- Banking: PCA Framework, Countercyclical capital buffer (CCCB) and BASEL-III Capitalization Norms
- Monetary Policy Update: standing deposit facility (SDF), Tri-party Repo Rate, Half Hour NEFT window
- Banks must maintain an adequate capital base to protect themselves against “bank runs” and NPAs. Therefore, BASEL Committee on banking supervision has prescribed certain norms.
- First: they must maintain a minimum capital to risk weighed asset ratio (CRAR). RBI has prescribed limits and deadlines for its compliance.
- To comply with these norms, public sector banks of India will require 1.8 lakh crore additional capital, out of which, government of India is supply Rs. 70,000 crores under the Mission Indradhanush.
- Secondly, during the boom period, Banks are required to set aside certain capital buffer, which they’ve to use as loans during the bust period. This is known as countercyclical capital buffer- although RBI Governor Dr. Urjit Patel has said, we don’t need it for the moment.
- In 2002, the then RBI governor Bimal Jalan had drafted prompt corrective action (PCA) framework against weak banks, now Dr. Urjit Patel has further strengthen it. In what circumstances can RBI use this tool, we shall see in today’s lecture.
- As such we covered the theory monetary policy and review of bi-monthly monetary policies during 2016-17.
- But, afterwards RBI released the first bimonthly policy of the financial year 2017 – 18 in April 2017. it contains so many new changes, so I have add it as a rejoinder to the topics I’ve already taught.
- Earlier we had learned that to absorb the excess liquidity created by the demonetization, forced RBI to impose incremental CRR, and issue Cash management bills under the market stabilisation scheme (MSS). But now those CMB are maturing, so to temporarily absorb that excess liquidity under reverse repo mechanism, RBI narrowed the policy corridor.
- What is standing deposit facility (SDF)
- Swapping of the collateral in repo window.
- Frequency of NEFT settlements increased from one hour to half hour.
- Prompt corrective action framework (PCA) against weak banks.
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see url Next lecture: Non Performing Assets (NPA), Bad Bank.