This document discusses the Indian banking industry and compliance with Basel III norms. It provides background on the history and development of banking in India, from the establishment of presidency banks in the early 1800s to the modern banking system. It also discusses key events that transformed the banking system such as nationalization, financial sector reforms, and the establishment of new private banks. Finally, it notes that the electronic age and development of electronic banking has introduced new risks around data security and integrity that require improved risk management techniques.
This project was done by me under cheif marketing manager of J&K bank,the study was conducted by me in both rular and urban areas of srinagar to kmow consumer perception towards products and services of J&KBANK
This project was done by me under cheif marketing manager of J&K bank,the study was conducted by me in both rular and urban areas of srinagar to kmow consumer perception towards products and services of J&KBANK
Financial Crime: How Financial Institutions Can Mitigate Risk and Improve Com...Cognizant
Banks face dramatically higher operating costs and business complexity, with the increased scope of financial crimes and growing regulatory liabilities. This highlights the need for a more integrated and unified approach to risk mitigation and compliance.
CEI Compliance is the UK's fastest growing regulatory consultancy and provides associate opportunities to consultants and cost effective value to financial services and other regulated companies.
We show you the methodology for conducting the Compliance Risk Assessment and how to provide meaningful action plans.
Customer satisfaction level towards the service provided by the co operative ...Pritesh Radadiya
In this report all services of the SHREE RAJKOT DISTRICT CO-OPERATIVE BANK. Like loan facility, locker facility, fixed deposit facility and followed by other services provided by the bank have been analyzed and rehired with the help of primary data.
We have tried our level best to include each and special features of SHREE RAJKOT DISTRICT CO-OPERATIVE BANK. in this report.
Each part begins with an introduction section to know what actually does it means.
The very first part of the report starts with the history of banking and followed by the company’s information and analysis of primary data.
Empowering the Unbanked: The Vital Role of NBFCs in Promoting Financial Inclu...Vighnesh Shashtri
In India, financial inclusion remains a critical challenge, with a significant portion of the population still unbanked. Non-Banking Financial Companies (NBFCs) have emerged as key players in bridging this gap by providing financial services to those often overlooked by traditional banking institutions. This article delves into how NBFCs are fostering financial inclusion and empowering the unbanked.
The secret way to sell pi coins effortlessly.DOT TECH
Well as we all know pi isn't launched yet. But you can still sell your pi coins effortlessly because some whales in China are interested in holding massive pi coins. And they are willing to pay good money for it. If you are interested in selling I will leave a contact for you. Just telegram this number below. I sold about 3000 pi coins to him and he paid me immediately.
Telegram: @Pi_vendor_247
how can i use my minded pi coins I need some funds.DOT TECH
If you are interested in selling your pi coins, i have a verified pi merchant, who buys pi coins and resell them to exchanges looking forward to hold till mainnet launch.
Because the core team has announced that pi network will not be doing any pre-sale. The only way exchanges like huobi, bitmart and hotbit can get pi is by buying from miners.
Now a merchant stands in between these exchanges and the miners. As a link to make transactions smooth. Because right now in the enclosed mainnet you can't sell pi coins your self. You need the help of a merchant,
i will leave the telegram contact of my personal pi merchant below. 👇 I and my friends has traded more than 3000pi coins with him successfully.
@Pi_vendor_247
when will pi network coin be available on crypto exchange.DOT TECH
There is no set date for when Pi coins will enter the market.
However, the developers are working hard to get them released as soon as possible.
Once they are available, users will be able to exchange other cryptocurrencies for Pi coins on designated exchanges.
But for now the only way to sell your pi coins is through verified pi vendor.
Here is the telegram contact of my personal pi vendor
@Pi_vendor_247
What website can I sell pi coins securely.DOT TECH
Currently there are no website or exchange that allow buying or selling of pi coins..
But you can still easily sell pi coins, by reselling it to exchanges/crypto whales interested in holding thousands of pi coins before the mainnet launch.
Who is a pi merchant?
A pi merchant is someone who buys pi coins from miners and resell to these crypto whales and holders of pi..
This is because pi network is not doing any pre-sale. The only way exchanges can get pi is by buying from miners and pi merchants stands in between the miners and the exchanges.
How can I sell my pi coins?
Selling pi coins is really easy, but first you need to migrate to mainnet wallet before you can do that. I will leave the telegram contact of my personal pi merchant to trade with.
Tele-gram.
@Pi_vendor_247
How to get verified on Coinbase Account?_.docxBuy bitget
t's important to note that buying verified Coinbase accounts is not recommended and may violate Coinbase's terms of service. Instead of searching to "buy verified Coinbase accounts," follow the proper steps to verify your own account to ensure compliance and security.
Currently pi network is not tradable on binance or any other exchange because we are still in the enclosed mainnet.
Right now the only way to sell pi coins is by trading with a verified merchant.
What is a pi merchant?
A pi merchant is someone verified by pi network team and allowed to barter pi coins for goods and services.
Since pi network is not doing any pre-sale The only way exchanges like binance/huobi or crypto whales can get pi is by buying from miners. And a merchant stands in between the exchanges and the miners.
I will leave the telegram contact of my personal pi merchant. I and my friends has traded more than 6000pi coins successfully
Tele-gram
@Pi_vendor_247
how to sell pi coins on Bitmart crypto exchangeDOT TECH
Yes. Pi network coins can be exchanged but not on bitmart exchange. Because pi network is still in the enclosed mainnet. The only way pioneers are able to trade pi coins is by reselling the pi coins to pi verified merchants.
A verified merchant is someone who buys pi network coins and resell it to exchanges looking forward to hold till mainnet launch.
I will leave the telegram contact of my personal pi merchant to trade with.
@Pi_vendor_247
What price will pi network be listed on exchangesDOT TECH
The rate at which pi will be listed is practically unknown. But due to speculations surrounding it the predicted rate is tends to be from 30$ — 50$.
So if you are interested in selling your pi network coins at a high rate tho. Or you can't wait till the mainnet launch in 2026. You can easily trade your pi coins with a merchant.
A merchant is someone who buys pi coins from miners and resell them to Investors looking forward to hold massive quantities till mainnet launch.
I will leave the telegram contact of my personal pi vendor to trade with.
@Pi_vendor_247
what is the future of Pi Network currency.DOT TECH
The future of the Pi cryptocurrency is uncertain, and its success will depend on several factors. Pi is a relatively new cryptocurrency that aims to be user-friendly and accessible to a wide audience. Here are a few key considerations for its future:
Message: @Pi_vendor_247 on telegram if u want to sell PI COINS.
1. Mainnet Launch: As of my last knowledge update in January 2022, Pi was still in the testnet phase. Its success will depend on a successful transition to a mainnet, where actual transactions can take place.
2. User Adoption: Pi's success will be closely tied to user adoption. The more users who join the network and actively participate, the stronger the ecosystem can become.
3. Utility and Use Cases: For a cryptocurrency to thrive, it must offer utility and practical use cases. The Pi team has talked about various applications, including peer-to-peer transactions, smart contracts, and more. The development and implementation of these features will be essential.
4. Regulatory Environment: The regulatory environment for cryptocurrencies is evolving globally. How Pi navigates and complies with regulations in various jurisdictions will significantly impact its future.
5. Technology Development: The Pi network must continue to develop and improve its technology, security, and scalability to compete with established cryptocurrencies.
6. Community Engagement: The Pi community plays a critical role in its future. Engaged users can help build trust and grow the network.
7. Monetization and Sustainability: The Pi team's monetization strategy, such as fees, partnerships, or other revenue sources, will affect its long-term sustainability.
It's essential to approach Pi or any new cryptocurrency with caution and conduct due diligence. Cryptocurrency investments involve risks, and potential rewards can be uncertain. The success and future of Pi will depend on the collective efforts of its team, community, and the broader cryptocurrency market dynamics. It's advisable to stay updated on Pi's development and follow any updates from the official Pi Network website or announcements from the team.
how to sell pi coins effectively (from 50 - 100k pi)DOT TECH
Anywhere in the world, including Africa, America, and Europe, you can sell Pi Network Coins online and receive cash through online payment options.
Pi has not yet been launched on any exchange because we are currently using the confined Mainnet. The planned launch date for Pi is June 28, 2026.
Reselling to investors who want to hold until the mainnet launch in 2026 is currently the sole way to sell.
Consequently, right now. All you need to do is select the right pi network provider.
Who is a pi merchant?
An individual who buys coins from miners on the pi network and resells them to investors hoping to hang onto them until the mainnet is launched is known as a pi merchant.
debuts.
I'll provide you the Telegram username
@Pi_vendor_247
how to sell pi coins at high rate quickly.DOT TECH
Where can I sell my pi coins at a high rate.
Pi is not launched yet on any exchange. But one can easily sell his or her pi coins to investors who want to hold pi till mainnet launch.
This means crypto whales want to hold pi. And you can get a good rate for selling pi to them. I will leave the telegram contact of my personal pi vendor below.
A vendor is someone who buys from a miner and resell it to a holder or crypto whale.
Here is the telegram contact of my vendor:
@Pi_vendor_247
USDA Loans in California: A Comprehensive Overview.pptxmarketing367770
USDA Loans in California: A Comprehensive Overview
If you're dreaming of owning a home in California's rural or suburban areas, a USDA loan might be the perfect solution. The U.S. Department of Agriculture (USDA) offers these loans to help low-to-moderate-income individuals and families achieve homeownership.
Key Features of USDA Loans:
Zero Down Payment: USDA loans require no down payment, making homeownership more accessible.
Competitive Interest Rates: These loans often come with lower interest rates compared to conventional loans.
Flexible Credit Requirements: USDA loans have more lenient credit score requirements, helping those with less-than-perfect credit.
Guaranteed Loan Program: The USDA guarantees a portion of the loan, reducing risk for lenders and expanding borrowing options.
Eligibility Criteria:
Location: The property must be located in a USDA-designated rural or suburban area. Many areas in California qualify.
Income Limits: Applicants must meet income guidelines, which vary by region and household size.
Primary Residence: The home must be used as the borrower's primary residence.
Application Process:
Find a USDA-Approved Lender: Not all lenders offer USDA loans, so it's essential to choose one approved by the USDA.
Pre-Qualification: Determine your eligibility and the amount you can borrow.
Property Search: Look for properties in eligible rural or suburban areas.
Loan Application: Submit your application, including financial and personal information.
Processing and Approval: The lender and USDA will review your application. If approved, you can proceed to closing.
USDA loans are an excellent option for those looking to buy a home in California's rural and suburban areas. With no down payment and flexible requirements, these loans make homeownership more attainable for many families. Explore your eligibility today and take the first step toward owning your dream home.
how to swap pi coins to foreign currency withdrawable.DOT TECH
As of my last update, Pi is still in the testing phase and is not tradable on any exchanges.
However, Pi Network has announced plans to launch its Testnet and Mainnet in the future, which may include listing Pi on exchanges.
The current method for selling pi coins involves exchanging them with a pi vendor who purchases pi coins for investment reasons.
If you want to sell your pi coins, reach out to a pi vendor and sell them to anyone looking to sell pi coins from any country around the globe.
Below is the contact information for my personal pi vendor.
Telegram: @Pi_vendor_247
how to swap pi coins to foreign currency withdrawable.
Compliance of Indian Banks to Basel III guidelines
1. 2012-13
Faculty of Management Studies
Banaras Hindu University
Compliance of Indian Banks to
Basel III Norms
Under the Guidance of:
Dr. Raj Kumar
Professor
Submitted By:
Amit Kumar Vishwakarma
MBA (IB): 2011-13
Enrolment No: 306546
Dissertation Project Report on:
2. 1
DECLARATION
I hereby declare that the work that being presented in this Project entitled
“COMPLIANCE OF INDIAN BANKS TO BASEL III NORMS ” in partial
fulfilment of the requirements for the degree of the Master of Business
Administration in International Business at Faculty of Management Studies,
Banaras Hindu University is mine original work carried out by me under the
supervision of Dr. Raj Kumar, FMS BHU.
Amit Kumar Vishwakarma
MBA-(IB) 4th
Semester (2012-2013)
Exam Roll No:11382MA006
Enrolment No: 306546
Faculty of Management Studies
Banaras Hindu University
3. 2
Acknowledgement
No task is a single man’s effort. Various factors, situations and persons integrate together to form
a background for accomplishment of a task. The valuable cooperation and guidance, directly or
indirectly of various people has contributed a lot to the successful completion of the Project
undertaken.
This dissertation report entitled “Compliance of Indian Banks to Basel III Norms” has been
prepared as a partial fulfilment of Master of Business Administration - International Business
(MBA-IB) program at FMS, BHU. The report is the outcome of a lot of work and commitment
but this would never have been completed without the incredible amount of help and support I
received from many people. I would like to thank, without implicating, all of them.
I would like to express my sincere gratitude and appreciation to Prof. Raj Kumar sir, Faculty of
Management Studies, Banaras Hindu University for his valuable guidance throughout this
dissertation. I had been fortunate enough to have him as a wonderful guide and for his open and
gracious contribution of time, counsel, cooperation and support, encouraging and providing all
information in completing my research report successfully.
I express my sincere appreciation to Prof. R.K. Pandey (Dean FMS, BHU) and all other
members of Faculty of Management Studies, BHU for their advice and unstinted support.
Without their help and cooperation, I could not have completes this dissertation.
Any shortcomings and weakness regarding this project is apologized. Suggestions and
recommendations regarding this project are heartily welcome.
……………………….
Amit Kumar Vishwakarma
MBA-IB 4th
Semester
FMS, BHU
4. 3
Table of Contents
1. Introduction 3
2. Industry Profile 6
3. Literature Review 15
4. Research Methodology 33
5. Analysis & Interpretation 34
6. Findings 53
7. Suggestions 54
8. Bibliography 56
5. 4
Introduction
Indian banking is the lifeline of the nation and its people. Banking has helped in
developing the vital sectors of the economy and usher in a new dawn of
progress on the Indian horizon. The sector has translated the hopes and
aspirations of millions of people into reality. But to do so, it has had to control
miles and miles of difficult terrain, suffer the indignities of foreign rule and the
pangs of partition. Today, Indian banks can confidently compete with modern
banks of the world. Before the 20th century, usury, or lending money at a high
rate of interest, was widely prevalent in rural India. Entry of Joint stock banks
and development of Cooperative movement have taken over a good deal of
business from the hands of the Indian money lender, who although still exist,
have lost his menacing teeth. In the Indian Banking System, Cooperative banks
exist side by side with commercial banks and play a supplementary role in
providing need-based finance, especially for agricultural and agriculture-based
operations including farming, cattle, milk, hatchery, personal finance etc. along
with some small industries and self-employment driven activities. Generally, co-
operative banks are governed by the respective co-operative acts of state
governments. But, since banks began to be regulated by the RBI after 1st
March
1966, these banks are also regulated by the RBI after amendment to the
Banking Regulation Act 1949. The Reserve Bank is responsible for licensing of
banks and branches, and it also regulates credit limits to state co-operative
banks on behalf of primary co-operative banks for financing SSI units.
Banking in India originated in the first decade of 18th century with The General
Bank of India coming into existence in 1786. This was followed by Bank of
Hindustan. Both these banks are now defunct. After this, the Indian
government established three presidency banks in India. The first of three was
the Bank of Bengal, which obtains charter in 1809, the other two presidency
bank, viz., the Bank of Bombay and the Bank of Madras, were established in
1840 and 1843, respectively. The three presidency banks were subsequently
amalgamated into the Imperial Bank of India (IBI) under the Imperial Bank of
India Act, 1920 – which is now known as the State Bank of India. A couple of
decades later, foreign banks like Credit Lyonnais started their Calcutta
operations in the 1850s. At that point of time, Calcutta was the most active
trading port, mainly due to the trade of the British Empire, and due to which
banking activity took roots there and prospered. The first fully Indian owned
bank was the Allahabad Bank, which was established in 1865. By the 1900s, the
6. 5
market expanded with the establishment of banks such as Punjab National
Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai – both of which
were founded under private ownership. The Reserve Bank of India formally
took on the responsibility of regulating the Indian banking sector from 1935.
After Indias independence in 1947, the Reserve Bank was nationalized and
given broader powers. As the banking institutions expand and become
increasingly complex under the impact of deregulation, innovation and
technological upgradation, it is crucial to maintain balance between efficiency
and stability. During the last 30 years since nationalization tremendous changes
have taken place in the financial markets as well as in the banking industry due
to financial sector reforms. The banks have shed their traditional functions and
have been innovating, improving and coming out with new types of services to
cater emerging needs of their 5 customers. Banks have been given greater
freedom to frame their own policies. Rapid advancement of technology has
contributed to significant reduction in transaction costs, facilitated greater
diversification of portfolio and improvements in credit delivery of banks.
Prudential norms, in line with international standards, have been put in place
for promoting and enhancing the efficiency of banks. The process of institution
building has been strengthened with several measures in the areas of debt
recovery, asset reconstruction and securitization, consolidation, convergence,
mass banking etc. Despite this commendable progress, serious problem have
emerged reflecting in a decline in productivity and efficiency, and erosion of
the profitability of the banking sector. There has been deterioration in the
quality of loan portfolio which, in turn, has come in the way of bank’s income
generation and enhancement of their capital funds. Inadequacy of capital has
been accompanied by inadequacy of loan loss provisions resulting into the
adverse impact on the depositors and investors confidence. The
Government, therefore, set up Narasimham Committee to look into the
problems and recommend measures to improve the health of the financial
system. The acceptance of the Narasimham Committee recommendations by
the Government has resulted in transformation of hitherto highly regimented
and over bureaucratized banking system into market driven and extremely
competitive one. The massive and speedy expansion and diversification of
banking has not been without its strains. The banking industry is entering a
new phase in which it will be facing increasing competition from non-banks not
only in the domestic market but in the international markets also. The
operational structure of banking in India is expected to undergo a profound
7. 6
change during the next decade. With the emergence of new private banks, the
private bank sector has 6 become enriched and diversified with focus spread to
the wholesale as well as retail banking. The existing banks have wide branch
network and geographic spread, whereas the new private banks have the clout
of massive capital, lean personnel component, the expertise in developing
sophisticated financial products and use of state-of-the-art technology. Gradual
deregulation that is being ushered in while stimulating the competition would
also facilitate forging mutually beneficial relationships, which would ultimately
enhance the quality and content of banking. In the final phase, the banking
system in India will give a good account of itself only with the combined efforts
of cooperative banks, regional rural banks and development banking
institutions which are expected to provide an adequate number of effective
retail outlets to meet the emerging socio-economic challenges during the next
two decades. The electronic age has also affected the banking system, leading
to very fast electronic fund transfer. However, the development of electronic
banking has also led to new areas of risk such as data security and integrity
requiring new techniques of risk management. Cooperative (mutual) banks are
an important part of many financial systems. In a number of countries, they are
among the largest financial institutions when considered as a group. Moreover,
the share of cooperative banks has been increasing in recent years; in the
sample of banks in advanced economies and emerging markets analyzed in this
paper, the market share of cooperative banks in terms of total banking sector
assets increased from about 9 percent in mid- 1990s to about 14 percent in
2004.
8. 7
Industry Profile
The growth in the Indian Banking Industry has been more qualitative
thanquantitative and it is expected to remain the same in the coming years.
Based onthe projections made in the India Vision 2020 prepared by the
PlanningCommission and the Draft 10th Plan, the report forecasts that the pace
ofexpansion in the balance-sheets of banks is likely to decelerate. The total
assetsof all scheduled commercial banks by end-March 2010 is estimated at
Rs40,90,000crores. That will comprise about 65 per cent of GDP at
currentmarket prices as compared to 67 per cent in 2002-03. Bank assets are
expectedto grow at an annual composite rate of 13.4 per cent during the rest
of thedecade as against the growth rate of 16.7 per cent that existed between
1994-95and 2002-03. It is expected that there will be large additions to the
capital baseand reserves on the liability side.The Indian Banking industry, which
is governed by the Banking Regulation Actof India, 1949 can be broadly
classified into two major categories,nonscheduledbanks and scheduled banks.
Scheduled banks comprise commercialbanks and the co-operative banks. In
terms of ownership, commercial banks canbe further grouped into
nationalized banks, the State Bank of India and its groupbanks, regional rural
banks and private sector banks (the old/ new domestic andforeign). These
banks have over 67,000 branches spread across the country.The Public Sector
Banks(PSBs), which are the base of the Banking sector inIndia account for
more than 78 per cent of the total banking industry assets.Unfortunately they
are burdened with excessive Non Performing assets (NPAs),massive
manpower and lack of modern technology. On the other hand thePrivate
Sector Banks are making tremendous progress. They are leaders inInternet
banking, mobile banking, phone banking, ATMs. As far as foreignbanks are
concerned they are likely to succeed in the Indian Banking Industry.
In the Indian Banking Industry some of the Private Sector Banks operating
areIDBI Bank, ING Vyasa Bank, SBI Commercial and International Bank Ltd,Bank
of Rajasthan Ltd. and banks from the Public Sector include PunjabNational
bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank amongothers. ANZ
Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd,Citibank are
some of the foreign banks operating in the Indian BankingIndustry.As far as the
present scenario is concerned the Banking Industry in India isgoing through a
transitional phase. The first phase of financial reforms resultedin the
nationalization of 14 major banks in 1969 and resulted in a shift fromClass
9. 8
banking to Mass banking. This in turn resulted in a significant growth inthe
geographical coverage of banks. Every bank had to earmark a
minimumpercentage of their loan portfolio to sectors identified as “priority
sectors”. Themanufacturing sector also grew during the 1970s in protected
environs and thebanking sector was a critical source. The next wave of reforms
saw thenationalization of 6 more commercial banks in 1980. Since then the
number ofscheduled commercial banks increased four-fold and the number of
bankbranches increased eight-fold.After the second phase of financial sector
reforms and liberalization of thesector in the early nineties, the Public Sector
Banks (PSB) s found it extremelydifficult to compete with the new private
sector banks and the foreign banks.The new private sector banks first made
their appearance after the guidelinespermitting them were issued in January
1993. Eight new private sector banksare presently in operation. These banks
due to their late start have access tostate-of-the-art technology, which in turn
helps them to save on manpower costsand provide better services.
Table: Top 10 banks having largest credit share
11. 10
STRUCTURE OF INDIAN BANKING INDUSTRY
Banking Industry in India functions under the sunshade of Reserve Bank of
India - the regulatory,central bank. Banking Industry mainly consists of:
• Commercial Banks
• Co-operative Banks
The commercial banking structure in India consists of: Scheduled Commercial
BanksUnscheduled Bank. Scheduled commercial Banks constitute those banks
which have beenincluded in the Second Schedule of Reserve Bank of India
(RBI) Act, 1934.RBI in turn includes only those banks in this schedule which
satisfy the criteria laid down videsection 42 (60) of the Act. Some co-operative
banks are scheduled commercial banks althoughnot all co-operative banks are.
Being a part of the second schedule confers some benefits to thebank in terms
of access to accommodation by RBI during the times of liquidity constraints. At
thesame time, however, this status also subjects the bank certain conditions
and obligation towardsthe reserve regulations of RBI.For the purpose of
assessment of performance of banks, the Reserve Bank of India
categorizethem as public sector banks, old private sector banks, new private
sector banks and foreignbanks.
Fig:The commercial banking structure in India
12. 11
Indian banks enjoyed higher levels of money supply, credit and deposits as a
percentage of GDP in FY11 as compared to that in FY10 showing improved
maturity in the financial sector. Credit growth remained high in the first half of
FY11 on account of increased demand from industry and the service sector.
Personal loans grew significantly by 17% during 2010-11 as compared with 4.1%
during the previous year.
17. 16
About the Basel Committee
The Basel Committee on Banking Supervision provides a forum for regular
cooperation on banking supervisory matters. Its objective is to enhance
understanding of key supervisory issues and improve the quality of banking
supervision worldwide. It seeks to do so by exchanging information on national
supervisory issues, approaches and techniques, with a view to promoting
common understanding. At times, the Committee uses this common
understanding to develop guidelines and supervisory standards in areas where
they are considered desirable. In this regard, the Committee is best known for
its international standards on capital adequacy; the Core Principles for Effective
Banking Supervision; and the Concordat on cross-border banking supervision.
The Committee's members come from Argentina, Australia, Belgium, Brazil,
Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan,
Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore,
South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the
United States. The present Chairman of the Committee is Mr Stefan Ingves,
Governor of SverigesRiksbank.
The Committee encourages contacts and cooperation among its members and
other banking supervisory authorities. It circulates to supervisors throughout
the world both published and unpublished papers providing guidance on
banking supervisory matters. Contacts have been further strengthened by an
International Conference of Banking Supervisors (ICBS) which takes place
every two years.
The Committee's Secretariat is located at the Bank for International
Settlements in Basel, Switzerland, and is staffed mainly by professional
supervisors on temporary secondment from member institutions. In addition
to undertaking the secretarial work for the Committee and its many expert
sub-committees, it stands ready to give advice to supervisory authorities in all
countries. Mr Wayne Byres is the Secretary General of the Basel Committee.
18. 17
History of the Basel Committee and its Membership
The Basel Committee on Banking Supervision was established as the
Committee on BankingRegulations and Supervisory Practices by the central-
bank Governors of the Group of Tencountries at the end of 1974 in the
aftermath of serious disturbances in international currencyand banking
markets (notably the failure of BankhausHerstatt in West Germany). The
firstmeeting took place in February 1975 and meetings have been held regularly
three or fourtimes a year since.
The Committee does not possess any formal supranational supervisory
authority. Itsconclusions do not have, and were never intended to have, legal
force. Rather, it formulatesbroad supervisory standards and guidelines and
recommends statements of best practice inthe expectation that individual
authorities will take steps to implement them through detailedarrangements –
statutory or otherwise – which are best suited to their own national systems.In
this way, the Committee encourages convergence towards common
approaches andcommon standards without attempting detailed harmonisation
of member countries'supervisory techniques. More than 100 documents
providing guidance on a wide range ofsupervisory topics appear on the BIS
website.
One important objective of the Committee's work has been to close gaps in
internationalsupervisory coverage in pursuit of two basic principles: that no
foreign banking establishmentshould escape supervision; and that supervision
should be adequate. In May 1983 theCommittee finalised a document Principles
for the Supervision of Banks' ForeignEstablishments which set down the
principles for sharing supervisory responsibility for banks'foreign branches,
subsidiaries and joint ventures between host and parent (or home)supervisory
authorities. This document is a revised version of a paper originally issued
in1975 which came to be known as the Concordat. The text of the earlier
paper wasexpanded and reformulated to take account of changes in the
market and to incorporate theprinciple of consolidated supervision of
international banking groups (which had beenadopted in 1978). In April 1990, a
Supplement to the 1983 Concordat was issued with theintention of improving
the flow of prudential information between banking supervisors indifferent
countries. In June 1992 certain principles of the Concordat were reformulated
asMinimum Standards. These Standards were communicated to other banking
supervisoryauthorities who were invited to endorse them, and in July 1992 the
Standards werepublished.
19. 18
There was a strong recognition within the Committee of the overriding need
for amultinational accord to strengthen the stability of the international
banking system and toremove a source of competitive inequality arising from
differences in national capitalrequirements. Following comments on a
consultative paper published in December 1987, acapital measurement system
commonly referred to as the Basel Capital Accord (or the 1988Accord) was
approved by the G10 Governors and released to banks in July 1988. Thissystem
provided for the implementation of the framework with a minimum capital
ratio ofcapital to risk-weighted assets of 8 percent by end-1992. Since 1988, this
framework hasbeen progressively introduced not only in member countries
but also in virtually all othercountries with active international banks. In
September 1993, a statement was issuedconfirming that all the banks in the
G10 countries with material international bankingbusiness were meeting the
minimum requirements laid down in the 1988 Accord.
In June 1999, the Committee issued a proposal for a new capital adequacy
framework toreplace the 1988 Accord, and this has been refined in the
intervening years, culminating inthe release of the New Capital Framework on
26 June 2004. The new Framework consists ofthree pillars: minimum capital
requirements, which seek to develop and expand on thestandardised rules set
forth in the 1988 Accord; supervisory review of an institution's capitaladequacy
and internal assessment process; and effective use of disclosure as a lever
tostrengthen market discipline and encourage safe and sound banking
practices. TheCommittee believes that, taken together, these three elements
are the essential pillars of aneffective capital framework. The new Framework
is designed to improve the way regulatorycapital requirements reflect
underlying risks and to better address the financial innovationthat has occurred
in recent years, as shown, for example, by asset securitisation structures.The
changes aim at rewarding the improvements in risk measurement and control
that haveoccurred and providing incentives for such improvements to
continue.
The Committee issued in July 2009 a package of documents to strengthen the
Basel IIcapital framework, with regard notably to the treatment of certain
complex securitization positions, off-balance sheet vehicles and trading book
exposures. This package also coveredkey aspects of risk managements and
disclosure in the context of the Pillar 2 and the Pillar 3rules. These
enhancements are part of a broader effort the Committee has undertaken
tostrengthen the regulation and supervision of internationally active banks, in
20. 19
light ofweaknesses revealed by the financial market crisis which started in
2007. The 2008publications of the Committee, on liquidity and on valuation
issues in particular, reflected partof these efforts, but further developments on
other aspects are ongoing. In order to providean appropriate and timely
response to events which go beyond the sole banking sphere, theCommittee
has been liaising more closely since the beginning of the crisis with other
relevantinternational financial bodies, like in particular the Financial Stability
Forum.
The Basel Committee maintains close relations with a number of fellow bank
supervisorygroupings. These include the Offshore Group of Banking
Supervisors, with members fromthe principal offshore banking centres; and
supervisory groups from the Americas, theCaribbean, from the Arab States,
from the SEANZA countries of the Indian sub-continent,South-East Asia and
Australasia, from central and eastern European countries, from theAfrican
continent and from Central Asia and Transcaucasia. The Committee assists
thesegroups in a variety of ways, by providing suitable documentation,
participating as appropriatein the meetings, offering limited Secretariat
assistance and hosting meetings between the
principals to coordinate future work.
Chairman: Christian Noyer, Paris
Secretariat: Bank for International Settlements
23. 22
Basel III Framework
Basel III is a comprehensive set of reform measures, developed by the Basel
Committee on Banking Supervision, to strengthen the regulation, supervision
and risk management of the banking sector. These measures aim to:
improve the banking sector's ability to absorb shocks arising from
financial and economic stress, whatever the source
improve risk management and governance
strengthen banks' transparency and disclosures.
The reforms target:
bank-level, or microprudential, regulation, which will help raise the
resilience of individual banking institutions to periods of stress.
macroprudential, system wide risks that can build up across the banking
sector as well as the procyclical amplification of these risks over time.
These two approaches to supervision are complementary as greater resilience
at the individual bank level reduces the risk of system wide shocks.
The original Basel III rule from 2010 was supposed to require banks to hold 4.5%
of common equity (up from 2% in Basel II) and 6% of Tier I capital (up from 4% in
Basel II) of risk-weighted assets (RWA). Basel III introduced additional
capital buffers, (i) a mandatory capital conservation buffer of 2.5% and (ii) a
discretionary counter-cyclical buffer, which would allow national regulators
to require up to another 2.5% of capital during periods of high credit growth. In
addition, Basel III introduced a minimum leverage ratio and two required
liquidity ratios. The leverage ratio was calculated by dividing Tier 1 capital by
the bank's average total consolidated assets; the banks were expected to
maintain the leverage ratio in excess of 3%. The Liquidity Coverage Ratio was
supposed to require a bank to hold sufficient high-quality liquid assets to cover
its total net cash outflows over 30 days; the Net Stable Funding Ratio was to
require the available amount of stable funding to exceed the required amount
of stable funding over a one-year period of extended stress.
Basel II-The New Capital Adequacy Framework
The structure of Basel II framework has its foundation on three mutually
reinforcing pillarsthat allow banks and bank supervisors to evaluate
24. 23
properlythe various risks that banks face and realign regulatory capital more
closely with inherentrisks . These three pillars are discussed as under:
Pillar I: Minimum Capital requirement
The first pillar of Basel II deals with maintenance of regulatory capital, i.e.
minimum capitalrequired by banks as per their risk profile. As in Basel I, Basel II
also has same provisionsrelating to regulatory capital requirements i.e. 8 %
Capital Adequacy Ratio (CAR). CARunder Basel II is the ratio of Regulatory
Capital to risk weighted assets which signifies theamount of regulatory capital
to be maintained by banks to guard against various risksinherent in banking
system.
Capital Adequacy Ratio =Total Regulatory Capital (Tier I + Tier II + Tier III) / Risk
weighted Assets (Credit risk + Market risk+ Operational risk)
The risks covered under CAR in Basel II are credit risk, market risk and
operational risk.Pillar I focuses on new approaches for calculating minimum
capital requirements undercredit risk, market risk and operational risk vary
from simple to sophisticated and allow banksupervisors to choose an approach
that seems most appropriate according to their riskprofile, activities and
internal control.
Pillar II: Supervisory Review
The Second Pillar of Basel II provides key principles for supervisory review,
riskmanagement guidance and supervisory transparency and accountability as
under:
Banks should have a process for assessing their overall capital adequacy
in relation to their risk profile and a strategy for maintaining their capital
levels.
Supervisors should review and evaluate banks’ internal capital adequacy
assessments and strategies, as well as their ability to monitor and ensure
their compliance with regulatory capital ratios and should take
appropriate action if they are not satisfied with the result of this process.
Supervisors should expect banks to operate above the minimum
regulatory capital ratios.
25. 24
Supervisors should intervene at an early stage to prevent capital from
declining below benchmark level.
Pillar II cast responsibility on the supervisors to exercise best ways to manage
the risksspecific to that bank and also to review and validate banks risk
measurement modes.
All the supervisors should evaluate the activities and risk profiles of individual
banks todetermine whether those organizations should hold higher levels of
capital than theminimum requirements and to see whether is any need for
remedial action to ensure thateach financial institution adopts effective
internal processing for risk management.
Pillar III: Market Discipline
The objective of Pillar III is to improve market discipline through effective
public disclosureto complement requirements under Pillar I and Pillar II. Pillar III
relates to periodicaldisclosures to regulators, board of bank and market about
various parameters which indicaterisk profile of the bank. It introduces
substantial new public disclosure requirements andallows market participants
to analyze key pieces of information on the scope of application,risk
exposures, risk assessment and management processes and hence the capital
adequacy ofthe institution. The disclosures provided under Pillar III must fulfill
the criteria ofcomprehensiveness, relevance, timeliness, reliability,
comparability and materiality ofdisclosure to enable the interested parties to
make informed decision about the bank.
The Three pillars of Basel II framework provides a kind of “triple protection “
byencompassing three complementary approaches that work together
towards ensuring thecapital adequacy of institutional practices prevalent in the
banks .Taken individually eachpillar has its merits ,but they are even more
efficient when they are synergized in a commonframework.
26. 25
Basel III: New Capital and Liquidity Standards
1. What are the Basel III capital and liquidity standards?
Basel III proposes many new capital, leverage and liquidity standards to
strengthen the regulation, supervision and risk management of the banking
sector. The capital standards and new capital buffers will require banks to hold
more capital and higher quality of capital than under current Basel II rules. The
new leverage ratio introduces a non-risk based measure to supplement the
risk-based minimum capital requirements. The new liquidity ratios ensure that
adequate funding is maintained in case of crisis.
27. 26
2. What are the key elements of the new regulations?
The new regulations raise the quality, consistency and transparency of the
capital base and strengthen the risk coverage of the capital framework. The
major elements of the proposals are noted below.
28. 27
3. What is the impact on capital requirements?
Capital requirements will progressively and significantly increase and the cost
of capital should be closely monitored. The diagram below demonstrates that
increasing capital ratios (Core Tier 1, Tier 1, Conservation buffer, Countercyclical
buffer), stricter rules on eligible capital and higher capital requirements (RWA
increase for some asset classes) are causing this increase.
The diagram below outlines how the Basel III minimum add-on, conservation
buffer and counter-cyclical buffer will affect the core, tier 1 and tier 1+ 2 ratios.
29. 28
4. What are the major changes to credit risk and counterparty credit risk?
Basel III introduces capital requirements to cover Credit Value Adjustment risk
and higher capital requirements for securitization products. Derivatives and
Repos cleared through CCPs are no longer risk-free and have a 2% risk weight
and clearing members shares in CCPs default funds shall be capitalized.
Additionally, Basel III introduces a higher correlation factor (applicable to
internal ratings based approaches) to risk weight large and unregulated
financial institutions andchanges concerning collateral eligibilities and haircuts
rules.
5. What does the new framework look like?
The diagram below outlines the major differences between Basel II and Basel
III. It is important to note that Basel III is a fundamental upheaval of Basel II,
with many elements of the regulation being updated. Brand new elements in
the regulations include liquidity ratios and a leverage ratio as already outlined
above.
30. 29
6. What are the main challenges of the new Basel III liquidity risk
requirements?
Regulatory liquidity risk reports will have to be produced at least monthly with
the ability, when required by regulators, to bedelivered weekly or even daily.
This is challenging banks to put in place robust automated reporting solutions
to meet this need.The first challenge banks will face is to consolidate clean
exposures, liabilities, counterparties and market data in a centralizedrisk
datamart. All portfolios’ contractual and behavioural cash flows should be
made available and banks should have theability to stress those and produce
liquidity gap analysis according to various scenarios. Liquidity Coverage Ratio
(LCR) buffereligibility and haircut rules rely on external ratings, Basel
classification of counterparties and standardized credit risk weights.
The LCR numerators run-off rates as well as Net Stable Funding Ratio (NSFR)
Available Stable Funding and Required StableFunding factors also depend on
such information, usually only available in risk specific systems.The next
challenge banks face is interfacing or merging their current risk and finance
systems to meet the new Basel IIILiquidity Risk ratio requirements. The funding
concentration monitoring requirement will require banks to put in place a
cleanhierarchical referential of counterparties for consolidating their
liabilities.Different LCR ratios will have to be produced per consolidation level
and currencies. As it is already the case for credit risk rules,international banks
will have to cope with various national discretions and local flavors for such
new liquidity ratio rules and willhave to generate various kinds of liquidity risk
regulatory reporting templates in different electronic formats per jurisdiction.
31. 30
7. What is the LCR Buffer composed of?
The LCR is composed of level 1 and 2 assets as outlined below:
8. What are the key dates?
The Basel Committee has outlined phase-in arrangements outlined below.
Specific implementation timelines for individual countries, both members and
non-members of the Basel Committee on Banking Supervision, may vary.
33. 32
Capital
Pillar 1
Pillar 2 Pillar 3
Capital Riskcoverage Containing
leverage
Riskmanagement
and supervision
Market
discipline
AllBanks
Qualityand level of capital
Greater focus on common equity. The
minimumwill be raised to 4.5% of risk-
weighted assets, after deductions.
Capitalloss absorption at the
point of non-viability
Contractualterms of capital
instruments will include a clause
that allows – at
thediscretion of the relevant authority
–write-off or conversion to common
shares if the bank is judged to be
non-viable.This principle increases
thecontribution of the private sector
to resolving future banking crises and
therebyreduces moral hazard.
Capitalconservation buffer
Comprising common equity of
2.5% of risk-weighted assets,
bringing the total common
equity standard to 7%. Constraint
on a bank’s discretionary
distributions will be imposed
when banks fall into the buffer
range.
Countercyclical buffer
Imposedwithin a range of 0-2.5%
comprisingcommon equity, when
authoritiesjudge credit growth is
resulting in an unacceptable build
upof
systematic risk.
Securitisations
Strengthens the capital treatment for certain
complexsecuritisations. Requires banks to
conduct
more rigorous credit analyses of externally
rated
securitisationexposures.
Trading book
Significantlyhigher capital for trading and
derivatives activities, as well as complex
securitisationsheld in the trading book.
Introduction of a stressed value-at-risk
framework
to help mitigate procyclicality. A capital charge
for incremental risk that estimates the default
and
migrationrisks of unsecuritised credit products
and
takes liquidity into account.
Counterparty credit risk
Substantialstrengthening of the counterparty
credit risk framework. Includes: more
stringent
requirements for measuring exposure; capital
incentives for banks to use central
counterparties
forderivatives; and higher capital for inter-
financial
sector exposures.
Bankexposures to central counterparties
(CCPs) The Committee has proposed that
trade exposures to a qualifying CCP will
receive a 2% risk weight
anddefault fund exposures to a qualifying
CCP will be capitalised according to a risk-
based method that consistently and simply
estimates risk arising from such default fund.
Leverage ratio
A non-risk-based
leverage ratio
thatincludes
off-balance
sheetexposures
willserve as a
backstop to the
risk-based capital
requirement. Also
helpscontain
system wide build
upof leverage.
SupplementalPillar 2
requirements.
Address firm-wide
governance and risk
management; capturing
the risk of off-balance
sheet exposures
and securitisation
activities; managing
risk concentrations;
providing incentives for
banksto better manage
risk and returns over
thelong term; sound
compensation practices;
valuation practices;
stresstesting; accounting
standards for financial
instruments; corporate
governance; and
supervisory colleges.
Revised Pillar 3
disclosures
requirements
The requirements
introduced relate
to securitisation
exposures and
sponsorship of
off-balance sheet
vehicles. Enhanced
disclosures on
thedetail of the
components
of regulatory
capital and their
reconciliation
to the reported
accounts will be
required, including
a comprehensive
explanation of how
abank calculates its
regulatory capital
ratios.
34. 33
Research Methodology
Research Problem: To study the different aspects of Basel III regulations with
special reference to Indian Banking.
Research Objectives:The Basel IIII regulations are guidelines which all the
banks should comply. The regulations change time to time in tandem with the
global financial conditions. But the to comply to the regulations is a very
complicated tasks for the banks as it needs strategic planning. The study tries
to identify the complications and hurdles in adopting the regulations.
The objectives of the research can broadly be divided as:
• To study the various aspects of Basel III framework and its distinctive
features.
• To assess the need of Basel III regulations in global banking environment.
• To study the compliance of Indian banks to Basel III regulations.
Research Design
As the research project iscompletely a theoreticalstudy wherein the different
aspects of Basel III regulations have been pursued and presented before you,
the methodology applied is of a Descriptive Research Design.
Data Collection Design
Although the use of collected data is minimal (the dissertation being a
theoretical study ofBasel III regulations), the data used, if anywhere, are
Secondary Data.
Data Presentation Tools
Tables, line graphs, pie charts, bar diagrams and other charts have been used
to present data in an efficient and decipherable manner.
Research Scope
The research covers the compliance of Indian banks to Basel III regulations at
large. The implications of these regulations on Indian banks and on Indian
financial market has been thoroughly studied. Towards theend, conclusions has
been drawn as to what will be the after effects of these regulations.
36. 35
Where Indian Banks are:
2010 2011 2012 2013 2014 2015 2016
Internal Models Approach for Market Risk
• Final Guidelines for IMA issued in April
2010.
• The earliest date of making application by
banks to RBI is 1st
April 2010.
Internal Rating Based Approach for Credit Risk
(Foundation as well as Advanced)
• The earliest date for making application
by banks 1st April 2012
• Guidelines note under process
Advanced Measurement Approach for
Operational Risk
• Draft Guidelines note on 6th January 2011.
• The earliest date for making application
by banks 1st
April 2012
Basel III: Regulatory Framework (contd. Next
slide)
• Guidelines issued in December 2010.
• Common equity requirement at 4.5% by
1st January 2015
• Tier 1 capital requirement at 6% by 1st
January 2015.
40. 39
Basel III is BOTH a firm-specific, risk based framework and a
system-wide, systemic risk-based framework .
Basel III : Key Components
41. 40
Public sector banks (PSBs) –
Marginal reduction in Tier 1 Capital. - Use of preference share
capital and perpetual debt instruments.
To support rapid loan-book expansion in the coming years,
government supports may be required to enhance core tier 1
capital, assuming that government continue to hold 51%
stake. Currently, there are only seven PSBs in which
government equity is more than 65%
Definition of
Capital
Banks with Core Tier I less than 7% would be negatively impacted.
It will have a impact on profitability and Return on equity (ROE)
Countercyclical
buffers
Deductions should be from core capital may lead to reduction of
amount in core capital for Indian Banks
Deductions
Basel III : Impact on Indian Banks
42. 41
Banks having a huge trading book and off balance sheet derivative
exposures will be impacted due to increased risk coverage (capital)
on account of counterparty credit risk.
RWA
Requirements
The implementation of liquidity ratio (LCR/NSFR) is from 2015 can
lead Indian Banks to maintain additional liquidityLiquidity Ratio
43. 42
Over View of the RBI Guidelines for Implementation of Basel III guidelines:
The final guidelines have been issued by Reserve Bank of India for
implementation of Basel 3 guidelines on 2nd May, 2012. Major features of
these guidelines are :
(a) These guidelines would become effective from January 1, 2013 in a phased
manner. This means that as at the close of business on January 1, 2013, banks
must be able to declare or disclose capital ratios computed under the amended
guidelines. The Basel III capital ratios will be fully implemented as on March 31,
2018.
(b) The capital requirements for the implementation of Basel III guidelines may
be lower during the initial periods and higher during the later years. Banks
needs to keep this in view while Capital Planning;
(c) Guidelines on operational aspects of implementation of the Countercyclical
Capital Buffer. Guidance to banks on this will be issued in due course as RBI is
still working on these. Moreover, some other proposals viz. ‘Definition of
Capital Disclosure Requirements’, ‘Capitalisation of Bank Exposures to Central
Counterparties’ etc., are also engaging the attention of the Basel Committee at
present. Therefore, the final proposals of the BaselCommittee on these
aspects will be considered for implementation, to the extent applicable, in
future.
(d) For the financial year ending March 31, 2013, banks will have to disclose the
capital ratios computed under the existing guidelines (Basel II) on capital
adequacy as well as those computed under the Basel III capital adequacy
framework.
(e) The guidelines require banks to maintain a Minimum Total Capital (MTC) of
9% against 8% (international) prescribed by the Basel Committee of Total Risk
weighted assets. This has been decided by Indian regulator as a matter of
prudence. Thus, it requirement in this regard remained at the same level.
However, banks will need to raise more money than under Basel II as several
items are excluded under the new definition.
44. 43
(f) of the above, Common Equity Tier 1 (CET 1) capital must be at least 5.5% of
RWAs;
(g) In addition to the Minimum Common Equity Tier 1 capital of 5.5% of RWAs,
(international standards require these to be only at 4.5%) banks are also
required to maintain a Capital Conservation Buffer (CCB) of 2.5% of RWAs in the
form of Common Equity Tier 1 capital. CCB is designed to ensure that banks
build up capital buffers during normal times (i.e. outside periods of stress)
which can be drawn down as losses are incurred during a stressed period. In
case suchbuffers have been drawn down, the banks have to rebuild them
through reduced discretionary distribution of earnings. This could include
reducing dividend payments, share buybacks and staff bonus.
(h) Indian banks under Basel II are required to maintain Tier 1 capital of 6%,
which has been raised to 7% under Basel III. Moreover, certain instruments,
including some with the characteristics of debts, will not be now included for
arriving at Tier 1 capital;
(i) The new norms do not allow banks to use the consolidated capital of any
insurance or non-financial subsidiaries for calculating capital adequacy.
(j) Leverage Ratio : Under the new set of guidelines, RBI has set the leverage
ratio at 4.5% (3% under Basel III). Leverage ratio has been introduced in Basel 3
to regulate banks which have huge trading book and off balance sheet
derivative positions. However, In India, most of banks do not have large
derivative activities so as to arrange enhanced cover for counterparty credit
risk. Hence, the pressure on banks should be minimal on this count.
(k) Liquidity norms: The Liquidity Coverage Ratio (LCR) under Basel III
45. 44
requires banks to hold enough unencumbered liquid assets to cover expected
net outflows during a 30-day stress period. In India, the burden from LCR
stipulation will depend on how much of CRR and SLR can be offset against
LCR. Under present guidelines, Indian banks already follow the norms set by
RBI for the statutory liquidity ratio (SLR) – and cash reserve ratio (CRR), which
are liquidity buffers. The SLR is mainly government securities while the CRR is
mainly cash. Thus, for this aspect also Indian banks are better placed over many
of their overseas counterparts.
(l) Countercyclical Buffer: Economic activity moves in cycles and banking
system is inherently pro-cyclic. During upswings, carried away by the boom,
banks end up in excessive lending and unchecked risk build-up, which carry the
seeds of a disastrous downturn. The regulation to create additional capital
buffers to lend further would act as a break on unbridled bank-lending. The
detailed guidelines for these are likely to be issued by RBI only at a later stage.
On the day of release of these guidelines, analysts felt that India may need at
least $30 billion (i.e. around Rs 1.6 trillion) to $40 billion as capital over the next
six years to comply with the new norms. It was also felt that this would
impose a heavy financial burden on the government, as it will need to infuse
capital in case it wanst to continue its hold on these PS Banks. RBI Deputy
Governor, MrAnandSinha viewed that the implementation of Basel II may have
a negative impact on India's growth story. In FY 2012-13, Government of India
is expected to provide Rs 15888 crores to recapitalize the banks. as to maintain
capital adequacy of 8% under old Basel II norms.
46. 45
What is the additional capital that Indian banks have to mobilize toconform to
Basel III? What are the options for, and challenges in, raising this size
ofcapital?
Admittedly, Indian banks already meet the minimum capital requirements of
Basel IIIat an aggregate level, even though some individual banks may have to
top up. But capitaladequacy today does not mean capital adequacy going
forward. Currently, the bank credit –GDP ratio in India is around 55 per cent. If
we want growth to accelerate, this ratio will have to go up as a necessary pre-
condition. Besides, as our economy goes through a structural transformation,
as it should, the share of the industry sector will increase and the credit-GDP
ratio will rise even further. What this means is that Indian banks would have
been required to BIS central bankers’ speeches raise additional capital even in
the absence of Basel III. In estimating the net additional burden on account of
Basel III, we have to take this factor into account.
What is the size of the additional capital required to be raised by Indian banks?
Itdepends on the assumption made, and there are various estimates floating
around. TheReserve bank has made some quick estimates based on the
following two conservativeassumptions covering the period to March 31, 2018:
(i) risk weighted assets of individual banks will increase by 20 per cent per
annum; and
(ii) internal accruals will be of the order of 1 per cent of risk weighted assets.
Reserve Bank’s estimates project an additional capital requirement of 5 trillion,
ofwhich non-equity capital will be of the order of 3.25 trillion while equity
capital will be of the order of 1.75 trillion (Table 3).
The additional equity capital requirement of the order of 1.75 trillion raises
twoquestions. First, can the market provide capital of this size? Second, what
will be the burden on the Government in capitalizing public sector banks
(PSBs)and what are its options?
Let us turn to the first question, whether the market will be able to provide
equitycapital of this size. The amount the market will have to provide will
47. 46
depend on how much of the recapitalization burden of PSBs the Government
will meet. Data in Table 3 indicate that the amount that the market will have to
provide will be in the range of 700 billion– 1 trillion depending on how much
the Government will provide. Over the last five years, banks have revised
equity capital to the tune of 520 billion through the primary markets. Raising an
additional 700 billion– 1 trillion over the next five years from the market should
therefore not be an insurmountable problem. The extended period of full Basel
III implementation spread over five years gives sufficient time to banks to plan
the time-table of their capital rising over this period.
Moving on to the second question of the burden on the Government which
owns 70 per cent of the banking system. If the Government opts to maintain its
shareholding at thecurrent level, the burden of recapitalization will be of the
order of 900 billion; on the otherhand, if it decides to reduce its shareholding in
every bank to a minimum of 51 per cent, theburden reduces to under 700
billion.
Clearly, providing equity capital of this size in the face of fiscal constraints
posessignificant challenges. A tempting option for the Government would be
to issuerecapitalization bonds against common equity infusion. But this will
militate against fiscaltransparency. In the alternative, would the Government
be open to reducing its shareholding in PSBs to below 51 per cent? If the
Government decides to pursue this option, an additional consideration is
whether it will amend the statute to protect its majority voting rights.
48. 47
What are the potential challenges in implementing the
countercyclical capital buffer?
As we noted earlier, a critical component of the Basel III package is
acountercyclical capital buffer which mandates banks to build up a higher level
of capital ingood times that could be run down in times of economic
contraction, consistent with safetyand soundness considerations. This is
conceptually neat, but is challenging in operationalterms, as indeed evidenced
by Spain’s recent experience. The foremost challenge isidentifying the inflexion
point in an economic cycle which should trigger the release of thebuffer. It is
quite evident that both tightening too early or too late can be costly
inmacroeconomic terms. The identification of the inflexion point therefore
needs to be basedon objective and observable criteria. It also needs long series
data on economic cycles. So,what we need is both a better database and more
refined statistical skills in analyzingeconomic cycles.
The countercyclical capital buffer as prescribed in Basel III was initially based on
thecredit / GDP metric. Is this a good economic indicator from the Indian
perspective? A studyundertaken by the Reserve Bank shows that the credit to
GDP ratio has not historically beena good indicator of build up of systemic risk
in our banking system.
Furthermore, some economic sectors such as real estate, housing, micro
financeand consumer credit are relatively new in India, and banks have only
recently begunfinancing them in a big way. The risk build up in such sectors
cannot accurately be capturedby the aggregate credit to GDP ratio. The
Reserve Bank has so far calibrated countercyclicalpolicies at the sectoral level,
and I believe we need to continue to use that approach. TheBasel Committee
also has now recognized that no single variable can fully capture thedynamics
of the economic cycle. Appropriate calibration of the buffer requires
countryspecific judgement backed by a broad range of other simple indicators
used in financialstability assessments.
51. 50
Public Sector Banks:
Private Sector Banks:
As per the March 2010 dataset
The Average Common Equity Tier 1 capital of Public Sector Banks is 7.27% and average CRAR is 13.21%.
The Maximum and minimum of the core capital (common equity tier 1) are 10.50% and 4.37%.
Core Capital - One Bank is below Basel III prescribed CET
Tier 1 - Three Banks are falling short of Basel III prescribed Tier I capital (net of deductions).
The CRAR of all the public sector banks is above 10.5%.
As per the March 2010 dataset
The Average Common Equity Tier 1 capital of Private Banks is 12.67% and average CRAR is 14.91%.
The Private Banks are well cushioned above the Basel III defined Core (Common Equity Tier 1) capital
The Maximum and minimum of the core capital (common equity tier 1) are 17.31% and 9.62%.
The CRAR of all the private banks is above 10.5%.
52. 51
The Compliance process of Indian Banks to Basel III
The minimum capital for common equity, the highest form of loss absorbing
capital, will beraised from the current 2% level, before the application of
regulatory adjustments to 4.5%,after the application of regulatory adjustments.
This increase will be phased in to apply fromJan 1, 2013. In addition to the
above, the committee recommended a 2.5% of additional coreequity capital as
a conservation buffer above the regulatory minimum taking the
aggregateminimum core equity required to 7%. The conservation buffer is also
phased in to applyfrom Jan 1, 2016 and will come into full effect from Jan 1,
2017.Certain regulatory deductions (material holdings, deferred tax assets,
mortgage servicingrights etc) that are currently applied to tier 1 capital and/or
tier 2 capital or treated as RWAwill now be deducted from Core equity capital.
This will also be progressively phased inover a five year period commencing
2014.
Regulatory buffers, provisions, and cyclicality of the minimum
The capital conservation buffer should be available to absorb banking sector
lossesconditional on a plausibly severe stressed financial and economic
environment. Thecountercyclical buffer would extend the capital conservation
range during periods of excesscredit growth, or other indicators deemed
53. 52
appropriate by supervisors for their nationalcontexts. Both buffers could be
run down to absorb losses during a period of stress.
Deductions from Core Tier 1
Minority interest - The excess capital above the minimum of a subsidiary that is
a bank will be deducted in proportion to the minority interest share.
Investments in other financial institutions - The gross long positions may be
deducted net of short and the proposals now include an underwriting
exemption. Minority interest in a banking subsidiary is strictly excluded from
the parent bank’s common equity if the parent bank or affiliate has entered
into any arrangements to fund directly or indirectly minority investment in the
subsidiary whether through an SPV or through another vehicle or arrangement.
Other deductions
The other deductions from Common Equity Tier 1 are: goodwill and other
intangibles (excluding Mortgage Servicing Rights), Deferred Tax Assets,
investments in own shares, other investments in financial institutions, shortfall
of provision to expected losses, cash flow hedge reserve, cumulative changes
in own credit risk and pension fund assets. The following items may each
receive limited recognition when calculating the common equity component of
Tier 1, with recognition capped at 10% of the bank’s common equity
component:
Significant investments in the common shares of unconsolidated
financial institutions (banks, insurance and other financial entities).
“Significant” means more than 10% of the issued share capital;
Mortgage servicing rights (MSRs); and
Deferred tax assets (DTAs) that arise from timing differences.
A bank must deduct the amount by which the aggregate of the three items
above exceeds15% of its common equity component of Tier 1.
With the RBI flagging off the implementation of Basel III guidelines, Indian
banks have toplan for more capital in the years ahead. They are well placed to
meet the higher capitalrequirements and can strengthen their competitive
positions vis –a vis international banks –provided the government can deliver
on its own responsibilities towards public sector banks.The RBI has set a more
demanding schedule for Basel III implementation than the Bank
forinternational Settlements. The BIS has set the deadline for the full
implementation as 2019.The RBI would like the Indian banks to comply by 2017.
54. 53
Findings
Higher Capital Requirement: Presently, in India, most banks' common
equity ratio falls in the range of about 6-10 per cent. Hence, banks may
able to comply with the higher capital requirement as per Basel III norms
at least till 2014/15. This, without infusing any fresh equity, even while
taking into account the marginal increase in capital requirement.
The increase in the minimum capital ratio, combined with loan growth
outpacing internal capital generation in most government banks, will
lead to a shortfall of capital. This will mount mainly between 2015/16 and
2017/18 due to introduction of a Capital Conservation Buffer (CCB).
The requirement of capital will be less to large private sector banks due
to their higher capital ratios and stronger profitability. However, some
public sector banks are likely to fall short of the revised core capital
adequacy requirement and would therefore depend on government
support to augment their core capital. The additional equity capital
requirements in the public sector banks, mainly due to Basel III norms in
the next five years, work out to around Rs 1,400-1,500 billion.
Pressure on Return on Equity: To meet the new norms, apart from
government support a significant number of banks have to raise capital
from the market. This will push the interest rate up, and in turn, cost of
capital will rise while return on equity (RoE) will come down. To
compensate the RoE loss, banks may increase their lending rates.
However, this will adversely affect the effective demand for loan and,
thereby, interest income. Further, with effective cost of capital rising, the
relative immobility displayed by Indian banks with respect to raising fresh
capital is also likely to directly affect credit offtake in the long run. All
these affect the profitability of banks.
55. 54
Conclusion
Basel standards, by and large, were an outcome of international
cooperation among central banks on the face of indiscriminate cross –
border bank lending and debt repudiation from certain debtor countries.
India had always set an example in implementing these standards, but
the compliance was gradual and easy –paced, so as not to disrupt the
banking system. The compliance levels were relaxed from time to time to
accommodate even the weakest link in the banking chain. The idea was
to enable the entire system to adapt these standards over a fixed time
line in a way that the overall investor response and the capital market in
the economy is ready for the huge resource mobilization requirements
posed by the compliance by the Indian banks . However, the real issue is
now whether the banks would be able to raise funds from the capital
market when the investors are rather wary about the performance and
returns from the banks /industries in general in the context of a general
slowdown in industries coupled with inflation prevailing in the economy.
Following the debacle of new and innovative instruments, there is a need
to assimilation and watch than creating an overlay and urge by RBI to
expect all the Indian Banks to comply with Basel III standards in hurry
,even before the full compliance with Basel II by some weak banks in the
Indian economy. Before the onslaught of the global financial crisis
originating from the west, even the US and Europe were not seriously
concerned about compliance with Basel norms. Now, the US and Europe
are forced to do so, due to the international pressure. Given the above
background, it is rather surprising that RBI would expect the Indian
banks to be ready to comply with Basel standards so early by March 2017,
earlier than the 2019 time frame laid down in the original Basel III
framework.
Risk management in banks is abstract and analytical activity that draws
heavily on advances in statistics and financial economics. But the
professionalization of the field ‘is at an early stage’s to be emphasized
here. Much of the risk management within banks is carried out using
internally developed proprietary models. The data on these aspects is
not disclosed by the banks for reasons citing ‘confidentiality’ or
‘competitiveness’.
56. 55
The link between nonperforming assets (NPA) capital adequacy and
provisioning is well known to be highlighted here. The challenge is to
provide incentives for banks /financial institutions to recognize losses on
account of NPAs as per Basel norms. More than four years after the
financial crisis began, it is so widely accepted that many of the world’s
banks are burying /hiding losses and overstating their asset values ,even
the BIS is saying so- in writing. It fully expects the taxpayers to pick up
the tab should the need arise, too.
The lack of transparency, credibility in banks’ balance sheet fuels a
vicious circle. When investors cannot trust the books, lenders can’t raise
capital and may have to fall back on their home countries ‘governments
for help. This further pressures sovereign finances, which in turn, weaken
the banks even more. The adage ‘too big to fail ‘does not easily become
applicable to banks often as the size of the banks ‘capital, operations,
NPA, provisioning increases. This issue needs separate discussion as the
challenge is greater and real.
Finally, it is significant to note that new and private sector banks, with
their high capital adequacy ratios, enhanced proportion of common
equity and better IT and other modern financial skills of the personnel,
are well placed to comply with Basel III norms in general. PSU banks
although dominant banks in the Indian financial system may take more
time and face challenges in following the Basel III guidelines.
57. 56
Bibliography
1. Deutsche Bank, Capital Markets and Treasury Solutions
The Road to Basel 3
Implications for Credit, Derivatives the Economy
2. BASEL III NORMS AND INDIAN BANKING:ASSESSMENT AND
EMERGING CHALLENGES
-C.S.Balasubramaniam
3. Basel III: Issues and Implications, kpmg.com
4. Basel III Impact on Indian Banks, February 2011, Aptivaa
5. Basel III and Its Consequences: Confronting a New Regulatory
Environment, Accenture
6. DuvvuriSubbarao: Basel III in international and Indian contexts – ten
questions we should know the answers for.
Inaugural address by DrDuvvuriSubbarao, Governor of the Reserve Bank of India, at the
Annual FICCI – IBA Banking Conference, Mumbai, 4 September 2012.
7. www.bis.org
8. www.moodysanalytics.com, Media Insigght Regulatory Basel III
9. www.allbankingsolutions.com