Basel-III

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 capitalintensive. 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 BaselIII Norms.
As a percentage of risk
weighted assets
Basel II
Basel III(as on January
1,2019)
Minimum Total Capital

8.0

A = (B+D)

8.0
Minimum Tier - I Capital

4.0

6.0
of which:
2.02
Minimum Common Equity
Tier 1 Capital
Maximum Tier 2 Capital
4.0
(within Total Capital)

4.5

2.0

Capital Conservation Buffer (CCB)

2.5

F = C+E

Minimum Common Equity 2.0

Tier 1 Capital + CCB

7.0

G = A+E

Minimum Total Capital +

CCB

10.5

8.0

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.

2014: Banking in India will changebody and soul

2014: Banking in India will changebody and soul As an offshoot, Indian firms, especially
those operating in the infrastructure space and adding to the growing pile of bad loans at banks,
will become more aggressive in selling assets to shrink debt. Photo: Hemant Mishra/Mint To use
a clich, there will be a tectonic shift in the Indian banking landscape in 2014. Both the body and
the soul of the Rs.80 trillion banking industry will change. A set of new banks will get the
regulators approval, some foreign banks operating in India may decide in favour of local
incorporation to get near-national treatment, and new norms for early recognition of financial
distress and faster resolution and recovery will help curb rising bad assets and improve the health
of the banking system.
As an offshoot, Indian firms, especially those operating in the infrastructure space and adding to
the growing pile of bad loans at banks, will become more aggressive in selling assets to shrink
debt. In 2013, close to a dozen Indian companies either sold or made their intention clear to sell
assets, to pare at least Rs.3.5 trillion worth of debt, as rising interest costs and diminishing
margins took their toll on growth. This trend will intensify in 2014.
Reserve Bank of India (RBI) governor Raghuram Rajan, a former chief economist with the
International Monetary Fund (IMF), has been talking about offering banking licences on tap.
This might happen in the future, but, until now, this has been a once-in-a-decade phenomenon.
Following the nationalization of 14 large banks in 1969 and six in 1980, RBI has so far given
licences to only 12 banks in two phases, including the conversion of a cooperative bank into a

commercial bank. In the first round, the banking regulator issued licences to 10 private sector
banks in 1994, shortly after the nation embraced economic liberalization under the P.V.
Narasimha Rao-led Congress government. In the second round, licences were issued to two
banksYes Bank Ltd and Kotak Mahindra Bank Ltdin 2004.
In the past, RBIs stated objective behind giving licences to new banks was to introduce
competition in the sector, largely dominated by government-owned banks. This time, the prime
focus is to promote so-called financial inclusion, or increasing the reach of financial services to
the unbanked population. Then finance minister Pranab Mukherjee, in his February 2010 budget
speech, had announced that RBI would open up the sector and issue fresh licences with the
objective of spreading banking services wider in a nation where roughly 50% of the adult
population does not have access to them. After issuing a discussion paper and receiving public
feedback on it, RBI issued the guidelines on new banking licence in February 2013 and set a 1
July deadline for applications. A panel of four, headed by former RBI governor Bimal Jalan, has
been scrutinizing the applications.
IMFs financial access survey of 2011 gives us a fair idea about how critical financial inclusion
is in India. In every 1,000km stretch, India has 30.43 bank branches and 25.43 automated teller
machines (ATMs). In contrast, China has 1,428.98 branches and 2,975.05 ATMs. Similarly, there
are 10.64 bank branches and 8.9 ATMs for every 100,000 of the population in India. The
comparable figures for China are 23.81 and 49.56. Finally, bank deposits in India constitute
68.43% of the nations gross domestic product (GDP) and credit 51.75% against Chinas
433.96% and 287.89%, respectively. To expand banking services in a nation of 1.2 billion
people, one needs deep-pocketed promoters, and this is why corporations have been allowed to
apply for banking licences, but not too many of them seem to be interested. The Tata group
withdrew its application for a banking licence, leaving 25 applicants in the race and only three of
them belong to the corporate sectorthe Aditya Birla Group, the Bajaj Group and Anil Ambanis
Reliance Group. Tata is not the first business house to have a change of heart. The Mahindra and
Mahindra Group, too, decided not to apply for a banking licence, saying RBIs norms were not
conducive for large and successful non-banking financial companies to turn into banks.
According to the licensing norms, the new bank will have to be listed within three years,
bringing down the promoters shareholding to 40%. Within 10 years, this holding must be further
pared to 20%, and by the 12th year to 15%. This is a big deterrent as the promoters will not be
able to reap the benefits of the value they create. How many licences will be given is anybodys
guess at this point, but one thing is for sure: armed with technology, the new banks will shift the
playing field from the cities to rural India and add a new dimension to the rural consumption
story.
At a parallel level, some old and big foreign lenders may set up wholly owned subsidiaries in
India because they will get near national treatment by the regulator when it comes to opening
branches. Foreign banks with complex structures and banks that do not provide adequate
disclosure in their home jurisdiction as well as systemically important ones will have to
convert their local units into subsidiaries. Systemically important banks are those whose assets
account for at least 0.25% of the total assets of all commercial banks. At least 12 foreign banks,
including Bank of America Corp., Barclays Plc, Citibank NA, Deutsche Bank AG, Hong and

Shanghai Banking Corp. Ltd, DBS Bank Ltd and Standard Chartered Plc, fall into this category.
Those banks that started operations in India before August 2010, however, have the option to
continue their business through the branch mode, but they will be incentivized to follow the
local incorporation route. One of the incentives is allowing foreign banks to buy private sector
banks in India. If indeed that happens, banking will never be the same in India.
While new banks and locally incorporated foreign banks will rewrite the rules of the game, RBIs
initiative to clean up bad loans will add strength to the banking system. The combination of bad
and restructured loans is at least 10% of total banking assets in India. The new norms will give
incentives to banks to detect the first sign of a loan turning bad and take remedial steps and, at
the same time, they will make life difficult for rogue borrowers. At the next stage, RBI will
probably focus on reforming state-run banks that account for about 70% of banking assets, but
lack the skill to manage them and arent smart enough to say no when it comes to taking
exposure to some sectors. Overall, 2014 will be action-packed; banks cannot ask for a more
exciting time
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