EFFECTS OF BASEL III IMPLEMENTATIONS IN

INDIAN BANKING INDUSTRY

(A COMPARATIVE STUDY OF SELECTED INDIAN
PUBLIC AND PRIVATE SECTOR BANKS)

A
Thesis
Submitted to the

University of Rajasthan
For the Degree of

Doctor of Philosophy
(Faculty of Commerce)

Supervised by: Submitted by:

Dr. Mohar Singh Charu Watts
Associate Professor (Research Scholar)
Department of Accountancy
and Business Statistics
University of Rajasthan
Jaipur-302004

DEPARTMENT OF ACCOUNTANCY AND BUSINESS

STATISTICS UNIVERSITY OF RAJASTHAN,
JAIPUR 2020
 CONCLUSION

This chapter summarizes the major research outcomes from the present work. The
researcher has made the conclusions to compare the impact of the implementation of
the regulatory norms of Basel III on the regulatory capital of the Indian Public and
Private Sector Banks. The chapter also highlights the results of inferential
comparative analysis in Public and Private Indian Sector Banks to review the impact
of regulatory norms of Basel III on the regulatory capital of the Indian Public and
Private Sector Banks and to evaluate and compare the capital requirements of the
Indian Public and Private Sector Banks under Basel III. Furthermore, the conclusion
of the present study leads to the suggestions on the possible way forward to face the
challenges and implement the capital norms of Basel III smoothly in Indian Banks.
Finally, the limitations of the study are identified along with the scope for the future
research.

Key Finding

 Higher Capital Requirements for the Indian Public Sector Banks

Study revealed that capital requirements of Indian PSBs have raised under Basel
III capital norms. According to the government of India, Public sector banks
would Rs 2400 billion by 2019 to meet the new guidelines. Though they are
sufficiently capitalized in the current period but they would need more capital in
the future to fulfill the regulatory norms. Study reveals that during the current
years, the ability of PSBs to raise the capital internally have severely affected
primarily due to decline in the asset quality of the banks. The banks are struggling
to reorganize their NPAs. To fulfill the extra capital requirements, Government of
India has infused capital in the banks and will be continuing to do so according to
their performance. In return the banks would make the preferential allotment of
shares or equity in the favor of Indian Government.

 Preparedness of the Indian Public Sector Banks

Study revealed that Basel III capital guidelines have been started implementing in
India from April 1, 2013. But the magnitude of implementation specifically with
respect to the risk evaluation methods such as advanced approach is yet to be
adopted by the banks completely. It has been found that there is inadequacy with

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 reference to expertize, IT infrastructure, database, finances and staff training. IT
upgradation is required in most of the cases. Required training related to the Basel
norms would be provided to the staff.

 Capital Infusion in the Indian Public & Private Sector Banks

Study described that the Indian PSBs are required to infuse extra capital for the
next 5 years by including imminent capital infusion in the current capital of the
banks, in order to fulfill the Basel III capital guidelines. Banks will be taking the
support of the government, market for generating the capital. Government of India
will be infusing the capital in the banks on the basis of their performance. It has
been analyzed that extra capital would be needed to address the improved
counterparty default, particularly in OTC derivatives. Various estimates of extra
capital to be infused have been declared by the distinct global credit rating
agencies.

 Profitability of the Indian Public Sector Banks

It has been found that the profitability of the PSBs has declined significantly due
to higher provisioning, less interest margin, increased operating costs. Study
concluded that after the implementation of Basel III capital guidelines, the capital
of many Indian Public and Private Sector Banks is expected to decline due to the
phased deduction of certain elements of capital from the Tier 1 capital. Further the
risk weightings are supposed to increase. It has been analyzed that the impact of
both the stipulations will highly decrease the Return of Equity and subsequently
profitability of PSBs. The suggested move from short period to long period
liquidity will raise the cost of funds in the banking institutions. As a result, profit
margins of the bank will reduce.

 Asset quality of the Indian Public Sector Banks

It has been found that during the past quarters, asset quality of the Banks has
continuously declined. NPAs are the indicator of the asset quality in the banks.
The number of NPAs are increasing in the Indian Public & Private Sector banks,
which is putting lot of pressure on the profitability of the banks. Study reveals that
most of the NPAs of the public sector banks are in the infrastructure sector.
Whereas NPAs of these banks in the other sectors like personal, agriculture and
industry are almost the same. It has been found that the major reasons behind the

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 rising NPAs is the relaxed lending norms adopted by banks, especially to the big
corporate houses, foregoing analysis of their financials and their credit ratings.

 Adoption of Advanced Risk Management Approaches

It has been found that some of the PSBs are working in the direction of adopting
the advanced approaches of risk management. The larger banks require to move
towards the advanced approaches particularly, when they extend their presence in
the foreign countries. It has been analyzed that implementation of advanced
approaches will help the banks to utilize their capital efficiently and enhance their
profitability.

 Establishment of Risk Management Committees in the Indian Public Sector

Banks

Study reveals that for measuring and managing the different types of risks most of
the banks have established a Risk Management Committee which is also known as
Consolidated Risk Management Department. It has been found that the
fundamental responsibility of this committee is to develop risk parameters and
forming a consolidated risk management structure and control system.

 Use of Stress Testing Policy in the Indian Public & Private Sector Banks

It has been found that to improve the risk assessment process, banks are making
use of stress testing which give a better knowledge of the possible impact in the
future circumstances. It helps the banks to assess their financial position under the
situation of changing severity and to curb business risks. Study concluded that
banks are conducting stress tests periodically to assess the credit, market and
liquidity risks.

 Cost of Lending in Indian Public and Private Sector Banks

Study reveals that increased and stringent capital requirements along with the
improvements in the Tier 1 and Tier 2 capital would decline the Return of Equity
of the banks. Subsequently the Public & Private Sector Banks will provide the
loans at a higher interest rate. Study concluded that in order to counter balance
this, Public & private Sector banks might reduce the deposit interest rates and
could go for some different non-income streams.

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 Credit Growth in the Indian Public and Private Sector Banks

It has been identified that the advances of SBI has marginally increased but BOB
advances shows unsteady trend whereas the Indian Private Banks HDFC and
ICICI advances has increased over the years. Moreover, banks are facing a decline
in the core and manufacturing sector. Net interest margin of the banks have
declined to a certain level due to the reversals of interest on NPAs and increase in
the number of NPAs.

 Implications of Basel III norms for the Indian Public & Private Sector Banks

It has been found that for the appropriate risk management under Basel III precise,
suitable and timely data is required. Thus, to meet the capital norms of Basel III,
all the banks must make sure that their risk and finance teams can make a rapid
and simple access to consolidated, clean and correct data. Maintaining the
required data and also the system infrastructure requires the high costs. Various
components of Basel III will impact the growth and profitability of Indian Public
Sector Banks.

 Asset Portfolio of Indian Public and Private Sector Banks

It has been identified that the Banks have a large exposure in the corporate
segments and in the other sectors such as telecom and infrastructure in comparison
to retail loans. It has been analyzed that PSU banks are changing their product mix
to expand their asset portfolio. This will help them in declining the concentration
risk in a particular sector.

 Survival of Indian Public and Private Sector Banks under the Basel III
norms

Study revealed that the survival of the Indian PSBs under the Basel regime is
based on the strategies adopted by the different banks to enhance their
profitability, curbing operating costs, controlling the decline in the asset quality. It
has been found that banks have started focusing on the revenue streams with the
help of reducing the interest expenses and diversifying the resources.

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Summary of Inferential Testing or Capital Requirements Based
Hypothesis Testing

 The entire hypotheses have been formulated and tested for the inferential study.
The t-test has been applied to test the above stated hypotheses and to attain the
objectives of the study. The prime objective of the study was ―To review
the impact of Basel III Implementation on the capital requirements on the Indian
Public and Private Sector Banks‖. However, to prove this objective research
framed the hypotheses with respect to selected indicators first analysis has been
done on Public Banks and then on Private Sector Banks 1. There is or there is no
significant impact of Basel III Implementation on the Capital Adequacy Ratio of
the Indian Public Sector Banks 2. There is or there is no significant impact of
Basel III Implementation on the Gross NPA Ratio of the Indian Public Sector
Banks 3. There is or there is no significant impact of Basel III Implementation on
the Net NPA Ratio of the Indian Public Sector Banks. The one sample t-test has
been performed by the researcher to review the impact of Basel III
Implementation on the capital requirements with respect to the selected indicators.
Analysis drawn shows that there is a significant impact of Basel III
Implementation on the ―Capital Adequacy Ratio, Gross NPA Ratio and Net NPA
Ratio‖ of the Indian Public Sector Banks. Subsequently, there is a significant
impact of Basel III Implementation on the capital requirements of the Indian
Public Sector Banks.

 Second part of main objective analysis has been done on Indian Private Banks, to
prove this objective research framed the hypotheses with respect to selected
indicators. There is or there is no significant impact of Basel III Implementation
on the Capital Adequacy Ratio of the Indian Private Sector Banks 2. There is or
there is no significant impact of Basel III Implementation on the Gross NPA Ratio
of the Indian Private Sector Banks 3. There is or there is no significant impact of
Basel III Implementation on the Net NPA Ratio of the Indian Private Sector
Banks. The one sample t-test has been performed by the researcher to review the
impact of Basel III Implementation on the capital requirements with respect to the
selected indicators. Analysis drawn shows that there is a significant impact of
Basel III Implementation on the ―Capital Adequacy Ratio, Gross NPA Ratio and
Net NPA Ratio‖ of the Indian Private Sector Banks. Subsequently, there is a

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 significant impact of Basel III Implementation on the capital requirements of the
Indian Private Sector Banks.

 Second objective of the study was ―To evaluate and compare the capital adequacy
requirements of the Indian Public and Private Sector Banks under Basel III
norms‖. To attain this objective research framed the hypotheses To attain this
objective, researcher has done the analysis by 3 ways:

a) Comparing the Capital Adequacy ratio of Indian public and private sector
banks. For this analysis research framed the hypotheses 1. There is or there is
no significant impact of Basel III implementation on the Capital Adequacy
Ratio of the Indian Public and Private Sector Bank. The two sample t-test has
been performed on CAR of Indian Public and Private Sector Bank. The
analysis drawn shows that there is significant impact of Basel III
implementation on the Capital Adequacy Ratio of the Public and Private
Sector Indian Banks.

b) Comparing the Gross NPA ratio of Indian public and private sector banks. For
this analysis research framed the hypotheses 1. There is or there is no
significant impact of Basel III implementation on the Gross NPA Ratio of the
Indian Public and Private Sector Bank. The two sample t-test has been
performed on Gross NPA of Indian Public and Private Sector Bank. The
analysis drawn shows that there is significant impact of Basel III
implementation on the Gross NPA Ratio of the Public and Private Sector
Indian Banks.

c) Comparing the NET NPA ratio of Indian public and private sector banks. For
this analysis research framed the hypotheses 1. There is or there is no
significant impact of Basel III implementation on the NET NPA Ratio of the
Indian Public and Private Sector Bank. The two sample t-test has been
performed on NET NPA of Indian Public and Private Sector Bank. The
analysis drawn shows that there is significant impact of Basel III
implementation on the NET NPA Ratio of the Public and Private Sector Indian
Banks.

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Suggestions

In order to face the challenges and implement the capital regulations of Basel III, the
following measures:

 Portfolio maximization

For optimizing the portfolio, banks should examine current positions that are
capital intensive and non-core. Securitized instruments can be restructured to get a
favorable treatment such as rebooking some portfolios in books of banking rather
than trading books to prevent stressed VAR charges. Also augmenting hedging
strategies and selecting counterparties with healthy collateral and netting
agreements will assist in decreasing the counterparty risk.

 Financial Management

In order to enhance capital quality and reduce charges, banks must manage their
capital efficiently. Financial instruments can be reclassified from current value to
fair value and purchasing minority stakes can decrease some regulatory charges.
Liquidity management can be centralized and better access to the market.
Required funding can be used effectively by reacting spontaneously to changes
and opportunities for increasing costs, closely supervising and centralizing
funding plans.

 Technology Upgradation

As there are significant changes in the approach for calculating Risk Weighted
Assets for three types of risk and these revised standardized approaches will be
based on number of computational requirements so banks must modify their
systems and processes to calculate the capital requirements on the basis of the new
approach. They should adopt highly quick operating models for the speed and
agility to handle the volatility and macroeconomic events. Banks should make
their system framework strong, easily upgradable and extraordinary configurable.
Banks must introduce new products based on technology and price efficiency.

 Balance Sheet Management

Banks must change the composition of their assets and liabilities to improve their
bottom line. For credit growth they should look to retail and MSME sectors as
there is slowing down of the corporate investment in the upcoming projects, bad

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 performance of various manufacturing sectors and infrastructure sectors is already
facing lot of stress.

 Skill Development

Implementation of Basel III guidelines requires higher specialized skills in banks.

It requires a shift to advanced risk management systems. Awareness about the risk
management systems has to be spread across the banks. Top management of the
banks must get tuned to this requirement.

 Operational Efficiency

In order to remain steady and effective in implementing the core business of IT

and operations, banks must need a comprehensive and sustained organizational
focus from CXOs. The design of the systems should be scalable and flexible to
adjust with revised business projects in less time and at less cost. Intelligence
systems should be used to help in maximizing resources with minimum human
intervention will support enhanced operational risk management.

 Adoption of Scientific Risk Measurement Techniques

The new ratios and charges proposed to take stock of market and counterparty risk
like stressed value at risk (VaR), additional risk charge (IRC) and credit value
adjustment (CVA) can be enhanced by increasing the calculation models and
insuring the availability and timeliness of data.

Limitations

Though this research study has significantly contributed to distinct areas as

mentioned, but still it has certain limitations.

 Since this is a new area of study and with very meagre literature available on
analysis of Basel III norms in the Indian Banks, thus the conceptual framework
used has been framed based on the understanding of the researcher with the help
of few experts.

 The study focuses only on Indian Public and Private Sector Banks. It does not
consider the Private foreign banks.

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 The findings of the research study cannot be reasonably generalized to the other
bank groups besides the PSBs as data has been collected with main focus on
PSBs.

 This study has used the secondary data collected from websites of PSBs, RBI and
Basel Committee of Banking Supervision so the findings of the research depends
entirely on the accuracy of such data.

 For analyzing the impact of regulatory norms of Basel III on the regulatory capital
of the Indian PSBs, the period of study is four years only which is quite a shorter
span of time for concluding.

Scope for Further Research

The issues highlighted in the limitations could be considered for continuing research
on this area. The research study intended to explore the impact of Basel III norms on
the Indian Public and Private Sector Banks. The study make use of secondary data
wherein inferential and qualitative methods have been used to analyze the
implementation of Basel III norms with reference to Indian Public and Private Sector
Banks. There is a vast scope for further study as this area requires lot of study. It is
recommended that the same research could be extended to foreign banks. The same
research can be enriched by using advanced statistical tools and techniques.
Therefore, further research could be carried out in the following areas:

 Preparedness of the Private and Foreign Banks for the implementation of Basel III
norms.

 PSBs vs Private Banks: Different sets of challenges to be faced while

implementing Basel III norms.

 Analysis of impact of Basel III norms on the Private and Foreign Banks with
respect to lending behavior, portfolio composition and performance.

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