BASEL 1

WHAT IS BASEL 1?
Basel I is a set of international banking regulations put forth by the Basel Committee on Bank
Supervision (BCBS) that sets out the minimum capital requirements of financial institutions
with the goal of minimizing credit risk. Basel I was the BCBS' first accord. It was issued in
1988 and focused mainly on credit risk by creating a bank asset classification system.Banks
that operate internationally are required to maintain a minimum amount (8%) of capital based
on a percent of risk-weighted assets. Basel I is the first of three sets of regulations known
individually as Basel I, II, and III, and together as the Basel Accords.

Understanding Basel I
The BCBS was founded in 1974 as an international forum where members could cooperate
on banking supervision matters. The BCBS aims to enhance "financial stability by improving
supervisory know-how and the quality of banking supervision worldwide." This is done
through regulations known as accords.

The BCBS regulations do not have legal force. Members are responsible for their
implementation in their home countries. Basel I originally called for the minimum capital
ratio of capital to risk-weighted assets of 8% to be implemented by the end of 1992. In
September 1993, the BCBS issued a statement confirming that G10 countries'banks with
material international banking business were meeting the minimum requirements set out in
Basel I.
According to the BCBS, the minimum capital ratio framework was introduced in member
countries and in virtually all other countries with active international banks.

The twin objectives of Basel 1 are:

1. To ensure an adequate level of capital in the international banking system.

2. To create a more level playing field in the competitive environment.

Requirements for Basel I and Classifications

The Basel I classification system groups a bank's assets into five risk categories, classified as
percentages: 0%, 10%, 20%, 50%, and 100%. A bank's assets are placed into a category
based on the nature of the debtor.

The 0% risk category is comprised of cash, central bank and government debt, and any
Organization for Economic Cooperation and Development (OECD) government debt. Public
sector debt can be placed in the 0%, 10%, 20% or 50% category, depending on the debtor.

Development bank debt, OECD bank debt, OECD securities firm debt, non-OECD bank debt
(under one year of maturity), non-OECD public sector debt and cash in collection comprises
the 20% category. The 50% category is residential mortgages, and the 100% category is
represented by private sector debt, non-OECD bank debt (maturity over a year), real estate,
plant and equipment, and capital instruments issued at other banks.

The bank must maintain capital (Tier 1 and Tier 2) equal to at least 8% of its risk-weighted
assets. For example, if a bank has risk-weighted assets of $100 million, it is required to
maintain capital of at least $8 million.

Benefits of Basel I
Although some will argue that the Basel accords hamper bank activity, Basel I was developed
to mitigate risk to both the consumer and the institution. Basel II, brought forth some years
later, lessened the requirements for banks. This came under criticism from the public but,
since Basel II did not supersede Basel II, many banks proceeded to operate under the original
Basel I framework, supplemented by Basel III addendums.

Basel I lowered most banks' risk profiles, which in turn drove investment back into banks that
were rightfully distrusted following the sub-prime mortgage collapse of 2008. The public
needed, perhaps even more than the protections Basel offered to trust banks with their assets
again. Basel I was the driving force behind that much-needed capital influx to the banks.

Perhaps the greatest contribution of Basel I was that it contributed to the ongoing adjustment
of banking regulations and best practices, paving the way for additional measures that protect
banks, consumers, and their respective economies.

Basel I is a set of international banking regulations put forth by the Basel Committee on Bank
Supervision (BCBS) that sets out the minimum capital requirements of financial institutions
with the goal of minimizing credit risk.

 
Basel I was the BCBS' first accord. It was issued in 1988 and focused mainly on creditrisk by
creating a bank asset classification system.
Banks that operate internationally are required to maintain a minimum amount (8%) of
capital based on a percent of risk-weighted assets. Basel I is the first of three sets of
regulations known individually as Basel I, II, and III, and together as the Basel Accords.
BASEL II

Basel II is the second of the Basel Accords, (now extended and partially superseded by Basel
III), which are recommendations on banking laws and regulations issued by the Basel
Committee on Banking Supervision.

The Basel II Accord was published initially in June 2004 and was intended to amend
international banking standards that controlled how much capital banks were required to hold
to guard against the financial and operational risks banks face. These regulations aimed to
ensure that the more significant the risk a bank is exposed to, the greater the amount of
capital the bank needs to hold to safeguard its solvency and overall economic stability. Basel
II attempted to accomplish this by establishing risk and capital management requirements to
ensure that a bank has adequate capital for the risk the bank exposes itself to through its
lending, investment and trading activities. One focus was to maintain sufficient consistency
of regulations so to limit competitive inequality amongst internationally active banks.

Basel II was implemented in the years prior to 2008, and was only to be implemented in early
2008 in most major economies; the financial crisis of 2007–2008 intervened before Basel II
could become fully effective. As Basel III was negotiated, the crisis was top of mind and
accordingly more stringent standards were contemplated and quickly adopted in some key
countries including in Europe and the US.

Objective

The final version aims at:

1. Ensuring that capital allocation is more risk-sensitive;

2. Enhance disclosure requirements which would allow market participants to assess the
capital adequacy of an institution;
3. Ensuring that credit risk, operational risk and market risk are quantified based on data
and formal techniques;
4. Attempting to align economic and regulatory capital more closely to reduce the scope
for regulatory arbitrage.

While the final accord has at large addressed the regulatory arbitrage issue, there are still
areas where regulatory capital requirements will diverge from the economic capital.
The accord in operation: Three pillars

Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing risk),

(2) supervisory review and (3) market discipline.

The Basel I accord dealt with only parts of each of these pillars. For example: concerning the
first Basel II pillar, only one risk, credit risk, was dealt with easily while the market risk was
an afterthought; operational risk was not dealt with at all.

 The first pillar: Minimum capital requirements

The first pillar deals with maintenance of regulatory capital calculated for three major
components of risk that a bank faces: credit risk, operational risk, and market risk. Other risks
are not considered fully quantifiable at this stage.

1. The credit risk component can be calculated in three different ways of varying degree

of sophistication, namely standardized approach, Foundation IRB, Advanced
IRB and General IB2 Restriction. IRB stands for "Internal Rating-Based Approach".
2. For operational risk, there are three different approaches – basic indicator approach or
BIA, standardized approach or TSA, and the internal measurement approach (an
advanced form of which is the advanced measurement approach or AMA).
3. For market risk the preferred approach is VAR (value at risk).

As the Basel II recommendations are phased in by the banking industry it will move from
standardised requirements to more refined and specific requirements that have been
developed for each risk category by each bank. The upside for banks that do develop their
bespoke risk measurement systems is that they will be rewarded with potentially lower risk
capital requirements. In the future, there will be closer links between the concepts of
economic and regulatory capital.

 The second pillar: Supervisory review

This is a regulatory response to the first pillar, giving regulators better 'tools' over those
previously available. It also provides a framework for dealing with systemic risk, pension
risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the
accord combines under the title of residual risk. Banks can review their risk management
system.The Internal Capital Adequacy Assessment Process (ICAAP) is a result of Pillar 2 of
Basel II accords.

 The third pillar: Market discipline

This pillar aims to complement the minimum capital requirements and supervisory review
process by developing a set of disclosure requirements which will allow the market
participants to gauge the capital adequacy of an institution.

Market discipline supplements regulation as sharing of information facilitates the assessment

of the bank by others, including investors, analysts, customers, other banks, and rating
agencies, which leads to good corporate governance. The aim of Pillar 3 is to allow market
discipline to operate by requiring institutions to disclose details on the scope of application,
capital, risk exposures, risk assessment processes, and the capital adequacy of the institution.
It must be consistent with how the senior management, including the board, assess and
manage the risks of the institution.

When market participants have a sufficient understanding of a bank's activities and the
controls it has in place to manage its exposures, they are better able to distinguish between
banking organizations so that they can reward those that manage their risks prudently and
penalize those that do not.

These disclosures are required to be made at least twice a year, except qualitative disclosures
providing a summary of the general risk management objectives and policies which can be
made annually. Institutions are also required to create a formal policy on what will be
disclosed and controls around them along with the validation and frequency of these
disclosures. In general, the disclosures under Pillar 3 apply to the top consolidated level of
the banking group to which the Basel II framework applies.
Implementation progress

Regulators in most jurisdictions around the world plan to implement the new accord, but with
widely varying timelines and use of the varying methodologies being restricted. The United
States various regulators have agreed on a final approach. They have required the Internal
Ratings-Based approach for the largest banks, and the standardized approach will be
available for smaller banks.

In India, Reserve Bank of India has implemented the Basel II standardized norms on 31

March 2009 and is moving to internal ratings in credit and AMA (Advanced Measurement
Approach) norms for operational risks in banks.

Existing RBI norms for banks in India (as of September 2010): Common equity (incl of
buffer): 3.6% (Buffer Basel 2 requirement requirements are zero); Tier 1 requirement: 6%.
Total Capital: 9% of risk-weighted assets.

According to the draft guidelines published by RBI the capital ratios are set to become:
Common Equity as 5% + 2.5% (Capital Conservation Buffer) + 0–2.5% (Counter Cyclical
Buffer), 7% of Tier 1 capital and minimum capital adequacy ratio (excluding Capital
Conservation Buffer) of 9% of Risk Weighted Assets. Thus, the actual capital requirement is
between 11 and 13.5% (including Capital Conservation Buffer and Counter Cyclical Buffer).

In response to a questionnaire released by the Financial Stability Institute (FSI), 95 national

regulators indicated they were to implement Basel II, in some form or another, by 2015.

The European Union has already implemented the Accord via the EU Capital Requirements
Directives and many European banks already report their capital adequacy ratios according to
the new system. All the credit institutions adopted it by 2008–09.

Australia, through its Australian Prudential Regulation Authority, implemented the Basel II

Framework on 1 January 2008.
 BASEL III
MEANING:

Basel III is an international regulatory accord that introduced a set of reforms designed to
improve the regulation, supervision and risk management within the banking sector. Largely
in response to the credits crisis, banks are required to maintain proper leverage ratios and
meet certain minimum capital requirements.

OBJECTIVES/AIMS:

 Improve the banking sector’s ability to absorb ups and down arising from financial
and economic instability.
 Improve risk management ability and governance of banking sector.
 Strengthen banks transparency and disclosure.

PILLARS OF BASEL III:

BASEL III

PILLAR I PILLAR II PILLAR III

Enhanced Enhanced Enhanced risk
minimum supervisory disclosure &
capital & review process market
liquidity for firm-wide discipline
requirements. risk
management
and capital
planning

Basel III resealed December, 2010 is the third in the series of Basel Accords. These accords
deal with risk management aspects for the banking sector. So we can say that Basel III is the
global regulatory standard on bank capital adequacy, stress testing and market liquidity risk.
Norms are implemented from March 31, 2015 in phases and fully implemented on March 31,
2018.
Major features of Basel 3

 Revised minimum equity and Tier 1 capital requirements.

 Better capital quality
 Backstop leverage ratio
 Short term and long term liquidity ratio
 Rigorous credit risk management
 Counter Cyclical Buffer
 Capital Conservation Buffer

Over View f the RBI Guidelines for Implementation of Basel III guidelines
The final guidelines have been issued by Reserve Bank of India for implementation of
Basel 3 guidelines on 2nd May, 2012

  Major features of these guidelines are :

(a) The guidelines would become effective from January 1, 2013 in a phased manner. This
means that as at the close of business on January 1, 2013, banks must be able to declare or
disclose capital ratios computed under the amended guidelines. The Basel III capital ratios
will be fully implemented as on March 31, 2018.
(b) The capital requirements for the implementation of Basel III guidelines may be lower
during the initial periods and higher during the later years. Banks needs to keep this in view
while Capital Planning.
(c) Guidelines on operational aspects of implementation of the Countercyclical Capital
Buffer. Guidance to banks on this will be issued in due course as RBI is still working on
these.   Moreover, some  other proposals viz. ‘Definition of Capital Disclosure
Requirements’, ‘Capitalization of Bank Exposures to Central Counterparties’ etc., are also
engaging the attention of the Basel Committee at present.  Therefore, the final proposals of
the BaselCommittee on these aspects will be considered for implementation, to the extent
applicable, in future.
(d) For the financial year ending March 31, 2013, banks will have to disclose the capital
ratios computed under the existing guidelines (Basel II) on capital adequacy as well as those
computed under the Basel III capital adequacy framework.
(e) The guidelines require banks to maintain a Minimum Total Capital (MTC) of 9% against
8% (international) prescribed by the Basel Committee of Total Risk Weighted assets.  This
has been decided  by Indian regulator as a matter of prudence.   Thus, it requirement in this
regard remained at the same level.  However, banks will need to raise more money than under
Basel II as several items are excluded under the new definition.
(f) Of the above, Common Equity Tier 1 (CET 1) capital must be at least 5.5% of RWAs.
(g) In addition to the Minimum Common Equity Tier 1 capital of 5.5% of RWAs,
(international standards require these to be only at 4.5%)  banks are also required to maintain
a Capital Conservation Buffer (CCB) of 2.5% of RWAs in the form of Common Equity Tier
1 capital.    CCB is designed to ensure that banks build up capital buffers during normal times
(i.e. outside periods of stress) which can be drawn down as losses are incurred during a
stressed period. 
In case such buffers have been drawn down, the banks have to rebuild them through reduced
discretionary distribution of earnings.  This could include reducing dividend payments, share
buybacks and staff bonus.
(h) Indian banks under Basel II are required to maintain Tier 1 capital of 6%, which has been
raised to 7% under Basel III.  Moreover, certain instruments, including some with the
characteristics of debts, will not be now included for arriving at Tier 1 capital.
(i) The new norms do not allow banks to use the consolidated capital of any insurance or non
financial subsidiaries for calculating capital adequacy.
(j) Leverage Ratio :   Under the new set of guidelines, RBI has set the leverage ratio at 4.5%
(3% under Basel III).   Leverage ratio has been introduced in Basel 3 to regulate banks which
have huge trading book and off balance sheet derivative positions.  However, In India,  most
of banks do not have large derivative activities  so as to arrange enhanced cover for
counterparty credit risk. Hence, the pressure on banks should be minimal on this count.
(k) Liquidity norms:   The Liquidity Coverage Ratio (LCR) under Basel III requires banks
to hold enough unencumbered liquid assets to cover expected net outflows during a 30-day
stress period. In India, the burden from LCR stipulation will depend on how much of CRR
and SLR can be offset against LCR.     Under present guidelines, Indian banks already follow
the norms set by RBI for  the statutory liquidity ratio (SLR) –  and cash reserve ratio (CRR),
which are liquidity buffers.   The SLR is mainly government securities while the CRR is
mainly cash. Thus, for this aspect also Indian banks are better placed over many of their
overseas counterparts. Net Stable Funding Ratio(NSFR) promotes resilience over long-term
time horizons by creating more incentives for financial institutions to fund their activities
with more stable sources of funding on an ongoing structural basis.
(l) Countercyclical Buffer: Economic activity moves in cycles and banking system is
inherently pro-cyclic. During upswings, carried away by the boom, banks end up in excessive
lending and unchecked risk build-up, which carry the seeds of a disastrous downturn. The
regulation to create additional capital buffers to lend further would act as a break on
unbridled bank-lending.  The detailed guidelines for these are likely to be issued by RBI only
at a later stage. On the day of release of these guidelines, analysts felt that India may need at
least $30 billion (i.e. around Rs 1.6 trillion) to $40 billion as capital over the next six years to
comply with the new norms.   It was also felt that this would impose a heavy financial burden
on the government, as it will need to infuse capital in case it wanst to continue its hold on
these PS Banks.   RBI Deputy Governor, Mr Anand Sinha viewed that the implementation of
Basel II may have a negative impact on India's growth story.   In FY 2012-13, Government of
India is expected to provide Rs 15888 crores to recapitalize the banks. as to maintain capital
adequacy of 8% under old Basel II norms.
(m)Minimum Total Capital Ratio: Minimum total capital ratio remains at 8%. The addition
of the capital conservation buffer increases the total amount of capital a financial institution
must hold to 10.5% of risk weighted assets, of which 8.5% must be tier 1 capital. Tier 2
capital instruments are harmonized and tier 3 capital is abolished.
(n) Changes to Counterparty Risk: Basel 3 introduced capital requirements to cover Credit
Value Adjustments (CVA) risk and higher capital requirements for securitization products.

Some Major Developments after 2nd May 2012 (i.e. the date when RBI issued Basel III
guidelines)
(A) On 30th October 2012, RBI in its  Second Quarter Review of Monetary Policy 2012-
13  has declared as follows:
(i) "Basel III Disclosure Requirements on Regulatory Capital Composition
The Basel Committee on Banking Supervision (BCBS) has finalized proposals on disclosure
requirements in respect of the composition of regulatory capital, aimed at improving
transparency of regulatory capital reporting as well as market discipline. As these disclosures
have to be given effect by national authorities by June 30, 2013, it has been decided:
to issue draft guidelines on composition of capital disclosure requirements by end-December
2012.
(ii) bank exposure to counter
The BCBS has also issued an interim framework for determining capital requirements for
bank exposures to CCPs. This framework is being introduced as an amendment to the
existing Basel II capital adequacy framework and is intended to create incentives to increase
the use of CCPs. These standards will come into effect on January 1, 2013. Accordingly, it
has been decided to issue draft guidelines on capital requirements for bank exposures to
central counterparties, based on the interim framework of the BCBS, by mid-November
2012.

(iii) Core Principles for Effective Banking Supervision

The Basel Committee has issued a revised version of the Core Principles in September 2012
to reflect the lessons learned during the recent global financial crisis. In this context, it is
proposed to carry out a self-assessment of the existing regulatory and supervisory practices
based on the revised Core Principles and to initiate steps to further strengthen the mechanism.
 
(B) On 7th November, 2012 : RBI has issued final guidelines in respect of liquidity Risk
Management by Banks.

IMPLEMENTATIONS

BETTER CAPITAL QUALITY: One of the key elements of Basel III is the introduction of
much stricter definition of capital. Better quality capital means the higher loss absorbing
capacity. This in turn will mean that banks will be stronger, allowing them to better withstand
period of stress.

CAPITAL CONSERVATION BUFFER: Another key feature of Basel III is that now
banks will be required to hold a capital conservation buffer of 2.5%. The aim of asking to
build conservation buffer is to ensure that banks maintain a cushion of capital that can be
used to absorb losses during periods of financial and economic stress.
COUNTERCYLICAL BUFFER: This is also one of the key elements of Basel III. The
countercyclical buffer has been introduced with the objective to increase capital requirements
in good times and decrease the same in bad times. The buffer will slow banking activity when
it overheats and will encourage lending when times are tough i.e. in bad times. The buffer
will range from 0% to 2.5%, consisting of common equity or other loss absorbing capital.

MINIMUM COMMON EQUITY & TIER 1 CAPITAL REQUIREMENTS: The

minimum requirement for common equity, the highest form of loss absorbing capital, has
been raised under Basel III from 2% to 4.5% of total risk weighted assets. The overall Tier 1
capital requirement, consisting of not only common equity but also other qualifying financial
instruments, will also increase from the current minimum of 4 % to 6%. Although the
minimum total capital requirement will remain at the current 8% level, yet the required total
capital will increase to 10.5% when combined with the conversation buffer.

LEVERAGE RATIO: A review of the financial crisis of 2008 has indicated that the value
of many assets fell quicker than assumed from historical experience. Thus, now Basel III
rules include a leverage ratio to serve as a safety net. A leverage ratio is the relative amount
of capital to total assets. This aims to put a cap on swelling of leverage in the banking sector
on a global basis. 3% leverage ratio of Tier 1 will be tested before a mandatory leverage ratio
is introduced in January 2018.

LIQUIDITY: Under Basel III, a framework for liquidity risk management will be created. A
new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are to be
introduced in 2015 and 2018, respectively.

HOW BASEL III NORMS WILL AFFECTS INDIAN BANKS?

The Basel III which is implemented by banks in India as per the guidelines issued by RBI
from time to time will be challenging task not only for the banks but also for Government of
India. It is estimated that Indian banks will be required to raise Rs6, 00,000 cores in external
capital in next nine years or so i.e. by 2020 (The estimates vary from organisation to
organisation). Expansion of capital to this extent will affect the returns on the equity of these
banks especially public sector banks. However, only consolation for Indian banks is the fact
that historically they have maintained their ore and overall capital well in excess of the
regulatory minimum.
BASEL III norms mentioned in the news. These are important global norms that set a
common standard for banks across countries. This is why there are global norms called the
BASEL norms, to set common standards for banks across countries. Originally set in 1974,
the most recent set of norms, called BASEL III, is likely to be implemented in India from
2019. This affects a lot of banks. If you are an investor, you may need to know about the
BASEL III norms.

WHY NEED BASEL NORMS?

It is not for nothing that banks are considered important for an economy, especially if it is a
developing country like India. Go back to 2008, the crisis in the US banking sector wreaked
havoc throughout the world. The US is still trying to limp back to economic growth. A
banking collapse is one of the worst crises a country can face. The BASEL norms have three
aims: Make the banking sector strong enough to withstand economic and financial stress;
reduce risk in the system, and improve transparency in banks.

IMPLEMENTATION IN INDIA

The Reserve Bank of India (RBI) introduced the norms in India in 2003. It now aims to get
all commercial banks BASEL III-compliant by March 2019. So far, India’s banks are
compliant with the capital needs. On average, India’s banks have around 8% capital
adequacy. This is lower than the capital needs of 10.5% (after taking into account the
additional 2.5% buffer). In fact, the BASEL committee credited the RBI for its efforts.

CHALLENGES FOR INDIAN BANKS

Complying with BASEL III norms is not an easy task for India’s banks, which have to
increase capital, liquidity and also reduce leverage. This could affect profit margins for
Indian banks. Plus, when banks keep aside more money as capital or liquidity, it reduces their
capacity to lend money. Loans are the biggest source of profits from banks. Plus, India banks
have to meet both LCR as well as the RBI’s Statutory Liquidity Ratio (SLR) and Cash
Reserve Ratio (CRR) norms. This means more money would have to be set aside, further
stressing balance sheets.
RS 2.4 LAKH CRORE

India’s government-owned banks are not ready to meet BASEL III norms. They fall short of
the required capital requirements. Media reports suggest India’s state-run banks need Rs 2.4
lakh crore capital by 2019 to meet the norms. This is a huge task, considering that the banks
have a lot of bad loans on their books—loss-making loans that may not be paid. In fact, the
total bad loans on the 40-listed banks in India amount to Rs 3 lakh crore.

RECENT UPDATES:

The Reserve Bank of India has fallen short of meeting tougher requirements set by the Basel
III norms, according to a report by the Basel Committee on Bank Supervision (BCBS).

The semi-annual report brought out by the BCBS, a committee under the Bank For
International Settlements, looked at adoption status of Basel III standards by 30 global
systemically important banks (G-Sibs) as of end-May 2019. This committee of banking
supervisory authorities aims to enhance understanding of key supervisory issues and also
improve the quality of banking supervision worldwide.

The committee reports that India’s central bank is yet to publish the securitisation framework
and rules on total loss-absorbing capacity (TLAC) requirements. Globally, the norms on
securitisation exposures held in the banking book had come into effect on 1 January, 2018.

The RBI also missed the deadline for meeting the TLAC requirement, which ensures that G-
Sibs have adequate loss absorbing and recapitalisation capacity so that critical functions can
be continued without taxpayers’ funds or financial stability being put at risk. These include
instruments that can be either written down or converted into equity, like capital instruments
and long-term unsecured debt. The TLAC constitutes 16% to 20% of a group's consolidated
risk-weighted assets.

The RBI is also yet to come out with draft regulations on revised Pillar 3 disclosure
requirements, which took effect from end-2016. Pillar 3 disclosures aim at ensuring market
discipline through disclosures in prescribed format, while Pillar1 focuses on capital adequacy
and Pillar 2 looks at the supervisory review process.

According to the report, India’s G-sibs are in the process of implementing rules on interest
rate risk in the banking book (IRRBB). These regulations refer to the current or prospective
risk to the bank’s capital and earnings arising from adverse movements in interest rates that
affect the bank’s book positions. The central bank had issued draft guidelines in February
2017 and is yet to come out with final guidelines.

MONEY & BANKING

Extension of time period for implementation of Basel 3 guidelines is credit negative for
banks, says Moody's

Our Bureau Updated on November 20, 2018

The Reserve Bank of India's decision to extend the timeline for the full implementation of
Basel 3 guidelines by a year is a credit negative for Indian public sector banks (PSBs),
according to Moody's Investors Service.

The RBI's board on Monday decided to ease capital pressure on banks by allowing them one
more year to meet the Capital Conservation Buffer (CCB). This buffer is aimed at ensuring
that banks build up capital buffers during non-stress periods so that they can be drawn down
when losses are incurred.

The transition period to implement the last tranche of 0.625 per cent under CCB has been
extended by one year — up to March 31, 2020. Now, banks can achieve CCB of 2.5 per cent
of their risk-weighted assets by March-end 2020.

However, the capital to risk-weighted assets ratio (CRAR), which is the amount of capital
banks need to hold for making loans and absorbing possible losses, has been retained at 9 per
cent.

The global credit rating agency, in a statement, said, "It was our expectation that all PSBs
would have a core equity tier 1 (CET1) ratio of at least 8 per cent by the end of March 2019,
based on the government's commitment that it would capitalise all these banks to a level
sufficient to meet the minimum regulatory capital norms."

With the regulatory timelines now extended, Moody's observed that it may be a case that at
least some of the rated PSBs CET1 ratios over the next 12 months would be lower than what
it currently expects.
FEW BENEFITS

Karthik Srinivasan, Group Head, Financial Sector ratings, ICRA Ltd, said, "With many banks
struggling to meet the basic capital ratios, i.e. CRAR of 9 per cent, the decision to extend the
transition period for implementing the last tranche of CCB by one year is likely to benefit
only a few banks, as most of the PSBs are not maintaining the existing CCB requirement of
1.875 per cent."

"The benefit will hence be limited to banks whose CCB is higher than 1.875 per cent but
lower than 2.5 per cent, who can now purse credit growth without a worry of capital breach.
While CCB is not a concern for most of the private banks, CCB deferment can increase their
capital cushion over regulatory levels."

Further, the decision for RBI to retain the CRAR of banks at minimum 9 per cent is a positive
for the banking system, given high unprovided losses against the existing stressed loans. The
solvency ratio for PSBs (i.e., Net NPA / Net worth) stood weak at 84 per cent. Lowering
CRAR would have meant a further lowering of capital against unprovided losses.

On the RBI board's decision that the central bank will consider a scheme for the restructuring
of the stressed standard assets of MSME (micro, small and medium enterprise) borrowers
with aggregate credit facilities of up to Rs 25 crore, subject to certain conditions, Moody's
said, "while more details are awaited, this approach has the potential for negative
implications for the credit profiles of Indian banks."

The agency underscored that the track record of such dispensations on asset classification
have largely been unsuccessful in addressing the underlying stress. On the contrary, keeping
stressed loans in the standard category has led to an underestimation of the extent of
underlying asset quality issues by bank managements and consequently, the severity of the
actions they need to take to address the issue.

Karthik assessed that based on the existing framework, almost 17 out of 21 PSBs would come
under the PCA (Prompt Corrective Action) framework, even though only 11 of them are
formally placed under PCA. With the PCA framework to now be examined by the Board for
Financial Supervision (BFS) of RBI, one may explore scenarios for a faster exit of banks
from PCA framework, he added. The framework restricts weak banks' lending and expansion
so that they can be nursed back to health.