August 31, 2015 / 1:45 PM / 4 years ago

RBI names SBI, ICICI two banks "too big to fail"

MUMBAI (Reuters) - Reserve Bank of India (RBI) named State Bank of India and ICICI Bank on Monday as “systemically important”, lining the lenders up for tougher supervision to avoid collapses that could rattle the financial system and economy.

A man walks past an ATM at a State Bank of India branch in Mumbai, July 23, 2015. REUTERS/Shailesh Andrade

The designation, effectively declaring the banks “too big to fail”, was only applied by the central bank to the two lenders: India’s largest state-owned bank and its largest private sector bank.

State Bank of India (SBI) must now set aside additional Tier 1 common equity worth 0.6 percent of its risk-weighted assets. ICICI will have to maintain an additional 0.2 percent, the RBI said.

This will be in addition to the extra capital buffers already in place under Basel III guidelines, a set of measures aimed at strengthening regulation and supervision.

Both banks said their capital base was higher than mandated and that they would adhere to the additional requirements.

“SBI currently has a much higher level of Tier I at 9.62 percent as opposed to 7.00 percent required under the current guidelines,” said Chairman Arundhati Bhattacharya.

ICICI is not expected to raise fresh equity funds for the next couple of years, said bank’s Managing Director and Chief Executive Officer Chanda Kochhar.

The Financial Stability Board had recommended in 2010 that all member countries build a framework to reduce risks attributable to Systemically Important Financial Institutions.

The RBI released its framework last year.

In compiling Monday’s list, the RBI had said banks larger than 2 percent of India’s economy would be selected, but it also considered factors beyond size, including complexity, interconnectedness, international links and the institutions’ ability to be replaced.

The banks selected will have to maintain the additional mandated capital from April 1, 2016 in stages, and fully from April 2019.

That means SBI and ICICI Bank will need to set aside more funds at a time when Indian lenders, and particularly state-run banks, are battling a huge bad debt burden and facing a capital crunch.

The RBI said it will review its list of systemically important banks every year and announce them in August.

India’s finance ministry estimates government-owned lenders require 1.8 trillion rupees ($27 bln) in new capital to meet global Basel III banking norms. The government plans to inject 700 billion rupees over four years into the lenders, while the remainder is expected to be raised in the market.

For full statement see:

($1 = 66.4419 rupees)

Reporting by Suvashree Dey Choudhury and Devidutta Tripathy; Editing by Rafael Nam and David Clarke

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