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Basel-III Norms and Indian Financial System

May 17, 2014 15:28 IST

Introduction

After the economic crisis of the year 2008, BCBS released the Basel-III Accord in 2010. The purpose of Basel-III norms was to find out the loopholes in Basel-II Norms, especially in context with the debt regulation of the banks.

The main objective of the Basel-III Norms was to target the activities which were capital-intensive. The purpose of these norms is increasing the capacity of the banks to absorb shock during financial crisis and at the same time, decrease such crisis probabilities.

Areas of Target of Basel-III Norms

The Basel-III Norms focus on a few very important areas and these are:
• Risk Coverage
• Capital
• Liquidity
• Leverage

BCBS made it mandatory for all international banks to comply Basel-III Norms by 31 December 2018. The deadline for the banks in India is 31 March 2018.
 
Capital Requirements under Basel II and Basel III

The following table shows Capital Requirements for the Indian banks under Basel-II and Basel-III Norms.

 

 

As a percentage of risk

weighted assets

Basel II

Basel III

(as on January 1,

2019)

A = (B+D)

Minimum Total Capital

8.0

8.0

B

Minimum Tier - I Capital

4.0

6.0

C

of which:

 Minimum Common Equity

 Tier 1 Capital

2.02

4.5

D

Maximum Tier 2 Capital

(within Total Capital)

4.0

2.0

E

Capital Conservation Buffer

(CCB)

-

2.5

F = C+E

Minimum Common Equity

Tier 1 Capital + CCB

2.0

7.0

G = A+E

Minimum Total Capital +

CCB

8.0

10.5

Basel-III Norms and Impact on Indian Financial System: Advantages and Disadvantages
Basel-III Norms offer both pros and cons for the Indian banks. These are discussed here:


Advantages of Basel-III Norms for Indian Banks
i. The Indian Banks will become less probable towards financial shutdown and will become stronger and stable.
ii. With the proper implementation of Basel-III Norms, the Indian Banks will become sound.
iii. Advanced approach can help the Indian Banks in efficiently managing their capital, while at the same time, improving profitability.
iv.    Proper update of the Indian banks to Basel-III Norms will enable them to grab better financial opportunities not just in India but also abroad.

Disadvantages of Basel-III Norms for Indian Banks

i.    The Indian economy is gradually moving towards higher growth and so, there will be an increased demand for the credit. Because of the increasing credit demand, the Indian banks will grow more in terms of capital requirement. However, this will not be completely possible under Basel-III Norms because these Norms make it mandatory to have capital backup.
ii.    The Indian economy is still recovering from its economic meltdown because of which it is not possible for the banks to lend money. Increasing credit demand and inability of banks to lend money will push the borrowing rates higher, leading to even more economic slowdown.
iii.    Also, the Basel-III Norms need an additional cost for implementation, which in turn will have a diverse effect on the returns as well as profitability of the banks.
iv.    Indian Banks have still not updated completely to Basel-II Norms. In order to avail the advantages of Basel-III Norms, it is mandatory for the banks in Indian financial system to upgrade gradually to these Norms. This is even more important for the banks which have international presence.

Conclusion
Although the cost of implementing Basel-III Norms is high, but imbibing these Norms in Indian financial system will offer a safer financial environment to the entire system as well as the banks. With the higher integration of Indian banks with global financial system, it is important for India to mitigate its financial risk by implementing these reforms.

About Basel Norms
Basel is a city in Switzerland and is also the Bureau of International Settlement (BIS) Headquarters. The objective of BIS primarily is to promote the assistance among all the central banks with one common goal of common standards as well as financial stability of the banking regulations.

There is a Basel Committee on Bank Supervision (BCBS) which at present comprises of 27 nations, including India. BCBS has certain agreements of its own and these are known as Basel Accord.

The basic purpose of Basel Accord is ensuring that all the financial institutions have capital enough to maintain the obligations as well as absorb any kind of unexpected loss.

As of now, there are three main kinds of guidelines introduced by this body. These are Basel-I, Basel-II and Basel-III. While Basel-I focuses mainly on credit risk. Basel-II, on the other hand, contains detailed focus on risk management, capital inadequacy as well as disclosure requirements. In India, as of now, only the Basel-II Norms’ basic features are implemented.

Is this article important for exams ? Yes110 People Agreed

DISCLAIMER: JPL and its affiliates shall have no liability for any views, thoughts and comments expressed on this article.

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