Basel norms & impact on indian banking system nisha

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Basel Norms - origin, Norms and Pillars, How it affect Indian Banking System and current actions to implement Basel III

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Basel norms & impact on indian banking system nisha

  1. 1. Basel Norms & Impact on Indian Banking System Presented By: -Nisha Kapadia (22)
  2. 2. Project Goals To study the impact of Basel III on Indian Banking System (PSU) To analyze Basel Norms in Indian Environment To study Basel Norms 2
  3. 3. Roadmap Brief Background Basel Norms Basel III in India Impact on Indian Banking System Impact on Public Sector Banks & Actions Conclusion 3
  4. 4. Brief Background • Purpose of banking supervision is  to ensure that banks operate in a safe and sound manner.  to ensure that banks "hold capital and reserves sufficient to support the risks that arise in their business".  sound practices for banks' risk management • Why Capital Requirement?  While bank’s assets (loans & Investments) are risky and prone to losses, its liability (deposits) are certain.  Assets = External Liabilities + Capital Liabilities (deposits) are to be honoured. Hence, reduction In Capital. When Capital is wiped out – Bank Fails. 4
  5. 5. What is CAR? Credit Risk • Default by Borrowers Market Risk • Interest Rate Risk • Foreign Exchange Risk • Commodity Pricing Risk Operational Risk • Fraud, system and Process failures • Capital Adequacy provides regulators with a means of establishing whether banks and other financial institutions have sufficient capital to keep them out of difficulties. Regulators use a Capital Adequacy Ratio (CAR) to assess risk. • CAR = Bank’s Capital Risk Weighted Assets Risk Involved: 5
  6. 6. Basel Committee • Basel Committee on Banking Supervision [BCBS] was established by the central-bank governors of the G10 countries in 1974. (Current network - 26 Countries) • Meets at the Bank for International Settlements in Basel, Switzerland • Its objective was to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. • Formulates broad supervisory standards and guidelines • First major result was the 1988 Capital Accord • In 1997, developed a set of "Core Principles for Effective Banking Supervision", which provides a comprehensive blueprint for an effective supervisory system. 6
  7. 7. • Created in 1988, Basel I Capital Accord had general purpose:  To strengthen the stability of International Banking System  To set up a fair and consistent international banking system in order to decrease competitive inequality among international banks. • Focused on Credit Risk • Set up an international ‘minimum’ amount of capital that bank should hold  Tier I (Core Capital): Tier I capital includes stock issues (or share holder equity) and declared reserves, such as loan loss reserves set aside to cushion future losses or for smoothing out income variation.  Tier II (Supplementary Capital): Tier II Capital includes all other capital such as gains on investment assets, long term debt with maturity greater than 5 years and hidden reserves. However, short-term are not included. Basel – I Norms 7
  8. 8. Basel – I (Contd.) Capital Requirement • Limited differentiation of credit risk • Strategic Measure of default risk • No recognition of term-structure of credit risk • Simplified calculation of potential future counterparty risk • Lack of recognition of portfolio diversification effects Pitfall of Basel - I • According to Basel I, the total capital should represent at least 8% of the bank’s credit risk. 8
  9. 9. • Basel II was intended:  To create an international standard for banking system  To maintain sufficient consistency of regulations  To protect the international financial system  To reduce scope of regulatory arbitrage • Defined new calculation of credit Risk • Addition of operation risk in the existing norms • Ensuring that capital allocation is more risk sensitive Basel – II Norms (2004) 9
  10. 10. Basel II Framework 10
  11. 11. Pillar –I Minimum Capital Requirement Extended Credit Risk 11
  12. 12. Pitfall of Basel II • Too much regulatory compliance • Banks defined their own risk metrics and derivative investments • Depends on good underlying data requirement • Complex to understand & implement and hence demand for skilled supervisors • Most of the institutional cogs in credit crisis aren’t covered • Basic assumption was pre-cyclical process which fails to consider capital requirement changes with inflation/ deflation in economy • Heavily Rely on external credit rating agencies 12
  13. 13. Basel – III Norms (2010) • The G-20 endorsed the new ‘Basel 3’ capital and liquidity requirement as remedy to overcome financial crisis of 2008-2009. • The new accord aims to:  Have special emphasis on Capital Adequacy Ratio  Improve banking sectors ability to absorb shocks arising from financial and economic stress  Strengthen banks transparency and disclosures • The accord provides a substantial strengthening of capital requirements • Places greater emphasis on loss-absorbency capacity on a going concern basis 13
  14. 14. Basel III Framework • Major Features of Basel III  Revised Minimum Equity & Tier I Capital Requirements  Better Capital Quality  Leverage Ratio  Liquidity Ratio  Countercyclical Buffer  Capital Conservation Buffer • Ratio under consideration CAR = (Tier 1 Capital + Tier 2 Capital) Risk Weighted Assets 14
  15. 15. 15
  16. 16. Capital Requirements Under Basel II Under Basel III Minimum Ratio of Total Capital To RWAs 8.00% 10.50% Minimum Ratio of Common Equity to RWAs 2.00% 4.50% to 7.00% Tier I capital to RWAs 4.00% 6.00% Core Tier I capital to RWAs 2.00% 5.00% Capital Conservation Buffers to RWAs None 2.50% Leverage Ratio None 3.00% Countercyclical Buffer None 0% to 2.50% Minimum Liquidity Coverage Ratio None From 2015 Minimum Net Stable Funding Ratio None From 2018 Systemically important Financial Institutions Charge None From 2011 Comparison of Capital Requirement under Basel II & III 16
  17. 17. Basel III- India Consideration Sr. No. Regulatory Capital - Basel III Global (As % to RWAs) Indian (As % to RWAs) (i) Minimum common equity Tier I ratio 4.5 5.5 (ii) Capital conservation buffer (comprised of common equity) 2.5 2.5 (iii) Minimum common equity Tier I ratio plus capital conservation buffer [(i)+ (ii)] 7.0 8.0 (iv) Additional Tier I capital 1.5 1.5 (v) Minimum Tier I capital Ratio [(i)+(iv)] 6.0 7.0 (vi) Tier 2 capital 2.0 2.0 (vii) Minimum Total Capital ratio (MTC) [(v)+(vi) 8.0 9.0 (viii) Minimum total capital ratio plus capital conservation buffer [(vii)+(ii)] 10.5 11.5 17
  18. 18. Impact on Indian Banking System • Reduced Systematic Risk and absorb economic-finance stress • Challenge for Weaker Banks to survive • Increased Supervisory Vigil • Reorganisation of Institutions with more mergers & acquisitions • Chances of increased International Arbitrage • Bank Capital – Increased NPA, reduced Tier II CAR Ratio • Increased Tier I capital requirement 18
  19. 19. Current Phase – Indian Banking System Minimum capital Ratios Basel III Of BCBS Basel III Of RBI Existing RBI Norms PSBs current Position Private Banks current Position Min. Common Equity Tier 1 4.5% 5.5% 3.6% 7.3% 11.2% Capital Conservation Buffer 2.5% 2.5% - - - Minimum CET 1 + CCB 7.0% 8.0% 3.6% 7.3% 11.2% Minimum Tier 1 Capital 7.0% 7.0% 3.6% 7.3% 11.2% Min. Total Capital Including buffer 8.0% 9.0% 6.0% 8.1% 11.5% Min. Total Capital + CCB * 10.5% 11.5% 9.0% 12.1% 15.9% Additional counter-cyclical buffer in form of common equity capital 0-2.5% 0-2.5% NA NA NA •- Data as on June 30 2010. - Private Banks & Foreign banks maintained high Capital Ratio as compared to Public Sector Banks in India. 19
  20. 20. Why PSU Banks Study?IndianBankingIndustry 20
  21. 21. Capital & NPA Levels in Sample PSBs Canara BankBank of India Punjab National BankBank of BarodaState Bank of India 21
  22. 22. Latest Developments in Sample Banks SBI has raised Rs. 8,032 Cr. by way of QIP and Govt. Stake reduced from 62.9 % to 58.6%. BOB has privately placed non-convertible, redeemable, un- secured Basel III Tier 2 Bonds worth Rs. 1000 Cr. @ 9.73% p.a. and Govt. Stake is 55.41%. PNB has raised Rs. 1000 Cr. Through Tier 2 Bonds @ 9.65% and Govt. Stake is 57.87%. BOI allotted Rs. 1000 Cr. Basel III, unsecured Tier 2 Bonds @ 9.80 % via private placement and Govt. Stake is 66.70%. Canara Bank is about to place Tier 2 Bonds @ 9.70% to raise Rs. 1000 Cr. per Basel requirement and Govt. Stake is 67.72%. 22
  23. 23. Impact on Public Sector Banks • Presently PSU banks carry adequate CAR. • Over next few years, Tier I Capital specially Equity Shares will be of prime importance instead of CAR. • Public Sector Banks need Rs. 4.15 trillion additionally to meet the requirement – Rs. 2.72 trillion for non-equity capital and approx Rs. 1.43 trillion for equity capital over a period. • Government to recapitalize an estimated Rs. 900 billion at existing stake holding position or Rs. 660 billion if reduce its shareholding down to 51%. • Some public sector banks are likely to fall short of the revised core capital adequacy requirement. • Increase in requirement of capital will affect the ROE of the public banks. 23
  24. 24. Basel III- Implementation Phase - Global 24
  25. 25. Transitional Arrangements-Scheduled Commercial Banks (excluding LABs and RRBs) As on March 27, 2014 (% of RWAs) Minimum capital ratios April 1, 2013 March 31, 2014 March 31, 2015 March 31, 2016 March 31, 2017 March 31, 2018 March 31, 2019 Minimum Common Equity Tier 1 (CET1) 4.5 5 5.5 5.5 5.5 5.5 5.5 Capital conservation buffer (CCB) - - - 0.625 1.25 1.875 2.5 Minimum CET1+ CCB 4.5 5 5.5 6.125 6.75 7.375 8 Minimum Tier 1 capital 6 6.5 7 7 7 7 7 Minimum Total Capital* 9 9 9 9 9 9 9 Minimum Total Capital +CCB 9 9 9 9.625 10.25 10.875 11.5 Phase-in of all deductions from CET1 (in %) # 20 40 60 80 100 100 100 * The difference between the minimum total capital requirement of 9% and the Tier 1 requirement can be met with Tier 2 and higher forms of capital; # The same transition approach will apply to deductions from Additional Tier 1 and Tier 2 capital. Basel III- Implementation Phase - India 25
  26. 26. Conclusion • One shoe doesn’t fit all • Basel 3 is an evolution & improvement over Basel 2 • Though India was well positioned in financial crisis compare to global economy, require to increase vigilance • Private Banks and Foreign Banks are in advantageous position against public sector banks in terms of - CAR, IT Infrastructure, Better skilled persons. • PSBs would take more time to implement Basel 3 • Constant regulatory assessment towards sound practices followed by banks • Better approach to Risk Management • Effective Data Management System • Effective & SPEEDY implementation would help banks to stay competitive 26
  27. 27. Questions & Suggestions

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