For dealing with the coronavirus-led slowdown, the Reserve Bank of India (RBI) announced that banks don’t need to activate countercyclical capital buffers (CCyB) for one more year, which means the banks can utilize the capital earmarked for the buffer.
The framework on countercyclical capital buffer (CCyB) was put in place by the RBI in terms of guidelines issued in 2015 wherein it was advised that the CCyB would be activated as and when the circumstances warranted.
The framework envisages the credit-to-GDP gap as the main indicator, which is used in conjunction with other supplementary indicators.
It requires banks to build up a buffer of capital in good times, which may be used to maintain flow of credit to the real sector in difficult times.
The buffer was also meant to restrict the banking sector from indiscriminate lending in the periods of excess credit growth, which have often been associated with the building up of system-wide risk.
Based on the review and empirical analysis of CCyB indicators, it has been decided that it is not necessary to activate CCyB for a period of one year or earlier, as may be necessary.
Source : LiveMint