Basel norms compliance in India: Issues and concerns

Swami, Madhu (2016): Basel norms compliance in India: Issues and concerns. Published in: Management Guru: Journal of Management Research , Vol. 4, No. 1 (February 2016): pp. 87-92.

Abstract

The recurrence of financial crises in the world prompted Group of 10 countries (G – 10) to form the Basel Committee on Banking Supervision (BCBS) of Bank of International Standards. The BCBS proposed a Basel accord in 1988 which was adopted in April 1994 in India. Gradually, India implemented Basel – II and Basel – III norms in 2009 and 2013 respectively. The global financial crisis necessitated the need for strengthening banks all over the world by creating an extensive regulatory framework for computing Credit to Risk weighted Asset Ratio (CRAR) taking into consideration credit market and operational risks. Indian Banks have been following Basel – III norms since 2013 and full compliance will be achieved by 31st March, 2019. The stringent capital adequacy requirements have posed various challenges for the Indian Banks. Full compliance of these new norms will increase Indian banks’ capital needs by $20 billion to $30 billion. Various studies on implementation of Basel norms have revealed that these standards have been formulated taking into account Organisation for Economic Cooperation and Development countries than developing countries. The banks especially in developing countries may face a sharp decline in their return on capital (ROA) due to these new norms. India is finding itself at crossroads, balancing to achieve social objectives of financial inclusion and creating a resilient financial system to absorb financial shocks. The objective of this paper is to study the implementation of Basel standards from 1994 onwards in phases from Basel – I to Basel – III and the challenges faced in the process.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banking, Financial Services, Regulation, Basel Norms, Capital Adequacy
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

References

Allen, Bill, Ka Kei Chan, Alistair Milne, and Steve Thomas (2012). Basel III: Is the cure worse than the disease? International Review of Financial Analysis, Vol. 25, pp. 159-166. Bank of International Settlements (1988), “International Convergence of Capital Measurement and Capital Standards,” Bank of International Settlements Publications.

Bardoloi, S (2003). Basel II: New Wine in an Old Bottle, Data Monitoring Review, US, September 12.

Ferri, G., Liu, L. and Majnoni, G. (2000). How the Proposed Basel Guidelines on Rating-Agency Assessments Would Affect Developing Countries, Policy Research Working Paper 2369, World Bank.

Griffith-Jones, S. and Cailloux, J. (1998). Encouraging the Long-term Institutional Investors and Emerging Markets, Working Paper of Institute of Development Studies, University of Sussex.

Griffith-Jones, S., Sefoviano, M. and Spratt, S. (2002). Basel II and Developing Countries: Diversification and Portfolio Effects, Working Paper of Institute of Development Studies, University of Sussex.

Griffith-Jones, S. (2003). How to Prevent the New Basel Capital Accord Harming Developing Countries, Working Paper of Institute of Development Studies, University of Sussex.

Jayadev, M. (2013), “Basel III implementation: Issues and challenges for Indian banks,” IIMB Management Review, Vol. 25, pp. 115-130.

King, M. R. and Sinclair, T.J. (2003): ‘Private Actors and Public Policy: A Requiem for the New Basel Capital Accord’, International Political Science Review, 24(3): 354-62.

Kraussl, R. (2003). A Critique on the Proposed Use of External Sovereign Credit Ratings in Basel II, Centre for Financial Studies Working Paper No 2003/23.

Monfort, B and C Mulder (2000). The Impact of Using Sovereign Ratings by Credit Rating Agencies on the Capital Requirements for Banks: A Study of Emerging Market Economies, IMF Working Paper WP/00/69.

Prakash, Anupam (2008), “Evolution of the Basel Framework on Bank Capital Regulation,” RBI Occasional Papers, Vol. 29, No. 2.

Reddy, Y V (2006). ‘Challenges and Implications of Basel II for Asia, BIS Review, 37/2006.

Rodrik, D and A Velasco (1999). Short-term Capital Flows, NBER Working Paper 7364. 9

Sarma, M and Y Nikaido (forthcoming). ‘Capital Adequacy Regime in India: An Overview’, Economic and Political Weekly.

Shah, Mamta (2013), “Basel-3 and its Impact on Indian Banking Sector,” Journal of Indian Research, Vol. 1, No. 1, pp. 53-58.

Shenoy, A., Mohane, Y.B. and Singh, C. (2013). Basel Banking Norms – A Primer. IIMB Working Paper No. 470.