The Reserve Bank of India (RBI) on Tuesday said it is not necessary to activate countercyclical capital buffer (CCyB) for banks at this point in time.

The aim of the CCyB regime is two-fold. Firstly, it requires banks to build up a buffer of capital in good times which may be used to maintain flow of credit to the real sector in difficult times.

Secondly, it achieves the broader macro-prudential goal of restricting the banking sector from indiscriminate lending in the periods of excess credit growth that have often been associated with the building up of system-wide risk.

The framework envisages credit-to-GDP gap as the main indicator, which may be used in conjunction with other supplementary indicators.

“Based on review and empirical analysis of CCyB indicators, it has been decided that it is not necessary to activate CCyB at this point in time,” RBI said.

Credit flow

If CCyB is activated, it can slowdown credit growth, which in turn will impact GDP growth, say banking experts. By not activating this buffer, the RBI is ensuring that there are no hurdles in the flow of credit to the productive sectors of the economy.

As per ICRA, credit growth is expected to moderate to 11.6-12.5 per cent in FY2025 from 16.3 per cent in FY2024 due to challenges in mobilising deposits, high interest rates and the increase in risk weights

As per the guidelines for implementation of CCyB, the buffer may be maintained in the form of Common Equity Tier 1 (CET 1) capital or other fully loss absorbing capital only, and the amount of the CCyB may vary from 0 to 2.5 per cent of total risk weighted assets (RWA) of the banks.

The CCyB decision is normally pre-announced with a lead time of four quarters. However, depending on the CCyB indicators, the banks may be advised to build up requisite buffer in a shorter span of time.

According to the central bank, the credit-to-GDP gap will be the main indicator in the CCyB framework in India. However, it will not be the only reference point and shall be used in conjunction with GNPA (gross non-performing assets) growth.

“The Reserve Bank of India shall also look at other supplementary indicators for CCyB decision such as 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).

“While taking the final decision on CCyB, the Reserve Bank of India may use its discretion to use all or some of the indicators along with the credit-to-GDP gap,” per the guidelines.