By Shubhra Agrawal
The Ministry of Finance has put forth a proposal to the Reserve Bank of India (RBI) asking for an extension of its deadline for implementing the Basel III banking norms. To deal with the increasing number of bad loans, the Basel III regulations require banks to maintain a higher capital. Deferring the deadline beyond March 2019 will help banks meet capital needs and increase credit flow to the productive sectors. It would also help with balance sheet clean-up.
What exactly are the Basel banking norms?
The Basel Committee on Banking Supervision (BCBS), comprised of banking supervisory authorities, was first established by a group of ten countries in 1974. Basel I was issued by the committee in 1988, followed by Basel II issued in 2004 to further amend international capital standards.
During the Pittsburgh Summit following the global financial crisis of 2008, the G20 leaders decided to further strengthen regulatory systems for banks and other financial firms. In response to the Pittsburgh Summit, the third instalment of the Basel Accords was developed. Basel III is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage. The accord was introduced to end the practice of excessive risk taking.
To summarise, it can be said that the aim of the Basel III reforms is to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source. This should reduce the risk of spillover from the financial sector to the real economy.
The current reform goals
The Basel III reforms have been implemented in a phased manner since April 1, 2013. As per the present schedule, all the reforms should be fully implemented by March 31, 2019. So far, 21 state-owned banks already satisfy the figures prescribed by the RBI. However, there are 6 PSU banks—including IDBI Bank, Bank of Maharashtra, and the Central Bank of India—which have been said to have “poor financial health”. These banks have been put on a prompt corrective action (PCA) framework, which includes course correction and higher capital.
Getting back on track
As per the norms, banks must be maintaining a minimum common equity ratio of 8 percent and total capital ratio of 11.5 percent by March 2019. However, toxic loans—primarily within the power, steel, road infrastructure, and textile sectors—rose to Rs. 6.06 lakh crore during April-December of 2016. The corrective course of action is designed keeping in mind the nature of the Indian markets, financial stability, and provisioning requirements.
To further solve the problem of capital, Finance Minister Arun Jaitley has announced capital infusion of Rs 10,000 crore for Public Sector Banks (PSBs) in line with the Indradhanush scheme. This is in addition to the Rs 70,000 crore that banks will get as capital support from the government. Of this, the government has already infused Rs 50,000 crore in the past two fiscal years. The remainder will be pumped in by the end of 2018.
A call for quick action
The deadline was already extended once in 2014 from March 2018 to March 2019. That being said, the Basel III regulations came with a set framework that should not be disturbed. Any further divergence from the Basel III norms by the RBI would impact the global perception of Indian banks. This hit to the Central Bank’s image would have multifold effects. During Narendra Modi’s tenure, various partnerships have been forged with other countries. However, if the RBI comes across as a partner which doesn’t enforce deadlines, it would cast a black shadow over these relationships of trust. The bank’s ability to be partner capable of handling the money flow from another country would be in question. Delaying the implementation of the Basel III guidelines would also discourage investors; it may appear that India is not sufficiently protecting itself from a potential economic crisis.
The Basel III guidelines must be implemented quickly so as to ensure prevention of an economic crisis and promote proper economic growth within India.
Featured Image Source: Wikimedia Commons
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