BASEL III Objectives: According to the BCBS, the Based III proposals have two main objectives.

These are : 1. To strengthen the regulations regarding capital base and liquidity of banks with the goal of promoting a more resilient banking sector. 2. To improve the banking sector’s ability to absorb shocks arising from financial and economic stress. These twin objectives are proposed to be achieved by bring in new norms and modifying some of the existing ones in the following three main areas :

Introduction of capital conservation buffer. Introduction of counter-cyclical capital buffer Introduction of leverage ratio It also intends to harmonise the definition of capital across the globe-all countries would follow the same definition for Tier I & II capital.a) Capital reforms Redefining both the quantity and quality of capital. b) Liquidity reforms Introducing long term and short term ratios .

The difference between the total requirement of 8 percent and the tier I requirement can be met by tier II capital. well above the current 50 percent rule. the Tier I capital requirement has been increased to 6 percent from 4 percent. • • • Capital will be required to be maintained as given below : . Common equity and retained earnings should be the predominant components instead of debt instruments.• c) Other elements relating to general improvement in the stability for the financial system ( more importantly systemic risk and interconnectedness) Tier I capital In the total capital requirement of 8 percent.

from Tier I .• Core Tier I capital • Under Tier I capital. such as innovative perpetual debts. what is left is core Tier I capital). • This increase will be phased in to apply from Jan. 2016 and will come into full effect from Jan.5 percent. the highest form of loss absorbing capital. ( After subtracting perpetual debts. • This is to be adhered to after making the necessary regulatory adjustments. will be raised from the current level of 2 percent to 4. 2019 . the minimum capital of common equity ( core capital) .

Capital conservation buffer • In addition to the increased core capital. Countercyclical buffer capital The national regulators can also specify a countercyclical buffer capital upto 2.5 percent + 2.5 percent is recommended as a capital conservation buffer. .5 percent). • This will take the minimum core equity requirement to 7 percent (4. an additional core capital of 2. This is also be met by common equity only.5 percent) from macro prudential objectives according to the individual national circumstances.5 percent ( 0 percent to 2.

other intangibles. This would. inter alia. • An important thing to note here is that as per existing norms certain items mentioned above can be deducted 50 percent from Tier I and 50 percent from Tier II now. whereas in the new regime all deductions will be from core capital. include investment in financial subsidiaries and associates . goodwill. . securitization exposures. deferred tax assets. • Certain hybrid Tier I components will be gradually phased out.• Deductions from Tier I capital • Some components of the existing Tier I capital will be disqualified under the new regime. etc.

the size of deposits from public exceeds the capital of the banks manifold. This means that banking business is a highly leveraged one. . In our banking system also.• Leverage ratios • Banks’ assets are funded predominantly by borrowed funds which includes deposits from public. The new norms seek to reduce the build up of excess leverage (ratio of Tier I capital: total assets) so as to reduce the risk of failure.

This ratio will be effective from January 2018. the supervisory monitoring commences from January.balance sheet assets. should not be more than 33 times of bank’s capital . . However. i.2013. The leverage ratio is to be implemented on a gross and unweighted basis without taking into account the risk associated with the assets of the bank.2011 and runs through January. a bank’s total assets including both on and off.• Basel III sets the leverage ratio 3 percent.e.

5% 6.0% 4.0% 6.0% 2.5% 9.0% Tier I + Tier II Conservation buffer 8.0% .0% NA 8.0% 8.5%13.0% NA Counter cyclical buffer NA Total Capital requirements 0/25% 10.BASEL II Tier I Capital Tier I Core Tier I BASEL III INDIA * 4.0% NA 9.0% 2.

Long term: Net stable funding ratio (NSFR) Liquidity coverage ratio (LCR) It requires a bank to maintain an adequate levels of unencumbered.• The liquidity standards are divided into 2 types: a. Short term : Liquidity coverage ratio (LCR) b. . banks have to maintain high quality liquid assets that are sufficient to cover the net cash outflows for a 30 day period. under an acute liquidity stress scenario. high quality assets that can be converted into cash to meet its liquidity needs over a 30-days time horizon. In other words.

the weightier factors vary from 0 percent to 100 percent as follows: Tier I capital 100 percent Core retail deposits 90 percent Unsecured wholesome funding 50 percent ECB funding 0 percent .• The weightage factors for assets vary from 0 percent to 5 percent for cash and Govt. In respect of liabilities. bonds to 85 percent for retail loans and 100 percent for other assets.

Proposed Basel III Existing RBI norm Liquidity Ratios Liquidity Coverage Ratio = Stock of high quality liquid assets / Net cash outflow over a 30 day time period > = 100% Net Stable Funding Ratio (NSFR) = Available amount of stable funding / Required amount of stable funding >=100% Number of days 1 2-7 10 % 8-14 15% 15-28 20% Maximum 5 Permissible gap (as % % of outflows) No such norm .

it may not be difficult proposition to comply with the leverage requirements also. • As regards the leverage ratio. This table shows that Indian banks are better positioned to meet the capital norms than their western counterparts.2010) vis-à-vis the Basel II norms .• Indian scenario • Table 4 depicts the position of capital of Indian banks ( as on June. Hence. Indian banks have comfortable Tier I capital of about 10 percent and their exposure to off balance sheet items like derivatives is also less in comparison to their western counterparts. . The leverage of banks in India is moderate.

• Coming to the liquidity ratios. Most of them still follow retail banking model only. But . a good portion of resources mobilized is parked in SLR bonds. . which would provide adequate liquidity in the times of need. as per the extant RBI stipulations. most of our banks do not rely much on short term or wholesale overnight funding. the RBI governor has indicated that our banks need to develop their capability to collect the required data accurately and more granularly. Further .

5% 14.0% Common equity 7.0% 9.0% 8.5% 10.5% 7.2010 Under Basel II Under Basel III Capital to risk weighted assets ratio (CRAR) 10.4% 11.7% Tier I capital 8.Parameter Basel III requirement Actual value for Indian banks as on June 30.4% .

the volume of additional capital that would be required by the banking sector over next 9 years ending March.• However going forward . ICRA. 2019 works out to be INR 600. Indian banks need to make efforts to further shore up their capital base to meet their ever increasing balance sheet size. has estimated that in a scenario of 20 percent annualized growth in risk weighted assets and internal capital generation. The credit rating agency.000 crore .