In a move that could affect private equity (PE) and venture capital (VC) funds being set up by banks, the Reserve Bank of India (RBI) today said it was planning to lay down a risk management and capital adequacy framework for bank-sponsored private pools of capital.
The move, a part of the new set of prudential norms being discussed by financial sector regulators across the globe in the wake of the credit crisis, was being discussed in view of the reputational risk arising from undertaking such activities, RBI said in its annual report for 2008-09.
Laying emphasis on the macro-prudential dimension of the systemic risk assessment, the banking regulator said it was also in the process of revising the guidelines on stress testing and liquidity risk management and would factor in the new guidance issued by the Basel Committee on Banking Supervision in March. Indian banks had not shown any strain during the stress test conducted by RBI.
While banks such as ICICI Bank and Axis Bank are already in the private equity arena, others such as State Bank of India and Yes Bank are looking to launch such funds. While RBI had initially expressed certain concerns about State Bank of India's entry into the private equity-venture capital space, it asked the country's largest banks to initiate certain steps before foraying into the business. Canara Bank also has a venture capital fund.
If RBI goes ahead with the move, banks would have to factor in the capital they might have to set aside to cover the risk of VC and PE funds promoted by them.
In recent years, the regulator has laid emphasis on initiatives such as consolidated supervision of banking groups. And with Indian financial players venturing outside the country, steps are also being taken to strengthen cross-border supervision.
RBI said elements of macro-prudential regulation were visible in India even before the global crisis started. The central bank had started using counter-cyclical risk weights and provisioning norms, such as those for bank loans to the real estate sector, to ensure that the risk was contained.
In light of the global financial turmoil, the global initiative would focus on a multi-pronged approach that would focus on introduction of automatic stabilisers by adopting counter-cyclical capital charge. This would help build a cushion during boom years to deal with asset-quality issues in a downturn.
Further, RBI said that in the coming days, regulators could focus on elements such as offbalance sheet exposure, risk concentration and valuation of financial instruments, among others, to strengthen supervision. In addition, they could promote market discipline through better disclosure and clarity on risks associated with certain instruments.
RBI said regulators could provide capital requirements for reputational and other risk-associated securitisation and activities undertaken by sponsored or connected conduits. Another element that can be used is stipulating capital treatment for trading book exposures, besides supplementing the regulatory approach to minimise the incentive for regulatory arbitrage between banking and trading books.
The regulator said the second element would be adequacy and quality of capital in line with the Basel II risk-based capital framework and use of simpler measures such as the leverage ratio.
