Basel III (India) - An Update

Reserve Bank of India (RBI) has issued Basel III (India) Regulations on 2 May 2012.
There have been few changes from the draft rules issued earlier for comment/feedback.

Key highlights of the new capital regulations are as follows:
1) Basel III regulations will have significant impact on ‘QUANTITY & QUALITY’ of capital requirements, therefore, there is an extended transition period beginning Jan 2013 till Mar 2018.

• With the introduction of new capital requirement called ‘Capital Conservation Buffer (CCB) of 2.5%, total minimum capital ratio increases to 11.5% from current requirement of 9%.

• Total regulatory capital will be predominantly in the form of Tier 1 and Common Equity; Tier 1 component will be 9.5% including CCB of 2.5%; Maximum permitted Tier 2 component reduced to 2% only.

• Most of the regulatory deduction/adjustments will be from Common Equity Tier 1.

2) A new non-risk based measure called ‘Leverage Ratio’ at 4.5% of Exposures has been introduced to monitor and prevent excessive build up of ‘On and Off B/S’ leverage in the banking system.

3) India regulations are based on the International Accord issued by BCBS in Dec 2010 (amended in June 2011) which was primarily in response to lessons learned during the recent global financial crisis & to address capital related aspects which were largely untouched in Basel II. In a few areas India rules are more stringent/ conservative.

Vidhyadhar Kulkarni

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