Answer:

Financial Stability Board (FSB), an international body affiliated with G20 recommended identification of systematically important banks (SIB), which are too important to fail as their failure would have cascading impact on the entire financial system.

RBI issued guidelines and listed two banks – SBI and ICICI as part of an annual process to declare such banks as Domestic Systemically Important Banks. These banks would have to set aside 0.2 per cent to 0.8 per cent extra capital, based on the category under which they fall.

However, it might not be easy for banks to arrange these additional funds. SBI has already stated the need for government help in this regard. RBI has kept the requirements already lower than other countries in face of the capital stress that banks in India are currently experiencing. For most global banks it ranges from 1 to 2.5 per cent. This could threaten the stability and dilute the original objective of the provision.

Also, the list included only two names instead of 6 originally considered. This can prove to be dangerous as these banks are big and systemically important with deep and wide exposures across the market.

The biggest benefit would be in increasing stability. Even in case of a financial crisis, these banks will find it easier to run their operations. Also, it reduces government bailout chances as well as quantum.

RBI's implementation of its domestic SIB framework is less stringent than that of other countries, as it has considered the fact that Indian banks are very small considered to global banks with lower assets as well as assets to GDP ratio. Also, global banks are exposed to riskier inter-connected and complex financial products which Indian banks have negligible.

The Reserve Bank of India has taken a well-balanced step as it followed the broad principles laid down by the Basel Committee for making such a selection, which would protect it from failure of financial system. At the same time, the decision has been made with an eye on local conditions.