In April 2021, Based on the empirical testing and review of Counter-Cyclical Capital Buffer (CCyB) indicators by The Reserve Bank Of India (RBI), it has decided not to activate CCyB at present as there is no necessity for it.
In February 2015, RBI has proposed the CCyB as a part of its Basel-III norms (not activated) and stated that it would be activated as and when there is a necessity. (But till now keeping the ratio at 0 per cent)
What is CCyB?
It is a part of Basel-III capital adequacy norms, which helps a bank to overcome distressed economic conditions.
How will it work?
- As per CCyB, banks will be required to set aside a higher portion of their capital during good times (when loans are growing rapidly), and that capital could be released and used during bad times (when there is distress in the economy).
- CCyB is supposed to be in the form of equity capital.
- It works by forecasting the credit-to-GDP gap as the main indicator, in conjunction with credit-to-deposit ratio, industrial outlook assessment survey, interest coverage ratio, and asset quality.
RBI had said the aim of the countercyclical capital buffer regime was two-fold.
Firstly, it requires banks to build up a buffer of capital in good times which may be used to maintain flow of credit to the real sector in difficult times.
Secondly, it achieves the broader macro-prudential goal of restricting the banking sector from indiscriminate lending in the periods of excess credit growth that have often been associated with the building up of system-wide risk.
Recent Related News:
On March 10, 2021, The Reserve Bank of India (RBI) removed LIC – owned Industrial Development Bank of India (IDBI) from its enhanced regulatory supervision, the Prompt Corrective Action (PCA) framework, after almost 4 years, on improved financial performance and credit profile.
About Reserve Bank of India (RBI):
- Key Appointments in RBI – Appointments Committee of the Cabinet (ACC) headed by the Prime Minister appoints the governor and deputy governors of RBI.
- Section 7 in The RBI Act, 1934, empowers the government to issue directions to the RBI governor.
- Shaktikanta Das – The 25th governor of RBI from 11 December 2018