Modifications to Basel II framework under Basel III accord

 Keeping in view of Basel III norms, RBI has modified the following existing Basel II framework, which includes the modifications and enhancements announced by BCBS in July 2009. RBI made amendments to, Basel II guidelines in respect of definition of Capital, Risk Coverage, Capital Charge for Credit Risk, External Credit Assessments, Credit Risk Mitigation and Capital Charge for Market Risk. Supervisory Review and Evaluation Process under Pillar 2, is also being modified.

General Provision and Loss Reserve is a provision or loan-loss reserves held against future, presently unidentified losses. The General Provision and Loss Reserve is freely available to meet losses which later materializes, would qualify for inclusion within Tier 2 capital. In the same way General Provisions on Standard Assets, Floating Provisions, Provisions held for Country Exposures, Investment Reserve Account, excess provisions which arise on account of sale of NPAs and countercyclical provisioning buffer will qualify for inclusion in Tier 2 capital. However, these items together will be admitted as Tier 2 capital up to a maximum of 1.25 % of the total credit risk-weighted assets under the standardized approach. Under Internal Ratings Based (IRB) approach, where the total expected loss amount is less than total eligible provisions, banks may recognize the difference as Tier 2 capital up to a maximum of 0.6 % of credit-risk weighted assets calculated under the IRB approach. Provisions qualified to identify corrosion of particular assets or loan liabilities, whether individual or grouped should be excluded. Banks will continue to have the option to net off provisions from Gross NPAs to arrive at Net NPA or reckoning it as part of their Tier 2 capital.

Salient features of Basel I accord & Basel II accord

The aim of Basel committee is to strengthen the soundness and stability of banking system globally. In July 1988 the Basel committee on banking supervision  came up with global capital adequacy rule and released the formulated guidelines on capital measures and capital standards The first guidelines issued by Basel Committee are known as 1st accord of Basel or BaseI I accord. .  RBI has accepted the Basel I accord and implemented the same with effect from 1992. In terms of Basel Accord 1, the capitals of Banks are divided into two categories. The first part is core equity capital of the bank, which is classified as Tier I capital. The second part of the capital is supplementary bank capital that includes items such as revaluation reserve. The supplementary capital of bank is called Tier II capital.

The second round of formulated guidelines on capital measures and capital standards by Basel Committee came into existence in June 2006 (The detailed guideline issued during 2007). This accord is known as Basel II accord.

Three Pillars of Basel II accord: 

First Pillar of Basel II deals with maintenance of regulatory Capital calculated on three major risks the bankers are facing viz. Credit risk, Operation risk and Market risk.

Second Pillar of Basel II deals with the regulatory answer to the first pillar, which enables the banks to review their risk management systems.

Third Pillar aspires to balance the minimum capital requirement and decision-making. The market participants are enabled to gauge the capital adequacy of a Bank with the help of set of mandatory disclosures prescribed in third pillar.

Revised deadline for implementation of Basel III

The Reserve Bank of India (RBI) RBI vides its notification no. RBI/2013-14/538
DBOD.No.BP.BC.102/21.06.201/2013-14 dated March 27, 2014, has deferred the deadline for full implementation of Basel III norms to March 2019 instead of as on March 31, 2018.  The revised deadline for full implementation of Basel III in India is closer to the internationally agreed date of January 1, 2019. Of late, industry-wide concerns have been expressed about the potential stresses on the asset quality and consequential impact on the performance / profitability of the banks. The Commercial banks in India were scrambling to raise thousands of crores of Rupees in the form of hybrid capital in FY15 to be complaint of capital requirement norms, prescribed under Basel III accord. This necessitated RBI to provide some lead time for banks to raise capital within the internationally agreed timeline for full implementation of the Basel III Capital Regulations. The extension of deadline by one year has delivered major respite to banks by removing immediate pressure on them to raise thousands of crores rupees of hybrid capital at a short period. The rescheduled transitional arrangements along with other modifications are as under.

Transitional Arrangements-Scheduled Commercial (excluding LABs and RRBs) Banks%The Risk Weighted Asset (%RWA)
Minimum capital ratios April 1, 2013 Mar 31,2014 Mar 31,2015 Mar 31,2016 Mar 31,2017 Mar 31,2018 Mar 31,2019
Minimum Common Equity Tier 1 (CET1) 4.5 5 5.5 5.5 5.5 5.5 5.5
Capital conservation buffer (CCB) 0.625 1.25 1.875 2.5
Capital conservation buffer (CCB) 4.5 5 5 6.125 6.75 7.375 8
Minimum Tier 1 capital 6 6.5 7 7 7 7 7
Minimum Total Capital 9 9 9 9 9 9 9
Minimum Total Capital+ CCB* 9 9 9 9.625 10.25 10.875 11.5
Phase-in of all deductions from CET1(in %)# 20 40 60 80 100 100 100

*The difference between the minimum total capital requirement of 9% and Tier 1 requirement can be met with Tier 2 and higher forms of capital.

# the same transition approach will apply to deductions from additional Tier 1 and Tier 2 capital.

related reference:  Credit Rating Agencies in India

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