Reserve bank of India (RBI) has added HDFC bank in the domestic- systematically important banks list. That means it comes under “ too big to fail ” category.Domestic- systematically important bank (D-SIBs) refers to one of the important banks whose downfall would affect the system along with the nation’s economy. The turn overs of banks are considered to classify and qualify them into the D-SIB category.
Now HDFC also joined with SBI and ICICI bank which is already tagged as D-SIBS. The banks come under the important category by an annual gross score. The annual turn-over of banks decide whether their role is important in the growth of the economy or not.
SBI and ICICI banks were considered as D-SIB on the basis of systematic importance score and the size of the bank as the percentage of annual gross domestic profit (GDP). Banks with assets more than 2% of GDP will be considered a part of this class of lenders.
Banks which act as biggest lenders, take part in all types of financial activities like home loans, car loans, educational loans, etc. which brings development in both people’s life and nation are considered as D-SIB. When a bank comes under D-SIB, its surcharges will be changes, and in case of HDFC, these taxes will be applicable from April 1st, 2018.
The banks under D-SIB, are Asserted into important buckets which refer to size, interconnectedness, substitutability, and complexity. Now HDFC and ICICI fall under bucket two and SBI under bucket three. There are four buckets in total.
According to the D-SIBs structure, released in August 2014, banks under bucket one will need to prolong an additional 0.15% of additional tier-I capital from April 2018, which will increase to 0.2% in the consecutive year. In case of bucket three, the additional requirement of 0.45% is to be maintained from the start of next fiscal and will rise to 0.6% from April 2019.
Speaking in detail Udit Kariwala, senior analyst at India Ratings said “For D-SIBs, while there are additional capital requirements, there is the advantage in the report of lower borrowing costs. This is because the entire perception of the bank should improve on account of the regulatory label of being a systemically important bank, creating an expectation of government support in times of financial distress.”