BASEL Norms | IBPS PO Prelims & Mains Preparation - Bank Exams PDF Download

Introduction

• BIS fosters co-operation among central banks with a common goal of financial stability and common standards of banking regulations.
• The Bank for International Settlements (BIS) established on 17 May 1930, is the world's oldest international financial organisation. There are two representative offices in the Hong Kong and in Mexico City. In total BIS has 60 member countries from all over the world and covers approx 95% of the world GDP.

Objective

• The set of the agreement by the BCBS (BASEL COMMITTEE ON BANKING SUPERVISION), which mainly focuses on risks to banks and the financial system are called Basel accord.
• The purpose of the accord is to ensure that financial institutions have enough capital on account to meet the obligations and absorb unexpected losses.
• India has accepted Basel accords for the banking system.
• BASEL ACCORD has given us three BASEL NORMS which are BASEL 1,2 and 3.

Tier 1 - The Tier- I Capital is the core capital

• Paid up Capital, Statutory Reserves, Other disclosed free reserves, Capital Reserves which represent surplus arising out of the sale proceeds of the assets, other intangible assets belong from the category of Tier1 capital.

Tier 2 - Tier-II capital can be said to be subordinate capitals.

• Undisclosed reserves, Revaluation Reserves, General Provisions and loss reserves , Hybrid debt capital instruments such as bonds, Long term unsecured loans, Debt Capital Instruments etc belong from the category of Tier 2 capital.

Risk Weighted Assets

• RWA means assets with different risk profiles; it means that we all know that is much larger risk in personal loans in comparison to the housing loan, so with different types of loans the risk percentage on these loans also varies.

BASEL - I

• In 1988, The Basel Committee on Banking Supervision (BCBS) introduced capital measurement system called Basel capital accord, also called as Basel 1.
• It focused almost entirely on credit risk, It defined capital and structure of risk weights for banks.
• The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA).
• India adopted Basel 1 guidelines in 1999.

BASEL - II

• Banks should maintain a minimum capital adequacy requirement of 8% of risk assets.
• Banks were needed to develop and use better risk management techniques in monitoring and managing all the three types of risks that is credit and increased disclosure requirements.
• The three types of risk are- operational risk, market risk, capital risk.
• Banks need to mandatory disclose their risk exposure, etc to the central bank.
• Basel II norms in India and overseas are yet to be fully implemented.

The three pillars of BASEL-3 can be understood from the following figure

Basel III

• In 2010, Basel III guidelines were released. These guidelines were introduced in response to the financial crisis of 2008.
• In 2008, Lehman Brothers collapsed in September 2008, the need for a fundamental strengthening of the Basel II framework had become apparent.
• Basel III norms aim at making most banking activities such as their trading book activities more capital-intensive.
• The guidelines aim to promote a more resilient banking system by focusing on four vital banking parameters viz. capital, leverage, funding and liquidity.
• Presently, the Indian banking system follows Basel III norms. Additionally, the RBI has extended Basel III capital framework to All India Financial Institutions (AIFIs) from April 2024.
  
• The Reserve Bank of India has fully implemented Basel III capital regulations, with continuous refinements based on evolving risk factors

Important Points Regarding Implementation of Basel III

• The Government of India has been infusing capital into Public Sector Banks (PSBs) to strengthen their financial position and ensure compliance with Basel III norms
• The government has announced a capital infusion of Rs 55,250 crore in ten public sector banks, including Punjab National Bank (Rs 16,000 crore), Union Bank (Rs 11,700 crore), Bank of Baroda (Rs 7,000 crore), and Canara Bank (Rs 6,500 crore), to enhance their capital and meet global risk norms
• This capital infusion is part of the government's ongoing efforts to strengthen PSBs, with significant allocations made in recent budgets to support these bank 
• The Indian government has infused significant capital into PSBs over the years. However, in 2025, the focus has shifted to strategic stake sales in public sector banks to ensure compliance with the 25% public shareholding mandat
• The Finance Minister has highlighted the need for capital infusion in public sector banks but has also introduced alternative strategies, such as stake sales, to enhance their financial health and governance.