BackGround for Basel III :
In a separate article I have already discussed the details of the Basel III accord as released by Basel Committee on Banking Supervision. In this article we will be dealing with the broad guidelines as issued by RBI for implementation of Basel 3 Accord. We are aware that originally Basel Committee was formed in 1974 by a group of central bank governors from 10 countries. Earlier guidelines were known as Basel I and Basel II accords. Later on the committee was expanded to include members from nearly 30 countries , including India. Inspite of implementation of Basel I and II guidelines, the financial world saw the worst crisis in early 2008 and whole financial markets tumbled. One of the major debacles was the fall of Lehman Brothers. One of the interesting comments on the Balance Sheet of Lehman Brothers read : “Whatever was on the left-hand side (liabilities) was not right and whatever was on the right-hand side (assets) was not left.” Thus, it became necessary to re-visit Basel II and plug the loopholes and make Basel norms more stringent and wider in scope.
BCBS, through Basel III, put forward norms aimed at strengthening both sides of balance sheets of banks viz. (a) enhancing the quantum of common equity; (b) improving the quality of capital base (c) creation of capital buffers to absorb shocks; (d) improving liquidity of assets (e) optimising the leverage through Leverage Ratio (f) creating more space for banking supervision by regulators under Pillar II and (g) bringing further transparency and market discipline under Pillar III. Thus, Basel III norms were released by BCBS and individual central banks were asked to implement these in a phased manner. RBI (India's central bank) too issued draft guidelines in the initial stage and then came up with the final guidelines.
Over View f the RBI Guidelines for Implementation of Basel III guidelines :
The final guidelines have been issued by Reserve Bank of India for implementation of Basel 3 guidelines on 2nd May, 2012. Full detailed guidelines can be downloaded from RBI website, by clicking on the following link : Implementation of Base III Guidelines. Major features of these guidelines are :
(a) These guidelines would become effective from January 1, 2013 in a phased manner. This means that as at the close of business on January 1, 2013, banks must be able to declare or disclose capital ratios computed under the amended guidelinesThe Basel III capital ratios will be fully implemented as on March 31, 2018
(b) The capital requirements for the implementation of Basel III guidelines may be lower during the initial periods and higher during the later years. Banks needs to keep this in view while Capital Planning;
(c) Guidelines on operational aspects of implementation of the Countercyclical Capital Buffer. Guidance to banks on this will be issued in due course as RBI is still working on these. Moreover, some other proposals viz. ‘Definition of Capital Disclosure Requirements’, ‘Capitalisation of Bank Exposures to Central Counterparties’ etc., are also engaging the attention of the Basel Committee at present. Therefore, the final proposals of the Basel Committee on these aspects will be considered for implementation, to the extent applicable, in future.
(d) For the financial year ending March 31, 2013, banks will have to disclose the capital ratios computed under the existing guidelines (Basel II) on capital adequacy as well as those computed under the Basel III capital adequacy framework.
(e) The guidelines require banks to maintain a Minimum Total Capital (MTC) of 9% against 8% (international) prescribed by the Basel Committee of Total Risk Weighted assets. This has been decided by Indian regulator as a matter of prudence. Thus, it requirement in this regard remained at the same level. However,...