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BackGround for Basel III :
In a separate article I have already discussed the details of the Basel III accord as released by Basel Committee on Banking Supervision. In this article we will be dealing with the broad guidelines as issued by RBI for implementation of Basel 3 Accord. We are aware that originally Basel Committee was formed in 1974 by a group of central bank governors from 10 countries. Earlier guidelines were known as Basel I and Basel II accords. Later on the committee was expanded to include members from nearly 30 countries , including India. Inspite of implementation of Basel I and II guidelines, the financial world saw the worst crisis in early 2008 and whole financial markets tumbled. One of the major debacles was the fall of Lehman Brothers. One of the interesting comments on the Balance Sheet of Lehman BrothersThus, it became necessary to re-visit Basel II and plug the loopholes and make Basel norms more stringent and wider in scope.
Thus, Basel III norms were released by BCBS and individual central banks were asked to implement these in a phased manner. RBI (India's central bank) too issued draft guidelines in the initial stage and then came up with the final guidelines.
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Over View f 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. Full detailed guidelines can be downloaded from RBI website, by clicking on the following link : Implementation of Base III Guidelines. Major features of these guidelines are :
(a) These guidelines would become effective from January 1, 2013 in a phased manner. 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 Basel
Committee 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.
(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.
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, Mr Anand Sinha 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.
Some Major Developments after 2nd May 2012 (i.e. the date when RBI issued Basel III guidelines) :
(A) On 30th October 2012, RBI in its Second Quarter Review of Monetary Policy 2012-13 has declared as follows :
(i) "Basel III Disclosure Requirements on Regulatory Capital Composition
(iii) Core Principles for Effective Banking Supervision
Other Related Topics
Click Here For : News For Basel III Implementation / News for Basel 3 Implementation
Click Here for : Base 3 Accord Details
Click Here for: Basel iii Accord for Capital Adequacy - Summary