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BASEL NORMS

Basel-III9885BASEL NORMS
INTRODUCTION

I was having tea with my friend dinkar dogra when I got a call from adarsh sidhu that there is a speculation in the market that bank of Punjab is going to default in the near future.I got goose bumps and went to the bank to withdraw the hard-earned money.everyone from my town was in the bank.Bank officials had to face the agony of the people and they had to borrow money from other branches of the district.After some hours it was relized that the it was a hoax spread by some unscrupulous people.                    BASEL NORMS

Had the bank been not on sound footing it would have collapsed and its ripple effect would have affected the market sentiments and the investors would be left scratching their heads.

To avoid any such situation,the banks should follow certain norms and principles.

ANALOGY-BANKS ARE LIKE HEART OF THE ECONOMY.IF THEY FAIL ECONOMY WILL FAIL SOON.SO BANKS HAVE TO FOLLOW CERTAIN RULES TO REMAIN HEALTHY

MOREOVER EVERBODY WANTS LOAN AND NOBODY WANTS TO RETURM THEM BACK AND IN SUCH A SCENARIO BANKS WILL FAIL.SO LENDING HAS TO FOLLOW CERTAIN RULES AND HERE COMES THE ROLE OF BASEL NORMS.

WHAT DO THE BANKS DO?

-They borrow money and lend money in terms of loan and earn commision.(like salman khan earns money from acting and so do banks from commision).

-This commision is the profit of the bank.now if the bank lends the money to the worng people there will be problem for the bank and it will become poor(garib like bangladesh cricket team) and wont be able to lend the money to the needed enterpreneurs and the economy will falter.

 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.(FOLLOW THE NORMS AND BE HEALTHY)

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.(HOW MUCH THE RISK BANKS SHOULD TAKE WHILE LENDING MONEY,PAISA WAPIS BHI TO LENA HOTA HAI NA)

-Basel II was introduced in 2004, laid down guidelines for capital adequacy, risk management and disclosure requirements.(KITNA CAPITAL HONA CHAIYE BANK KE PASS TO AVOID AND CRUNCH)

 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.

 WHAT DOES BASEL III NORM STIPULATE?

-Basel III establishes tougher capital standards through more restrictive capital definitions, higher requirements for minimum capital ratios.

– It also introduces new strict liquidity requirements.

TIER I CAPITAL-LIQUID

TIER II CAPITAL-NON LIQUID LIKE BUILDING.

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.(LESS MONNEY WILL BE AVAILABLE TO THE ENTERPRENEUS FOR INVESTING)

 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

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.

 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.(JAMES BOND 007 BAN RHA HAI RBI)

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.

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.

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.

MORAL OF THE STORY-

1.Standards will help the bank to become resilient and the financial instability will be taken care of in the future.

2.Investors will fell comfortable and there will be more fdi and hence less fiscal defict(jab ek hi tara ke rules world over honge then it will become easy for the foreign investors to invest money in indian market)

3.No country wants its financial set up to be weak and the rules will go a long way in infusing strength to the banks.

4.banks have to become rich which means that they have to maintain more capital

5.after basel norms are implemented no TOM DICK AND HARRY CAN JUST  GO AND ASK FOR LOAN.HE OR SHE HAS TO PLEGDE SOME SOLID DOCUMENTS  TO GET THE LOAN.

Indian Economy

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