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The Banking Game Changer

Monday, January 16, 2012
By Deepak Sahijwala

The Reserve Bank of India (RBI) recently announced draft guidelines, for implementing Basel III in India, which when implemented could be a great positive and a clear game changer for the Indian banking industry.

The proposed Basel III guidelines seek to improve the ability of banks to withstand periods of economic and financial stress by prescribing more stringent capital and liquidity requirements and that could strengthen the capitalization and credit profiles of banks in the country. The RBI has set the implementation period of minimum capital requirements to begin from January 1, 2013.

Naturally, then it has received praise across the board, including leading rating agencies both national and international. So what’s Basel III about and what would be its implications?

Says Standard & Poor's Ratings Services in a report titled "RBI's Basel III Guidelines Will Enhance Indian Banks' Stand-Alone Credit Profiles, “The draft guidelines, may negatively affect the credit growth of a few banks. But overall, the guidelines-if implemented-will benefit Indian banks' stand-alone credit profiles.”

According to the report, the RBI's conservative approach should enhance capitalization in a country where Standard & Poor's views economic risks to be relatively high. The RBI's stringent capitalization requirements will also help improve Indian banks' risk-adjusted capital ratios, which are currently lower than those of many Asian peers. The RBI's guidelines on capitalization are more stringent than what the Basel Committee on Banking Supervision (BCBS) has proposed. They are also conservative compared with those of some other Asian peers. In addition, the RBI expects banks to meet these requirements in a relatively shorter time frame.

ICRA views the suggested capital requirement as a positive for banks as it raises the minimum core capital stipulation, introduces counter-cyclical measures, and enhances banks’ ability to conserve core capital in the event of stress through a conservation capital buffer. The prescribed liquidity requirements, on the other hand, are aimed at bringing in uniformity in the liquidity standards followed by banks globally.

CRISIL believes that guidelines, if implemented, will strengthen the Indian banking sector and increase its resilience to systemic shocks.

"We interpret these draft guidelines as more conservative than the Bank for International Settlements (BIS) norms and view them as credit positive for the banking sector," said rating agency Moody's in its Weekly Credit Outlook.

Overall the new norms on capital adequacy will help rectify the gap in risk-adjusted capital of Indian banks compared to their Asian peers, and that in my opinion would be a great positive for India.

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