BASEL Norms & Implication
on Indian Banks
Presented by :
Kumar Ramchandani
Diploma Banking
Batch No: 14
BIRTH OF BASEL NORMS
 The failure of the German Bank Herstatt in
1974.
 The 1970s saw banks operating on wafer-
thin cap...
BIRTH OF BASEL NORMS
 The central banks of the G-10 countries
addressed the issue of under-capitalized banks
and non-stan...
BASEL I NORMS
 Maintain capital of at least 8 per cent of their
risk-weighted loan exposures.
 Exposures to Govt. – 0%
B...
WEAKNESS OF BASEL-I
NORMS
 The one-size-fits-all approach
 Did not consider capital requirement to take care of
operatio...
BASEL II NORMS (JUNE 2004)
 These norms are based on the three pillars
 Capital Requirement
 Supervisory Review
 Marke...
PILLAR I – CREDIT RISK
 Standardized Approach
 Based on ext. credit rating(CRISIL/ICRA)
 Foundation Internal Rating Bas...
PILLAR I – MARKET RISK
 Risk arising from market investments (SLR
Requirements)
PILLAR I – OPERATIONAL
RISK
 Failure of ...
PILLAR II – SUPERVISORY
REVIEW
 Employ better risk mgmt practices
 Principle 1: Assessing Capital Adequacy(CA)
vis-a-vis...
PILLAR III – MARKET DISCIPLINE
 Suggests greater transparency -adequate
disclosures to supervisors, bank's customers,
rat...
KEY ISSUES FOR BANKS IN INDIA
 Credit Risk Standardized Approach
 Portion of unrated assets have no rating
 Unrated Ass...
KEY ISSUES FOR BANKS IN INDIA
 Operational Risk
 Overall increase in Capital requirement
 Indian Banks are not ready
 ...
Upcoming SlideShare
Loading in …5
×

Mutual funds

1,347 views

Published on

Published in: Economy & Finance, Business
  • Be the first to comment

  • Be the first to like this

Mutual funds

  1. 1. BASEL Norms & Implication on Indian Banks Presented by : Kumar Ramchandani Diploma Banking Batch No: 14
  2. 2. BIRTH OF BASEL NORMS  The failure of the German Bank Herstatt in 1974.  The 1970s saw banks operating on wafer- thin capital base.  International banks, especially Japanese,tried to get short-term competitive advantage.  The definition of regulatory capital differed in every country.
  3. 3. BIRTH OF BASEL NORMS  The central banks of the G-10 countries addressed the issue of under-capitalized banks and non-standardized banking regulations.  “Basel Committee on Banking Supervision“ was formed under the Bank of International Settlements (BIS) in 1974.  In July 1988, the Basel Committee came out with a set of recommendations popularly known as Basel I norms.
  4. 4. BASEL I NORMS  Maintain capital of at least 8 per cent of their risk-weighted loan exposures.  Exposures to Govt. – 0% Banks – 20% Corporate-100%  Capital was categorized as Tier I capital - The permanent capital like equity. Tier II capital- Supplementary capital like subordinate debt.
  5. 5. WEAKNESS OF BASEL-I NORMS  The one-size-fits-all approach  Did not consider capital requirement to take care of operational risk  Did not distinguish between high and low quality assets in the same class.  Not compatible with developing services like derivatives and securitisation, as they could as manipulative tools.
  6. 6. BASEL II NORMS (JUNE 2004)  These norms are based on the three pillars  Capital Requirement  Supervisory Review  Market Discipline  PILLAR I provide banks with guidelines to measure the various types of risks - credit, market and operational risks.
  7. 7. PILLAR I – CREDIT RISK  Standardized Approach  Based on ext. credit rating(CRISIL/ICRA)  Foundation Internal Rating Based Approach  Expected Loss (EL) on a loan = Exposure at default (EAD) * Loss given default (LGD) * Probability of Default (PD)  LGD and EAD provided by Regulator  Independent group within bank  MIN 7 Rating Grades  Data on previous 5 years of PD estimates  Advanced IRB Approach
  8. 8. PILLAR I – MARKET RISK  Risk arising from market investments (SLR Requirements) PILLAR I – OPERATIONAL RISK  Failure of internal systems, human errors, fraud  Basic Indicator Approach – 15%  Standardized Approach – Diff for each busi.  Internal Measurement Approach – int. data
  9. 9. PILLAR II – SUPERVISORY REVIEW  Employ better risk mgmt practices  Principle 1: Assessing Capital Adequacy(CA) vis-a-vis their risk profile  Principle 2: Review and evaluate banks' internal CA and strategies, ensure compliance with regulatory capital ratios. Take appropriate supervisory action  Principle 3: Expect banks to operate above the minimum regulatory capital ratios.  Principle 4: Take fast remedial steps at an early stage.
  10. 10. PILLAR III – MARKET DISCIPLINE  Suggests greater transparency -adequate disclosures to supervisors, bank's customers, rating agencies, depositors and investors.  Provides a comprehensive menu of public and regulatory disclosures  Capital structure (core and supplementary capital)  Capital adequacy  Risk assessment  Risk management processes
  11. 11. KEY ISSUES FOR BANKS IN INDIA  Credit Risk Standardized Approach  Portion of unrated assets have no rating  Unrated Assets attracts 100% Risk  Credit Risk Foundation IRB Approach  5 years PD data not available  Mismatch due to diff in classifying NPA  LGD is tough to compute  Credit Risk Advanced IRB Approach  Tough to get LGD,EAD  Diversification benefits are not considered
  12. 12. KEY ISSUES FOR BANKS IN INDIA  Operational Risk  Overall increase in Capital requirement  Indian Banks are not ready  Market Discipline  Markets are not mature enough to respond the disclosure  CRISIL estimation  1.6% decline in capital adequacy

×