Basel III Guidelines for India

India's central bank, Reserve Bank of India, has issued the guidelines for implementation of Basel III capital regulations for banks in India.

These guidelines will be effective from January 1, 2013 and the Basel III capital ratios will have to be fully implemented by March 31, 2018. This gives banks a period of 6 years.

Under Basel III, the backs will need to maintain a capital of 11.5% of risk-weighted assets in contrast with the current 9%. The norms also have a stricter definition of Tier I capital which now must be made up mostly of common equity. From 2013 till 2018 the capital ration to be maintained will be increased gradually.

The Basel III norms also provide additional guidance on aspects such as Capital Conservation Buffer and Leverage ratio.

The capital conservation buffer (CCB) is designed to ensure that banks build  up capital buffers during normal times (i.e. outside periods of stress) which can be drawn down as losses are incurred during a stressed period. The requirement is based on simple capital conservation rules designed to avoid  breaches of minimum capital requirements. 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.

Further, a countercyclical capital buffer within a range of 0 – 2.5% of RWAs in form of Common Equity or other fully loss absorbing capital will be implemented according to national circumstances. The purpose of countercyclical capital buffer is to achieve the broader macro-prudential goal of protecting the banking sector from periods of excess aggregate credit growth.

The capital requirements will be supplemented by a non-risk based leverage ratio which is proposed to be calibrated with a Tier 1 leverage ratio of 3%.