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BASEL NORMS

BASEL NORMS

These are norms of sound banking practices laid down by the Basel Committee on Bank Supervision located at Basel, Switzerland. This Committee operates under the auspices of the Bank for International Settlement (BIS) located in Basel which acts as Central bank of Central banks, of which the RBI is also a member. Basel norms comprise of various parameters like liquidity, asset quality, capital adequacy, risk-weight, market-risk, operational risk, supervision, management etc. These norms were first laid down in 1988 under Basel accord in the form of BASEL-I subsequently migrating to BASEL-II by the year 2000.

One of the most important parameters of sound banking in these norms is the concept of Capital Adequacy Ratio which is defined as the ratio of total free, unencumbered capital of a bank to its risk-weighted assets. This ratio ensures that a bank has sufficient capital of its own to absorb a reasonable degree of losses and protects interests of depositors. A CAR of 10 for example would imply that if the total loans and advances of a bank amount to Rs. 100, it must maintain free capital of its own of Rs. 10. This ratio can be expressed as follows: –

CAR = Total free capital (Tier I + Tier II)  Risk weighted assets

BASEL- Ill

In the backdrop of the global financial meltdown, the Basel Committee on Banking Supervision has decided to introduce Basel-Ill norms to strengthen existing capital requirements and introduce a global liquidity standard to enable banks to weather financial storms. Basel-III mandates banks to increase the loss-absorbing capital from 2 percent to 4.5 percent of risk-weighted assets by January, 2015. In addition, banks will be required to hold a capital conservation buffer of 2.5 percent to withstand future periods of stress, bringing the total loss-absorbing capital to 7 percent.

Capital conservation buffer of 2.5 percent is to be maintained by March 2018 consisting of common equity to protect the banking sector from periods of excess aggregate credit growth. These capital requirements are to be supplemented with a non risk based leverage ratio that will serve to back stop the risk based majors and higher capital norms. Basel-Ill will thus triple the quantum of capital which banks will be required to maintain. Indian banks would need Rs. 3.9 to 5 lakh crore capital over the next six years to meet BASEL Ill norms.

Basel III represents an effort to fix the gaps and lacunae in Basel II that came to light during the financial meltdown. While Basel III does not jettison Basel II; it actually builds on the essence of Basel II – the link between the risk profiles and capital requirements of individual banks.

Basel Norms

Basel Norms

The enhancements of Basel III over Basel II come primarily in four areas:

  • augmentation in the level and quality of capital;
  • introduction of liquidity standards;
  • modifications in provisioning norms; and
  • better and more comprehensive disclosures.

The minimum total capital remains unchanged at 8 percent of risk weighted assets. However, Basel III introduces a capital conservation buffer of 2.5 percent of RWA over and above the minimum capital requirement, raising total capital need to 10.5 percent as against 8.0 percent under Basel II. This is to ensure banks absorb losses and not breach minimum capital need.

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In order to meet enhanced capital requirements of BASEL III, public sector banks would require nearly four lakh twenty thousand crores of additional capital, most of which would be Tier I capital, by March, 2019 which is the deadline set by RBI. The government has decided to bring down its shareholding in public sector banks to 52 percent by disinvesting its equity in these banks. This will bring in close to Rs. 1,60,000 crores. The RBI has proposed that additional capital to meet BASEL III norms can be raised by issuing non-voting rights share capital, differential voting rights capital and golden voting rights share capital. Also, it has proposed that banks could also float long­-term bonds.

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