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Bank capital (Basel III standards (Provisioning requirement (Setting aside…

- - - - Common Equity Tier 1 capital
        
        In Basel III inc from 4% to 4.5%,
        
        equity instruments that have discretionary dividends and no maturity
      - additional Tier 1
        capital
        
        securities that are subordinated to most subordinated debt, have no maturity, and their dividends can be cancelled at any time
      - Minimum Tier 1 capital inc from 4% to 6%
      - Example
        
        money kept as Statutory Liquidity Ratio (SLR)
        
        physical cash form
        
        share capital and secured loans
      - This capital can absorb losses without bank ceasing its trading operations
    - - unsecured subordinated debt with an original maturity of at least five years
      - Example
        
        after tax income
        
        retail earnings of the bank
        
        capital in the form of bonds/hybrid instruments
        
        unsecured loans (getting serviced)
    - - Non-Performing Assets (NPAs), subordinated loans (not getting serviced)
      - undisclosed reserves from the balance sheet
  - - - Tier 1
        
        7%
      - Tier 2
        
        2%
    - - 8%
    - - Measure of bank's financial strength
      - cushions to absorb losses before becoming insolvent and losing depositors' funds
  - - - Expected - buffer of 2.5% Risk Weighted Assets (RWAs) in the form of Common Equity, over and above Capital Adequacy Ratio of 9%
      - Current scenario
        
        1.875%
        
        remaining 0.625% tranche was to be met by March 2019
        
        Extended deadline by RBI March 31, 2020
    - - Procyclical nature of lending
        
        During credit expansion
        
        banks have to set aside additional capital
        
        During credit contraction
        
        capital requirements can be loosened
      - to accomodate periods of stress
      - Systematically important banks are subject to higher capital requirements
      - to ensure that banks build up capital buffers outside periods of stress which can be drawn down, as losses are incurred
      - increase the resilience of banks to losses
      - reduce excessive or underestimated exposures and restrict the distribution of capital
      - macro-prudential instruments limit systemic risks in the financial system
    - - Mounting pile of stressed assets
        
        resulted into low credit growth
        
        deterioration in asset quality
        
        low profitability of Indian banks
        
        over-reliance on capital infusion from the Government
      - Need to first meet basic capital ratios CRAR of 9%
    - - good money should not thrown after bad money - bank recapitalization
      - Improving credit discipline and risk management systems
      - resolve governance issues of the banks
      - Address over-enthusiastic lending in the past
      - Long pending reforms of P.J. Nayak Committee
        
        Cede control of nationalized banks and cut its stake below 51%.
        
        Form an independent Banking Investment Company (BIC) for corporatized governance of PSBs
        
        Performance related pay structure and incentives for upper management functionaries
- - - - Recap Bonds - 80k cr
        
        using equity to restructure debt
        
        issued by govt or a holding company.
        
        government will issue bonds to the
        banks for a share of the bank’s Equity
        
        Interest and Principal on redemption paid by govt
        
        bonds can be sold off by the banks in
        the market
        
        Implications
        
        Tax revenues impact less
        
        avoid crowding out private borrowings or
        distorting market yields as not borrowed from market
        
        improve the Bank’s asset-debt ratio - so more interest by investors
        
        Will inc govt debt liability - 0.8% of GDP
        
        But no govt borrowing ,so likely no inflation
      - Market Raising - 10k cr
      - Gross Budgetary Support - 8k cr