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RBI has enough powers to increase capital norms: Ex-RBI Deputy Guv KC Chakrabarty

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(G.N.S) Dt. 16
New Delhi
Under its current powers, the Reserve Bank of India (RBI) can increase capital adequacy ratio (CAR) of public sector banks based on its risks and direct a framework where the credit appraiser does not interact with the loan borrower, according to former RBI Deputy Governor KC Chakrabarty.
“In a bank, why should the customer meet the banker who is sanctioning the loans? My question is why a borrower is allowed to interact the back office staff…A Bank’s Board must ensure this (does not happen) and if the Board does not have that system, the RBI must point that out to the Board. RBI has said it has written to the Board but the action is not taken. If I point out the mistake, I must ensure it is implemented,” Chakrabarty told a TV channel a day after RBI Governor Urjit Patel’s comments.
Expressing helplessness in preventing frauds such as the massive Rs 13,000 crore-plus scam unearthed last month as Punjab National Bank (PNB), Patel blamed limited powers and that RBI is constrained by the Banking Regulation Act. It does not permit RBI to remove any public sector banks’ directors or management, (unlike private banks) who are appointed by the government of India, nor can it force a merger or trigger the liquidation of a bank.
Chakrabarty, who served as the Deputy Governor from June 2009 to March 2014, said, “I agree that the structure does not give powers to the RBI. But my question is, have you ever written to the Board? Have to written to the Government to remove this Board.”
According to him, a good credit practice of a lender has to be to ask questions for the money they lend. “Everyone who has sanctioned the loans must ask a question…Our credit appraisal system is a problem. Hence the risk framework is the need of the hour…Risk-based supervision needs to be made and hence if the Board fails to maintain the risks in place, they need to increase capital buffer,” said Chakrabarty, who was also the chairman and managing director at PNB between 2007 and 2009.
“Under the existing circumstances, if RBI does not have that power, increase the CAR for banks. If I am not happy with the risk management, increase their capital requirement and they must do business even as 100 percent. It will obviously vary from bank to bank,” said Chakrabarty.
CAR or capital adequacy ratio is a measure of a bank’s financial strength, expressed as a ratio of capital to risk-weighted assets.
Current RBI norms under Basel III require banks to maintain a minimum capital adequacy of 9 percent and a Tier-I ratio of 7 percent.
According to the career banker, India’s problem is much bigger – Rs 2 trillion (Rs 2 lakh crore) of non-performing assets. “This is much bigger… The PNB will not impact the system as much as the Rs 2 trillion NPAs, our system can collapse…We don’t have a framework on who should do what –what the government should do, what the RBI should do.”
Chakrabarty says the RBI has to pursue it to be taken forward. “Even on interest rates, customers are not getting the benefit of lower policy rates. RBI has changed the framework three times but nothing has happened…All of this needs to be more structured.”

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