<div><em>Designating just two banks could be credit negative for other banks, according to Moody's. <strong>Sumit Sharma </strong>reports</em></div><div> </div><div>The Reserve Bank of India’s (RBI) move to designate just two banks, the State Bank of India (SBI) and ICICI Bank as domestically systemically important bank (D-SIB) is described by Moody’s Investor Services as credit negative for banks in India.</div><div> </div><div>"The RBI’s implementation of its D-SIB framework appears less stringent than that of other jurisdictions, which appears to be related to the capital stress that banks in India are currently experiencing,’’ said Moody’s analysts Rebaca Tan and Srikanth Vadlamani.</div><div> </div><div>The RBI on August 31 designated SBI and ICICI Bank as the only two D-SIB, a status that also requires them to make an additional provision of 0.6 percent and 0.2 percent by April 1, 2019.</div><div> </div><div>India’s D-SIB framework is less rigorous than those of other jurisdictions and with only two banks in India designated as D-SIBs, the country has the least number of D-SIBs among those that have implemented the framework, says Moody’s.</div><div> </div><div>Also, RBI’s timeline for complying with the capital surcharges is longer, despite the presence of the less stringent capital requirements, it said. Canada and Australia require compliance by 2016, and in Singapore, locally incorporated banks have had to comply with the higher capital requirements since June 2011.</div><div> </div><div>In July 2014 RBI explained that problems faced by certain large and highly interconnected financial institutions hampered the orderly functioning of the financial system, which in turn, negatively impacted the real economy. The cost of public sector intervention and consequential increase in moral hazard require that future regulatory policies should aim at reducing the probability of failure of D-SIB and the impact of their failure.</div><div> </div><div>Indicators that RBI said would be used for assessment are size, interconnectedness, substitutability and complexity. Based on the sample of banks chosen for computation of their systemic importance, a relative composite systemic importance score of the banks will be computed, it then said.</div><div> </div><div>RBI in July 2014 expected four to six banks to be designated as D-SIBs. Banks designated as D-SIBs would be subjected to differentiated supervisory requirements and higher intensity of supervision based on the risks they pose to the financial system.</div><div> </div><div>Moody’s expects ICICI Bank to be able to easily meet the required increased capital. Yet, it expects State Bank of India to reply on a combination of government capital injections, raising of external capital to meet the additional capital required.</div><div> </div><div>Singapore had as many as seven SIBs, with Hong Kong five, Canada six and Australia four banks. Compared with other countries, the smallest SIB in India had 5 percent of the market share, compared with three percent for Singapore and Hong Kong, five percent for Canada and 16 percent for Australia.</div><div> </div><div>Australia and Canada would need banks to get the additional capital requirement by January 2016, while Singapore and Hong Kong by January 2019 and India April 1, 2019.</div><div> </div><div> </div>