The RBI on Thursday released the final guidelines for enabling banks to have unhindered credit flow to sectors such as infrastructure, power and ports during difficult times. Technically called Countercyclical Capital Conservation Buffer (CCCB), it is a system where banks save up on good days for tough times.
It also aims to reduce the overexposure of the banking system during good times, as banks have been found to lend excessively and often carelessly when the going is good. “The CCCB 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 CCCB may vary from 0 to 2.5 per cent of total risk weighted assets (RWA) of the banks,” the RBI said in a statement.
The central bank said that it will, for most parts, announce the percentage of money that banks need to set aside as CCCB at least four quarters in advance.
This will be mainly based on the credit-GDP ratio in the economy at various points in time.
The central bank clarified that banks will have to start setting aside money as soon as the credit-GDP ratio falls to 3 per cent. This will increase progressively till the credit-GDP ratio reaches 15 per cent. At this level, banks will have to set aside a full 2.5 per cent of the total risk weighted assets towards CCCB.
The RBI also made no exception to foreign banks having their operations in India and so they will also have to maintain the CCCB as prescribed from time to time. “All banks operating in India (both foreign and domestic) should maintain capital for Indian operations under CCCB framework based on their exposures in India,” the RBI said.
Subject to restrictions Banks not meeting the mandated CCCB will be ordered by the RBI to operate with several restrictions.
“Banks will be subject to restrictions on discretionary distributions (may include dividend payments, share buybacks and staff bonus payments) if they do not meet the requirement on countercyclical capital buffer,” the RBI said. The Internal Working Group of the RBI under the Chairmanship of B Mahapatra had submitted the final report on the implementation of Countercyclical Capital Buffer (CCCB) in July, 2014.
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