BackRBI’s action on Basel-III norms draws praise
Basel panel says Indian banking system more conservative than Basel rules, wants action on liquidity coverage ratio
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Geneva: The rapid implementation of the Basel-III standards by Reserve Bank of India (RBI) to improve commercial banks’ ability to absorb shocks from financial and economic stress drew praise from the Basel Committee on Banking Supervision on Monday.
“The Assessment Team compliments the Indian authorities for their substantial reforms and alignment with the Basel capital framework," noted the committee in its comprehensive report on India, which was issued Tuesday.
India’s commercial banks remain “compliant" with the Basel III global regulatory framework for implementing risk-based capital requirements.
“Overall, the domestic implementation of the risk-based capital framework (in India) is found to be ‘compliant’ with the Basel standards," the report stated.
However, there is still some distance to be covered in complying with the standards for liquidity coverage ratio (LCR), or highly liquid assets held by banks to meet their short-term obligations.
Prepared by a team of central bank experts from different countries, under the leadership of Arthur Yuen, deputy chief executive of Hong Kong Monetary Authority, the report suggested that India is “largely compliant" for implementing LCR, implying that most of the Basel standards are not yet implemented.
RBI began implementing the Basel-III standards from last year. The standards, which came after the financial crisis of 2008, aim at improving the banking sector’s ability to absorb shocks arising from financial and economic stress, risk management and governance, and strengthening banks’ transparency and disclosures. The reforms of the Basel-III call for bank-level or macro-prudential regulation.
“Several aspects of the Indian framework are more conservative than the Basel framework," the Basel committee stated. The RBI, for example, has imposed “higher minimum capital requirements and risk weightings for certain types of exposures, as well as higher minimum capital ratios". India’s banking regulator “also applies certain restrictions to banking activities through its prudential framework".
All commercial banks in India, excluding regional rural banks, come under the Basel-III regulations. Commercial banks, which dominate the Indian banking system, account for approximately 87% of total banking system assets. Public sector banks, with a market share of 73% banking assets and 82% of bank branches, play a major role in the Indian financial system.
Foreign banks account for about 6% of the Indian banking sector, according to the Basel Committee.
Indian banks remain compliant with the key components of the Basel capital framework, minimum capital requirements in Pillar 1, supervisory review process in Pillar 2, and market discipline in Pillar 3. The minimum capital requirements in Pillar 1 include definition of capital, credit risk for both standardized approach and internal ratings-based approach, securitization framework, counter-party credit risk framework, market risk, operational risk and capital buffers.
RBI, according to the report, applies the Basel framework to all scheduled commercial banks on a “solo and consolidated basis".
Responding to some observations from the Basel committee, RBI has clarified that the minimum capital requirement in India is higher at 9% of the risk-weighted assets, as compared to minimum of 8% under the Basel framework. “The absolute capital requirement for market risk and operational risk was effectively on par with Basel requirements," RBI said.
The team of central bank experts from different countries, which reviewed India’s compliance with Basel-III standards, identified “an overarching issue regarding the use of the word “may" in India’s regulatory documents for implementing binding minimum requirements. It recommended the use of the word “must", in line with the international practice.
“More generally, authorities should seek to ensure that local regulatory documents can be unambiguously understood even in an international context, particularly where these apply to internationally active banks," the committee noted.
RBI has concurred with the Basel assessment team’s findings but maintained that use of the term “may" instead of “must", or equivalent, in implementing minimum capital requirements must “follow the linguistics and social characteristics of the language used in the region".
The Indian central bank told the Basel committee that the use of the word “may" in regulations is construed as binding on the banks.
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