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 1st
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
