Second Quarter Review of Monetary Policy 2010-11
-Announced on the 2nd November 2010
Developmental and Regulatory Policies
V. Regulatory and Supervisory Measures for Commercial Banks
Strengthening the Resilience of the Banking Sector
100. The Basel Committee on Banking Supervision (BCBS), in response to the financial crisis, submitted a report to the G-20 in October 2010. The report contained the measures taken by the BCBS and its governing body - the Group of Central Bank Governors and Heads of Supervision (GHOS) - to strengthen the resilience of banks and the global banking system. The new global standards to address both bank-specific and broader systemic risks have been referred to as Basel III. Measures suggested under Basel III, among others, include revisions to the definition of regulatory capital, capital conservation buffer, counter-cyclical buffer, the treatment of counterparty credit risk, the leverage ratio, and the global liquidity standards.
101. It may be recalled that the BCBS had issued in December 2009 two consultative documents for public comments. It also undertook a comprehensive quantitative impact study (QIS) and top-down calibration of minimum capital requirement. At its July and September 2010 meetings, the GHOS broadly agreed on the overall design of the capital and liquidity reform package, based on the comments received, the QIS and top-down calibration. The fully calibrated Basel III rules will be published by the BCBS by end-December 2010.
102. The Reserve Bank has been adopting the international best regulatory practices as appropriate to banks in India. Banks are, therefore, advised:
to study the new developments and be in preparedness to meet the requirements; and
to continue with the parallel run beyond March 31, 2010, as advised to them in April 2010, to ensure that their Basel II minimum capital requirement continues to be higher than the prudential floor of 80 per cent of the minimum capital requirement as per Basel I framework for credit and market risks. The parallel run should continue for a period of three years, i.e., till March 31, 2013, subject to review.
Implementation of Advanced Approaches under Basel II Framework
103. The Reserve Bank had announced timeline for implementation of advanced approaches for computation of regulatory capital under the Basel II framework in India in July 2009. The guidelines for the standardised approach (TSA)/alternate standardised approach (ASA) for operational risk were issued in March 2010 and those for internal models approach (IMA) for market risk were issued in April 2010. Guidelines for advanced measurement approach (AMA) for operational risk will be finalised by December 2010. Guidelines for internal rating based approach for credit risk are under preparation.
Housing Loans by Commercial Banks
Loan to Value Ratio in Housing Loans
104. At present, there is no regulatory ceiling on the loan to value (LTV) ratio in respect of banks’ housing loan exposures. In order to prevent excessive leveraging, it is proposed:
that the LTV ratio in respect of housing loans hereafter should not exceed 80 per cent.
Risk Weights on Residential Housing Loans
105. At present, the risk weights on residential housing loans with LTV ratio up to 75 per cent are 50 per cent for loans up to `30 lakh and 75 per cent for loans above that amount. In case the LTV ratio is more than 75 per cent, the risk weight of all housing loans, irrespective of the amount of loan, is 100 per cent. Accordingly, it is proposed:
to increase the risk weight for residential housing loans of `75 lakh and above, irrespective of the LTV ratio, to 125 per cent.
Teaser Rates for Housing Loans
106. It has been observed that some banks are following the practice of sanctioning housing loans at ‘teaser rates’, wherein the loans are offered at a comparatively lower rate of interest in the first few years, after which rates are reset at higher rates. This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. It has been observed that many banks at the time of initial loan appraisal do not take into account the repaying capacity of the borrower at normal lending rates. In view of the higher risk associated with such loans, it is proposed:
to increase the standard asset provisioning by commercial banks for all such loans to 2 per cent.
Banks’ Investments in Non-Financial Companies
107. Under the extant prudential framework, banks are not required to obtain prior approval of the Reserve Bank for investment in companies other than financial services companies. Banks may be able to exercise control on such entities through their direct or indirect holdings or have significant influence over them. Thus, banks may indirectly undertake activities not permitted to them under Sub-section (1) of Section 6 of the Banking Regulation Act, 1949 or activities which are not conducive to the spread of banking in India or otherwise useful or necessary in the public interest. Therefore, it is proposed:
to stipulate prudential limits to regulate the investments of banks in companies engaged in forms of business other than financial services. Banks will be required to review their investments in such companies and be compliant with the guidelines as per the roadmap to be laid down.
108. Detailed guidelines in this regard will be issued separately.
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