Reserve Bank of India has prepared a draft guidelines on Basel-III norms. The main objective of the draft guideline issued by RBI on implementation of Basel-III capital regulations is unexceptionable. It is to “improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillovers from the financial sector to the real economy”.
Implementation of Basel-III in India is proposed to begin on January 1, 2013. It is proposed to be fully implemented by March 31, 2017, compared to the January 1, 2019 deadline proposed by the Basel Committee. The Indian banking sector is already under stringent supervision as compared to banks in most international jurisdictions. The total capital adequacy ratio for the banks currently stands at 9 per cent, as compared to 8 per cent prescribed in Basel-II. Most of the private and foreign banks have core capital above 9 per cent. Hence, they are not vulnerable to challenges complying with the additional capital requirements under Basel III. However, several of the public sector banks would require additional capital under Basel-III norms.
Preliminary estimates suggest that the Indian banking sector requires Z1.1 billion of capital to comply with the Basel-III norms. But the moot question for the Indian banking sector is the concern of raising the additional capital. Currently, with the SLR at 24 per cent and CRR at 6 per cent, 30 per cent of each bank’s balance sheet is not available for lending. How these reserve requirements are factored in during the liquidity calculations will need to be assessed. Basel-III norms are bound to put pressure on the banks to raise capital in uncertain economic conditions.
In the backdrop of the ripple effects of global financial crisis, the latest guidelines have introduced new buffers like leverage ratios and counter-cyclical capital buffers. Banks have been directed to build capital buffers during normal times that they could draw down when losses are incurred during periods of stress.
The global crisis has thrown up new kinds of risks such as those posed by inter¬connectedness among large financial players and deterioration in counter-party credit risk. These did not figure in Basel-II; but, rightly, find place in Basel-III. The guidelines also try to improve the quality of capital by doing away with ingenious instruments that masqueraded as equity in the past. Consequently, tier-I capital will henceforth predominantly consist of common equity.
The net effect is that banks will have to find additional sources of capital. This is not going to be easy even though banks have been told to ensure compliance in a phased manner, commencing January 2013 and ending January 2015. The government’s unwillingness to reduce its stake in Public Sector Banks (PSBs) means the additional capital for PSBs will have to come from public coffers. Despite the fact that the govt finances are ,very constrained, opting out is not an option. The govt must be prepared, to dilute its stake down to 51 % in state-owned banks and churn other assets.