High capital base needed for banks with PE arm: RBI

Soon banks such as ICICI Bank, Axis Bank and State Bank of India with a private equity (PE) arms may have to keep enhanced capital base to mitigate risks arising from such exposures.
The private equity business of banks involve reputational risk as people putting money (into private fund) look at credentials of those banks.
“So you have to recognise that this requires some capital. So some capital need to be provided for that,” RBI Deputy Governor Usha Thorat told reporters on the sidelines of the Ficci-IBA Banking Summit here today.
It meant banks would have to maintain additional capital if they were sponsoring and floating private equity funds, she added. She said that RBI would shortly be issuing a draft discussion paper on prudential issues on banks’ floating and managing a private pool of capital.
The purpose of the exercise was to sensitise banks about risks inherent in such activities (PE business) and limit such exposures commensurate with their risk management and available capital, she added.
While ICICI Bank, Axis Bank and Yes Bank already have active private funds, SBI has floated an infrastructure fund in collaboration with Macquarie.
Regarding steps to improve the regulation of financial conglomerates, Thorat said the central bank recently reviewed the regulatory and supervisory framework for them. RBI would shortly issue enhanced norms reflecting an improved regulatory framework.
Similarly, the central bank will issue a draft circular on modalities to adopt the integrated liquidity risk management system.
A guidance note on ‘Liquidity Risk Management’ based on the Basel Committee’s principles and other international best practices will be put on the RBI website by October 31.
Similarly, additional guidance on minimum lock-in period and minimum retention criteria for securitising loans originated and purchased by banks would be issued shortly, she said.
For the development of the financial market infrastructure, RBI has prescribed capital adequacy norms for central counter party (CCP). Clearing Corporation of India’s role is being gradually extended to the over-the-counter interest rate and foreign exchange derivatives segment. Initially, it will work as a reporting platform and, later, to cover the settlement aspect.