SYMBIOSIS CENTER FOR DISTANCE LEARNING

(Deemed University)

Project Report

“The impact of Basel III on Public Sector Banks”

Submitted by

JYOTSNA SINGH (Reg No. 201311587)

Submitted to

Symbiosis Center For Distance Learning

Symbiosis Bhavan, Pune-411016
Maharashtra, India
 SYMBIOSIS CENTER FOR DISTANCE LEARNING
(Deemed University)

MAY 2015

“The impact of Basel III on Public Sector Banks”

A Project Report submitted in partial fulfillment of the requirements

for the award of the degree of

Post Graduate Diploma In Banking and

Finance(PGDBF)

Submitted by

JYOTSNA SINGH
Symbiosis Center For Distance Learning
Symbiosis Bhavan, Pune-411016
Maharashtra, India
S. No. Topic Page
1 No Objection Certificate i
2 Declaration regarding originality ii
3 Certificate by the Guide iii
4 Acknowledgement iv
5 Preface v-vi
6 Executive Summary vii
7 CHAPTER -- 1 : Introduction (1-34)
 Risk Management 1-6
 Past history 7-9
 Basel I 10-14
 Basel II 15-17
 Basel III 18-24
 International view 25-27
 Basel III Implementation in India 28-31
 Major challenges 32-35

8 CHAPTER – 2 : Research Methodology (36-41)

 Introduction of the Project 37
 Hypothesis/objective of the Projects 38
 Sampling Method 39
 Research Design 40
 Sampling Procedure 41
 Data collection methods 41
 Data collection instrument 41

9 CHAPTER – 3 : Findings And Analysis (42-63)

 Data Analysis 43-59
 Findings& Analysis 60-62

10 CHAPTER – 4 : Conclusion And Recommendations (63-68)

 Conclusion 64-65
 Recommendations 66-68
11 CHAPTER – 5 : Webliography& Appendix (69-75)
 Webliography 70
 Questionnaire 71-75
 NO OBJECTION CERTIFICATE

This is to certify that Jyotsna Singh is an employee of this institution /organization for the past
2.5 years.

We have no objection for her to carry out a project work titled “The Impact of Basel III on
Public Sector Banks”in our organization and for submitting the same to the Director, SCDL
as a part of fulfillment of the Post Graduate Diploma in Banking and Finance Program.

We wish her all the success.

Signature of Competent Authority

Place: New Delhi

Date:

i
DECLARATION REGARDING ORIGINALITY

This is to declare that I have carried out this project work myself in part fulfillment of the Post
Graduate Diploma InBanking and Finance (PGDBF) Program of SCDL.

This work is original, has not been copied from anywhere else and has not been submitted to
any other University/Institute for an award of any degree/ diploma.

Date:- Signature:-
Place:-New Delhi Name:-Jyotsna Singh

ii
 SPECIMEN

Certified that the work incorporated in this Project Report “The Impact of Basel III on
Public Sector Banks” submitted by Jyotsna Singh is her original work and completed under
my supervision.Material obtained from other sources has been duly acknowledged in the
Project Report.

Date: Place: Signature of Guide:

iii
 ACKNOWLEDGEMENT

It gives me immense pleasure to express my deepest sense of gratitude and sincere thanks to
my highly respected and esteemed Mrs. Manu Singh–Manager (M.Com) for her valuable
guidance, encouragement and help for completing this work. Her useful suggestions for this
whole work and co-operative behaviour are sincerely acknowledged.

I am also grateful to SCDL for their constant support and guidance.

At the end we would like to express our sincere thanks to all my friends and family members
who helped me directly or indirectly during this project work.

JYOTSNA SINGH

Reg. No. 201311587

iv
 Preface
Today's age is an age of management. Management is the backbone of any
organization or any activity done. The real success of management lies in applying the
professional management techniques in all managerial activities. As we move into an era of
intense competition and high performance expectations, it is important that we develop the
Winning edge.

Practical study is eminent, and plays vital role for the students of management, because
classroom coaching and theoretical study alone are not enough. To survive in this highly
competitive world, practicality outweighs theoretic. Students are supposed to learn the various
principles of business administration conceptually but accuracy and efficiency in their
implementation is possible only through exposure to practical environment.

Hence, to attain this objective and to have the outlook of all intricacies of corporate
world I have undertaken topic "Studying the impact of Basel III on Public sector Banks.”.

In banking entity assets are created as a process of intermediation by accepting

deposits. The basic function of intermediation itself is a source of credit and liquidity risks for
any banking institution. Moreover, banks are exposed to various market and non-market risks
in performing their functions. These risks expose banks to events, both expected and
unexpected, with the potential to cause losses, putting depositors' money at risk.

Expected losses may be mitigated by a combination of product pricing and accounting loss
provisions, while capital funds are expected to meet unexpected losses. Thus the primary role
of capital in a banking institution is to meet the unexpected losses arising out of portfolio
choice of banks and to protect the depositor's money.

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 The Basel III framework, whose main thrust has been enhancing the banking sector's
safety and stability, emphasises the need to improve the quality and quantity of capital
components, leverage ratio, liquidity standards, and enhanced disclosures.

This project report first lays the context of Basel I,1.5,II,2.5,III and then incorporates
the analysis on the challenges of implementing the Basel III framework, especially in areas
such as augmentation of capital resources, growth versus financial stability, Challenges for
enhanced profitability, deposit pricing, cost of credit, maintenance of liquidity standards, and
strengthening of risk architecture.

I have tried my best and have applied all my efforts, knowledge and sources available
in this project report.

vi
 Executive Summary
Business is the art of extracting money from other’s pocket, sans resorting to violence.
But profiting in business without exposing to risk is like trying to live without being born Risk
is inherent in any walk of life in general and in financial sectors in particular.

Everyone knows that risk taking is failure prone as otherwise it would be treated as
sure taking. Hence risk is inherent in any walk of life in general and in financial sectors in
particular. Of late, banks have grown from being a financial intermediary into a risk
intermediary at present. But of late, banks are exposed to same competition and hence are
compelled to encounter various types of financial and non-financial risks. Risks and
uncertainties form an integral part of banking which by nature entails taking risks. There are
three main categories of risks; Credit Risk, Market Risk & Operational Risk.

In the process of financial intermediation, the gap of which becomes thinner and
thinner, banks are exposed to severe competition and hence are compelled to encounter
various types of financial and non-financial risks. Risks and uncertainties form an integral part
of banking which by nature entails taking risks. Business grows mainly by taking risk. Greater
the risk, higher the profit and hence the business unit must strike a trade off between the two.

The essential functions of risk management are to identify measure and more
importantly monitor the profile of the bank. While Non-Performing Assets are the legacy of
the past in the present, Risk Management system is the pro-active action in the present for the
future. Managing risk is nothing but managing the change before the risk manages. While new
avenues for the bank has opened up they have brought with them new risks as well, which the
banks will have to handle and overcome.

In this project report, I have conducted a survey on the impact of Basel III on Indian Banks. I
have interviewed managers of 27 different PSU’s, to find a suitable conclusion.

vii
Chapter 1

Introduction

1
 Risk Management
The etymology of the word “Risk” can be traced to the Latin word “Rescum”
meaning Risk at Sea or that which cuts. Risk is associated with uncertainty and reflected by
way of charge on the fundamental/basic i.e. in the case of business it is the Capital, which is
the cushion that protects the liability holders of an institution.

TYPES OF RISKS

When we use the term “Risk”, we all mean financial risk or uncertainty of financial loss. As
per the Reserve Bank of India guidelines issued in Oct. 1999, there are three major types of
risks encountered by the banks and these are Credit Risk, Market Risk & Operational Risk.
After publishing draft guidance note on Credit Risk Management and market risk
management, the RBI has issued the final guidelines and advised some of the large PSU banks
to implement so as to gauge the impact. Hence the need for sufficient Capital Adequacy Ratio
is felt. Each type of risks is measured to determine both the expected and unexpected losses
using VaR (Value at Risk) or worst-case type analytical model.

CREDIT RISK

Credit Risk is the potential that a bank borrower/counter party fails to meet the obligations on
Agreed terms. There is always scope for the borrower to default from his commitments for
one or the other reason resulting in crystallization of credit risk to the bank. Credit risk is
inherent to the business of lending funds to the operations linked closely to Market risk
variables.

2
The objective of credit risk management is to minimize the risk and maximize bank’s risk
adjusted rate of return by assuming and maintaining credit exposure within the acceptable
parameters.

The element of Credit Risk is Portfolio risk comprising Concentration Risk as well as
Intrinsic Risk and Transaction Risk comprising migration/down gradation risk as well as
Default Risk. At the transaction level, credit ratings are useful measures of evaluating credit
risk that is prevalent across the entire organization where treasury and credit functions are
handled. Portfolio analysis help in identifying concentration of credit risk, default/migration
statistics, recovery data, etc. Default is an extreme event of credit migration.

Off balance sheet exposures such as foreign exchange forward contracts, swaps options
etc are classified into three broad categories such as full Risk, Medium Risk and Low
risk and then translated into risk weighted assets.

MARKET RISK

Market Risk may be defined as the possibility of loss to bank caused by the changes in the
market variables. It is the risk that the value of on-/off-balance sheet positions will be
adversely affected by movements in equity and interest rate markets, currency exchange rates
and commodity prices. Market risk is the risk to the bank’s earnings and capital due to
changes in the market level of interest rates or prices of securities, foreign exchange and
equities, as well as the volatilities, of those prices.

Scenario analysis and stress testing is yet another tool used to assess areas of potential
problems in a given portfolio. Identification of future changes in economic conditions like –
economic/industry overturns, market risk events, liquidity conditions etc that could have
unfavourable effect on bank’s portfolio is a condition precedent for carrying out stress testing.

3
Liquidity Risk: Bank Deposits generally have a much shorter contractual maturity than loans
and liquidity management needs to provide a cushion to cover anticipated deposit
withdrawals. Liquidity is the ability to efficiently accommodate deposit as also reduction in
liabilities and to fund the loan growth and possible funding of the off-balance sheet claims.
The cash flows are placed in different time buckets based on future likely behaviour of assets,
liabilities and off-Balance sheet items. Liquidity risk consists of Funding Risk, Time Risk
&Call Risk. It is the need to replace net out flows due to unanticipated
withdrawal/nonrenewal of deposit.

Time risk: It is the need to compensate for non receipt of expected inflows of funds, i.e.
performing assets turning into nonperforming assets.

Call risk: It happens on account of crystallization of contingent liabilities and inability to

undertake profitable business opportunities when desired. The Asset Liability Management
(ALM) is a part of the overall risk management system in the banks. It implies examination of
all the assets and liabilities simultaneously on a continuous basis with a view to ensuring a
proper balance between funds mobilization and their deployment with respect to their a)
maturity profiles, b) cost, c) yield, d) risk exposure, etc.

Interest Rate Risk

Interest Rate Risk is the potential negative impact on the Net Interest Income and it refers to
the vulnerability of an institution’s financial condition to the movement in interest rates.
Changes in interest rate affect earnings, value of assets, liability off-balance sheet items and
cash flow.

4
Hence, the objective of interest rate risk management is to maintain earnings, improve the
capability, ability to absorb potential loss and to ensure the adequacy of the compensation
received for the risk taken and affect risk return trade-off.

The various types of interest rate risks are detailed below:

Gap/Mismatch risk: It arises from holding assets and liabilities and off balance sheet items
with different principal amounts, maturity dates & re-pricing dates thereby creating exposure
to unexpected changes in the level of market interest rates.

Basis Risk: It is the risk that the Interest rate of different Assets/liabilities and off balance
items may change in different magnitude. The degree of basis risk is fairly high in respect of
banks that create composite assets out of composite liabilities.

Embedded option Risk: Option of pre-payment of loan and Fore- closure of deposits before
their stated maturities constitute embedded option risk

Yield curve risk: Movement in yield curve and the impact of that on portfolio values and
income.

Re price risk: When assets are sold before maturities.

Reinvestment risk: Uncertainty with regard to interest rate at which the future cash flows
could be reinvested.

5
Net interest position risk: When banks have more earning assets than paying liabilities, net
interest position risk arises in case market interest rates adjust downwards.

There are different techniques such as a) the traditional Maturity Gap Analysis to measure the
interest rate sensitivity, b) Duration Gap Analysis to measure interest rate sensitivity of
capital, c) simulation and d) Value at Risk for measurement of interest rate risk. The approach
towards measurement and hedging interest rate risk varies with segmentation of bank’s
balance sheet.

Value at Risk (VaR) is a method of assessing the market risk using standard statistical
techniques. It is a statisticalMeasure of risk exposure and measures the worst expected loss
over a given time interval under normal market conditions at a given confidence level of say
95% or 99%. Thus VaR is simply a distribution of probable outcome of future losses that may
occur on a portfolio. The actual result will not be known until the event takes place. Till then it
is a random variable whose outcome has been estimated.

Forex Risk

Foreign exchange risk is the risk that a bank may suffer loss as a result of adverse exchange
rate movement during a period in which it has an open position, either spot or forward or both
in same foreign currency.

6
BASEL HISTORY:-

The business of a bank is to lend deposits to its customers. The interest earned from the loans
is then used to pay for the deposits. While deposits and interest are safe, the bank faces the
risk of losing money on the loans they have given. Briefly put, while a bank’s assets (loans
and investments) are risky and prone to losses, its liabilities (deposits) are certain. Bank
failures are mainly caused by losses on its assets in the form of default by borrowers (credit
risk), losses on investments in different securities (market risk) and frauds, systems and
process failures (operational risks).

From the fundamental accounting equation we know that the assets should equal the external
liabilities plus capital. A loss in bank’s assets will have to be balanced by a reduction in the
capital because the liabilities (the deposits) are to be honoured under all circumstances.
Therefore, it should have sufficient capital at all times to absorb losses on account of credit,
market and operational risks. Banks fail when their capital is wiped out by such losses.

The 1970s saw banks operating on wafer-thin capital base. Under-capitalised banks were
prone to failure, which could have dramatic consequences for the economy. Failure of banks
with a presence across countries was even riskier as it could have cross-country effects.
Several international banks, especially Japanese outfits, tried to get short-term competitive
advantage by keeping low capital and charging lower interest rates on their loans and
advances. The definition of regulatory capital also differed from country to country.

The Basel Committee, established by the central-bank Governors of the Group of Ten
countries at the end of 1974, meets regularly four times a year. It has four main working
groups which also meet regularly.

The Committee’s members come from Argentina, Australia, Belgium, Brazil, Canada, China,
France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg,
Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden,
Switzerland, Turkey, the United Kingdom and the United States. Countries are represented by

7
their central bank and also by the authority with formal responsibility for the prudential
supervision of banking business where this is not the central bank. The present chairman of
the Committee is Mr Stefan Ingves, Governor of SverigesRiksbank, who succeeded Mr
NoutWellink on 1 July 2011.

The Committee does not possess any formal supranational supervisory authority, and its
conclusions do not, and were never intended to, have legal force. Rather, it formulates broad
supervisory standards and guidelines and recommends statements of best practice in the
expectation that individual authorities will take steps to implement them through detailed
arrangements – statutory or otherwise – which are best suited to their own national systems. In
this way, the Committee encourages convergence towards common approaches and common
standards without attempting detailed harmonisation of member countries supervisory
techniques.

The Committee reports to the central bank Governors and Heads of Supervision of its member
countries. It seeks their endorsement for its major initiatives. These decisions cover a very
wide range of financial issues. One important objective of the Committee’s work has been to
close gaps in international supervisory coverage in pursuit of two basic principles: that no
foreign banking establishment should escape supervision; and that supervision should be
adequate. To achieve this, the Committee has issued a long series of documents since 1975.

In 1988, the Committee decided to introduce a capital measurement system commonly

referred to as the Basel Capital Accord. This system provided for the implementation of a
credit risk measurement framework with a minimum capital standard of 8% by end-1992.
Since 1988, this framework has been progressively introduced not only in member countries
but also in virtually all other countries with internationally active banks. In June 1999, the
Committee issued a proposal for a revised Capital Adequacy Framework. The proposed
capital framework consists of three pillars: minimum capital requirements, which seek to
refine the standardised rules set forth in the 1988 Accord; supervisory review of an
institution’s internal assessment process and capital adequacy; and effective use of disclosure
to strengthen market discipline as a complement to supervisory efforts. Following extensive

8
interaction with banks, industry groups and supervisory authorities that are not members of the
Committee, the revised framework was issued on 26 June 2004. This text serves as a basis for
national rule-making and for banks to complete their preparations for the new framework’s
implementation.

Over the past few years, the Committee has moved more aggressively to promote sound
supervisory standards worldwide. In close collaboration with many jurisdictions which are not
members of the Committee, in 1997 it developed a set of “ Core Principles for Effective
Banking Supervision”, which provides a comprehensive blueprint for an effective supervisory
system. To facilitate implementation and assessment, the Committee in October 1999
developed the “ Core Principles Methodology”. The Core Principles and the Methodology
were revised recently and released in October 2006.

In response to the financial crisis of 2008, the Committee and its oversight body, the Group of
Governors and Heads of Supervision, have developed a reform programme to address the
lessons of the crisis, which delivers on the mandates for banking sector reforms established by
the G20 at their 2009 Pittsburgh summit. Collectively, the new global standards to address
both firm-specific and broader, systemic risks have been referred to as “Basel III”.

In order to enable a wider group of countries to be associated with the work being pursued in
Basel, the Committee has always encouraged contacts and cooperation between its members
and other banking supervisory authorities. It circulates to supervisors throughout the world
published and unpublished papers. In many cases, supervisory authorities in non-member
countries have seen fit publicly to associate themselves with the Committee’s initiatives.
Contacts have been further strengthened by International Conferences of Banking Supervisors
(ICBS) which take place every two years. The last 18th ICBS was held in China in 2014.

The Committee’s Secretariat is provided by the Bank for International Settlements in Basel.
The 17 person Secretariat is mainly staffed by professional supervisors on temporary
secondment from member institutions. In addition to undertaking the secretarial work for

9
theCommittee and its many expert sub-committees, it stands ready to give advice to
supervisory authorities in all countries.

ORIGIN OF BASEL I :-

The failure of the German Bank Herstatt in 1974 forced the central banks of the G-10
countries (Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, Sweden,
Switzerland, The United Kingdom and The United States) to delve deeper into the issue of
under-capitalised banks and non-standardised banking regulations. These countries, along with
Luxembourg, formed the "Basel Committee on Banking Supervision" under the aegis of the
Bank of International Settlements (BIS) in 1974. Formed in 1930, the BIS are one of the
oldest international financial institutions. It is actively involved in securing and maintaining
international central banks cooperation.

In July 1988, the Basel Committee came out with a set of recommendations aimed at
introducing minimum levels of capital for internationally active banks. Though these
proposals were not legally binding on the signatory countries, more than hundred supervisors
from different countries agreed to implement the Basel norms with modifications suited to
their domestic economies. This first series of recommendations by Basel Committee are
popularly known asBasel I norms.

FEATURES :-

These norms required the banks to maintain capital of at least 8 per cent of their risk-
weighted loan exposures. Different risk weights were specified by the committee for
different categories of exposure. For instance, government bonds carried risk-weight of 0 per
cent, while the corporate loans had a risk-weight of 100 per cent.

10
The Basel Committee also laid down standard definitions for different types of capital. Capital
was categorised as Tier I and Tier II capital. Tier I capital is mainly the permanent capital
like equity. Tier II capital is the supplementary capital like subordinate debt.

PRINICIPLES :-

The two principal purposes of the Accord were to ensure an adequate level of capital in the
international banking system and to create a "more level playing field" in competitive terms
so that banks could no longer build business volume without adequate capital backing. These
two objectives have been achieved. The merits of the Accord were widely recognised and
during the 1990s the Accord became an accepted world standard, with well over 100
countries applying the Basel framework to their banking system.

PITFALLS:-

However, there also have been some less positive features. The regulatory capital requirement
has been in conflict with increasingly sophisticated internal measures of economic capital. The
simple bucket approach with a flat 8% charge for claims on the private sector has given banks
an incentive to move high quality assets off the balance sheet, thus reducing the average
quality of bank loan portfolios. In addition, the 1988 Accord does not sufficiently recognise
credit risk mitigation techniques, such as collateral and guarantees. These are the principal
reasons why the Basel Committee decided to propose a more risk-sensitive framework in June
1999.

In India, the banks were required by the Reserve Bank of India to maintain a higher
capital-to-risk-weighted-assets ratio (CRAR) of 9 per cent.

Basel 1.5 :-

11
The highly fragmented nature of the US banking system is a reflection of the country's
federal political structure and long history of rivalry between rural and urban interests. While
a massive banking consolidation has occurred in the past 20 years, there are still many
thousands of small local banking and thrift institutions across the country. Moreover, these
institutions tend to be well connected with local politicians and thereby exercise significant
influence in Washington, especially in the House of Representatives. It was largely in
deference to the power of the small bank lobby that the US chose to diverge from the EU's
across-the-board application of Basel II.

The central concern of regional and community banks in the US was that larger rivals would
be able to reduce their minimum required capital for credit risk through sophisticated internal
ratings-based (IRB) models that were beyond the reach of smaller institutions. On top of that,
smaller banks using the Basel II standardised approach would have to carry additional capital
because of the operational risk provisions of the Accord. It was widely felt that this would
leave smaller institutions at a competitive disadvantage to larger money-centre banks.

The initial resolution was to require only large internationally active US banks to implement
the most advanced approaches to Basel II. While maintaining their decision not to mandate
Basel II below the top-tier banks, US regulators are now proposing a revision to their version
of the Basel I rules.1 This tentative new regime incorporates some provisions of the
standardised approach for credit risk, plus some thoughtful extensions of that approach,
while still excluding any explicit capital requirement for operational risk.

Among the potential revisions to the current application of Basel I, the agencies propose to
increase the number of risk weights from five to nine. Reducing the size of the steps between
available risk weights certainly seems like a good idea. It would reduce the tendency to defer
reclassifying a deteriorating asset due to a large step-change in the required capital.

The agencies also intend to introduce partial use of external credit ratings into the
determination of risk weights, while retaining the existing treatment in selected areas.

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Among the other suggested or proposed innovations are:

• Recognition of the risk mitigation from a broader range of collateral than is allowed in
Basel I and similar to what is permitted in the standardised approach;

• Recognition of an expanded range of guarantors;

• A more risk-sensitive treatment of residential mortgage loans;

• Possible introduction of greater risk sensitivity into the treatment of other consumer loans.

Collateral in the form of short- or long-term debt obligations (with appropriate haircuts) of
any entity rated investment grade by a nationally recognised statistical rating organisation
(NRSRO) would be reflected in the capital calculation. But the agencies caution that such
recognition would be contingent on deployment of a collateral management system that can
track and value the securities pledged.

Recognition of guarantees would be extended to those of any entity that has long-term senior
debt rated investment grade by an NRSRO, regardless of the OECD versus non-OECD
distinction. Again, this is similar to the provisions of the standardised approach.

Perhaps the most significant extension is in the treatment of secured one- to four-family
residential mortgages that receive a 50% risk weight under the standardised approach. At a
minimum, the agencies propose to make the risk weights sensitive to the loan-to-value
(LTV) ratio. An even more ambitious proposal would be to incorporate a credit score for the
borrower in combination with the LTV ratio. Therefore, a loan to a highly rated borrower
would receive a reduced risk weight at a given LTV compared with a poorly rated borrower.
While this makes perfect sense from a pure risk standpoint, I suspect it will fail on two
counts. First, it introduces significant added complexity and associated cost into the capital
calculation – an issue about which the agencies express notable concern. Second, it is likely

13
 to have an adverse impact on mortgage availability to working class families – a very
sensitive political issue.

A more tentative suggestion is to increase the risk sensitivity of capital requirements for
other retail exposures such as consumer loans, credit cards and automobile loans. Obligor
credit scores, loan-to-value ratios for secured auto loans and/or the pledge of separate
collateral are possible factors put forward for consideration. In this area, such factors may
well have a greater chance of inclusion than for home mortgage loans, since they play a more
significant role in the loss experience. Moreover, greater recognition of the impact of
collateral pledged as security for durable goods (especially auto) loans has been proposed by
some in the industry as far back as the responses to the second consultative paper.

This recent proposal by US banking supervisors certainly does not signal an immediate
convergence of capital requirements with the EU. It does, however, reflect many common
themes and includes some ideas that are worth considering as future enhancements to the
standardised approach to credit risk under Basel II.

NEED FOR BASEL II:-

Despite these achievements, these norms were becoming increasingly ineffective to address
the fundamental changes in the banking sector over the past decade. There was a need to
revise the Basel I norms in view of the following:-

 The one-size-fits-all approach of using a single rate of CRAR did not take into consideration
the actual risks faced by different banks.
 The norms used a simplified approach with only four broad risk-weights for credit risk
measurement. Consequently, it could not provide enough granularities in risk measurement.

The increasing use of financial innovations such as securitisation and credit-risk derivatives

14
 allowed the banks to manipulate their balance-sheet figures in such a way that capital
requirements were lowered without significant reduction in actual risks.

To set right these aspects, the Basel Committee came up with a new set of guidelines in June
2004, popularly known as the Basel II norms.

ORIGIN OF BASEL II :-

Structure of the New Accord

The new Accord consists of three mutually reinforcing pillars, which together should
contribute to safety and soundness in the financial system. The Committee stresses the need
for rigorous application of all three pillars and plans to work actively with fellow supervisors
to achieve the effective implementation of all aspects of the Accord.

 First pillar: minimum capital requirement

 Second pillar: supervisory review process
 Third pillar: market discipline

Basel II

Pillar 1 Pillar 2 Pillar 3


Minimum capital Supervisory review of capital Market discipline
 . adequacy
requirement

Framework for Credit Risk Framework for operational Framework for market Risk
Risk

Standardized Basic indicator Standardized

approach approach duration
approach

15
 Foundation internal Standardized approach
rating based
approach

Advanced internal Advanced

rating based Measurement
approach Approach
The First Pillar: Minimum Capital Requirement :-

The first pillar sets out minimum capital requirements. The new Accord maintains both the
current definition of capital and the minimum requirement of 8% of capital to risk-weighted
assets. To ensure that risks within the entire banking group are considered, the revised
Accord was extended on a consolidated basis to holding companies of banking groups. The
revision focuses on improvements in the measurement of risks, i.e., the calculation of the
denominator of the capital ratio. The credit risk measurement methods are more elaborate
than those in the previous Accord. The new framework proposes for the first time a measure
for operational risk, while the market risk measure remains unchanged.

For the measurement of credit risk, two principal options have been proposed. The first is the
standardised approach, and the second the internal rating based (IRB) approach. There are
two variants of the IRB approach, foundation and advanced. The use of the IRB approach
will be subject to approval by the supervisor, based on the standards established by the
Committee.

The Second Pillar: Supervisory Review Process :-

The supervisory review process requires supervisors to ensure that each bank has sound
internal processes in place to assess the adequacy of its capital based on a thorough
evaluation of its risks. The new framework stresses the importance of bank management
developing an internal capital assessment process and setting targets for capital that are
commensurate with the bank's particular risk profile and control environment.

16
 Supervisors would be responsible for evaluating how well banks are assessing their capital
adequacy needs relative to their risks. This internal process would then be subject to
supervisory review and intervention, where appropriate.

The Third Pillar: Market Discipline:-

The third pillar of the new framework aims to bolster market discipline through enhanced
disclosure by banks. Effective disclosure is essential to ensure that market participants can
better understand banks' risk profiles and the adequacy of their capital positions. The new
framework sets out disclosure requirements and recommendations in several areas, including
the way a bank calculates its capital adequacy and its risk assessment methods.
The core set of disclosure recommendations applies to all banks, with more detailed
requirements for supervisory recognition of internal methodologies for credit risk, credit risk
mitigation techniques and asset securitization.

17
 ORIGIN OF BASEL III:-

1. Background:
Main reasons why the recent economic and financial crisis became so severe were:
Banking sectors of many countries had built up excessive on and off-balance sheet leverage.
This was accompanied by a gradual erosion of the level and quality of the Capital Base. At
the same time, many banks were holding insufficient liquidity buffers.
The crisis was further amplified by a procyclical deleveraging process and by the
interconnectedness of systemic institutions through an array of complex transactions.

To address the market failures revealed by the recent global financial crisis, the
Basel Committee on Banking Supervision (BCBS) had issued two consultative documents in
December 2009 titled “Strengthening the resilience of the banking sector” and “International
framework for liquidity risk measurement, standards and monitoring” with a proposal to
strengthen the capitalization and liquidity of global banking sector. The major issues were to
increase the quality, quantity and international consistency of capital, to strengthen liquidity
standards, to discourage excessive leverage and risk taking and reduce procyclicality.

On 26th July 2010, BCBS reached broad agreement (considering comments

received during public consultation) on the overall design of the capital and liquidity reform
package. In particular, this included the definition of capital, the treatment of counterparty
credit risk, the leverage ratio and the global liquidity standard.

On 12th September 2010, the Group of Governors and Heads of Supervision, the
oversight body of BCBS announced the reform package which will require banks to hold more

18
and better quality capital, to carry more liquid assets, will limit their leverage and mandate
them to build up capital buffers in good times that can be drawn down in periods of stress.

On 16th December, 2010, the Basel Committee issued the Basel III rules text,
which presents the details of global regulatory standards on bank capital adequacy and
liquidity agreed by the Governors and Heads of Supervision and endorsed by the G 20 leaders
at their November Seoul summit.

Basel III was introduces in response to financial crisis.

Timeline for New Minimum Capital Standards

Particular 2013 2014 2015 2016 2017 2018 2019

Tier1 common 3.5% 4% 4.5% 4.5% 4.5% 4.5% 4.5%

equity
Capital - - - .625% 1.25% 1.875% 2.5%
conservation
buffer
Tier1 common 3.5% 4% 4% 5.125% 5.75% 6.375% 7%
equity +
capital
conservation
buffer
Tier 1 capital 4.5% 5.5% 5.5% 6% 6% 6% 6%
Total capital 8% 8% 8% 8% 8% 8% 8%
Total capital + 8% 8% 8% 8.625% 9.25% 9.875% 10.5%
capital
conservation
buffer

19
 PHASE-IN ARRANAGEMENT FOR LEVERAGE RATIO
Leverage ratio Supervisory Parallel run (3%) Pillar 1 Migration
Monitoring Disclosure begins
January 1,2015

2009 what’s new in Basel III 2015-18

P P P
I I I
L 1 L2 L 3
L L L
A A A
R R R

OLD + NEW OLD + NEW OLD + NEW

Quantity of *Quality of * ICAAP * Leverage *Information *Compensation

Capital to Capital Ratio on Risk Policy
* Capital * SREP Management Disclosure
Cover Risks Conservation * MIS as a
Buffer Major * Timely * Corporate
(CR + MKT + Management quantitative Governance
* Liquidity
OP) Tool… & qualitative Practices
Ratios (LCR +
NSFR) information
* Stress Tests * Pressure to
* Capital
fully
Charge on *Countercycli implementPillar
OFF B/S... cal Capital 3 + IFRS7…
Buffer

20
Explanation:

Under Pillar 1: This time more focus is on maintaining quality of capital. Basel III introduces
capital buffers. Banks should maintain capital buffer. Capital buffer is of two types – capital
conservation buffer and countercyclical buffer.

Capital conservation buffer: It is a buffer which is maintained above minimum capital

requirement. As the BCBS committee has made it mandatory for all the banks to maintain
minimum capital of 8 %. In addition, the committee has also made it mandatory to maintain
capital Conservation buffer of 2.5 %. It will be fully implemented between a periods of
2015-18 in a four equal installment like .625%, 1.25%, 1.875%, 2.5.

Introduces new liquidity ratios – LCR and NSFR:-

There will be capital charge on off balance sheet items. Off balance sheets are those assets
which do not appear in the balance sheet. For example: guarantees on loans are off balance
sheet of a company.
In 2007, since the banks were having adequate capital but still they are suffering some
crisis due to shortage of liquid assets. In order to tackle the problem, BCBS in 2008
published principles for sound liquidity risk management and supervision
Further the committee developing two minimum standards for funding liquidity:
LCR (Liquidity Credit Ratio) - to be implemented on 1 Jan 2015 – calculated for a
period of 30 days
NSFR (Net Stable Funding Ratio) - to be implemented on 1 Jan 2018 – calculated for a
period of 1 year
Objective of these ratios
LCR – to meet short term requirement of meeting obligation by maintaining high
quality liquid assets (HQLA)
NSFR –to meet long term obligations with more stable sources of funding on an
ongoing basis.
21
 On October 31. 2014, the Basel Committee on Banking Supervision issued its final Net
Stable Funding Ratio.
Internationally active banks are require to maintain minimum levels of liquidity whereas
national authorities are free from such obligations

LCR

LCR = stock of HQLA (high quality liquid assets) / total net cash out flows over the next
30 calendar days >= 100 %
The committee is introducing phase in arrangements to implement the LCR to help ensure that
the banking sector can meet the standards through reasonable measures.
In 2015 LCR >=60 %
In 2016 LCR >=70 %
In 2017 LCR >=80 %
In 2018 LCR >=90%
In 2019 LCR >=100%

HQLA

Level 1 Level 2
Assets to be included Assets can only comprise
without limit. For e.g. up to 40 % of the stock.
secured funding, secured Maximum adjusted of high
lending, collateral swap quality liquid assets equals
to 2/3rd of level 1

Note: assets received as co-lateral are not included in high quality liquid assets or if they have
included in that, 30 days stress period is given in order to withdraw these assets
Total cash outflows = Outflows - min (inflows, 75 % of outflows)

22
 NSFR
Formula for computation

NSFR = available amount of stable funding/required amount of stable funding >= 100 %
Available amount of stable funding includes the following:
Capital
Preferred stock with maturity of equal to or greater than one year
Liabilities with effective maturities of one year or greater
The portion of non-maturity deposits and term deposits with maturities of less than 1 year
The portion of wholesale funding with maturities of less than a year
Note: outside regular open market operations are not considered in this ratio

Under Pillar 2:following are the new additions made

Leverage ratioof 3 % is to be maintained

Leverage ratio in banks are calculated by the following formula
Tier 1 capital
Total Assets (included Off Balance sheet Assets)

MIS is to be used as major management tool

Stress testing technique: In this technique, extreme situations are assumed and then analysis is
made that whether bank is able to handle situation in case if that situation arises.

23
Countercyclical buffer: This buffer is maintaining by the banks when they are in the stage of
growing so that they can use this capital at the time of declining of economy. Following graph
shows the cycle is the economy

Stage of
growing Boom

Stage of
declining

Depression

Under Pillar 3
Following additions has been made

Compensation policy disclosure: The US based banks used to give bonuses to their higher
officials like CEOs, CMDs etc when a bank exceeds its forecasted profits. In that case bank
has to disclose these kinds of bonuses in front of central authority and sign an agreement with
the higher officials that in case if a banks faces any kind of shortage of funds in the coming
year then the bank has the right to take back the bonus from the higher official. This policy is
called compensation policy disclosure.

Corporate Governance Practices: A bank has to disclose all their corporate governance
practices. For example if a banks provide loans to priority sector at low rate of interest then
banks has to disclose it to the regulatory authority. In our country RBI is the regulatory
authority.

24
Pressure to fully implement Pillar 3

International View on Basel III

The Basel Committee believes that the full and timely implementation of Basel III will be
crucial for restoring confidence in the banking system, which in turn will have a significant
effect on the state of the global economy. For banks and regulators, the next few months will
be critical in determining the success of Basel III.

As banks and non-bank financial institutions consider how best to operate under Basel III,
J.P. Morgan is ready to support our clients with a range solutions that will help them succeed
in an increasingly complex and challenging operating environment.

--- BCBS COMMITTEE

The Basel III framework introduces a paradigm shift in capital and liquidity standards, which
was constructed and agreed to in relatively record time. Many elements, however, remain
unfinished, and even the final implementation date looks a long way off. However, market
pressure and competitor’s pressure is already driving considerable change at a range of
organizations. Firms should ensure they are engaging with Basel III as soon as possible to
position themselves competitively in the new post-crisis financial risk and regulatory
landscape.

---KPMG

The higher capital requirement under Basel III will increase the pressure on Indian Banks to
raise capital and can lead to some changes in the industry

---
Standard & Poor’s Ratings services

25
The domestic banks will not be affected, as their developed world peers by the Basel III
guidelines and conserving capital will be the crucial issue as they look forward to implement
the rules meant for a stronger financial system, bankers and analysts said after the RBI
released its draft guideline. “Capital conservation, good plough back of profits and better
dividend management will be the key to strengthen the core capital”.

---Economic Times

State-owned banks registered heavy losses in May 3, 2012 amid weak market conditions, as
investors grew worried over lower return on assets after Basel III norms as implemented.

--- ET Bureau

We believe that the real challenge for affected banks will be to build upon the actions
mandated by Basel III to create stronger capital and risk structure. Banks that meet and
surpass the Basel III requirement may not return to levels of profitability experienced before
the global financial crisis of 2008 and 2009, but they will be in position to be well – prepared
for the next crisis and achieve high performance within their industry.

--- Accenture

The implementation of the Basel III framework will impose many challenges on banks. With
capital, risk, asset and liability restrictions, along with increased cost and shorter reporting
cycles, banks will have their jobs cut out to maintain margins and profitability.

--- Infosys

Basel committee released a report on the likely macroeconomic impact of Basel III. It
indicated that full compliance with Basel III is likely to result in a small dip in real GDP
growth. However, if the U.S rushes to implement Basel III more quickly than required, or if
banks decide to be even more conservative on capital and liquidity than Basel III requires, the

26
impact on GDP growth would be greater. Where banks have strengthened their capital over
the last few years through retained earnings and capital raisings, the implementation of Basel
III is likely to have less of an impact on the global economy.

--- Shearman & Sterling

According to ICRA, Indian banks would need 3.9-5 trillion capitals over the next six years,
out of which the requirements for Common Equity would be ` 1.3-2.0 trillion, for Additional
Tier I Rs. 1.9 trillion, and for Tier II Rs. 1 trillion.

--- ICRA

27
 Basel III Implementation in INDIA

Keeping in view the current situation of Indian Banks, the RBI has extended the final date for
Basel III to March 31, 2019 as against 2018 proposed earlier. This is positive as PSB’S will
get more time for preparation. Moreover, capital deduction now starts at 20% against 40%
stipulated earlier. This move is encouraging and should ensure smoother migration to new
framework.

Significant increase in equity capital requirement in a phased manner

 Higher emphasis on common equity Tier I (CET1) capital - Requirement of minimum

10.5% (8% without counter cyclical buffer) by end of FY18 (draft guideline mentioned till
FY17) v/s current minimum requirement of 3.6%.
 Introduction of capital conservation buffer (2.5% of CRAR) and counter cyclical capital
buffer (up to 2.5% of CRAR) to be fulfilled by CET1. RBI has extended the creation of the
capital conservation buffer period to FY18 vs. FY17 earlier.
 Introduction of leverage ratio (3% proposed globally and may be at 4.5%+ (earlier
proposed at 5%) for Indian banks, not stated as yet) supplementing overall risk based capital
requirement.
 RBI has kept the option open for considering the higher CRAR for banks, depending upon
the risk factor, internal capital adequacy assessment and risk management practices.
 Most of the banks in India are already above minimum CET1 of 5.5% and on aggregate
basis at Tier I of 8% or above hence, transition should not be an issue in the near term. Overall
guidelines place more emphasis on CET1. Private Banks and PSU Banks with higher ROA are
better placed as compared to mid-small sized PSU banks.

28
Enhancing the Total Capital Requirement and Phase-in Period:-

The minimum Common Equity, Tier 1 and Total Capital requirements have phased-in
between January 1, 2013 and January 1, 2015, as indicated below:

As a %age to risk January 1 , 2013 January 1 , 2014 January 1, 2015

weighted
assets(RWAs)
Minimum Common 3.5% 4.0% 4.5%
Equity Tier 1 capital
Minimum Tier 1 4.5% 5.5% 6.0%
capital
Minimum Total 8.0% 8% 8.0%
capital

Capital Conservation Buffer:-

Therefore, in addition to the minimum total of 8%, banks will be required to hold a capital
conservation buffer of 2.5% of RWAs in the form of Common Equity to withstand future
periods of stress bringing the total Common Equity requirement of 7% of RWAs and total
Capital to RWAs to 10.5%.

Regulatory Capital As % to RWAs

1. Minimum Common Equity Tier 1 ratio 5.5
2. Capital conservation buffer(comprised of common 2.5
equity)
3. Minimum Common Equity Tier1 ratio plus capital 8.0
conservation buffer(1 + 2)
4. Additional Tier 1 Capital 1.5
29
5. Minimum Tier 1 capital ratio(1 + 4) 7.0
6. Tier 2 capital 2.0
7. Minimum Total Capital Ratio ( 5 + 6) 9.0
8. Minimum Total Capital Ratio Plus capital 11.5
conservation buffer (7 + 2)

Transitional Arrangements - Scheduled Commercial Banks (excluding LABs and

RRBs):-

Minimum January March March March March March

capital ratios 1,2013 31,2014 31,2015 31,2016 31,2017 31,2018
Minimum 4.5% 5% 5.5% 5.5% 5.5% 5.5%
common
equity Tier 1
(CET 1)
Capital - - .625% 1.25% 1.875% 2.5%
conservation
buffer(CCB)
Minimum 4.5% 5% 6.125% 6.75% 7.375% 8%
CET 1 +CCB
Minimum Tier 6% 6.5% 7% 7% 7% 7%
1 capital
Minimum 9% 9% 9% 9% 9% 9%
Total Capital
Minimum 9% 9% 9.625% 10.25% 10.875% 11.5%
total capital +
CCB

Phase – in all 20% 40% 60% 80% 100% 100%

deductions
from CET 1
(in %)

30
The RBI wants to implement the recommendations of the 'Basel Committee on Banking
Supervision' to make the financial system safe. It is aimed at protecting the depositors and to
prevent a 2008-like crises. Moreover, the 'perception' of a lower standard regulatory regime
will put Indian banks at a disadvantage in global competition.RBI is currently working on
operational aspects of implementation of the Countercyclical Capital Buffer. Besides, certain
other proposals viz. 'Definition of Capital Disclosure Requirements', 'Capitalization of Bank
Exposures to Central Counterparties' etc., are also engaging the attention of the Basel
Committee at present.

Therefore, as per RBI, the final proposals of the Basel Committee on these aspects will be
considered for implementation, to the extent applicable, in future. Further, for the financial
year ending March 31, 2015, banks had disclosed the capital ratios computed under the
existing guidelines (Basel II) on capital adequacy as well as those computed under the Basel
III capital adequacy framework. India’s struggling banking sector will face a period of lower
profitability as it seeks to raise at least Rs.5000 billion in extra capital to meet the new Basel-
III international banking standards. The government could consider reducing its majority
stakes in a variety of state-owned banks, as it attempts to cut the Rs. 900 billion in
recapitalization, needed to maintain present shareholding levels. Indian government has so far
rejected suggestions that it might reduce its shareholding in more than two dozen public sector
banks, including a stake of approximately 60% in the State Bank of India, the nation's largest
lender by market share. The RBI governor had in the recent past suggested that the Indian
government could save Rs.200 billion in recapitalization costs if it reduced its stakes in all
state-owned banks to just 51 per cent.

Major Challenges being faced in Basel III implementation:-

In November 2011, the G20 Leaders emphasized the importance of implementing Basel III
fully and consistently in order to improve banks’ resilience to financial and economic shocks.

31
The actual implementation of the rules started in 2013 and will complete by January 1, 2019.
(See graphic: Basel III Implementation & Timeline).

Can regulators and banks meet this tight timeframe? What will they need to overcome
first?

The banks’ challenge

Capital and liquidity shortfalls

Banks have been looking — and are being pushed by regulators — to de-risk and de-leverage
their balance sheets to meet Basel III’s capital and leverage ratio requirements. Over the past
few months, banks around the world have been in the news due to their capital raising and
balance sheet restructuring efforts in preparation for Basel III. However, regulators and other
international bodies see the need for more to be done.

The Banker Top 1,000 (2012) study shows that despite efforts made by banks so far, the
global capital-to-assets ratio remains stable at 5.36% against 5% last year. Banks in Western
Europe have the lowest aggregate capital-to-assets ratio at 4.25%, a small reduction from
4.28% last year.

More recently, liquidity ratios (Liquidity Coverage Ratio (LCR) and Net Stable Funding
Ratio (NSFR)) are grabbing the spotlight. The increased focus could be attributed to the fact
that we are already in the observation period for both the LCR and the NSFR. These ratios aim
to strengthen a bank’s ability to withstand shocks in the market and hold sufficient stable
funding to match their medium-to-longer-term lending profile. As a result, banks that rely too
heavily on short-term wholesale funding will be disadvantaged on both ratios.

According to the BIS study, liquidity shortfall is estimated at €1,800 billion for the LCR, and
at €2,500 billion in regards to the NSFR. To breach the gap, banks are expected to take a
number of actions including the following:

32
  Look to attract — and compete more aggressively – for retail and operational
wholesale deposits
 Change their assets’ liquidity profile to include higher portions of liquid assets such as
government bonds
 Reduce the maturity of some lending so it falls below the one-year cut-off in the NSFR
ratio

These adjustments will be expensive, whether through having to pay higher interest to attract
the right type of balances or receiving a lower yield on assets.

The availability and eligibility criteria of high quality liquid assets may pose further
constraints in some jurisdictions. For example, some markets may not have issued significant
quantities of government bonds, due to the fact that they may be running in surplus. At the
opposite end of the spectrum, the instability that we see today in the euro zone may actually
further reduce the availability of eligible assets.

However, banks are not alone in managing tough challenges in the lead-up to Basel III
implementation. Regulators also face substantial hurdles in achieving their targets.

The regulators’ challenge

Will history repeat itself? Basel I, II and II.5

The Basel Committee published the Basel I Capital Accord in 1988 to set minimum capital
requirements for banks. The G10 countries were expected to have this implemented in local
law and regulations by 1992. Today, more than 100 countries have adopted the standards.

Basel II followed in 2004, setting out more risk-sensitive capital requirements and introducing
two new pillars (supervisory review and market discipline). Basel II was due to come into
force from the end of 2006. As on Dec 2014, except Russiaall 27Basel member countries had
implemented the rules.

33
Basel II.5 was introduced to address the early lessons from the 2007/08 crisis and was due to
be implemented at the end of 2011. Currently, all member states have final rules that are in
force.

We are now approaching Basel III and history appears to be repeating itself. According to a
report published in June by the Bank for International Settlement (BIS),so far all the countries
—have finalized rules that will phase in Basel III.

A patchwork solution? Global vs. national targets

Implementation is further complicated by potential inconsistencies in the national rules

phasing in Basel III.

The Basel Committee has set out a plan to monitor the member’s implementation of Basel III.
The final report is expected to be submitted to the Basel Committee in September and will be
published shortly thereafter.

However, recent news headlines suggest that different jurisdictions may be implementing
parts of the rules inconsistently, whether by strengthening or weakening the original
requirements. Here are some examples:

 Europe (Capital Requirements Directive/Regulation IV (CRD/R IV)) — According to

the latest proposals and negotiations, EU member states will have autonomy to
increase capital requirements by way of tackling any “bubbles.” 
 China — the implementation framework for Basel III is stricter than the international
standard, requiring higher core tier-1 capital adequacy ratio (5% vs. 4.5%) and a higher
leverage ratio requirement (4% vs. 3%).
 US — Proposals for Basel III contain a standard and a supplementary leverage ratio.
The supplementary leverage ratio adopts the Basel III standard thereby enhancing the
existing US leverage ratio to include off-balance sheet exposures.

34
The liquidity ratios (LCR and NSFR) pose additional challenges. The Basel Committee has
acknowledged that the rules relating to the ratios might change subject to the feedback
obtained during the observation periods. In response, national regulators are taking different
approaches:

 The US regulators have announced their intention for US banks to comply with the
ratios but have not yet issued or consulted on the details around the liquidity
requirements.
 In Asia-Pacific, the situation is somewhat similar to the US; some of the regulators
have announced their intention for banks to comply with the ratios but have not
published any details. An additional complication for the region is that certain markets
have a relatively limited supply of high quality liquid assets as defined in Basel III (i.e.
government bonds and other eligible capital markets instruments).

Any inconsistencies in applying the Basel III framework could lead to regulatory arbitrage,
which means that some institutions (and indirectly their underlying clients) may benefit or be
penalized depending on the stance taken by regulators in different jurisdictions.

35
 CHAPTER 2
RESEARCH METHODOLOGY

36
“In theory there is no difference between theory and practice but in practice there is.”
--Jan la Van de Snepscheut.

Research is the tool in the hands of the researcher either to find out the solution of any
managerial or other related problem or to find the new opportunities and threats that are
prevailing in the industry. Research is the systematic gathering, model building and fact
finding process to solve the problem relating to systematically implementing the new plans
and policies the regulatory body.

Research can be of three types;

1. Descriptive research
2. Exploratory research
3. Causal research

As a part of my training, I first wanted to have an overlook at the present financial

condition of the banks (especially PSU’s). So I first decided to do a pilot survey. A pilot
study is a small scale preliminary study conducted in order to evaluate feasibility, time,
cost, adverse events, and affect size (statistical variability) in an attempt to predict an
appropriate sample size and improve upon the study design prior to performance of a full-
scale research project. Based on that I make some strategy to enhance the awareness of
Basel norms issued by BCBS (Basel committee of banking supervision), guidelines issued
by RBI, views of consultants (like KPMG, IBM, JP MORGAN, WIPRO, etc)

So I first took the sample of 27 banks employees of different entities as a base and did the
survey with the help of a questionnaire, which is displayed in the annexure. The results of
the survey are discussed later in this section. The reason for the small size of my sample is
that I can’t conduct this survey on bank branches employees because they are not aware
about this Basel norms and how risk management is done.

37
 RESEARCH OBJECTIVES: -

To study the present financial condition of the PSU’s

To study the Basel III guidelines issued by RBI & BCBS committee
To study the benefits of implementing Basel III
To study the difficulties faced by PSU’s in implementing the Basel III
To study major concerns to be considered while implementing the Basel III
In short, the overall objective of my research was to study the impact of Basel III on
Indian PSU’s bank.

38
 SAMPLING METHOD

Research methodology states how the research study is under taken. It includes
specification of research design source of data, method of primary data collection,
sampling design and analysis procedure adopted.

Research methodology states what procedures were employed to carry out the research
study.
The sampling process comprises several stages:

 Defining the population of concern - A population can be defined as including all

people or items with the characteristic one wish to understand. Because there is very
rarely enough time or money to gather information from everyone or everything in a
population, the goal becomes finding a representative sample (or subset) of that
population. Population is my research study is Bank Employees and people related to the
banking sector like consultants

 Specifying a sampling frame, a set of items or events possible to measure- we seek

a sampling frame which has the property that we can identify every single element and
include any in our sample. My target sample includes RMD employees of different bank
entities, experienced bank employees and consultants. Specifying a sampling method for
selecting items or events from the frame

 Determining the sample size- In this I use a combination of systematic and stratified
sampling

 Implementing the sampling plan

 Sampling and data collecting

39
 RESEARCH DESIGN

As the main objective of my research is to study the impact Basel III on Indian PSU’s
banks, whether they will be able to maintain the minimum capital requirement issued by the
BIS(Bank for international settlements) committee or not. For this I have used exploratory
research design.Exploratory research is a form of research conducted for a problem that
has not been clearly defined. Exploratory research helps determine the
best research design, data collection method and selection of subjects. It should draw
definitive conclusions only with extreme caution. Given its fundamental nature, exploratory
research often concludes that a perceived problem does not actually exist. It will help to
understand the reader’s behavior. Research done on media habits and viewing habits of
target market is done under exploratory research.

Survey one of the research approaches is best suited for exploratory research. Survey
research is the most widely used method for primary data collection. It is used to obtain
many different kinds of information in different situations.

Target Audience

I generally cater to the following target audience:

 Bankers

 Chief Managers

 Employees of RMD department

 Specialist officer

 Probationary Officer

40
 General Manager

 Senior manager

SAMPLING PROCEDURE

There was a little scope for change cons duration in this study. So non-probability
sampling was preferred accordingly, convenient sampling method was used.

SAMPLE SIZE

One employee from one bank is being interviewed who has the complete knowledge of
Basel norms or belongs to RMD (risk management department)

DATA COLLECTION

Since, data collection signifies a very crucial place in a pilot survey. We have collected
primary data by personal interview through structured questionnaires and secondary data
through internet and website.

FORM OF QUESTIONNAIRE

The questionnaire for the purpose of this study was carefully drafted and very well
developed. Proper care has been taken in asking the questions, in wording them and in
41
maintaining the sequence of the question. The questions asked were in close-ended form
which consists of multiple-choice questions. Pre-testing of the questionnaire was done on a
sample of 10 respondents and based on the difficulties encountered by them in answering
the question. The initial format was modified suitably.

CHAPTER 3
FINDINGS AND ANALYSIS

42
 Data Analysis

In my first part of questionnaire I have collected financial details of 27 different PSU’s so

that I will be able to understand the present financial condition of banks

Analysis of Financial Details of the respondent banks for two years

1) Interest Income

Ans.

43
Interpretation:

2) SBI is earning highest income interest i.e. above Rs. 1190000 Million as on March
2013 & above Rs. 1300000 Million as on March 2014.
3) Approx 9 Banks are earning above Rs. 20000 Million as on March 2014.
4) Approx 6 banks are earning less than Rs. 100000 Million as on March 2014.

2) Other Income

Ans.

44
Interpretation:

1) Again SBI is earning high from other sources. It’s income is above Rs.160000 Million
as on March 2013 and 180000 Million as on March 2014.

2) PNB &BOB are earning above Rs.35000 Million as on March 2013&2014.

3) Approx 10 banksare earning less than Rs.10000 Million from other sources.

3) Total Income

45
 Ans.

Interpretation:

 SBI’s total income increased to Rs.1549037 Million as on March 2014 from Rs.
1356919 Million as on March 2013.

 PNB,BOB,BOI and CANARA are generating income above Rs.400000 Million as

on March 2014.

4) Gross NPA

46
 Ans.

Interpretation:

 SBIhas highest gross NPA i.e. above Rs 600000 Million as on March 2014 and Rs
500000 Million as on March 2013.

 PNB,BOI,BOB and CBI have Gross NPAs above Rs.100000 Million.

 There is a increase of more than Rs. 50000 Million as on March 2014in the Gross
NPA of PNB as compare to March 2013.

47
5) Net NPA

Ans.

Interpretation:

 We can see that SBI has highest number of Net NPA as on March 2014 which
is not considered good for the bank.

 Then comes PNB having Net NPA of Rs. 99170 Million.

48
  As on March 2013, there are only four banks having Net NPA less than Rs.
10000 Million. These are State Bank of Travancore, BOM, Dena Bank and
VijayaBank.

6) Capital Adequacy Ratio (%) Basel II

Ans.

Interpretation:

Following are the analysis made from the following table

 We can see that as on March 2014, 4 banks were maintaining CRAR above 13% but as
on March 2013, only one bank i.e. SBI is maintaining CRAR above 14%.

49
7)Net Profit:-

 SBI has a highest Net Profit in both the years as on March 2013 and 2014 of Rs. 141050
Million and Rs.108912 Million respectively

 United bank of India and Central Bank of India have loss of more than Rs. 12000
Million as on March 2014.

Details about Basel II Preparedness

Q1 what benefit do you think, you will get by implementing BASEL-III, Please give
the point on scale of 1-10 (1 if No benefit and 10 if it is highly benefited)

Ans.

50
 Particulars No Benefit Highly Benefited
Reduction in capital 66.67% 33.33%
requirement
Enhanced Reputation 53.33% 46.67%
Better Transparent 26.67% 73.33%
Environment
Nothing,Just for the 46.67% 53.33%
Regulatory compliance

Interpretation:

 Majority believes that there will be no reduction in capital requirement on the

implementation of Basel III. Implementation of Basel III will increase the
requirement of capital (CRAR) to be maintained by the banks.
 53.33% of the sample believes that Basel III will enhance the reputation of the bank
whereas 46.67% believes that it will not result in any enhancement of reputation.
 Majority of the sample believes that Basel III will result in better transparent
environment.
 53.33% believes that it is just a regulatory compliance

Q 2 Difficulties faced in implementing the Basel III, Please give the point on scale of 1-
10 (1 if No and 10 if Yes Major Difficulty)

Ans.

Particulars No Difficulty Major Difficulty

Too much information 40% 60%
Data insufficiency 33.33% 66.67%
Untrained staff 60% 40%
51
 Insufficient IT infrastructure 66.67% 33.33%
Shortage of staff 46.67% 53.33%
Lack of knowledge 66.67% 33.33%
High cost involved 46.67% 53.33%

Interpretation:

 Majority of the sample believes that too much information is required as this time Basle
III has introduced many measure ratios mandatory to be calculated and also introduced
new behavior modeling techniques for which past historical data is required.

 Majority of the respondents believes that there will be data insufficiency

 Majority of the sample believes that there will be untrained staff

 Majority of the respondents believes that there will be no problem of untrained IT

infrastructure

 Majority of the respondents believes that there will be shortage of staff

 Majority of the respondents believes that no difficulty of lack of knowledge

 Majority of the respondents believes that high cost involved will be a major problem

Q3 Major Concerns in implementing (Now and for the future) the Basel III, please give
the point on scale of 1-10 (1 if No problem at all and 10 if Major concern)

Ans.

Particulars No Problem Major Concern

Too Much Information 40% 60%
Required
Required more experts 40% 60%
High cost involved 46.67% 53.33%
No incentives 40% 60%
Complexity in the 40% 60%

52
 procedure

Interpretation:

 Majority of the sample believes that it is major concern that too much information in
required

 Majority of the respondents believes that it is major concern that expert are required
who are having knowledge of Basel norms

 Majority of the respondents believes that it is major concern that high cost is involved
while implementing Basel III

 Majority of the respondents believes that it is major concern that no extra incentive will
be given to bank employees

 Majority of the respondents believes that with the implementation of Basel III , banks
procedure will become complex as so many rules and guidelines have been given by
BCBS committee and RBI

Q4. In your opinion, whether increase in the capital base have adverse impact on
bank’s profits?

Ans. Yes 66.67%

No33.33%

53
 In your opinion, whether increase in the capital base have
adverse impact on bank’s profits?

33% Yes
67% No

Interpretation:

66.67% of the respondents say’s “yes”. In their opinion, Even if the bank requires less
CRAR to be maintained then also the bank has to maintain the minimum CRAR. So they
have to sacrifice their profits as that capital will remain idle which they can use for lending
purpose whereas 33.33% of the respondents believes that it will not have adverse impact on
bank’s profit.

Q5. Can PSU banks mobilize the sort of capital envisaged in Basel III?

Ans. Yes 46.67%

No53.33%

54
 Can PSU banks mobilize the sort of capital envisaged in
Basel III?

Yes
47% No
53%

Interpretation:

53.33% of the bank employees feel that PSU’s banks will not be able to mobilize the sort
of capital envisaged in Basel III where 46.67% of the bank employees feel that PSU banks
will be able to mobilize the sort of capital envisaged in Basel III.

Q6. Can private banks raise the sort of capital envisaged in Basel III?

Ans. Yes 80%

No20%

55
 can private banks raise this sort of money ?

Yes
No

Interpretation:

80% of the respondents feel that private banks will able to raise this sort of capital whereas
20% of the respondents population feels that the private banks may also face difficulty in
raising the capital envisaged in the Basel III implementation.

Q7. What are the chances that Basel III will help banks to recover from the situation of
financial crisis?
(Rate according to your preference)

Ans.

56
 Interpretation:

 Bank of India rated the highest i.e.85 % whereasSBI rated second highest i.e. 82%.
 Almost 17 banks believes that Basel III will have positive impact on the Indian banking
sector.

Q 8. Which form of capital will be more affected by the implementation of Basel III?

Ans.

Particulars Percentage
Teir 1 Capital 40%

57
 Teir 2 Capital 26.67%
Total Capital 33.33%

Interpretation:

40% of the banks respondents say that tier 1 capital will be more affected as it includes
common equity. Bank has to maintain more capital which will EPS of the banks. 26.67%
of the banks respondents say that tier 2 capital will be effected as includes subordinate
Debt instrument. Whereas 33.33% says that total capital will be affected.

Q9. With the increased demand for credit, will the Basel III capital framework increase
cost of credit?

Ans. Yes 40%

No26.67%

58
 Can’t Say33.33%

with the increased demand for credit , will the Basel III
capital Framework increase cost of credit ?
Yes
No
Can't Say

Interpretation:

40% says that with the increased demand for credit , the Basel III capital framework will also
increase as banks has to maintain more capital as per the guidelines issued in Basel III.
26.67% of the respondents say that cost of credit will not increase whereas 33.33% didn’t
respond to the question.

Q10.Do banks pass on these costs to depositors and borrowers?

Ans. Yes 60%

No20%

Can’t Say20%

59
 Do banks pass on these costs to depositors & borrowers ?

Yes
No
Can't Say

Interpretation:

60% of the depositors say that the cost will be transferred to depositors and borrowers. 20%
of the respondent’s says that the cost will not be transferred to depositors and borrowers
whereas 20 % didn’t respond to this question.

FINDINGS

The first part of the analysis includes financial analysis of banks. We can observe that SBI is
a major player in the Public sector in terms of scale of operations and branches. It has highest

60
total income including interest and other income. It is having highest CRAR and its NPA’s are
also under control.
As the main purpose of my research is to analyze the impact of Basel III on all Indian PSU
Banks. So, conclusion can be drawn that SBI is not be facing any problem keeping in mind its
financial condition. After analyzing, we can say that other major player after SBI are BOB,
Canara, PNB.Other bank condition is not as healthy as these banks means their profitability
and scale of operation is less than these banks.

The second part of the analysis includes studying the impact of Basel III on these banks and to
derive a conclusion of the question that whether PSU’s will be able to maintain the Basel III
standards or not?

As I have conducted a research on 27 bank employees of different PSU’s entities. I find that
Majority believes that there will be no reduction in capital requirement on the implementation
of Basel III. Implementation of Basel III will on the other hand increase the requirement of
capital (CRAR) to be maintained by the banks.53.33% of the respondents believes that Basel
III will enhance the reputation of the bank whereas 46.67% believes that it will not result in
any enhancement of reputation. Majority of the respondents believes that Basel III will result
in better transparent environment.53.33% believes that it is just a regulatory compliance.

Majority of the respondents believes that too much information is required as this time Basel
III has introduced many ratios to be computed and also introduced new behavior modeling
techniques for which past historical data is required. Majority of the respondents believes that
there will be data insufficiency.Majority of the respondents believes that there will be
untrained staff to implement Basel III guidelines.Majority of the respondents believes that
there will be no problem of untrained IT infrastructure Majority of the respondents believes
that there will be shortage of staff.Majority of the respondents believes that high cost involved
will be a major problem.

Majority of the respondents believes that it is major concern that too much information in
required. Majority of the respondents believes that it is major concern that expert are required
61
who are having knowledge of Basel norms .Majority of the respondents believes that it is
major concern that high cost is involved while implementing Basel III.Majority of the
respondents believes that it is major concern that no extra incentive will be given to bank
employees .Majority of the respondents believes that with the implementation of Basel III ,
banks procedure will become complex as so many rules and guidelines have been given by
BCBS committee and RBI .

As per the opinion of 66.67% of the respondents that Even if the bank requires less CRAR to
be maintained then also the bank has to maintain the minimum CRAR. So they have to
sacrifice their profits as that capital will remain idle which they can use for lending purpose
whereas 33.33% of the respondents believes that it will not have adverse impact on bank’s
profit.

53.33% of the bank employees believe that PSU’s banks will not be able to mobilize the sort
of capital envisaged in Basel III whereas 46.67% of the bank employees feel that PSU banks
will be able to mobilize the sort of capital envisaged in Basel III.

80% of the respondents believe that private banks will able to raise this sort of capital whereas
20% of the respondents population feels that the private banks may also face difficulty in
raising the capital envisaged in the Basel III implementation.

Almost 10 banks believe that Basel III will have positive impact on the Indian banking sector.

40% of the banks respondents say that tier 1 capital will be more affected as it includes
common equity. Bank has to maintain more capital which will affect EPS of the banks.
26.67% of the banks sample says that tier 2 capital will be effected as includes subordinate
Debt instrument. Whereas 33.33% says that total capital will be affected.

40% says that with the increased demand for credit , the Basel III capital framework will also
increase as banks has to maintain more capital as per the guidelines issued in Basel III.
26.67% of the respondents say that cost of credit will not increase whereas 33.33% didn’t
respond to the question.

62
60% of the depositors say that the cost will be transferred to depositors and borrowers. 20%
of the sample sys that the cost will not be transferred to depositors and borrowers whereas 20
% didn’t respond to this question.

63
 CHAPTER 4
CONCLUSION AND RECOMENDATION

CONCLUSION

64
Although, under Basel II,Indian banks are adequately capitalized well above the minimum
regulatory threshold of 9% Capital Adequacy Ratio, my study has highlighted the fact that in
case Basel III changes get implemented in India, there would be substantial reduction in the
tier 1 capital of Indian Banks with the % reduction in Tier 1 capital as high as 25% for IDBI ,
Central Bank, while a reduction range of 10-15% for SBI,PNB,Bank of India,etc.

Hence, as per new definition of tier 1 being predominantly common equity less some
adjustments, my conclusion is that a substantial amount of money will be raised by
commercial Banks from equity market in a few years.

The conclusions above are very valid and it is big concern in Banking Today.

Banks are expected to raise significant amount of equity or eligible capital once Basel III kicks
in. Given that Indian Banks were better managed than their counterparts in US/UK (that had
over 50X leverage); it would be little concern, but still a worry to raise capital cheap.

One of the things happening is that with the new banks coming into the scene in India, with
RBI granting new licenses, this should pump additional capital into the system. So, whatever
lending was with 20-30 banks would spread to 40-50 banks and CRAR would be better at the
same capital base. Instead of raising capital, banks would reduce lending, which would happen
naturally as competition increases.

Liquidity ratios and the recent changes make significant impact on banking business. Besides
the regulatory CRAR requirements, banks would typically want to hold sufficient cushion to
withstand shocks and so although the calculations you made for additional capital due to Tier
1 definition changes, the requirement for capital would be significantly more as banks was to
keep extra. This will create further squeeze to capital market.

65
With so much additional capital maintained and host of other changes, experts are predicting
ROE to fall drastically to sub 10%. So, banking is no longer a great business if not managed
well.

Increasing NPA in PSU banks means higher capital requirement, hence more capital from
markets.

General growth in banking business to fund mega infra/govt projects means more capital.

To conclude, all earlier Basel guidelines (Basel I, 1.5 and Basel II) focused on different types
of risk to which the banks are exposed to like Credit Risk, Market Risk, Operational risk,
Counterparty risk, concentration risk, Reputation risk, etc. But these Basel norms could not
find a perfect solution to all the banking problems. if we talk about reputation risk, guidelines
are given by Basel committee that how to handle this type of risk . But these guidelines were
not able to handle completely the actual situation. In April 2003, there were some rumours
about ICICI banks in Ahmadabad that bank is running in to losses and it will become
insolvent due to which large quantity banks depositors start withdrawing money from the
bank. This results in shortage of funds in the bank as they not having huge amount of liquid
cash, so even if the banks are maintaining standard norms and following guidelines issued by
the BCBS committee, it can only reduce the risk of banks and no amount of capital can save
the loss caused due to the reputation risk .
Now, the Basel III guidelines have been issued with the main objective to toughen up the
banking system in every country to withstand financial shock with primary focus on the
Quantity as well as Quality of the Capital and Capital Buffers to meet any unforeseen losses.
These norms and guidelines have been made keeping in mind the situation of financial crisis
arises in 2008.

However, we can’t really predict that if any financial crisis arises again, banks will be able to
withstand the same when they are following and maintaining that Basel III norms.
It is only a time can tell that these norms will be fruitful or not ????????

66
 Recommendations

The new norms will definitely address the systemic loopholes in Basel II, but it will have
some impact on banks.

Higher Capital Requirement: Presently, in India, most banks' common equity ratio falls in the
range of about 6-10 per cent. Hence, in my opinion, banks may able to comply with the higher
capital requirement as per Basel III norms at least till 2015/16. This, without infusing any
fresh equity, even while taking into account the marginal increase in capital requirement. 

However, the increase in the minimum capital ratio, combined with loan growth outpacing
internal capital generation in most government banks, will lead to a shortfall of capital. This
will mount mainly between 2015/16 and 2017/18 due to introduction of a Capital
Conservation Buffer (CCB). The CCB is designed to ensure that banks build up capital buffers
during normal times, which can be drawn down as losses are incurred during a stressed period.
The requirement of capital will be less to large private sector banks due to their higher capital
ratios and stronger profitability. However, some public sector banks are likely to fall short of
the revised core capital adequacy requirement and would therefore depend on government
support to augment their core capital. The additional equity capital requirements in the public
sector banks, mainly due to Basel III norms in the next five years, work out to around Rs
1,400-1,500billion. 

Ifthe government holds the existing shareholding, the recapitalisation burden borne by it will
be to the extent of around Rs 900-1,000 billion. This will contribute to additional government
borrowing to the extent of Rs 1,000 billion. As per the analysis, on account of this extra
government borrowing, the country's fiscal deficit is expected to increase further, by about 25
basis points per annum. This will widen the fiscal deficit, inflation, lower economic growth,
creditofftakeandtherebybankprofitability.

67
Pressure on Return on Equity: To meet the new norms, apart from government support a
significant number of banks have to raise capital from the market. This will push the interest
rate up, and in turn, cost of capital will rise while return on equity (RoE) will come down. To
compensate the RoE loss, banks may increase their lending rates. However, this will adversely
affect the effective demand for loan and, thereby, interest income. Further, with effective cost
of capital rising, the relative immobility displayed by Indian banks with respect to raising
fresh capital is also likely to directly affect credit off take in the long run. All these affect the
profitability of banks.

Pressure on Yield on Assets: On account of higher deployment of funds in liquid assets that
give comparatively lower returns, banks' yield on assets, and thereby their profit margins, may
be under pressure. Further higher deployment of more funds in liquid assets may crowd out
good private sector investments and also affect economic growth.

 
Action Required from Banks

To address these issues and to protect their profitability margins, banks need to look beyond
regulatory compliance and take proactive actions - assessing their lines of business, level of
risk profiles, economizing capital and drawing up funding strategies. 

In this regard the following strategies need to be adopted:

Change in Business Mix: Since retail banking has a comparatively lower risk weight

compared to corporate banking (except in the case of clients who are A rated and above), the
impact on higher allocation of capital will be less on retail banking. Further, in corporate
banking, as chances of a default in short-term loans is less, on an average, compared to
chances of a default in long-term loans, banks need to shift towards short-term/retail loans.
And to take a granular approach to protect their margins under the new Basel III norms. 

68
Change in Customer Mix: Banks need to review their capital allocation to each client
segment and price it in line with the profile to ensure that capital is allocated to segments that
generate higher risk-adjusted returns.

 
Low-Cost Funding: One of the most important factors to meet the new regulations is to have
a stable low-cost deposit base. For this, banks need to focus more on having business
correspondents/facilitators to reach customers as adding branches will increase costs and have
an impact on the profit margin.

 
Improvement in systems and procedures: Refining the rating model/data cleaning/
modernisation of systems and procedures may help banks economise their risk-weighted
assets, which will help reduce capital requirements to some extent. 

69
 CHAPTER 5
WEBLIOGRAPHY AND APPENDIX

70
 Webliography

www.rbi.org.in

www.risk.net

www.wikipedia.org

www.investopedia.com

www.kpmg.com

www.bis.org

www.capitalmarket.com

www.zerohedge.com

www.iibf.org.in

www.wiki.answers.com

www.youtube.com

www.investorwords.com

www.finacialdictionary.thefreedictionary.com

www.timesofindia.indiatimes.com

www.slideshare.net

71
 QUESTIONNAIRE

A. Basic Description

Name of the Bank/ Address

Name and Designation of the Informant(s)

Name

Designation

Phone No(s)

Email

B. Financial Details of the respondent bank for two years:

Item 2012-13 2013-14

Interest Income
Other Income
Total Income
Gross NPA (%)
Net NPA (%)
Capital Adequacy Ratio (%)
Basel I
Capital Adequacy Ratio (%)
Basel II
Total Tier 1 Capital
Approaches Used in

72
 Credit Risk

Market Risk

Liquidity Risk

CRAR as per present Basel

norms

C. Details about Basel II Preparedness

Q1 what benefit do you think, you will get by implementing BASEL-III, Please give the
point on scale of 1-10 (1 if No benefit and 10 if it is Highly Benefited)

I Reduction in Capital Requirement

Ii Enhanced Reputation

Iii Better Transparent Environment

Iv Nothing, just for the Regulatory Compliance

Q 2 Difficulties faced in implementing the Basel III, Please give the point on scale of 1-
10 (1 if No and 10 if Yes Major Difficulty)

I Too much Information

Ii Data Insufficiency

Iii Untrained Staff

Iv Insufficient IT infrastructure

V Shortage of Staff

73
 Vi Lack of Knowledge

Vii High Cost Involved

Viii Others (please specify)

Q3 Major Concerns in implementing (Now and for the future) the Basel III, please give
the point on scale of 1-10 (1 if No problem at all and 10 if Major concern)

I Too Much Information required

Ii Required more experts

Iii High Cost Involved

Iv No Incentives

V Complexity in the procedure

Q4. In your opinion, whether increase in the capital base have adverse impact on bank’s
profits?

Yes
No
Can’t say

Q5. Can PSU banks mobilize the sort of capital envisaged in Basel III?

Yes
No

74
Q6. Can private banks raise the sort of capital envisaged in Basel III?

Yes
No

Q7. The liquidity Ratio introduced in Basel III help in strengthening the Liquidity position of
the bank

Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree

Q8. What are the chances that Basel III will help banks to recover from the situation of
financial crisis?
(Rate according to your preference)
1 6
2 7
3 8
4 9
5 10

Q 9. Which form of capital will be more affected by the implementation of Basel III?

75
Q10. With the increased demand for credit, will the Basel III capital framework increase cost
of credit?
Yes
No
Can’t say

Q11. Do banks pass on these costs to depositors and borrowers?

76