In a notification to commercial banks,
Reserve Bank of India on 27 March 2014 has directed them to postpone full
implementation of Basel III norms by one year to 31 March 2019, instead of the
earlier timeline of 31 March 2018. This is a big relief for Indian banks who
have been going through a phase of bad loans threatening their capital and
profits. It is not a mere coincidence that this deferment is beneficial
especially to public sector banks. There is a design behind it.
Who is the biggest beneficiary of RBI’s move?
The biggest beneficiary
of the RBI’s decision to defer full implementation of Basel III norms will be
Government of India (GOI). As a majority owner of public sector banks (PSBs),
GOI is obligated to recapitalize PSBs in the next few years in accordance with
the Basel III norms, which are much tougher than Basel II norms. PSBs have a
market share of around 70 percent in Indian banking.
But, GOI has been facing
a lot of problems on the fiscal front. India’s GDP growth rate has slowed down considerably
in the last two to three years. Tax collections have come down, while subsidies
have gone up substantially, with fiscal deficit worsening.
However, for the current
financial year 2013-14, GOI has barely managed to rein in fiscal deficit within
4.8 percent of GDP, with some temporary measures such as extracting higher
dividends from public sector understandings (PSUs), burdening LIC of India with
stakes in PSUs and forcing some PSUs to buy shares in other PSUs.
GOI is likely to face
severe resource crunch in the next few years until GDP growth rate picks up
again. India is over-dependent on all sorts of subsidies. And there is this
overhand of providing food security to two-thirds of India’s population. Burden
of repayment of government bonds (both principal and interest) is very heavy in
the next three years—which is a result of heavy government borrowing since
2008-09 till now.
RBI is in the habit of
rescuing public sector banks, whenever they face headwinds either from global
or domestic forces. Postponing the full implementation of Basel III norms is
another clever decision by RBI to rescue GOI and public sector banks.
Whether Basel III Norms are Good for India?
Basel III norms will
force Indian banks to set aside more capital as a percentage of their assets.
The result is that banks’ ability to lend to needy sections will come down.
India is a developing country and credit penetration is low compared to
developed nations.
It is an irony that
Indian banks have to set aside more capital, as part of international banking
prudence, as a buffer to prevent any possibility of banking meltdown that
happened in the wake of 2008/2009 global financial crisis triggered by Lehman
Brothers collapse.
India is hungry for
capital. Even though our savings are high, they are not enough to sustain
lending activities in the economy. Due to statutory requirement (CRR and SLR),
banks have to park a large part of their resources in government securities—it
means a large part of banks’ funds are lent to GOI. Moreover, Indians invest
more in physical capital—gold and real estate, rather than financial capital—to
that extent banks’ ability to raise deposits or other forms of capital from
public is crimped.
Developed nations are
already developed. What I mean is that their economies are flat, with no
expectations of higher growth and they require less capital. On the contrary,
we have high expectations of GDP growth rates of above 8 percent.
As part of the
international coordination, India is obligated to implement Basel III norms.
However, Basel III norms allow considerable leeway to the implementing nations,
because any norms need to be tweaked to suit local issues.
One hopes that RBI is
wise enough to balance between India’s need for more loans and following
international norms, without giving any impression of dilution of the spirit of
Basel III norms.
Market Reaction:
Anyway, shares of all listed
banks, especially those of PSBs, will react positively to the RBI’s move after
stock markets open today.
References:
RBI’s notification dated
27 March 2014 deferring full implementation of Basel III norms:
Notes:
CRR – cash reserve ratio
GDP – Gross domestic
product or a measure of national income
SLR – statutory liquidity
ratio
Disclaimer: The author is
an investment analyst with a vested interest in the Indian stock markets. This
is for information purposes only. This should not be construed as investment
advice. Investors should consult their own financial advisers before taking any
investment decisions. The author blogs at:
Tweets at @vrk100
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