The recent guidelines issued by Reserve Bank of India (RBI) on countercyclical capital buffer (CCCB) are credit positive for the domestic lenders though the norms are unlikely to be activated in the current year, says Moody's.
In a report, the ratings agency said, "The guidelines are credit positive for Indian banks because they make clear that banks will be required to hold the additional capital amid periods of rapid credit growth".
Last week, the central bank had issued guidelines on when it would require Indian banks to maintain a CCCB, an additional layer of loss-absorbing capital on top of banks' increased minimum capital requirements under Basel III.
According to the RBI's guidelines, the key trigger for activating the CCCB will be when the credit/GDP ratio has risen relative to its long-term trend.
The RBI said it would require banks to hold the full 2.5% buffer when the gap between the credit/GDP ratio and the long-term trend exceeds 15 percentage points.
The central bank would implement a CCCB of less than 2.5% when the gap is between three and 15 percentage points, with the size of the required CCCB increasing on a graduated scale.
"Although the credit/GDP ratio will be the key trigger, the RBI said it will maintain its discretion when reducing the CCCB, and will also look at other indicators, including banks' ratios of loans to deposits, non-performing assets and interest coverage," Moody's said.
CCCB-activation guidelines from other countries such as Hong Kong, Switzerland and Norway focus not only on the level of credit/GDP, but also on household debt indicators such as banks' mortgage assets and property prices.
In contrast, corporate loans, which account for about 80 per cent of Indian banks' loan exposure, have negatively affected banks' asset quality owing to high corporate leverage, while the asset quality of loans to households have been relatively stable.
"Thus, RBI has focused its triggers on overall domestic credit and the health of banks and corporates to sustain the increase in credit," Moody's said, adding it does not expect the CCCB norms to be activated in 2015.
India's domestic credit/GDP ratio has consistently gone up over the years to touch at 80.2% at the end of March 2014.
"Nevertheless, these guidelines provide the RBI with a tool to compel banks to conserve capital and moderate their balance sheets during periods of fast credit growth, which would benefit the banks' credit quality," Moody's said.