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RBI to issue guidelines on bank transparency

The Reserve Bank of India will soon issue guidelines to promote greater transparency in bank operations and better corporate governance, RBI deputy governor S P Talwar said on Tuesday.

Speaking at a conference of bank economists, he added that RBI also expects to boost the capital adequacy requirements for banks in the next few years if proposals by the Basel Committee on Banking Supervision are put into effect.

Banks in India, he said, must maintain a capital adequacy ratio of 9 per cent, which is above the 8 per cent recommended by the Basel Accord of 1988.

The Basel Committee on Banking Supervision was meeting on Tuesday to finalise changes to the accord to determine the amount of capital individual banks need to hold to cover risks.

The revisions are expected to allow banks to match more closely the risk associated with a loan against the capital they need to set aside.

Among the big changes, banks are expected to be allowed to use their own internal risk ratings to calculate the amount of capital to be set aside for a loan, subject to approval from the bank's local regulator.

Talwar noted that while Indian banks had made strides towards adopting international accounting practices, a lot remains undone.

"We need to further tighten the prudential norms," he told the gathering.

He said that the strength and stability of financial systems has come into sharp focus after the Asian economic meltdown in the late 1990s and banking crises in particular had lasting and damaging effects on the economy.

He pointed out that as per estimation, some of the countries affected by the Asian crises could have recapitalisation costs ranging from 15 per cent to 50 per cent of GDP.

Talwar said India avoided the crisis due to a cautious approach to short-term external borrowing and capital account convertibility and lower exposure to real estate and equity markets.

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