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The government has hinted at easing of capital requirements by banks reeling under the Reserve Bank of India's (RBI) prompt corrective action (PCA) framework in a bid to "align regulatory norms to international practices".
"There was no easing which was ever required and which should be done. What is being talked about is aligning the PCA framework with best international practices," said Rajiv Kumar, Secretary, Department of Financial Services.
The comments three days after the RBI held its central board meeting on October 23. Economic Affairs Secretary Subhash Chandra Garg and Rajiv Kumar are on the board of RBI to represent the government.
A top finance ministry official had said after the meeting that the government expects "ease in PCA norms" in days to come.
PCA guidelines look at certain parameters to invoke the restrictions. These include capital to risk-weighted asset ratio, net non-performing assets and return on assets.
As per RBI's interpretation of capital requirements, banks are required to maintain a minimum common equity (CET) Tier-I ratio of 5.5 percent of risk-weighted assets. However, as per Basel - III guidelines, banks need to set aside a minimum of 4.5 percent of their assets.
If RBI accepts "aligning" it's regulatory requirements with international practices, banks could see more liquidity at hand.
Banks have strongly pitched for easing the regulatory requirements in order to expand their loan books.
"Bankers have certain expectations. Some of them have said that the PCA guidelines should be revisited because that is indirectly impacting their lending ability," union finance minister, Arun Jaitley had said in September after chairing public sector banks' annual review meeting. Out of 21 PSBs, 11 are under PCA.
Under PCA, banks are prohibited from distributing dividends and remitting profits. They are curtailed from expanding their branch networks while maintaining higher provisions. Management compensation and directors' fees are also capped.
While the government continues to remain optimistic about the ease in the norms, media reports suggest that RBI has rejected the idea.
"The regulator (RBI) has argued that the move has improved the financial health of some of the banks under stress," reports suggested.
Expect policy announcement soon
Kumar, who was speaking on the sidelines of SIDBI National Microfinance Congress 2018, said that the process of recapitalisation of banks is being worked out.
"We are assessing the performance of the banks in second quarter and recapitalisation could happen after this," he said.
The banking secretary also said that the finance ministry could soon make policy announcement to address issues in the financial sector and address the concerns.
"In a week or so, some policy announcement can be expected as things are being worked out," he said.