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To give banks a reasonable amount of time to adjust their capital plans, the Reserve Bank of India on Monday said a decision on Countercyclical Capital Buffer (CCCB), may be pre-announced with a lead time of four quarters.
The CCCB regime endeavours to ensure that not only the individual banks remain solvent through a period of stress, but also that the banking sector has capital in hand to help maintain the flow of credit in the economy during economic downturns and periods of stress.
As capital is a more expensive form of funding, the stipulation regarding build-up of capital defences may have the additional benefit of moderating excessive credit growth when economic and financial conditions are buoyant.
During the period of excessive credit growth, the buffer may act as a moderator from the debtors’ perspective as it is likely to raise the cost of credit, and therefore, dampen its demand, and may help to lean against the build-up phase of the cycle in the first place.
In the final report of its internal working group on implementation of CCCB, the RBI said while the credit-to-GDP gap shall be used for empirical analysis to facilitate CCCB decision, it may not be the only reference point in the CCCB framework for banks in India.
The credit-to-GDP gap may be used in conjunction with other indicators like Gross Non-Performing Assets (GNPA) growth for CCCB decisions in India.
The supplementary indicators shall include incremental Credit-Deposit ratio for a moving period of three-years (along with its correlation with credit-to-GDP gap and GNPA growth), Industry Outlook (IO) assessment index (along with its correlation with GNPA growth) and interest coverage ratio (along with its correlation with credit-to-GDP gap).
In due course, indices like House Price Index / RESIDEX and Credit Condition Survey may also form a part of the supplementary indicators for CCCB decision.
The CCCB shall increase gradually from 0 to 2.5 per cent of the risk weighted assets (RWA) of the bank but the rate of increase would be different based on the level/position of credit-to-GDP gap between 3 and 15 percentage points.
The Group said that if the credit-to-GDP gap exceeds 15 percentage points, the buffer shall remain at 2.5 per cent of the RWA. If the credit-to-GDP gap is below 3 percentage points then there will not be any CCCB requirement.
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