Q: What are Basel
norms?
Basel is a set of standards and practices developed for global banks to
ensure that they maintain adequate capital to withstand periods of
economic strain. It is a comprehensive set of reform measures designed
to improve the regulation, disclosures and risk management within the
banking sector.
Q: What did Basel I and Basel II focus on?
Basel I norms was introduced in 1998, focused almost entirely on credit
risk. It defined capital requirement and structure of risk weights for
banks.
Basel II was introduced in 2004, laid down guidelines for capital
adequacy, risk management and disclosure requirements.
Q: Why Basel III?
It is widely felt that the shortcoming in Basel II norms is what led to
the global financial crisis of 2008. That is because Basel II did not
have any explicit regulation on the debt that banks could take on their
books, and focused more on individual financial institutions, while
ignoring systemic risk. To ensure that banks don’t take on excessive
debt, and that they don’t rely too much on short term funds, Basel III
norms were proposed in 2010.
Q: What does Basel III norm stipulate?
Basel III establishes tougher capital standards through more restrictive
capital definitions, higher risk-weighted assets (RWA), additional
capital buffers and higher requirements for minimum capital ratios. It
also introduces new strict liquidity requirements.
Q: What is the biggest criticism against Basel III?
That the stringent capital requirements come at a time when the global
economy is in the midst of a slowdown. This will leave banks with less
money to lend, in turn pushing up the cost of borrowing; and thereby
further aggravating the slowdown.
Q: Why are many banks opposed to Basel III norms?
Basel III norms will require banks to undertake significant process and
system changes to make upgrades, particularly in the areas of stress
testing, liquidity and capital management infrastructure. The reforms
could fundamentally impact profitability and require sweeping changes in
the business models of many banks
Q: What is the deadline for banks to become Basel III compliant?
For international banks the deadline is December 31, 2018 and March 31,
2018 for Indian banks.
Q: Why the earlier deadline for Indian banks?
The RBI said that: We did this to align our date with the close of the
Indian fiscal year, which is March 31. We could have gone up to March
31, 2019, but that would have overshot the Basel III prescription by
three months and would have attracted adverse notice.
Q: Why are Indian banks concerned about Basel III norms?
Just like for international banks, Basel III norms will affect the
profitability and return ratios of Indian banks as well. Something which
is admitted by the RBI.
Basel III requires higher and better quality capital. Admittedly, the
cost of equity capital is high. The average Return on Equity (RoE) of
the Indian banking system for the last three years has been
approximately 15%. Implementation of Basel III is expected to result in a
decline in Indian banks' RoE in the short-term.
Q: How much extra capital will Indian banks need for Basel III?
According to RBI’s estimates, Indian banks will require a capital of Rs 5
lakh crore over the next five years, of which Rs 1.75 lakh crore will
have to be equity capital. Within the Rs 1.75 lakh crore, anywhere
between Rs 70,000-1,00,000 crore will have to raised through the market,
depending on to what extent the government will infuse capital in
state-owned banks.
Q: Indian banks are much better off than global banks that caused the
financial crisis. Why then should Indian banks then comply with Basel
III norms?
The RBI said: India should transit to Basel III because of several
reasons. By far the most important reason is that as India integrates
with the rest of the world, as increasingly Indian banks go abroad and
foreign banks come on to our shores, we cannot afford to have a
regulatory deviation from global standards. Any deviation will hurt us
both by way of perception and also in actual practice. Also, it is
important that Indian banks have the cushion afforded by improved risk
management systems to withstand shocks from external systems, especially
as they deepen their links with the global financial system going
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