an in in ndia 12.27
such as a balance sheet, but are nonetheless real in capital due to sovereign debt exposures and
assets, which are accepted as such by most banking stiffer regulation. They will have to reckon with
institutions, but cannot be used at will by the a permanent decline in their returns on equity
bank. That is why they are part of its secondary thanks to enhanced capital requirements under
capital (Tier 2). the new norms. In contrast, Indian banks—and
those in other emerging markets such as China and
bAsel iii Provisions48 Brazil—are well-placed to maintain their returns
The new provisions have defined the capital of the on capital consequent to Basel III. Financial
banks in different way. They consider common experts have opined that Basel III looks changing
equity and retained earnings as the predominant the economic landscape in which banking power
component of capital (as the past), but they shifts towards the emerging markets.
restrict inclusion of items such as deferred tax
assets, mortgage-servicing rights and investments Basel III coMPlIance oF the PsBs &
in financial institutions to no more than 15 per rrBs
cent of the common equity component. These
The capital to risk weighted assets ratio (CRAR)
rules aim to improve the quantity and quality of
of the scheduled commercial banks of India
the capital.
was 13.02 per cent by March 2014 (Basel-III)
While the key capital ratio has been raised to falling to 12.75 per cent by September 2014. The
7 per cent of risky assets, according to the new regulatory requirement for CRAR is 9 per cent for
norms, Tier-I capital that includes common 2015. The decline in capital positions at aggregate
equity and perpetual preferred stock will be raised level, however, was on account of deterioration in
from 2 to 4.5 per cent starting in phases from capital positions of PSBs. While the CRAR of the
January 2013 to be completed by January 2015. scheduled commercial banks (SCB) at 12.75 per
In addition, banks will have to set aside another cent as of September 2014 was satisfactory, going
2.5 per cent as a contingency for future stress. forward the banking sector, particularly PSBs
Banks that fail to meet the buffer would be unable will require substantial capital to meet regulatory
to pay dividends, though they will not be forced requirements with respect to additional capital
to raise cash. buffers.
The new norms are based on renewed focus In order to make the PSBs and RRBs compliant
of central bankers on ‘macro-prudential stability’. to the Basel III norms,49 the government has been
The global financial crisis following the crisis in the following a recapitalisation programme for them
US sub-prime market has prompted this change in since 2011–12. A High Level Committee on the
approach. The previous set of guidelines, popularly issue was also set up by the government which
known as Basel II focused on ‘macro-prudential has suggested the idea of ‘non-operating holding
regulation’. In other words, global regulators are company’ (HoldCo) under a special Act of
now focusing on financial stability of the system Parliament (action is yet to come regarding this).
as a whole, rather than micro regulation of any
individual bank. 49. Basel III norms prescribe a minimum regulatory capital
of 10.5 per cent for banks by 1 January, 2019. This
Banks in the West, which are market leaders includes a minimum of 6 per cent Tier I capital, plus
for the most part, face low growth, an erosion a minimum of 2 per cent Tier II capital, and a 2.5 per
cent capital conservation buffer. For this buffer, banks
48. Reserve Bank of India, MoF, GoI, New Delhi, May 5, are expected to set aside profits made during good times
2012. so that it can be drawn upon during periods of stress.