The Bank for International Settlements, the apex bank for all central banks, has complimented the Indian banking authorities for their substantial reforms and alignment with the Basel framework.
According to BIS’ Regulatory Consistency Assessment Programme (RCAP), which evaluates a country’s readiness for Basel III norms, “The risk-based capital requirements issued in July 2014 are assessed as compliant with the minimum Basel capital standards. All 14 components of the Basel framework included in the assessment have been assessed as compliant.” Observing that the additional regulatory initiatives undertaken by the RBI improved the level of compliance, it said that the assessment would have generated a relatively less positive result in the absence of these changes.
The 14 parameters include scope of application, transitional arrangements, definition of capital, various approaches to quantify risk capital (credit, market and operational risks), securitisation framework, capital buffers (conservation and countercyclical), supervisory review process, legal and regulatory framework for the supervisory review process and for taking supervisory actions besides disclosure requirements.
The RCAP team noted that these regulations were yet to be applied in substantial practice to Indian banks and thus the deviations observed had to be kept under follow-up review for materiality assessment.
It observed that several aspects of the Indian framework were more conservative than the Basel framework. This included higher minimum capital requirements and risk weightings for certain types of exposures, as well as higher minimum capital ratios.
The RBI also applied certain restrictions to banking activities through its prudential framework, it added.
RCAP observed that India’s regulatory documents used the word ‘may’ for implementing minimum binding requirements. For linguistic clarity and in line with international practices, RCAP has suggested that the word ‘must’ be used to ensure that local regulatory documents can be unambiguously understood even in an international context. The Indian Basel III framework for bank risk-based capital requirements came into force in April 2013.