RBI Confirms SBI, HDFC, ICICI as Key Banks with Higher Capital Norms
RBI insists major Indian banks maintain extra capital buffers due to systemic importance.
The Reserve Bank of India (RBI) maintains State Bank of India (SBI), HDFC Bank, and ICICI Bank as Domestic Systemically Important Banks (D-SIBs), requiring these institutions to hold additional capital buffers due to their critical role in the nation’s financial stability. This classification means these banks are considered “too big to fail” because their disorderly failure could disrupt banking services and affect the broader economy. SBI must maintain an extra capital buffer of 0.80%, HDFC Bank 0.40%, and ICICI Bank 0.20% of their risk-weighted assets, which act as a financial cushion to absorb potential losses and mitigate systemic risk.
The RBI’s D-SIB framework, introduced in 2014 and periodically updated, is designed to identify and supervise banks whose size, interconnectedness, complexity, and lack of substitutability pose significant risks to the financial system. Banks are assessed annually through a two-step process: first, selecting a sample of banks with assets over 2% of GDP, and second, calculating a composite Systemic Importance Score (SIS) based on indicators like size, interconnectedness, complexity, and substitutability. Based on their SIS, banks are placed into buckets that determine their additional capital requirements, which are phased in over time.
The framework requires annual disclosures of D-SIBs and their corresponding capital buffers, with updates made each November based on March-end data. The capital buffer, known as the Common Equity Tier 1 (CET1) surcharge, is applied over and above the minimum capital requirements and capital conservation buffers. Such regulatory measures aim to enhance the resilience of these banks, minimizing the chances that their failure would destabilize the Indian banking sector and economy.
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Further, the RBI’s revisions to the assessment methodology now also emphasize the growing role of digital payments in evaluating the substitutability indicator, reflecting the evolving nature of banking and financial services. This adjustment ensures that banks heavily involved in digital transactions are accurately assessed for their systemic footprint.
In summary, the RBI’s continued classification of SBI, HDFC Bank, and ICICI Bank as D-SIBs underscores their pivotal role in India’s economy and the necessity for enhanced capital requirements to safeguard economic stability. This framework not only protects the financial system from shocks but also promotes confidence among depositors and investors by ensuring these banks remain well-capitalized against potential disruptions.
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