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.