Context: Banks which suffered most from incidence of high NPAs during 2010s, also experienced high credit growth during the preceding economic boom. Their credit-deposit ratio was higher as compared to the industry average. In this context, adoption of Countercyclical Capital Buffer (CCyB) requirements is the need of the hour.
What is Countercyclical Capital Buffer (CCyB)
- The countercyclical capital buffer aims to ensure that banking sector capital requirements take account of the macro-financial environment in which banks operate.
- Its primary objective is to use a buffer of capital to achieve the broader macroprudential goal of protecting the banking sector from periods of excess aggregate credit growth that have often been associated with the build-up of system-wide risk.
- Due to its counter cyclical nature, the countercyclical capital buffer regime may also help to lean against the build-up phase of the credit cycle in the first place.
- In downturns, the regime should help to reduce the risk that the supply of credit will be constrained by regulatory capital requirements that could undermine the performance of the real economy and result in additional credit losses in the banking system.
- Hence, incorporating countercyclical capital regulations can effectively overcome excessive pro-cyclicality in bank lending, by moderating credit growth during economic boom, while promoting credit growth during recessions.
Present Norms on CCyB
- It may be noted that RBI’s current minimum capital and conservation buffer requirement for the banks is placed at 11.5%. (CAR of 9% along with a Capital Conservation Buffer of 2.5%).
- Including additional requirements for domestically significantly important banks (D-SIBs), the highest minimum requirement is placed at 12.1% (for SBI).
- However, in its circular dated April 23, 2024, the RBI said it was not activating CCyB as of now.
Way Forward
- As against this, RBI’s latest Financial Stability Report (FSR) revealed that CRAR of the SCBs was at 16.8% in September 2023. It suggested that the SCBs are well-capitalised and they are capable of absorbing macroeconomic shocks even in the absence of any further capital infusion by the stakeholders.
- Thus, the banks’ capital position at present in India seems to be comfortable for accommodating another 2.5% (maximum) capital requirement under CCyB.
- Early implementation of CCyB requirements will not just improve banking sector stability, but is highly relevant to deter any potential threat to sustain high and stable economic growth.