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Basel norms and Indian reality

Basel accord refers to a set of agreement by members of Basel Committee on Banking Supervision (BCBS) which mainly focuses on risks to banks and the financial system. At different stages it devised various tools like CASA, RWA, LEVERAGE RATIO, etc. However, the main objective remained the same i.e. to minimize the risk to banks and financial system.
For instance, Basel I 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).
While Basel III introduced a set of reforms designed to improve the regulation, supervision and risk management within the banking sector. Under this norm banks are required to maintain proper leverage ratios and meet certain minimum capital requirements.
So, the overall focus of Basel Norms can be summed up as

  1. To maintain a minimum reserve to meet some unforeseen risk
  2. To enhance such capital like Tier 1 capital that is considered to be least at risk
  3. To minimize banks’ NPAs

Why Indian banks do not need Basel norms in its complete form?
1. To maintain large idle fund in Indian system means ‘scarce fund’ becoming scarcer, which is much needed by Indian economy.
2. Infusion of capital into banks under Basel norms means more pressure on government as over 3/4th of this sector is under government control. This in turn will
• Aggravate fiscal management of government
• To bring more fiscal prudence, government will be forced to increase taxes, this in turn will increase burden on exchequers.
3. Moreover Indian banking system is shielded by Three Fire Walls viz.
• No foreign ownership of Indian Banks,
• 85% of banking asset owned by government, and
• High CRR & SLR rates which secures the interest of depositor as well insulate it from certain external risk
4. India needs cheap and easy money to boost its economy. Basel norms puts pressure on this front also, making lending by banks dearer.
5. Also, Indian banking system is facing the problem of NPAs and one of the major cause of it is high lending rate being followed by Indian banks. With Basel norms, ease of lending by banks is sacrificed and it does not suit India condition.
6. Indian Banks do not need Basel norm like NPAs rule of 90 days. A system where a lot is required to be done for ease of doing business, 90 day norm come as ultimate constraint and stress on the economic asset creator.
7. Basel norms are for developed economy where the problem is of excess of cheap liquid money, which are at risk because of various reasons faced by developed economy.
8. Moreover, to push development, investment needs to be increased in India. This will come from banking system. It is the Indian Banks that creates money & not the RBI and so banks in India need more operational capital at their disposal to enhance multiplier tool.

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