Basel III Capital Regulation Notified

Highlights

• Basel III to be effective from January 1, 2013
• Will be fully implemented by March, 2018
• Total capital ratio must be at 9%
• Banks will have to raise over Rs 1.67 lakh crore over the next five years

The Reserve Bank of India on May 2 issued the final guidelines for implementation of Basel IIIcapital regulation in India, which would be effective from January 1, 2013, in a phased manner. The Basel III capital ratios will be fully implemented as on March 31, 2018.

What Are Basel III Guidelines?

“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 Basel III framework is summarized in a table which provides an overview of the various measures taken by the Committee. (Source: Bank For International Settlements)

So, Basel III is asset of guidelines agreed upon by the Basel Committee on Banking Supervision in 2010-11. The Basel committee was formed in 1974 by a group of central bank governors from 10 countries, and has now expanded to include members from nearly 30 countries, including India.

The Basel Committee on Banking Supervision (BCBS) issued a comprehensive reform package entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” in December 2010, with the objective to improve the banking  sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the  financial sector to the real economy.

The Reserve Bank of India had released draft guidelines on its website on December 2011 for comments and feedback from various stakeholders.

Salient Features Of Basel III Guidelines

• Banks have to maintain Tier I capital, or core capital, of at least 7 per cent of their risk weighted assets on an ongoing basis. (Under the existing capital adequacy guidelines based on the Basel II framework, banks are required to maintain Tier I capital of at least 6 per cent of their risk weighted assets.)
• According to the RBI guidelines, the total capital ratio, including Tier I and Tier II, must be at least 9 per cent, unchanged from the current requirement, compared with the Basel III minimum requirement of 8 per cent.  (Capital ratio is the percentage of a bank’s capital to its risk-weighted assets.)
• Banks required to maintain a minimum 5.5% in common equity (as against the current 3.6%) by March 31, 2015
• Banks to create a capital conservation buffer (consisting of common equity) of 2.5% by March 31, 2018
• Banks to maintain a minimum overall capital adequacy of 11.5% (against the current 9%) by March 31, 2018

Impact Of Basel III Guidelines On Banks

According to global research firm Macquarie, Indian banks, will have to raise over Rs 1.67 lakh crore over the next five years to cater to their growth requirements and Basel-III implementation charges.

Total capital requirement of Rs 1.67 lakh crore in five years means, Banks will have to raise Rs. 30000 crore a year.  In the eight years since Basel II norms were announced, Indian banks have raised a total of Rs. 80,000 crore, or about Rs. 10,000 crore a year. And most of this fund raising activities took place in boom years.

With slowdown looming, Basel III puts a huge burden on Banks. Private sector banks are little better placed than public sector peers, as large chunk of this fund raising is expected to be mopped up by the PSU banks, with SBI group alone is likely to raise around USD 14 billion by fiscal year 2015.