Dear Readers,

Current affairs is an important component of several
competitive exams such as the UPSC Civil Services Examination, SSC-CGL, Bank PO
& PSU entrance tests, etc. Therefore, understanding the
terms/concepts/events that make news is critical for aspirants. We at PaGaLGuY
bring you series of articles explaining some of these important
concepts/events. This article is about the RBI’s final guidelines on

Countercyclical Capital Buffer.

On February 5 this year, the RBI released final guidelines on
capital buffer to enable banks to have unrestricted credit flow to the real sectors
of the economy during difficult times. Known as the Countercyclical Capital
Conservation Buffer (CCCB), it is a system that necessitates banks to save up credit
on good days for tough times.

The Internal Working Group of the RBI had, under the
Chairmanship of B Mahapatra, submitted the final report on the implementation
of Countercyclical Capital Buffer (CCCB) in July last year. The report
suggested several recommendations for the system to be effectively implemented.

What is Countercyclical Capital Conservation Buffer?    

CCCBs are compulsory capital reserves that banks have to
maintain so as to be able to pass through difficult times smoothly. Regulations
for creation of adequate capital buffers are framed in a way to reduce the
procyclical nature of lending (lending more during good times) by promoting the
creation of countercyclical buffers (lending less during good times).

As per the guidelines released by RBI, CCCBs have two major
aims: Firstly, it requires banks to build up a buffer of capital in good times.
Secondly, to prevent banks from lending indiscriminately during periods of
excess credit growth.

Highlights of RBI’s recent
guidelines on CCCB

·
CCCB aims to reduce the overexposure of banks during good times as banks have the habit of lending excessively when
credit flow and economic growth is high.

·
CCCB may be maintained in the form of Common
Equity Tier 1 (CET 1) capital or other fully loss-absorbing capital. CET 1 is a
measure of the bank’s financial strength that is arrived at by comparing a bank’s
core equity capital and its gross risk-weighted assets (RWAs).

·
The amount of the CCCB may vary from 0 to 2.5
per cent of total risk-weighted assets (assets that are prone to more risks) of the
banks.

·
The central bank will announce the percentage of
money that banks need to set aside as CCCB at least four quarters in advance.

·
CCCB framework will be mainly based on
credit-to-GDP gap (difference between the credit-to-GDP ratio and its long-term
trend. Credit-to-GDP ratio is the ratio of a country’s national debt to its
gross domestic product).

·
However, the credit-to-GDP gap will be used in
conjunction with the GNPA growth.

·
Banks having overseas presence also have to
maintain adequate capital under CCCB as prescribed by that (host country) central
bank regulations. RBI may also ask Indian banks to keep excess capital under
CCCB for exposures in any of the host countries if it feels the CCCB
requirement in host country is not adequate.

·
Similarly RBI foreign banks in India have to
maintain CCCB as directed from time to time based on their exposures in India.

·
Banks not complying with the RBI’s CCCB framework
will be ordered to operate with several restrictions on discretionary
distributions (may include dividend payments, share buybacks and staff bonus
payments).

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