The Reserve Bank of India headquarters in Mumbai. Photo: AFP
The Reserve Bank of India headquarters in Mumbai. Photo: AFP

A parliamentary finance committee has backed calls by the central government for a relaxation of capital requirements for banks, despite warnings that such a move could lead to a further blowout in bad loans.

The Reserve Bank of India (RBI) has already ruled out any dilution of the minimum capital to risk-weighted asset ratio (CRAR) of 9%, though it did agree in November to defer implementation of the last phase of a capital conservation buffer of 2.5% for banks until March this year.

Prime Minister Narendra Modi’s government argues that the CRAR, which is 1% higher than the global Basel-III requirement, should be eased to encourage more lending and cut the public spending burden. The finance committee agreed in a report tabled in parliament Thursday.

“Such stringent norms stipulated by RBI for our banks … is unrealistic and unwarranted,” said the report, adding that Basel-III rules applied only to banks with global operations. Nine public sector banks — Central Bank of India, Andhra Bank, Oriental Bank of Commerce, Corporation Bank, Vijaya Bank, Bank of Maharashtra, Dena Bank, United Bank of India and Punjab and Sind Bank — do not fall under this category.

If the rules were waived for these banks, their lending would grow by 51% and interest income would climb by Rs500 million (US$7.1 million) annually, avoiding the need for additional government capital infusions, the committee reported, according to the Press Trust of India.

Rating agencies have warned that any dilution of capital norms for banks would be counter-productive, as it could undermine efforts to reduce the level of bad loans. The government revealed in April that Rs2.41 lakh crore (US$37 billion) of non-performing loans had been written off by public sector banks alone in the last four financial years.

The report also raises further concerns over the continued autonomy of the RBI, which has been under pressure from the government for months after refusing to bow to its demands for policy changes. Urjit Patel quit as bank governor several weeks ago over the autonomy issue.

Chaired by Veerappa Moily, leader of the opposition Congress party, the standing committee also urged the government to look at several issues of RBI accountability in its role as banking regulator. In particular, it called for an evaluation of the RBI guidelines for dealing with fraud.

A framework used by the RBI for strengthening financially weak banks, known as Prompt Corrective Action (PCA) was questioned, with the committee expressing its concern that more banks might be affected. So far 11 state-owned banks have been classified under the PCA framework,  and their lending and hiring activities have been curbed.

The committee called on the RBI to provide a coherent road map and timeframe for how each of the banks could come out of PCA and resume their normal banking operations.