RBI allows easier capital recognition for banks; Bank Nifty zooms 4.5 per cent

Reserve Bank of India in a circular on Thursday made some modifications to the treatment of certain balance sheet items of banks, in effect boosting their regulatory capital and aligning it with the internationally adopted Basel III capital standards.

The Reserve Bank has reviewed the position in this regard and it has been decided to align, to some extent, the current regulations on treatment of these balance sheet items, for the purpose of regulatory capital, with the BCBS guidelines.

Treatment of revaluation reserves

Revaluation reserves arising out of change in the carrying amount of a bank’s property consequent upon its revaluation, may at the discretion of banks, be reckoned as CET1 capital at a discount of 55 per cent, instead of as Tier 2 capital under extant regulations subject to meeting certain conditions.

Treatment of Foreign Currency Translation Reserve (FCTR)

Banks may, at their discretion, reckon with FCTR arising due to translation of financial statements of their foreign operations in terms of Accounting Standard (AS) 11 as CET1 capital, at a discount of 25 per cent subject to meeting certain conditions. RBI has also allowed deferred tax assets up to 10 per cent of a bank's Tier I capital to be recognised as core capital, freeing up further money for banks.

The Phillip Capital report believes this would be a big positive for PSBs as it would evade the risk of huge dilution of equity. “SBI can gain Rs 20,000 crore from revaluation of property, which can add 50 basis points to Tier-1 on account of revaluation reserves only,” it said.

RBI's permission to recognise some of the assets of banks, which were till now not permitted, comes at a time when they are struggling to meet capital adequacy norms due to soaring provisions for bad loans. The Central Bank forced them to declare more loans as bad and provide for their losses, eating into their capital, as it wants to clean up the system by March 2017.

This is certainly a positive development for the banking sector as it would improve their balance sheet position.

Reacting to this positive development, Bank Nifty was up by more than 4.30 per cent at 15,051. Bank of Baroda, State Bank of India were up by 10 per cent each; Bank of India, Canara Bank and ICICI Bank were trading up by 7 per cent each. All the other banks too were trading with gains in the range of 2 to 5 per cent.