• HDFC securities
• 01 Sep 2018
• Knowledge Centre

“Whatever was on the left-hand side (liabilities) was not right, and whatever was on the right-hand side (assets) was not left.” This comment on the balance sheet of Lehman Brothers, the largest victim of the U.S. subprime crisis in 2008, says it all. The fourth-largest investment bank in the US (US$ 639 bn in assets and US$ 619 bn in debt), Lehman Brothers filed for bankruptcy on 15th September 2008.

 

It was the grave deficiencies in financial regulation that prompted a relook at the Basel II norms. They were then revised to those that were more stringent and wider in scope, i.e., Basel III. Basel III norms were shaped with the intention to strengthen banks’ capital requirements by increasing their liquidity and decreasing bank leverage. The revised norms called for banks to have a greater amount, as well as higher quality of capital in relation to Basel II rules.

 

As per the Reserve Bank of India’s directive, the Basel III capital regulations will be fully adopted on 31st March 2019.

 

Defining the Norms

 

Basel III is an extension of the existing Basel II framework. It introduces new capital and liquidity standards to strengthen the regulation, supervision, and risk management of the entire banking and finance sector.

 

However, according to a report by SBI, the country would need more time to implement Basel III norms, as the banking sector is already under pressure due to demonetization and the GST roll-out. The report stated, “We believe that the Indian banking sector needs some time to assimilate the impact of the last three structural changes (demonetization, GST implementation, and RERA), before facing the new ones. Even as we acknowledge the positive impact of such reforms, we are convinced that perhaps the Indian banking sector deserves a small interregnum so as to meaningfully concentrate on issues related to financial inclusion, asset quality, and credit growth.”

 

India’s Position

 

Regarding the status of the country-wise implementation of Basel III standards, India is largely compliant with the key norms vis-à-vis most countries.
According to a senior Government official, the Government would hold talks with the Reserve Bank of India (RBI) on relaxing capital norms for banks and bringing them in line with less stringent Basel III guidelines.

 

Such a move would free up an estimated Rs 60,000 crore of capital at state-owned lenders. This will allow them to step up lending to fuel the reviving economy, bolster weaker banks and reduce pressure on the Government to provide capital. This follows discussions by the finance ministry with Niti Aayog and other stakeholders.

 

According to a report carried in a publication, has, the minimum common equity (CET) Tier-I ratio as prescribed by the RBI — i.e. money that banks need to set aside — stands at 5.5% of risk-weighted assets against 4.5% under Basel III norms. There is a need to lower this to the level stipulated by the Basel Committee on Banking Supervision, said the official cited above. By freeing up capital, around Rs 6 lakh crore of lending can be achieved without any additional requirement for provisioning, the official said.