COMMENT. Maintaining additional capital not a tough task for the big daddy banks

Two banks — ICICI Bank and SBI — need to bulk up their capital after being named domestic systemically important banks (D-SIB) by the RBI on Monday.

These ‘too-big-to-fail’ banks will be required to set aside more capital than their peers. After putting in place the framework for D-SIBs last year, the RBI has short-listed two Indian banks. Among the criteria used by the RBI to shortlist such banks, asset size is the main one with a 40 per cent weight.

The biggies Going by size alone, 12-14 banks could have been categorised as systemically important. But many appear to have been filtered out when other criteria such as interconnectedness and complexity were considered.

Based on the category in which a bank falls, it has to set aside extra capital in the range of 0.2 per cent to 0.8 per cent of risk weighted assets by April 2019.

SBI, which has been put in the third bucket, needs to set aside 0.6 per cent additional Tier I capital by April 2019 in a phased manner; 0.15 per cent by April 2016 to start with.

ICICI Bank, on the other hand, will need to set aside a lower 0.2 per cent by 2019.

For both these banks, maintaining additional capital requirement may not be difficult since they already have a strong capital adequacy ratio.

ICICI Bank’s core Tier 1 ratio (essentially the bank’s own equity) is about 12 per cent, much above the mandated 7 per cent. For SBI, the Tier I capital ratio is about 9.6 per cent. Given the bank’s relatively better performance vis-à-vis its peers, the government is likely to continue to infuse capital. This will help SBI to comfortably meet its capital needs.

Midgets at global level The move to identify ‘too-big-to-fail’ banks is in line with the mandate of the Basel Committee of Banking Supervision. The Financial Stability Board (headquartered in Switzerland) has identified 30 banks as systemically important from a global perspective.

An analysis of data shows that Indian banks are midgets compared to these global banks, which are headquartered across 11 countries. The eight US banks in the list have combined assets of a little more than 60 per cent of the country’s GDP. The UK and France have four banks each featuring in the list, and their assets-to-GDP ratio is more than 200 per cent.

Contrast this with the two big banks in India. Their combined assets are just over one-fifth of the country’s GDP. India’s largest bank SBI’s assets are just 15 per cent of our GDP. In Germany, one bank alone has assets-to-GDP of over 50 per cent.

In absolute terms, too, the size of global banks are intimidating. JP Morgan Chase, the largest bank in the US, has an asset size of about $2,500 billion, which is nearly six times that of SBI’s. The lending operations of Indian banks are also much lower than that of their global peers.

Closer home, Industrial and Commercial Bank of China, has a loan book that is nearly seven times that of SBI’s.

COMMENT NOW