Basel 3 and the Indian Banks

It was supposed to be implemented from the very first day of 2013. Yes, the Basel 3 norms which had been planned to come in to affect from 1^st January has now been postponed till April 1. But what are the Basel 3 norms and why do the Indian Banks need it. This article will give a complete overview about the Basel 3 norms that are going to be introduced in our country within a few months time.

Well, the name Basel is derived from a place that is located in Switzerland. The Basel norms were introduced in the aftermath of the 2008 bubble crisis so that Banks all over the world posses the financial strength to absorb any kind of financial shocks. The idea behind introducing the Basel 3 was taken after the European Debt Crisis shattered the economy and its disastrous impact on the Banks. The Basel 1 and 2 norms are already in effect and now in order to tighten the banks liquidity as well as the leverage of Indian Banks. The Reserve Bank of India which is a member of the Basel Committee on Banking Supervision urged upon the need to implement the Basel 3 norms will come in to effect from April 1, 2013.

Now lets see the Basel 3 norms for Indian Banks

·         The Banks need to maintain a 4.5% of common equity that is 6% of the Tier 1 capital of the risk weighted class. Common equity means the equity and the retained earnings of the bank.

·         They need to have a capital conservation buffer of 2.5% within March 31, 2008.

·         Capital adequacy ratio must be 11.5%. This ratio determines the capacity of the bank to meet the time liabilities and other risks such as credit and operational risk. It is calculated by the following formula:

CAR=Tier 1 capital +Tier 2 capital/RWA

·         A leverage ratio of 4.5% must be maintained.

The reason as to why the implementation of the Basel 3 norms was delayed was due to the fact that currently the Indian banks do not qualify for the capital requirements of these norms. The Government needs to implement at least Rs 90,000 crores  as equity to retain its stake in the Public Sector Banks. The Finance Ministry has recently decided to inject of Rs 12,000 crore in 12 public sector banks including State Bank of India, Central Bank of India and the United Bank of India in the form of investments. Out of the proposed Rs. 12000 crores SBI will get 0.56 %, CBI will get 0.99 % and UBI will get 0.73 %. Well, the impact of these norms will have a positive impact on the Indian banks as the equity requirement will go up to Rs 3.2 to 4 trillion in the next six years. According to the credit rating agency ICRA, the return on equity could drop by 1.4% which can be compensated by raising the lending yields.

Below is the image of the three pillars of Basel 3 norms