A

Presentation on
Basel Committee Norms as regards to
Financial Sector Reforms In India

Submitted by-
Roll no- 55-Umang Dwivedi
56-Varsa Lodha
57-Vengatesh v.g
58- Venkatesh Thatraju
59- Vidha Shukla
60- Yogesh Sirsat
 Introduction
 What?

 For what?

 How?
 Evolution of Basel norms
 In effect since 1988; very simple in
Basel I application
 Easy to achieve significant capital
reduction with little or no risk transfer.

 Much more complex and risk sensitive

 First Pillar – Minimum capital
 Second Pillar – Supervisory review
Basel II
 Third Pillar – Market discipline
 Treats banks very unequally depending on
sophistication of risk management systems
 Evolution of Basel norms
BASEL- I
 Concentrates on single risk component.

 Arbitrary risk categories and risk weights

BASEL- II
 Concentrates credit risk, market risk & operational
risk
 Risk weights are linked to external rating
 Terminologies
 Tier 1 capital: also called the core capital. it
includes paid up equity share capital and
disclosed reserves such as: statutory, capital and
general reserve. Eg: common stock, preferred
stock etc.
 Tier 2 capital: also called the supplementary
capital. Measure of a banks financial strength. It
consists of undisclosed reserves. Eg
:revaluation reserves, general provisions,
subordinated debt.
 TERMINOLOGIES

 CRAR: Capital to Risk weighted Assets Ratio.

Also known as capital adequacy ratio.
 Indicates banks risk taking ability.
 RBI uses this to track financial position of a
bank.
 CRAR = Tier 1 + Tier2
risk weighted assets.
 BCBS
 Created by central bank Governors of the
group of 10 nations.
 Founded in 1974.
 Meets regularly 4 times a year, at the BIS,
Basel, Switzerland.
 Formulates broad supervisory standards and
guidelines and recommends best practice in
banking supervision.
 BCBS
 PURPOSE & FUNCTION:
 Encourage convergence towards common
approaches and standards.
 “The BCBS is not a classical multilateral
organization. It has no founding treaty, and it
does not issue binding regulation. Rather, its
main function is to act as an informal forum to
find policy solutions and to promulgate
standards."
 BASEL II NORMS
 Basel II is the international capital adequacy
framework to banks that prescribe capital
requirements for credit risk, market risk and
operational risk.
 Basel II is the second of the Basel Accords
recommended on banking laws and regulations
issued by Basel Committee on Banking
Supervision.
 NEED FOR BASEL II NORMS IN
INDIAN BANKS
 The purpose behind applying Basel II norms to Indian
banks is to help them comply with international
standards. These international standards can help
protect the international financial system from
problems that may arise from the collapse of a major
bank.
 Basel II is stated to set up rigorous risk and capital
management requirements to ensure that banks have
capital reserves appropriate to their risk profile.
 The outcome is that the greater the risk to
which a bank is exposed, greater is the amount
of capital it will require to hold to protect its
solvency and overall stability.
 It will also force banks to enhance disclosures,
which will help create more transparency and
trust in the banking system itself.
 We believe transparency in financial reporting
will improve.
 PILLARS OF BASEL II
NORMS
 Pillar 1 – Minimum Capital Requirements
 Pillar 2 – Supervisory Review Process
 Pillar 3 – Market Discipline
 PILLAR 1
 Includes 3 risks now, operational risk + credit risk +
market risk.
 Keeping in view RBI's goal to have consistency and
harmony with international standards, it has been
decided that all commercial banks in India shall adopt
Standardized Approach (SA) for credit risk and Basic
Indicator Approach (BIA) for operational risk.
 Banks shall continue to apply the Standardized
Duration Approach (SDA) for computing capital
requirement for market risks.
DOMESTIC AND INTERNATIONAL
CREDIT RATING AGENCIES
 The RBI decided that banks may use the ratings of
the following domestic credit rating agencies for the
purposes of risk weighting their claims for capital
adequacy purposes: a) Credit Analysis and Research
Ltd. b) CRISIL Ltd. c) FITCH Ltd. and d) ICRA Ltd.
Banks may use the ratings of the following
international credit rating agencies for the purposes of
risk weighting their claims for capital adequacy
purposes a) Fitch; b) Moody's; and c) Standard &
Poor's.
 Banks must disclose the names of the credit rating
agencies that they use for the risk weighting of their
assets, the risk weights associated with the particular
rating grades as determined by RBI for each eligible
credit rating agency as well as the aggregated risk
weighted assets.
 For instance recently, Induslnd bank entered MOU
with CRISIL and Allahabad bank entered MOU with
CARE for rating facility as required under Basel II.
 PILLAR 2
 Its requirements give supervisors, i.e., the RBI,
the discretion to increase regulatory capital
requirements.
 The RBI can administer and enforce minimum
capital requirements from bank even higher
than the level specified in Basel II, based on
risk management skills of the bank.
 RBI will consider prescribing a higher level of
minimum capital ratio for each bank under the
Pillar 2 framework on the basis of their
respective risk profiles and their risk
management systems.
 Further, in terms of the Pillar 2 requirements
of the New Capital Adequacy Framework,
banks are expected to operate at a level well
above the minimum requirement.
 PILLAR 3
 It demands comprehensive disclosure
requirements from banks.
 For such comprehensive disclosure, IT
structure must be in place for supporting data
collection and generating MIS which is
compatible with Pillar 3 requirements.
 In short, compliance is a win-win situation for
all concerned. Banks will have to continuously
improve the quality of their internal loss data,
with Basel II requiring them to have at least
five years of data, including a downturn.
 Impact of Basel II in terms of borrowers

• Lower rates
•Favorable terms
Efficient borrower
•Large amount

Concept of
Basel norms

• Higher rates
Risky borrower •Less favorable terms
•Lower amount
 risk

Liquidity Operational Legal &

Market credit Human factor
Risk regulatory
 Banking risks

 Banking Activities are exposed to a host of

risks.

 Based on the origin & their nature, they are

classified into various categories
 ADVANTAGES OF BASEL II
BASEL I
 Focus on a single risk
measure, primarily on credit
risk.
 Does not cover operational
risk.
 One size fits all.
 Broad structure.
 Uses arbitrary risk
categories and risk weights.
BASEL II
 More emphasis on banks
own internal methodologies,
supervisory review and
market discipline.
 Flexibility, menu of
approaches, incentives for
better risk management.
 More risk sensitivity.
 Risk weight linked to
external ratings assigned by
IRB by bank.