an in in ndia        12.25
     institutions, primary dealers and non-banking                  (ii) The amount of capital affects returns for
     financial companies (NBFCs), too. Meanwhile,                           the owners (equity holders) of the bank.
     the BIS came up with another set of CAR norms,
     popularly known as Basel-II. The RBI guidelines            bAsel AccorDs
     regarding the CAR norms in India have been as              The Basel Accords (i.e., Basel I, II and now III)
     given below:                                               are a set of agreements set by the Basel Committee
           (i) Basel-I norm of the CAR was to be                on Bank Supervision (BCBS), which provides
                achieved by the Indian banks by March           recommendations on banking regulations in
                1997.                                           regards to capital risk, market risk and operational
         (ii) The CAR norm was raised to 9 per                  risk. The purpose of the accords is to ensure that
                cent with effect from March 31,                 financial institutions have enough capital on
                2000 (Narasimham Committee-II had               account to meet obligations and absorb unexpected
                recommended to raise it to 10 per cent in
                                                                losses. They are of paramount importance to the
                                                                banking world and are presently implemented
        (iii) Foreign banks as well as Indian banks             by over 100 countries across the world. The BIS
                with foreign presence to follow Basel-
                                                                Accords were the outcome of a long-drawn-
                II norms, w.e.f. 31 March, 2008 while
                                                                out initiative to strive for greater international
                other scheduled commercial banks to
                                                                uniformity in prudential capital standards for
                follow it not later than 31 March, 2009.
                                                                banks’ credit risk. The objectives of the accords
                The Basel-II norm for the CAR is 12 per
                cent.42                                         could be summed up44 as:
                                                                      (i) to strengthen the international banking
     Why to mAintAin cAr?                                                   system;
     The basic question which comes to mind is as                   (ii) to promote convergence of national
     to why do the banks need to hold capital in the                        capital standards; and
     form of CAR norms? Two reasons43 have been                    (iii) to iron out competitive inequalities
     generally forwarded for the same:                                      among banks across countries of the
           (i) Bank capital helps to prevent bank                           world.
                failure, which arises in case the bank               The Basel Capital Adequacy Risk-related
                cannot satisfy its obligations to pay the       Ratio Agreement of 1988 (i.e., Basel I) was not
                depositors and other creditors. The low         a legal document. It was designed to apply to
                capital bank has a negative net worth after
                                                                internationally active banks of member countries
                the loss in its business. In other words,
                                                                of the Basel Committee on Banking Supervision
                it turns into insolvent capital, therefore,
                                                                (BCBS) of the BIS at Basel, Switzerland. But the
                acts as a cushion to lessen the chance of
                the bank turning insolvent.                     details of its implementation were left to national
                                                                discretion. This is why Basel I looked G10-
       41.    Ministry of Finance, Committee on Banking Sector  centric.45
              Reforms (M Narasimhan Committee-II), (New Delhi:
              Government of India, April 1998).                   44.    Ibid, p. 172.
       42.    Ministry of Finnace, Economic Survey 2006–07.       45.    G-10 comprises Belgium, Canada, France, Germany,
       43.    D. M. Nachane, Partha Ray and Saibal Ghosh, India          Italy, Japan, The Netherlands, Sweden, UK and USA;
              Development Report 2004–05 (New Delhi: Oxford              later the group incorporated Luxembourg, Switzerland
              University Press, 2005), p. 171.                           and recently Spain into its fold.