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RBI: Basel-II will benefit capital use

The proposed Basel-II norms will enable more efficient use of capital in the banking sector, according to the Reserve Bank of India.

RBI deputy governor V Leeladhar commented: "Basel-II prescriptions have ushered in a transition from the traditional regulatory measure of capital adequacy to an evaluation of whether a bank has found the most efficient use of its capital to support its business — a transition from capital adequacy to capital efficiency."

Speaking at a function organised by the Indian Merchant’s Chamber, he said that the return on equity would depend on how effectively capital is used.

"With the extension of capital charge for market risks to the available for sale portfolio this year and the coming into force of Basel-II norms in March ’07, banks would need to shore up their capital levels not only for complying with these requirements but also for supporting the balance sheet growth," he said, according to the Economic Times.

In addition to improvement in capital efficiency, the implementation of Basel-II norms offers opportunities for refinement of risk management systems, Mr Leeladhar added.