10-Jul-2019: Assessment of compliance with Basel Norms.

An assessment of compliance with Basel Norms was recently conducted by the Regulatory Consistency Assessment Programme (RCAP). RCAP is part of the Basel committee.

The assessment focused on the completeness and consistency of the domestic regulations in force on 7 June 2019, as applied to commercial banks in India, with the Basel large exposures framework.

Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks, has 45 members, comprising central banks and bank supervisors from 28 jurisdictions.

The Reserve Bank of India’s (RBI) norms on large exposures for banks are not only compliant with the Basel requirements, they are stricter in some areas as well. This is highest possible grade. In some other respects, the Indian regulations are stricter than the Basel large exposures framework. For example, banks’ exposures to global systemically important banks are subject to stricter limits, in line with the letter and spirit of the Basel Guidelines, and the scope of application of the Indian standards is wider than just the internationally active banks covered by the Basel framework.

Basel guidelines refer to broad supervisory standards formulated by 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. Basel is a city in Switzerland which is also the headquarters of Bureau of International Settlement (BIS).

The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

BASEL-I: Introduced in 1988. Focused almost entirely on credit risk, it defined capital and structure of risk weights for banks. The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA). India adopted Basel 1 guidelines in 1999.

BASEL-II: Published in 2004. The guidelines were based on three parameters:

1. Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
2. Banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that is credit and increased disclosure requirements. The three types of risk are- operational risk, market risk, capital risk.
3. Banks need to mandatory disclose their risk exposure to the central bank.

Basel III: In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008. 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.

Presently Indian banking system follows Basel II norms.