Proposed Basel III rules not to impact Indian banks much

Reserve Bank of India (RBI) does not see higher capital requirements under the proposed Basel III norms hitting Indian banks significantly.

“Indian banks are not likely to be significantly impacted by the proposed new capital rules. As on June 30, 2010, the aggregate capital to risk weighted assets ratio of the Indian banking system stood at 13.4%, of which Tier I capital constituted 9.3%. Although the Basel III norms are yet to be calibrated, it is unlikely that they will be higher than the above figures,” Duvvuri Subbarao, governor, RBI, said at a conference on Tuesday.

As such, we do not expect our banking system to be significantly stretched in meeting the proposed new capital rules both in terms of the overall capital requirement and the quality of capital, Subbarao said.

The Basel Committee on Banking Supervision, under the Basel III rules, proposes that banks hold more and better quality capital, besides having more liquid assets.  

The norms will also limit banks’ leverage and make it mandatory for them to build up capital buffers in good times that can be utilised in periods of stress.

“Indian banks already make most of the deductions from capital now being proposed under Basel III. Moreover, our banks do not have re-securitisation exposures and their trading books are small. However, there may be some negative impact arising from shifting some deductions from Tier I and Tier II capital to common equity,” said Subbarao.

“The major challenge for banks in India, in implementing liquidity standards, is to develop the capability to collect the relevant data accurately and granularly, and to formulate and predict the liquidity stress scenarios with reasonable accuracy and consistent with their own situation,” he said.

Tier-I capital (equity capital and disclosed reserves) can absorb losses without a bank being required to cease trading and Tier-II capital (undisclosed reserves, general loss reserves and subordinate term debts) can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.

Bankers seem to be comfortable with the proposed Basel III norms. Rana Kapoor, founder/managing director & CEO, Yes Bank, said the migration to Basel III works in the bank’s favour because external ratings are actually helping it reduce the core Tier I burden. “In fact, every time we get external ratings, in almost 75% of the cases, we are releasing capital. And secondly we do not have any exclusion capital — for instance we do not have any large investments sitting on our book,” he said at the sidelines of the conference.