Credit growth, liquidity boost to support banking sector ahead of Basel III: Dinesh Kumar Khara

Core Insights - The Indian banking system is well-capitalized and prepared for the transition to Basel III norms, which will be effective from April 1, 2027, enhancing banks' ability to raise foreign capital and strengthening their overall capital base [5][8][6] - The Reserve Bank of India (RBI) has adopted a neutral stance in its latest policy, indicating a wait-and-watch approach regarding credit growth, which will depend on tariff-related challenges in the real economy [2][8] - The coverage ratios of banks are at healthy levels, providing adequate buffers against potential credit risks, which is crucial for the stability of the banking sector [1][8] Liquidity and Monetary Transmission - Approximately 58 basis points (bps) of monetary transmission on new loans has occurred, with 21 bps achieved in recent months, while deposit rates have increased by 106 bps, indicating a gradual alignment of lending and deposit rates [1][8] - The relaxation in the Cash Reserve Ratio (CRR) is expected to release about Rs 2.5 trillion in liquidity, supporting credit growth and improving corporate credit demand during the busy season [8][2] Basel III Implementation - The transition to Basel III is viewed positively, as it is expected to boost investor confidence and align India's banking sector more closely with global regulatory standards [6][7] - The additional preparation time until 2027 will strengthen the banking system, allowing for a smoother adoption of Basel III guidelines without significant disruption [8][5] Overall Banking System Health - The Indian banking system has undergone significant clean-up in recent years, resulting in improved asset quality, healthy capital ratios, and robust profitability [7][8] - Experts believe that the Expected Credit Loss (ECL) framework and Basel III adoption will signify a new phase of resilience and global integration for Indian banks [7][8]