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Current affairs is an important component of several competitive exams such as the UPSC Civil Services Examination, SSC CGL, Bank PO & PSU entrance tests, etc. Therefore, understanding the terms/concepts/events that make news is critical for aspirants. We at PaGaLGuY bring you series of articles explaining some of these important concepts/events. Read on to know about Basel III Capital Regulations.

For Indian banks that are already burdened by bad loans, RBI’s announcement extending the timeline for full implementation of Basel III capital regulations is a relief. As declared in March 2014, the deadline has been extended to March 31 2019. This extension means that banks will have adequate time to meet capital requirements under Basel III norms.

What are Basel norms?

The Basel Committee on Banking Supervision (BCBS) was set up by central bank governors of G-10 countries and has 27 member countries, including India. This committee comes up with Basel norms. These are followed by banks in India to comply with international best practices. This enables banks to be judged in com-
parison to other banks as to their work practices and strength. So far BASEL-I, II, III are in

operation.

What are Basel III Capital Regulations?

An effort of BCBS, Basel III or Basel III capital regulations
are a set of measures to improve regulation, supervision and risk management within
the banking sector. According to the Basel III regulations, banks are required
to maintain proper leverage ratios and meet certain capital requirements so as
to be capable of dealing with crisis situations.

Aims of Basel III regulations:

·
Improve banks’ ability to deal with shocks
arising from financial and overall economic stress, whatever the source.

·
Improve risk management and governance

·
Strengthen banks’ transparency and disclosures.

·
Improve liquidity of assets

RBI’s decision

India’s central bank decided to extend the deadline for full
implementation of Basel III capital regulations up to March 31, 2019, instead
of March 31, 2018. It will align its implementation in India closer to the
internationally agreed date of January 1, 2019.

Reasons for the
extension

Weak economic growth, high interest costs and stalled
projects that have reduced cash flows, have made it difficult for corporate
borrowers to repay loans, causing a rise in bad loans for banks.

There have been concerns about potential stresses on the
asset quality and resultant impact on the performance of the banks. This necessitates
some lead time for banks to raise capital before the deadline.

What is required of
banks?

Under Basel III norms:

·
Banks need to have a core capital ratio of 8%
and a total capital adequacy ratio of 11.5% against the current 9% now.
(Capital adequacy is a measure of a bank’s financial strength expressed as a
ratio of capital to risk-weighted assets.)

·
Banks should improve and strengthen their
capital planning processes in a way that will enable banks to appropriately
assess the level of capital needed to support their business strategies over
the medium-term.

·
Boards of banks should engage in the capital
planning process and oversee its implementation as capital requirements may be
substantially lower during the initial years as compared to later years of full
implementation of Basel III norms.

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