What are BASEL-III norms and why are they important for India?

What are BASEL-III norms? Why are they important for India?

"Basel III" is a name given to reform measures for the Banking sector. It was developed by the Basel Committee, hence the name. The measures are to strengthen the regulation, supervision and risk management of the banking sector.

Aims of BASEL-III norms:

create an ability to absorb financial and economic shocks
improve risk management and governance
strengthen banks' transparency and disclosures

The reforms are targeted at the individual banks and banking institutions. It is also aimed at reducing the system-wide risks.

The norms have received a positive appreciation in India. The Reserve Bank of India (RBI) Governor, D. Subbarao in an interview to a newspaper mentioned that BASEL-III norms would strengthen Indian banks.

The BASEL-III norms have provided important guidelines for Liquidity and Capital. There are three important pillars defined for Capital.

Pillar – I

• Capital
• Risk Coverage
• Containing Leverage

Pillar-II

• Risk Management and Supervision

Pillar-III

• Market Discipline

In order to meet the BASEL-III requirements, Indian banks would have to raise a lot of external capital. While the norms would strengthen the robustness of banks against risks, it will also have some effect on the profitability in the short run. The norms would increase the cost of capital for the banks and have an adverse effect on the reqturn on equity in the short run.