Basel Norms: Basel I, II, III & Implementation in India

What are Basel Norms?

Definition: International banking regulations issued by the Basel Committee on Banking Supervision (BCBS) to ensure financial stability.

Objective: Strengthen bank capital adequacy, risk management, and transparency.

1. Basel I (1988)

Key Features:

• Introduced minimum capital requirements (8% of risk-weighted assets).
• Focused only on credit risk.

Implementation in India:

• Adopted in 1992 after Narasimham Committee-I recommendations.
• Banks required to maintain CRAR (Capital to Risk-Weighted Assets Ratio).

2. Basel II (2004)

Three Pillars:

Pillar	Description
Pillar 1	Minimum Capital Requirements (Credit, Market, Operational Risks)
Pillar 2	Supervisory Review (RBI monitors banks' risk management)
Pillar 3	Market Discipline (Public disclosures by banks)

Implementation in India:

• Phased adoption from 2008-2009.
• Introduced Standardized Approach for risk measurement.

3. Basel III (2010, Post-2008 Crisis)

Key Reforms:

• Higher Capital Requirements:
  • Common Equity Tier 1 (CET1): 4.5% (vs 2% in Basel II)
  • Total Capital Ratio: 8% + 2.5% Capital Conservation Buffer
• Liquidity Ratios:
  • Liquidity Coverage Ratio (LCR): Ensures 30-day survival during crisis.
  • Net Stable Funding Ratio (NSFR): Long-term stability.
• Leverage Ratio: Caps excessive borrowing (3% minimum).

Implementation in India:

• RBI phased it from 2013-2019.
• Indian banks required higher CET1 (5.5%) than global norms.
• Introduced Countercyclical Capital Buffer (CCyB) during high credit growth.

4. Basel III.1 (2017 Reforms)

• Revised standardized approach for credit risk.
• New output floor to limit internal model advantages.
• India’s timeline: Implementation by 2025.

5. Impact on Indian Banking System

Positive Effects:

• Reduced NPAs due to stricter risk management.
• Improved transparency (Pillar 3 disclosures).

Challenges:

• PSBs struggled to raise capital (led to recapitalization plans).
• Higher compliance costs for small banks.

Key Terms (Prelims Focus)

• CRAR: Capital to Risk-Weighted Assets Ratio.
• CCyB: Countercyclical Capital Buffer (0-2.5%).
• PCA Framework: RBI’s Prompt Corrective Action for weak banks.

Conclusion

Basel norms are critical for UPSC Prelims (Economy). Focus on Basel III reforms, RBI’s implementation, and terms like LCR, NSFR.