Mumbai, Nov 2: The Reserve Bank of India has rejected the capital account convertibility (CAC) panel's recommendation on clamping a higher capital adequacy ratio on weaker banks. "We have no plan to go for a differential capital adequacy ratio system for banks. The present uniform level of eight per cent is fine," a Reserve Bank source said.

The SS Tarapore-headed capital account convertibility panel, which had submitted its report earlier this fiscal, said: "As risks faced by the financial sector are much higher in developing countries...the RBI should consider the imposition of even more stringent capital adequacy standards that the Basle norms and income recognition and asset classification norms should be tightened expeditiously."

The panel had suggested that "the tighter norms may be in the form of steeper capital requirements for banks with higher level of non-performing assets". However, the central bank is not in favour of jacking up the current level of capital adequacy ratio for banks with higher non-performing assets. "We are not accepting the committee's recommendation on higher tighter capital adequacy requirements for weak banks. We will keep it at a uniform level," sources said.

At present, all banks are required to maintain a eight per cent capital adequacy ratio. The Reserve Bank had, in fact, extended the deadline thrice to enable the public sector banks achieve the stipulated norm. The Tarapore panel prescribed more stringent capital-adequacy norms for banks with higher bad loans to force the weaker banks to go slow on expanding the risk weighted assets. The committee was in favour of converting the weaker banks into "narrow" banks, concentrating only on investment in government papers.

The panel's report categorically said that prudential norms like capital adequacy ratio should be revised to enable the financial system to attain international standards. The prudential norms, according to the Tarapore panel, should not end up providing the "weakest segment of the financial system" with a cushion for survival. The Reserve Bank, however, has not taken any action on the panel's recommendation on narrow banking. The objective of the busy-season monetary and credit policy, announced on October 21, was to force banks to lend. The central bank cut the bank rate by one percentage point to signal lowering of lending rates and augmented the lendable resources by Rs 9,600 crore through a phased two percentage-point cut in the cash reserve ratio.

Reserve Bank governor C Rangarjan, however, said that banks having more lendable resources need not neccessarily mean that they had to lend to lower quality assets. "The lending decisions need to be taken in accordance with the prudential norms and in the backdrop of banks' own assessment of the quality of the asset," Rangarjan said.

On Reserve Bank of India's objective of encouraging banks to lend and the capital account convertibility panel's concern for weak banks, Rangarajan said: "The capital account convertibility comittee's concern are well taken care of...their concerns were basically that the economy should be managed in such a way that it ensures domestic stability...and domestic stability was interpreted in terms of the inflation rate in the system. We are not deviating from it."

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.