RBI unveils guidelines for implementation of Basel III

**Mumbai:**In order to strengthen risk managementmechanism, the Reserve Bank of India (RBI) today unveiled guidelines for implementation of the new global capital adequacy norms,called Basel III, by March 2018.

“These guidelines would become effective from 1 January 2013 in a phased manner. The Basel III capital ratios will befully implemented as on 31 March 2018,” RBI said in astatement.

The capital requirements for the implementation of BaselIII guidelines may be lower during the initial periods andhigher during the later years.While undertaking the capital planning exercise, banksshould keep this in view, the RBI said.

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The implementation of the capital adequacy guidelinesbased on the Basel III capital regulations will begin as on 1January 2013.This means that as at the close of business on 1 January 2013, banks must be able to declare or disclose capital ratioscomputed under the amended guidelines, the statement said.

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The guideline envisages banks to maintain a minimum totalcapital (MTC) of 9 percent against 8 percent prescribed bythe basel Committee of total risk weighted assets.

“As a matter of prudence, it has been decided thatscheduled commercial banks (excluding LABs and RRBs) operatingin India shall maintain a minimum total capital (MTC) of 9 percent of total risk weighted assets (RWAs) as against a MTC of8 percent of RWAs as prescribed in Basel III rules text ofthe BCBS (Basel Committee on Banking Supervision), it said.

Of this, it said, Common Equity Tier 1 (CET1) capitalmust be at least 5.5 percent of RWAs.

In addition to the minimum Common Equity Tier 1 capitalof 5.5 percent of RWAs, banks are also required to maintain acapital conservation buffer (CCB) of 2.5 percent of RWAs inthe form of Common Equity Tier 1 capital, it said.

The CCB is designed to ensure that banks build up capitalbuffers during normal times (i.e. outside periods of stress)which can be drawn down as losses are incurred during astressed period.

The requirement is based on simple capital conservationrules designed to avoid breaches of minimum capitalrequirements.

Outside the period of stress, banks should hold buffersof capital above the regulatory minimum.When buffers have been drawn down, one way banks shouldlook to rebuild them is through reducing discretionarydistributions of earnings.

This could include reducing dividend payments, sharebuybacks and staff bonus payments.

Further, RBI said, a countercyclical capital bufferwithin a range of 0-2.5 percent of RWAs in form of CommonEquity or other fully loss absorbing capital will beimplemented according to national circumstances.

The purpose of countercyclical capital buffer is toachieve the broader macro-prudential goal of protecting thebanking sector from periods of excess aggregate credit growth,it said.

For any given country, this buffer will only be in effectwhen there is excess credit growth that results in asystem-wide build-up of risk.The countercyclical capital buffer, when in effect,would be introduced as an extension of the capitalconservation buffer range.

Currently, RBI follows Basel II norms under which Tier Icomponent is not only pure equity capital but PerpetualNon-cumulative Preference Shares (PNCPS), Innovative PerpetualDebt Instruments (IPDI) and capital reserves.

Banks are required to maintain a minimum Capital to Riskweighted Assets Ratio (CRAR) of 9 per cent within this Tier 1capital should be at least 6 per cent of risk weighted assets.

Under the existing capital adequacy guidelines based onBasel II framework, total regulatory capital comprise Tier 1capital (core capital) and Tier 2 capital (supplementarycapital).

PTI