How Successful is the Indian Banking System in Upgrading to Basel III? – Some Exploratory Evidence

Abstract

The Basel III framework was introduced by the Bank for International Settlements (BIS after the 2008 financial crisis which revealed the shortcomings of the Basel II norms. All the countries are supposed to implement Basel III norms by March 2019. The Basel Committee has recognized that the capital adequacy of banks plays a critical role in banks’ failure and has increased the total capital adequacy to 9%, of which Tier I capital is 7% and Tier II capital is 2%. Other than this, a countercyclical buffer has also been introduced, the implementation of which will start from 2015. The higher capital requirements are expected to raise certain challenges for the developing nations like India. The paper first analyzes the current situation of the Indian banks by classifying the banks into public sector banks and private sector banks, new banks and old banks, and domestic banks and MNCs, and then compares the results in each category. The paper then discusses that even though the Central Bank has done a great job in maintaining the capital adequacy, it does not necessarily imply that the banks are safe because despite adequate capital, banks can fail. The paper also discusses that it would not be easy for the banks to maintain capital adequacy once the countercyclical buffer requirements kick in. As the Government of India is the majority stakeholder in the public sector banks, the higher capital requirements could also impact the Indian economy negatively.