SBI, HDFC Bank and ICICI Bank continue to be identified as Domestic Systemically Important Banks: RBI

The Reserve Bank of India (RBI) on Wednesday said State Bank of India (SBI), HDFC Bank and ICICI Bank will continue to be identified as Domestic Systemically Important Banks (D-SIBs).

The D-SIB designated banks have to maintain additional Common Equity Tier 1 (CET1) in addition to the capital conservation buffer.

The central bank, which released the 2024 list of D-SIBs, has prescribed additional CET 1 requirement of 0.80 per cent for SBI, 0.40 per cent for HDFC Bank, and 0.20 per cent for ICICI Bank, as a percentage of their Risk Weighted Assets (RWAs).

RBI said the higher D-SIB surcharge for SBI and HDFC Bank will be applicable from April 01, 2025. Hence, up to March 31, 2025, the D-SIB surcharge applicable to SBI and HDFC Bank will be 0.60 per cent and 0.20 per cent, respectively.

Within the CRAR (capital to risk-weighted assets ratio) of 11.5 per cent for banks, the CET-1 is at 5.5 per cent.

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So, beginning FY26, if SBI wants to make a loan, it will have to back it up with 12.3 per cent of the loan amount as capital against 12.1 per cent now, going by the D-SIB prescription.

If HDFC Bank wants to make a loan, it will have to back it up with 11.9 per cent of the loan amount as capital against 11.7 per cent now, going by the D-SIB prescription.

The Reserve Bank had announced SBI and ICICI Bank as D-SIBs in 2015 and 2016 while HDFC Bank was classified as D-SIB in 2017 along with SBI and ICICI Bank. The current update is based on the data collected from banks as on March 31, 2024.

The indicators used for identifying a Bank as a D-SIB are: size, interconnectedness, substitutability (including total value and volume of payments made in Rupees) and complexity.

In its December 2023 “Framework for Dealing with D-SIBs”, RBI underscored that D-SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’. This perception of TBTF creates an expectation of government support for these banks at the time of distress. Due to this perception, these banks enjoy certain advantages in the funding markets.

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However, the perceived expectation of government support amplifies risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future.

“These considerations require that SIBs should be subjected to additional policy measures to deal with the systemic risks and moral hazard issues posed by them,” RBI said.