RBI proposes new capital rules for banks too-big-to-fail

The Reserve Bank of India plans to introduce increased capital requirements by 2016 for banks regarded as too big to fail, and make them subject to greater regulatory oversight.

With the economy growing at its slowest rate in a decade, India's banking system is facing rising levels of stressed loans, with $100 billion, or about 10 percent of the total, categorised as bad or restructured.

The RBI released a draft of the new guidelines late on Monday, the same day as it issued proposals for counter-cyclical buffers, which would require banks to build reserves during periods of stability in order to weather more difficult times.

Domestic brokerage Motilal Oswal estimated the RBI could class at least 15 domestic banks, including ICICI Bank and Axis Bank, as domestic systemically important banks.

"Banks with size of more than 2 per cent of gross domestic product will be selected in the sample of banks," Motilal Oswal said in an email to clients.

Though not as big, five top foreign lenders could also be subject to similar requirements due to their high level of activity in the derivatives market, the brokerage said.

Banks classified as systemically important will be required to hold additional capital in the range of 0.2 per cent to 1 per cent of their risk weighted assets, according to the central bank proposals. The higher capital requirement will begin from April 2016 and would be implemented in phases until 2019.

The names of banks classified as D-SIBs will be disclosed in August every year, starting in 2015, RBI said.

"The banks designated as D-SIBs will be subjected to more intense supervision in the form of higher frequency and higher intensity of off- and on-site monitoring," RBI said.

The RBI has asked banks to send responses to its proposals by December 31.

Image: RBI Governor Raghuram Rajan; Photograph: Reuters