Basel III

implementation

Presented by
Ramya N P301413CMG340
Mallikarjun Swami
P301413CMG324
Mrini Mishra P301413CMG388
Nukaraju Maroju P301413CMG33
Vivek Menon K P301413CMG385

PSU Banks Basel III

implementation
Issues
1.
2.
3.

Raising Capital to meet regulatory norms

Increasing NPA
Decreasing Quality of Assets

PSU Banks Basel III

implementation
Existing Situation of PSU Banks
Capital
Requirement in
NPA,% CAR,%
Cr

Bank
SBI
BOI
Canara
IDBI
Union Bank of India
Central Bank of India
Oriental Bank of India
Allahabad Bank
Andhra Bank
Indian Bank
Total Capital
required
3

2.57
2.00
1.98
2.48
2.33
3.75
2.81
4.15
3.11
2.26

12.33
10.97
10.19
11.71
10.23
10.65
10.88
9.90
10.30
13.16

11.5

1,25,813
29,759
27,325
23,630
20,577
16,493
12,594
11,080
9,729
9,142

4,60,120

Total capital requirement in

next 4 yrs
4,60,120 Crore

2,39,720
Tier I
Common
Equity

1,55,900
Tier I Hybrid
capital

64,500
Tier II Bonds

Government Calculation
Rs 1,60,825
Reduction of Govt stake to at least 52%

Rs 78,895
Budgetary Support

Rs 2,20,400
Tier II Bonds from the market

Feasibility of government
solution
Equity

Budgetary Support
Year

Budget

2014/15

11,200

2013/14

14,000

2012/11

15,888

2011/10

12,000

2010/09

20,117

Falling Budget
Major chunk will be
taken by Big PSU

Raising Bonds
Timing: Raising under falling
Interest rates will increase cost
of funds
6

Solution ( The way out)

Sell Non core assets
2. Sell corporate to release capital
3. Revalue fixed assets
4. Reduce lending growth to preserve
capital
5. Focus on assets with low risk weights like
loans to companies with triple A rating
6. Reduce of stop dividend payments to
government
7. Consolidation of PSU banks
8. Stake reduction to 33 percent
9. Improve governance and management
quality
10. Economic revival: Stock market rally
1.

Impact of Basel III

l
l
l
l
l

Loan Spreads
Capital Requirements
Cost Benefit Analysis
Loan Demand
Effectiveness of Basel III timeline

Loan Spreads
l

Impact of Basel III on loan spreads

estimated using 2 different
methodologies representative bank
approach
and
OECD
model approach
Comparison of
results
for estimation
of bank loan spread
for SCBs
Increase in Capital
Ratio (% points)

Representative
Bank Approach

OECD Model
Approach

Assuming RWAs unchanged

+1

31.40

15.63

+2

45.20

31.26

+3

59.00

46.89

+4

72.80

62.52

+5

86.60

78.15

Loan Spreads
Comparison of results for estimation of bank loan spread
for SCBs
Increase in Capital
Ratio (% points)

Representative
Bank Approach

OECD Model
Approach

Assuming RWAs decline

10

+1

22.00

15.01

+2

31.00

30.02

+3

41.00

45.03

+4

50.00

60.04

+5

59.00

75.05

Loan Spreads
l

Increase in bank lending spreads for a 1

% point increase in bank capital

Bank
lending
spreads
(bps)

11

USA

Euro
Region

Japan

India

20.5

14.3

8.4

15.63

Capital Requirements

12

Research House

Estimations

Swamy

Additional Tier 1 capital of INR

251,106.67 crores with 10%
growth in RWAs

E&Y

Additional capital of INR

431,517 crores by 2019 by
which 70% required as common
equity

ICRA

INR 600,000 crores of which 7075% required by PSBs

PWC

Similar capital requirements

estimated. For every % point
increase in CAR, possible drop
of 0.2% drop in GDP

Cost-benefit analysis
Estimate

Cost

Benefit

Cost estimated as
251,106.57
additional minimum Tier 1
capital with RWAs
assumed at 10%
Prevention of loss in
output

1,601,971.00

Cost estimated as
474,168.60
additional minimum Tier 1
capital with RWAs
l The
of implementation
assumed
at costs
15%

are broadly
considered to be the additional
minimum capital requirements
(implementation costs are not
considered)

13

Loan Demand
Increase
in Capital
Ratio

Represent Impact on
ative Bank Loan
Approach
Demand

OECD
Model
Approach

Impact on
Loan
Demand

Assuming RWAs unchanged

+1

31.40

-18.8

15.6

-9.3

+2

45.20

-27.1

31.2

-18.7

+3

59.0

-35.4

46.8

-28.1

Assuming RWAs decline

14

+1

22.0

-13.2

15.0

-9.0

+2

31.0

-18.6

30.0

-18.0

+3

41.0

-24.6

45.0

-27.0

Basel III Timeline Effectiveness

l
l

l
l

15

Widely pleased proponents of stricter standards

who argue for safer banks
Joseph Stiglitz, a critic, quoted as saying that a
delay in quick and full implementation will allow
banks to continue to pocket profits instead of
pooling the money as capital buffer and continue
to take big risk as long as possible to collect their
bonuses
Other than PSUs, most other Indian banks are
well positioned for implementation of Basel III
norms
Banks would be guided by market forces to
implement before deadline
Generally consensus is that the timeline offers a
prudent approach by allowing banks to ramp up
their capital without harming their business,
while still compelling them to make gradual
progress towards the finish.