The Reserve Bank of India (RBI) has decided not to activate the countercyclical capital buffer (CCCB) framework as the current situation does not warrant such an action.
- Following Basel-III norms, central banks specify certain capital adequacy norms for banks in a country. The CCCB is a part of such norms and is calculated as a fixed percentage of a bank’s risk-weighted loan book.
- Under CCCB, banks are required to set aside a higher portion of their capital during good times when loans are growing rapidly, so that the capital can be released and used during bad times, when there’s distress in the economy.
- The RBI had proposed the CCCB for Indian banks in 2015 as part of its Basel-III requirements, it hasn’t actually required the CCCB to be maintained, keeping the ratio at zero per cent ever since.
The CCCB has two broad objectives:
- 1. It requires banks to build up a buffer of capital in good times to be used in the bad times so that the credit flow is maintained.
- 2. It restricts indiscriminate lending during excess credit growth period. In this way it restricts systemic risks by curbing unruly bank credit growth.
