Wednesday, May 02, 2012

How to Follow Basle III Recommendation

RBI lays down road map to make banks safer, avoid crisis repeat under Basel Committee recommendations

MUMBAI: The Reserve Bank of India has laid out a six-year road map to make Indian banks safer and avoid recurrence of the 2008 crisis, but it will need an estimated Rs 1.5 lakh crore in capital at a time it is scarce. 

The central bank has raised the equity component in overall capital and restricted dividend or bonus payouts when capital ratios fall close to mandated levels. It has also addressed banks' leverage ratios, which will shrink off-balance sheet businesses and investments in subsidiaries, to reduce risk. 

The banking regulator also aims to reduce systemic risk by eliminating some dodgy entries in the books of accounts and explaining the cross-holdings of capital instruments among banks, which exposed many of them during the credit crisis. 

These guidelines prepared by the Basel Committee on Banking Supervision are implemented "with the objective to improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy", the RBIsaid. 

Prudential norms under the so-called Basel-III have become a bone of contention between bankers and regulators as the former say it would drag down return ratios and may not serve the purpose. But the regulators believe banks are biased and these capital buffers are essential to prevent another 2008-like crisis, which led to governments bailing out banks with taxpayers' money. 

Minimum capital levels will rise to as high as 11.5%, from 9%, by 2019. 


Tier-I capital, the significant portion of total capital, will rise to 6% by 2015, of which 4.5% would be equity. 

Total capital has to be 8%. A 2.5% of capital conservation buffer, mainly equity, will be added to it, taking the total common equity to 7%. These ratios will be fully implemented by March 31, 2018. 

Whenever banks' capital levels fall close to the prescribed levels, shareholders may not get dividend till such time capital levels rise. 

"It will not be appropriate for banks which depleted their capital buffers to use future predictions of recovery as justification for maintaining generous distributions to shareholders," said the RBI. 

"It is also not acceptable for banks which have depleted their capital buffers to try and use the distribution of capital as a way to signal their financial strength. Not only is this irresponsible from the perspective of an individual bank, putting shareholders' interests above depositors, it may also encourage other banks to follow suit." 

Credit Suisse estimates migration to Basel-III guidelines may push up capital needs by another $20-30 billion. A bank's investment in the capital issued by banking, financial and insurance entities should not exceed 10% of its capital funds. These financial entities would include asset management companies of mutual funds, venture capital funds, private equity funds, finance companies and primary dealers. Banks will also have to report their leverage ratios at quarterly intervals to the RBI. 

"There is going to be pressure on banks' earnings, not only in India but across the world," Anand Sinha, deputy governor at the RBI, said recently. "That's why, Basel-III implementation has been made longer, so that there will be least disruption." 

These guidelines would become effective from January 1, 2013, in a phased manner. The Basel-III capital ratios will be fully implemented as on March 31, 2018. 

The Reserve Bank said: "Capital requirements for the implementation of Basel-III guidelines may be lower during the initial periods and higher during the later years. While undertaking the capital planning exercise, banks should keep this in view." 

The central bank is currently working on operational aspects of implementation of the 'Countercyclical Capital Buffer'. Besides, certain other proposals such as 'Definition of Capital Disclosure Requirements', 'Capitalisation of Bank Exposures to Central Counterparties' etc are also being looked into. Therefore, the final proposals of the Basel committee on these aspects will be considered for implementation later.

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