There is a greatest challenge due to extension of deadline for Basel III.
What are Basel norms?
Basel, a city in Switzerland, is the headquarters of Bureau of International Settlement (BIS), which fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.
Currently there are 27 member nations in the committee.
Basel guidelines refer to broad supervisory standards formulated by this group of central banks called the Basel Committee on Banking Supervision (BCBS).
The set of agreement by the BCBS, which mainly focuses on risks to banks and the financial system are called Basel accord.
The purpose of the accord is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.
India has accepted Basel accords for the banking system. In fact, on a few parameters the RBI has prescribed stringent norms as compared to the norms prescribed by BCBS.
What is Basel III norms?
In 2010, Basel III guidelines were released.
These guidelines were introduced in response to the financial crisis of 2008.
A need was felt to further strengthen the system as banks in the developed economies were under-capitalized, over-leveraged and had a greater reliance on short-term funding.
Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.
The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.
What are the issues with RBI Stand on Basel norms?
Reserve Bank of India (RBI) recently extended the deadline for compliance of capital requirements under Basel III norms to March 2019.
Extending more time under Basel III means lower capital burden on the banks in terms of provisioning requirements, including the NPAs.
This extension would impact the perception of Indian Banks and central bank in the eyes of the global players.
As per Basel III norms, most of the regulatory adjustments are made from common equity capital, like deduction from common equity component of Tier-1 capital.
Whenever, there is an unanticipated large increase in stressed assets, banks require more capital to boost their loss-absorbing capacity.
In the given situation, it become quite difficult to raise the capital through equity as it becomes costlier and unattractive in such a situation.
It is a natural tendency that whenever banks are faced with large stressed assets, they tend to reduce supply of credit.
Within stress assets the non-payment of loans brake the financial cycle of lending-repaying-borrowing.
What are the suggested measures?
With the latest development of amending Banking Regulation (amendment) ordinance, RBI may try to bring down stressed assets.
Without losing any time, RBI has taken prompt action on six PSU banks and has placed them under Prompt Corrective Action (PCA) rules.
Banks are reducing stressed assets by selling them to asset reconstruction companies (ARCs).
Hardships faced by micro, small and medium enterprises (MSMEs) in restructuring their stressed bank loans, regulator has issued a separate guidelines for revival of distressed assets in this segment.
The composition of liabilities of banks should not influence the price and quantity of credit.
Assocham has suggested to create Stressed Assets Funds (SAFs) with the active participation of cash-rich public sector firms.
