Greater transparency is good for Indian banking—here’s how RBI could go further in that direction

Subscribe to enjoy similar stories.The Reserve Bank of India (RBI) has put out a draft amendment to its earlier directions on prudential norms for the capital adequacy of commercial banks. It deals with Pillar 3 (disclosure requirements) of the Basel III framework, adopted by RBI in 2013.The rationale, according to the central bank, is to ensure greater consistency with that framework, as prescribed by the Bank for International Settlements, the global collective of central banks.

Its three pillars cover minimum capital ratios, supervisory review processes and market discipline. The third pillar aims to keep markets informed about the financial status of banks through a regulatory mandate to disclose vital information that has no legitimate claim to secrecy.

The draft circular hits the nail on its head by stating that the provision of “meaningful information about common key risk metrics to market participants is a fundamental tenet of a sound banking system” as it “reduces information asymmetry and helps promote comparability of a bank’s risk profile within and across jurisdictions.”The business of banking is, by definition, characterized by a certain degree of opacity, thanks to its underlying principle of customer confidentiality. Information asymmetry—where one side knows more than the other—is almost a given.

This is where Pillar 3 hopes to make a difference. By stipulating what exactly a bank must disclose, it enables market participants to access key information on a bank’s risk exposure and capital cushion designed to absorb any losses that may arise from operations.

The broad idea is to increase transparency and confidence in a bank’s ability to withstand financial blows. However, the adequacy of regulatory