The Reserve Bank of India said on Monday that it would increase capital requirements for “too big to fail” banks by 2016 and subject them to enhanced oversight as part of an effort to address problems in the financial system.
India has seen increased levels of stressed loans, with approximately 10 percent of all loans categorized as “bad” or “restructured,” The Times of India reports.
“Systemically important banks are perceived as ones that are [TBTF],” Reserve Bank of India said. “This perception…creates an expectation of government support for these banks at the time of distress… However, the perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions and increases the probability of distress in the future. These considerations require that SIBs should be subjected to additional policy measures to deal with the system risks and moral hazard issues posed by them.”
Beginning April 2016, institutions classified as TBTF will be required to hold extra capital of between 0.2 percent and one percent of risk-weighted assets. The new framework would be implemented in phases until 2019, and the names of domestic designated institutions will be released every August, beginning in 2015, according to The Times of India.
The RBI has requested public comment on the proposal, due by Dec. 31.