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Project Report On Basel III norms And Impact on Indian banking system

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Table of Contents
Project Report on Basel III norms and impact on Indian Banking Services ......................................................................... 3 Impact on Indian banking system ..................................................................................................................................... 3 Introduction ................................................................................................................................................................. 3 Requisites for implementation of Basel III norms.............................................................................................................. 4 Basel II and Reason for its Failure ..................................................................................................................................... 4 Reason for failure ......................................................................................................................................................... 4 Difference in Basel II and Basel III ..................................................................................................................................... 5 Impact of Basel III on Indian banks ................................................................................................................................... 6 Capital Adequacy and Tier1 Capital for Indian banks..................................................................................................... 6 Impact on Introduction of Capital buffers on Indian banks............................................................................................ 6 Impact of Liquidity standards on Indian banks .............................................................................................................. 6 Limitation of Basel III on Indian banks........................................................................................................................... 7 CONCLUSION ................................................................................................................................................................... 7

Project Report On Basel III norms And Impact on Indian banking system

Introduction
Basel III norms are the rules given by bank of international settlement committee on banking supervision (BCBS) as these are the norms introduced for banking community as a whole. The new banking norms or Basel III norms are intended to make the global banking industry safer and protect economies from financial meltdowns. Basel III norms describes about how to assess risks and how much capital banks need to kept aside to keep with the risk profile. Basel III norms wants bank to hold more and better quality capital, more liquid assets, to limit and mandate leverage and to build capital buffers. Capital includes common equity and retained earnings and to restrict inclusion of deferred tax assets, mortgage servicing rights and investment in financial institutions to not more than 15% equity components.

Requisites for implementation of Basel III norms

For the implementation of Basel III norms banks need to maintain capital adequacy ratio minimum at 8% and the minimum core Tier 1 capital is raised from 2-4.5% while the Tier 1 component is raised from 4% to 6%. Since Tier 1 include paid up capital, reserve and surplus preference capital subtracting deferred tax, investments and intangibles. As the deadline is year 2015 for these ratios and also bank need to maintain 2.5% as capital conservation buffer so that to absorb losses during the financial and economic stresses. The Basel committee has also come out with two standards to address the acute liquidity problems seen by banks at the start of the global financial crisis. First, it expects banks to comply with a liquidity coverage ratio from the start of 2015, requiring them to hold sufficient high-quality assets to withstand a 30-day period of acute stress. Meanwhile, a net stable funding ratio will come into force from January 2018, aimed at removing long-term structural liquidity mismatches on bank balance sheets.

Basel II and Reason for its Failure

Basel II, which was introduced in June 2004 for banking regulators that they can use while creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks that banks face., Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Basel II includes of 3 pillars which talks about capital requirements of credit risk, market risk and operation risk, internal assessment process and encourage safe and sound practices.

Reason for failure

The major reason for failure of Basel II was it focused on the regulations to guard the banks from the risks as a result it focused safe and sound practices which restricted banks from making loans and investments under the fear of making losses which lead neither servicing the community nor the shareholders and employees and also the regulations employed by Basel II was leading to increase cost and inadequacy in banking system to deploy the safety practices. This was the reason BCBS came up with introduction of Basel III norms which were well defined with clarity of ratios in capital adequacy and Tier1 capital and also the capital buffers to prevent the banks from stressful conditions and to make it more transparent, clear for the banking sector.

Difference in Basel II and Basel III

Impact of Basel III on Indian banks

Capital Adequacy and Tier1 Capital for Indian banks

Basel III has come up with norms which talks about capital adequacy ratio (CAR) whose minimum requirement kept by BCBS is 8% , capital adequacy is ratio of capital fund to risk weighted assets expressed in percentage terms and currently Indian banks are operating CAR to 13.2%. By far India is operating at more CAR than the prescribed Basel III norms. Since Basel III norms also ask to keep tier I capital at 6% and Indian banks are usually operating their Tier 1 capital at 9.3% as Tier 1 capital ratio is the ratio of banks core equity capital to total risk weighted assets which includes (Equity and Disclosed Reserves). According to RBI it could have negative impact on banks making deductions from Tier 1 capital as banks do not have re-securitization exposures and even trading books are small i.e. is banks do not have much exposure to securitize its asset in the market again and also the trading book i.e. is portfolio of financial instrument with bank is not huge so reducing tier 1 capital for Indian banks could be a difficult and this would have negative impact on Indian banks.

Impact on Introduction of Capital buffers on Indian banks

Basel III norms explains about building countercyclical and additional capital buffers means the bank needs to keep additional 2.5% as contingency for preventing itself from future losses, this means Indian banks need to incur additional costs to meet the international standards. Since capital buffers are required to be maintained to cover the risk but taking Indias point of view banks are already maintaining more capital adequacy than required and moreover the Indian banks do not go resecuritization or subprime mortgages which leads to global imbalances or high risk. So introducing capital buffer will affect Indian banks to restrict their leverage on better prospects which will affect earnings of shareholders not good for Indian banks. Maintaining so much high capital for covering the risks would have a negative effect on ROE i.e. return on equity as it is expected to fall by 10% if banks fail to manage its business efficiently. India is considering for the creation of Capital buffer somewhere between periods of January 2016 to 2019.

Impact of Liquidity standards on Indian banks

Basel III norms have introduced liquidity standards and considering its impact on Indian banks it does not seem to have any serious issues. Most of our banks follow a retail business model and also have a substantial amount of liquid assets, which should enable them to meet the new standards with comfort. However, there may be some challenge due to the fact that our banks have a limited capacity to collect the relevant data accurately and granularly, and to formulate and predict the liquidity stress scenarios. But the phase in period for the compliance with these ratios is fairly long up to 2019 and this challenge could be easily overcome by then.

Additionally, there is some ambiguity about the treatment of Statutory Liquidity Ratio (SLR) under the new banking regulations. The RBI has been negotiating for taking at least the part of the SLR in the liquidity ratios as these are government bonds against which the RBI provides liquidity to banks.

Limitation of Basel III on Indian banks

Indian banking industry has a side effect with the introduction of Basel III norms since norms were introduced looking into scenario of world moving into recession but whereas Indian banking industry has been emerged as undisturbed from the global financial crisis of 2007-09 and remained sound and resilient. The primary factor behind our banks safety and fine working during these recession times was the strength they had acquired from various structural reforms since 1991. The strength in the balance sheets of Indian banks is partly attributed to their satisfactory capital adequacy and partly to their greater exposure to conventional domestic assets rather than to exotic structured products like subprime mortgages. Moreover, the RBI had foreseen the dangerous outcomes of the mounting global imbalances and, since 2006 it had started controlling the banking industrys exposure to sensitive sectors like commercial real estate and capital market. So these norms somehow are been made looking for the safety and transparency but India has already prepare itself for the same.

CONCLUSION
Basel III norms have come up with regulations taking into consideration the capital adequacy, liquidity standards; capital buffers norms which are in context to make industry safer from economic crunch. As far as Indian banks are concerned taking into long term perspective india needs to infuse more capital looking into the growth and the regulation requirements as looking at PSU banks and their% of accounts being NPA i.e nonperforming assets it shows signs of requirement of more capital to play safer and also with RBI considering to issue new licenses for opening of new banks require considerable amount of huge capital. There are certain changes banks need to do in regard to capital buffer and Tier1 capital within a stipulated period of time other than that Indian banks are very much operating well and should be able to meet the norms without much problem since Indian banks capital adequacy ratio is higher than what is prescribed by BCBS. Also Indian banks have been able to successfully prevent themselves from the financial crisis and economic meltdowns therefore Basel III norms should not affect Indian banks to a large extent.

Thank you

Submitted to-: Mr. Inderpreet

Miss. - Amarpreet

Submitted by -:
Aparna kumari Arjun singh Ashish bajaj Ashish shukla Avinash SR Charles deora Deeksha ray Dheeraj kumar SEC- E