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Global Perspective:
Basel Framework

Global Perspective:
Basel Framework UNIT 5 GLOBAL PERSPECTIVE: BASEL
FRAMEWORK
Objectives
After reading this chapter you should be able to;
? comprehend the background and relevance of Basel Norms in the
Banking Sector
? understand the Evolution of Basel Accord framework for commercial
banks
? evaluate the Status of Basel III Accord in India.
Structure
5.1 Introduction
5.2 Historical Perspective
5.3 RBI’s Approach to Implementation of Basel Norms
5.4 Implementation of Basel II to Basel III Norms
5.5 Capital Requirement under Basel III
5.6 The Implication; High Capital Deficiency in PSBs
5.7 Basel-III Norms Require Strong and Big Banks alike D-SIBs
5.8 Summary
5.9 Key Words
5.10 Self-Assessment Questions
5.11 References/Further Readings
5.1 INTRODUCTION
Banks are most prominent financial institutions that affect all the industries
and sectors in an economy. Banks deal in borrowing and lending as a major
activity but it includes many kinds of risks. It has been noticed in the past
about the downfall of the many big banks due to heavy credit risks
associated. The norms such as BASEL norms are made to control the risks
associated with banks.
Development of need based, multi agency banking and financial services
sector in its present institutional structure, operations and practices has been
largely mandated by Reserve Bank of India (RBI) based on the specific
recommendations of Expert Committee Reports/Study Groups as well as the
popular public opinions. The introduction of new liberalized and globalized
policies coupled with strong regulatory framework of RBI particularly in the
post reform period have made banks to take better risks in banking operations

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Global Perspective:
Basel Framework

88
Corporate Governance
in Banking
rather than higher or no risks
1
, on both assets and liability side, para-banking
products, delivery channels etc. This has resulted into transparency in the
financial statements of banks and less of window dressing. Particularly, since
the last decade of bygone century, successful introduction of reforms in
banking as well as implementation of Basel Committee on Banking
Supervision (BCBS) of Bank for International Settlement (BIS) led Basel I &
II Accord to be well-documented. India could with stand the Asian Currency
Crisis (ACC) 1997-1998 and also the Global Financial Crisis (GFC) 2007-
2009 which, albeit brought bank failures in many developed economies in the
world and not a single commercial bank in India was affected by the global
melt down. Further, we have political consensus to make banks and financial
institutions strong with ability to meet, sustain and compete in global
markets
2
.
This chapter presents the evolution of Basel
3
Accord I, II and the latest III for
banks with international presence and also in India under the guidance/
directives of RBI for implementation by all banks. Basel Accord is the
regulatory framework for banks with international presence, emphasizing on
adequacy of capital and liquidity standards, evolved and prescribed by BCBS
of BIS comprising of Central Banks and Supervising Authorities of G-10
4

countries, Head-quartered in Basel, Switzerland, popularly known as Basel
Accord. The Basel-I Capital Accord of July, 1988 was implemented in India
from April 1, 1998. The Basel-II proposal of 1999 (The International
Convergence of Capital Measurement and Capital Standards: A Revised
Framework–BCBS-128), was first published by BIS in 2004, amended in
November 2005 and finally made applicable worldwide in 2006, and was
implemented in India in 2009. As said earlier, having tasted success in
implementation of earlier Norms I and II, India readily agreed to implement
new set of Basel-III Norms. The Basel-III proposal of June 2011 was
mandated to be effective worldwide from January 1, 2018. RBI released draft
guidelines based on BCBS roadmap on December 30, 2011, and based on
suggestions of various market participants final guidelines on May 2, 2013
for progressive implementation by banks in India from April 1, 2013. These
Norms were mandated by RBI
5
to be implemented progressively with effect
from 2013 and all banks were required to be fully compliant by March-end

1
The business of banking is to accept deposits from savers and make it available to users mainly for
productive purposes. Banks are therefore, inherently exposed to various types of risks such as
Liquidity risks, Credit risks, Market risks and last but not the least operational risks.
2
Dr. Dilip K. Chellani. Banking in India: An Assessment of Changes. Southern Economist, Number
19, February 1, 2012.
3
Basel is a city in north-western Switzerland on the river Rhine.
4
Historically, G-10 refers to the group of countries that have agreed to participate in General
Arrangements to Borrow (GAB). The GAB was established in 1962, when the governments of
8 International Monetary Fund (IMF) members viz. Belgium, Canada, France, Italy, Japan,
Netherlands, United Kingdom & United States and the central banks of two other countries viz.
Germany and Sweden, agreed to make resources available to the IMF for drawings by participants
and circumstances, for drawings by nonparticipants.
5
RBI Master Circular Number -. RBI/2013-14/70 DBOD No. BP.BC. 2/21.06.201/2013-14 dated 01-
07-2013.
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Global Perspective:
Basel Framework

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Global Perspective:
Basel Framework

Global Perspective:
Basel Framework
2018. However, on March 27, 2014, RBI extended this time line for banks by
one year i.e., now by March-end 2019 all banks in India were to be Basel-III
compliant
6
but it was extended repeatedly to January 01, 2022 and now
finally mandated to be compliant by January 01, 2023, in the wake of the
Covid-19 pandemic. This highlights the grave challenges that banks in India
are facing in implementing new international regulatory norms of Basel–III.
However, as always cautious and conservative approach of RBI and their
strict regulatory oversight, pro-active prudential risk management tools have
been employed by every bank’s top management. It is expected that banks
particularly Private-Sector Banks (PBs) would be able to sail through
smoothly as ever in the past. Government of India (GOI) in consultation with
RBI may announce more of Public Sector Banks (PSBs) mergers at earliest
in this financial year only, and reduces PSBs to maximum five (From earlier
total 28 to present 12 and further to have 5 PSBs in the current financial year
2022-2023) so as to become Basel III compliant
7
. All banks in India become
financial super market to qualify in due course to be reckoned as Domestic-
Systemically Important Banks (D-SIBs) as envisioned under Basel-III and
put banks in India at par on international standards and norms.
5.2 HISTORICAL PERSPECTIVE
During early eighties period, over 130 countries had experienced ‘significant’
banking sector distress
8
. In order to prevent such risk, the BCBS met in 1987
in Basel, Switzerland with a view to strengthen the stability of international
banking system. The Committee’s first draft document states “to set up an
International Norm of 'minimum' amount of capital that banks should hold”.
This minimum was a percentage of total capital of a bank, which is also
called Capital Adequacy Ratio (CAR). In July 1988, Basel Capital Accord
(agreement) was created as “the International Convergence of Capital
Measurement and Capital Standards of BCBS”. The agreement underlined on
reducing credit risk at the minimum Capital Risk Adjusted Ratio (CRAR) of
8% of the Risk Weighted Assets (RWAs). This was first International Norm
emphasizing the importance of risk in relation to bank capital. The strength
of Basel-I therefore, lies in inducing banks to maintain adequate capital ratios
and shall thus, remain a milestone in finance and banking history. Although it
was originally meant for banks in G-10 Countries, subsequently more than
hundred countries claimed to adhere to it and RBI also asked banks to
implement Basel-I provisions from April 01, 1998.

6
RBI Circular Number-RBI/2013-14/538 DBOD No- BP-BC-102/21.06.201/2013-14 Dated 27-3-
2014.
7
Based on the study conducted in an unpublished P.hd thesis guided by the author in 2017.
8
“Tackling the Global Job Crisis: Recovery through decent work policies”: Report of Director
General, ILO, Geneva-(2009). (…130 Countries with sound macroeconomic and financial policies,
which were not immediately affected by the financial crisis, are now hit by the adverse trade flows;
bolstering distressed banking systems; unemployment problem …….and find difficult in keeping
infrastructure projects on track”……)
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Global Perspective:
Basel Framework

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Global Perspective:
Basel Framework

90
Corporate Governance
in Banking
Activity 1
Go to the website of the BIS and review its functions.
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
Introduction of Basel Norms in India
With the start of last decade of bygone century, India faced currency crisis
(Currency crisis occurs when a nation is unable to pay for essential imports
or service its external debt repayments). IMF asked India to pledge gold
reserves in return for the interim loan of $3.9 billion. India carried 67 tons of
gold in two planes?—?one to London and another to Switzerland to get the
urgent financial assistance. The 1991 Indian general election were held
because the previous Lok Sabha had been dissolved in just 16 months after
government formation. The new government which was formed put domestic
economy back on track with the introduction of reforms that liberalized the
India's economy. Dr. Manmohan Singh as Finance Minister, carried out
several structural reforms (As a result of these reforms, India has solved the
problem of currency shortages along with other problems) that liberalized
India's economy solely based on the specific and strong recommendation of
Narasimham Committee. In the year 1992-93 the Narasimham Committee
submitted its first report and recommended inter-alia that all banks are
required to have a minimum capital of 8% to the Risk Weighted Assets
(RWAs).
The Narasimham Committee Report was thus, in tune with global practices
as enunciated by Basel-Norms. As said earlier, India was fortunate to be
almost unaffected by Asian Financial Crisis (AFC) and as such there was
not much criticism of Basel-I in regulating banks or its impact on the
economy. It was with a view to keep pace with the global best practices that
India also migrated to Basel Norms. As said earlier, Basel-I was the first
international Norm emphasizing the importance of risk in relation to bank
capital with simplified calculations and classifications. The Report of
Narasimham Committee-II was submitted in 1998-99 and it recommended
raising of Capital Adequacy Ratio (CAR) to 10% in a phased manner: 9% to
be achieved by the year 2000 and 10% by 2002. In 1996, BCBS also made
amendments to its Basel-I Accord. Basel-II Norms were designed to address
all the shortcomings that had surfaced in the wake of the AFC. The BCBS
released the “International Convergence of Capital Measurement and Capital
Standards: a Revised Framework–BCBS”
9
in June 2004 with the fundamental

9
The International Convergence of Capital Measurement and Capital Standards: a Revised
Framework, 2004–Published by BIS, Known as Basel-II Accord -128”.
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Global Perspective:
Basel Framework

89
Global Perspective:
Basel Framework

9
The International Convergence of Capital Measurement and Capital Standards: a Revised
Framework, 2004–Published by BIS, Known as Basel-II Accord -128”.

91
Global Perspective:
Basel Framework

Global Perspective:
Basel Framework
objective being “to develop a framework that would further strengthen the
soundness and stability of international banking system while maintaining
sufficient consistency that capital adequacy regulation will not be a
significant source of competitive inequality among internationally active
banks”. This document of BCBS was further supplemented by the
“amendment to Capital Accord to incorporate Market Risks” in November
2005. These recommendations on banking laws and regulations issued by the
BCBS together are popularly known as Basel-II framework which was set
out to revising and setting right the inadequacies of Basel-I.
5.3 RBI’S APPROACH TO IMPLEMENTATION
OF BASEL NORMS
As said earlier, with the commencement of banking sector reforms on the
recommendations of Narasimham Committee I and II during the last decade
of bygone century, RBI consistently upgraded the banking sector by issuing
various regulatory initiatives so as to ensure that the banks have tailor made
risk management frameworks dictated by their size, complexity of business,
market perceptions and last but not the least, the expected level of capital.
RBI issued series of specific guidelines to banks like on health code system
(With effect from 1-4-2004 the NPAs
10
norms were made on par with
International norms of 90 days.), prudential norms of capital adequacy etc. so
as to adhere to adopt and adept by adjusting to the systems and procedures as
per specific indigenized requirements. Accordingly, by 2004, there was
ample optimism and evidence of the capacity of the Indian banking system to
migrate smoothly to Basel-II Norms. Further, to ensure a smooth migration, a
consultative and participative approach was adopted for both designing and
implementing Basel-II Norms. A Steering Committee comprising of senior
officials from 14 banks (public, private and foreign) was constituted with
representation from the Indian Banks’ Association (IBA) and RBI. The
Steering Committee had formed sub-groups to address specific issues and
disclosure norms. On the basis of recommendations of the Steering
Committee, in February 2005, RBI proposed draft guidelines for banks on
implementation of New Capital Adequacy Framework. RBI had also
specified that the migration to Basel-II would be effective March 31, 2007
and had suggested that banks should adopt these new guidelines and parallel
run effective April 1, 2006. RBI later, extended this to Feb. 2009.
Hence, Basel-II Norms were introduced progressively from February 2009 in
India. Important to note here is that, in Basel-II, the definition of Capital
Fund remained same as that in Basel-I. Further, the method of calculation of
RWAs was modified to include market risk and operational risk, in addition
to the credit risk that alone was reckoned in Basel-I/1988 Capital Accord.

10
Shri R. K. Sinha and Dr. D. K. Chellani; ‘Dimensions of Spurt in Non- Performing Assets of
Public Sector Banks in India’. International Journal of Liberal Arts and Social Science, UK.
ISSN:230-924X, No. 6. August 2014..

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FAQs on Global Perspective: Basel Framework - RBI Grade B Phase 2 Preparation - Bank Exams

1. What is the Basel Framework and why is it important for banks?

Ans. The Basel Framework refers to a set of international banking regulations developed by the Basel Committee on Banking Supervision (BCBS). It aims to ensure that financial institutions maintain adequate capital to meet obligations and absorb unexpected losses. This framework is crucial for promoting stability in the global financial system by establishing minimum capital requirements, risk management standards, and supervisory practices.

2. How often do Basel Framework bank exams occur?

Ans. Basel Framework bank exams do not have a fixed schedule; however, they are generally conducted periodically by regulatory authorities in line with the Basel Committee's guidelines. The frequency can depend on various factors, including changes in regulations, market conditions, and the individual bank's performance. Banks are expected to consistently adhere to the Basel standards throughout their operations.

3. What are the key components of the Basel III framework?

Ans. The Basel III framework includes several key components: increased capital requirements, a new liquidity framework, and leverage ratios. It emphasizes higher quality capital, particularly common equity tier 1 (CET1) capital, and introduces liquidity coverage ratios (LCR) and net stable funding ratios (NSFR) to enhance banks' risk management and reduce the likelihood of financial crises.

4. What types of risks do the Basel Framework regulations address?

Ans. The Basel Framework addresses various types of risks faced by banks, including credit risk, operational risk, and market risk. Additionally, it encompasses liquidity risk and systemic risk, which are critical for maintaining overall financial stability. By providing guidelines on risk management, the framework helps banks mitigate potential losses and maintain solvency.

5. How do Basel Framework exams impact bank operations?

Ans. Basel Framework exams significantly influence bank operations by ensuring compliance with regulatory standards. These exams help banks identify and rectify weaknesses in their risk management practices and capital adequacy. Successful compliance can enhance a bank's reputation and trustworthiness in the market, while failure to meet standards can result in penalties, increased scrutiny, and potential loss of licenses.

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