The Reserve Bank today released on its website, draft guidelines outlining proposed implementation of Basel III capital regulation in India. These guidelines are in response to the comprehensive reform package entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” of the Basel Committee on Banking Supervision (BCBS) issued in December 2010.

The major highlights of the draft guidelines are:

Minimum Capital Requirements

  • Common Equity Tier 1 (CET1) capital must be at least 5.5% of risk-weighted assets (RWAs);
  • Tier 1 capital must be at least 7% of RWAs; and
  • Total capital must be at least 9% of RWAs.

Capital Conservation Buffer

  • The capital conservation buffer in the form of Common Equity of 2.5% of RWAs.

Transitional Arrangements

  • It is proposed that the implementation period of minimum capital requirements and deductions from Common Equity will begin from January 1, 2013 and be fully implemented as on March 31, 2017.
  • Capital conservation buffer requirement is proposed to be implemented between March 31, 2014 and March 31, 2017.
  • The implementation schedule indicated above will be finalized taking into account the feedback received on these guidelines.
  • Instruments which no longer qualify as regulatory capital instruments will be phased-out during the period beginning from January 1, 2013 to March 31, 2022.

Enhancing Risk Coverage

  • For OTC derivatives, in addition to the capital charge for counterparty default risk under Current Exposure Method, banks will be required to compute an additional credit value adjustments (CVA) risk capital charge.

Leverage Ratio

  • The parallel run for the leverage ratio will be from January 1, 2013 to January 1, 2017, during which banks would be expected to strive to operate at a minimum Tier 1 leverage ratio of 5%. The leverage ratio requirement will be finalized taking into account the final proposal of the Basel Committee.

Comments / Feedback

Comments / feedback on the draft guidelines, including implementation schedule may be sent on or before February 15, 2012 to the Chief General Manager-in-Charge, Department of Banking Operations and Development, Reserve Bank of India, Central Office Building, 12th Floor, S.B. Singh Marg, Mumbai – 400001, through e-mail . The guidelines will be finalized taking into account the suggestions and comments.

Background

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It may be recalled that in the Second Quarter Review of Monetary Policy 2011-12 (paragraph 95) on October 25, 2011, it was announced that the Reserve Bank would issue the draft guidelines for implementing the Basel III framework by end-December 2011.

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Notification Related to above is as follows:-

RBI/2011-12/331
DBOD.No.BP.BC. 71/ 21.06.201 / 2011-12

December 30, 2011

The Chairman and Managing Directors/
Chief Executives Officers of
All Scheduled Commercial Banks
(Excluding Local Area Banks and Regional Rural Banks)

Madam / Dear Sir,

Implementation of Basel III Capital Regulations in India – Draft Guidelines

As you are aware, the Basel Committee on Banking Supervision (BCBS) has issued comprehensive reform packages entitled “Basel III: A global regulatory framework for more resilient banks and banking systems” and “Basel III: International framework for liquidity risk measurement, standard and monitoring” in December 2010, with the objective of improving banking sector resilience by strengthening global capital and liquidity regulations, respectively. The reform package addresses the lessons of the financial crisis and aims at enhancing banking sector’s ability to absorb shocks arising from financial and economic stress. Further, the BCBS, through the reform package also aims to improve risk management and governance as well as strengthen banks’ transparency and disclosure standards relating to regulatory capital. The reforms also have a macroprudential focus, addressing system-wide risks which can build up across the banking sector as well as the procyclical amplification of these risks over time.

2. Reserve Bank of India, being a member of the BCBS, is fully committed to the objectives of Basel III reform package and therefore, intends to implement these proposals for banks operating in India. Accordingly, guidelines have been drafted based on the Basel III reforms on capital regulation, to the extent applicable to banks operating in India. RBI is currently working on operational aspects of implementation of the Countercyclical Capital Buffer. Guidance to banks on this will be issued in due course. Similarly, guidelines on new global liquidity standards introduced as part of Basel III (Basel III: International framework for liquidity risk measurement, standards and monitoring, December 2010) will be issued separately.

3. The Basel III framework will be applicable both at the level of consolidated bank as well as at the level of stand-alone bank. Accordingly, overseas operations of a bank through its branches will be covered in both the scenarios.

4. Draft guidelines are enclosed. Banks are requested to offer their comments / suggestions on the various proposals enumerated therein latest by February 15, 2012 by mail to the Chief General Manager-in-Charge, Reserve Bank of India, Department of Banking Operations and Development, Central Office, 12th floor, Central Office Building, Shahid Bhagat Singh Marg, Mumbai-400001 or through e-mail .

Yours faithfully,

(Deepak Singhal)
Chief General Manager-in-Charge

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