into consideration.  In effect, , this gives the RBI discretion on the terms, timing  and applicability of these additional capital requirements. These are draft norms and feedback  can be sent to the RBI’s Department of Banking Operations  by December 31.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.

Countries: India
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