The capital and provisioning requirements for banks will increase once Basel III guidelines come into force. However, there will be no pressure on banks to raise capital immediately as the deadline for implementation is 2017, said bankers.
The Reserve Bank of India released the draft guidelines for implementation of Basel III capital regulation on Friday.
As per the draft guidelines, banks have to build up capital buffers, called Capital Conservation Buffer, during normal times which can be drawn down as losses are incurred during a stressed period.
Common Equity
Therefore, in addition to the minimum total capital requirement of 8 per cent, banks will be required to hold a capital conservation buffer of 2.5 per cent of Risk Weighted Assets in the form of Common Equity to withstand future periods of stress, said the RBI.
In addition, the RBI has also recommended a countercyclical capital buffer, the purpose of which is to protect the banking sector from periods of excess aggregate credit growth.
“For any given country, this buffer will only be in effect when there is excess credit growth that results in a system-wide build up of risk,” the RBI said.
This countercyclical buffer will ensure that banks have capital to fall back on in case of a crisis, said an official from a public sector bank
The transparency of capital base will be improved, with all elements of capital required to be disclosed along with a detailed reconciliation to the published accounts.
This requirement will improve the market discipline under Pillar 3 of the Basel II framework, said RBI.