Friday 28 March 2014

Basel III Norms Postponed to Suit Government-VRK100-28March2014




In a notification to commercial banks, Reserve Bank of India on 27 March 2014 has directed them to postpone full implementation of Basel III norms by one year to 31 March 2019, instead of the earlier timeline of 31 March 2018. This is a big relief for Indian banks who have been going through a phase of bad loans threatening their capital and profits. It is not a mere coincidence that this deferment is beneficial especially to public sector banks. There is a design behind it.

Who is the biggest beneficiary of RBI’s move?

The biggest beneficiary of the RBI’s decision to defer full implementation of Basel III norms will be Government of India (GOI). As a majority owner of public sector banks (PSBs), GOI is obligated to recapitalize PSBs in the next few years in accordance with the Basel III norms, which are much tougher than Basel II norms. PSBs have a market share of around 70 percent in Indian banking.

But, GOI has been facing a lot of problems on the fiscal front. India’s GDP growth rate has slowed down considerably in the last two to three years. Tax collections have come down, while subsidies have gone up substantially, with fiscal deficit worsening.

However, for the current financial year 2013-14, GOI has barely managed to rein in fiscal deficit within 4.8 percent of GDP, with some temporary measures such as extracting higher dividends from public sector understandings (PSUs), burdening LIC of India with stakes in PSUs and forcing some PSUs to buy shares in other PSUs.

GOI is likely to face severe resource crunch in the next few years until GDP growth rate picks up again. India is over-dependent on all sorts of subsidies. And there is this overhand of providing food security to two-thirds of India’s population. Burden of repayment of government bonds (both principal and interest) is very heavy in the next three years—which is a result of heavy government borrowing since 2008-09 till now.

RBI is in the habit of rescuing public sector banks, whenever they face headwinds either from global or domestic forces. Postponing the full implementation of Basel III norms is another clever decision by RBI to rescue GOI and public sector banks.

Whether Basel III Norms are Good for India?

Basel III norms will force Indian banks to set aside more capital as a percentage of their assets. The result is that banks’ ability to lend to needy sections will come down. India is a developing country and credit penetration is low compared to developed nations.

It is an irony that Indian banks have to set aside more capital, as part of international banking prudence, as a buffer to prevent any possibility of banking meltdown that happened in the wake of 2008/2009 global financial crisis triggered by Lehman Brothers collapse.

India is hungry for capital. Even though our savings are high, they are not enough to sustain lending activities in the economy. Due to statutory requirement (CRR and SLR), banks have to park a large part of their resources in government securities—it means a large part of banks’ funds are lent to GOI. Moreover, Indians invest more in physical capital—gold and real estate, rather than financial capital—to that extent banks’ ability to raise deposits or other forms of capital from public is crimped.

Developed nations are already developed. What I mean is that their economies are flat, with no expectations of higher growth and they require less capital. On the contrary, we have high expectations of GDP growth rates of above 8 percent.

As part of the international coordination, India is obligated to implement Basel III norms. However, Basel III norms allow considerable leeway to the implementing nations, because any norms need to be tweaked to suit local issues.

One hopes that RBI is wise enough to balance between India’s need for more loans and following international norms, without giving any impression of dilution of the spirit of Basel III norms.

Market Reaction:

Anyway, shares of all listed banks, especially those of PSBs, will react positively to the RBI’s move after stock markets open today.


References:

RBI’s notification dated 27 March 2014 deferring full implementation of Basel III norms:


Notes:

CRR – cash reserve ratio
GDP – Gross domestic product or a measure of national income
SLR – statutory liquidity ratio

Disclaimer: The author is an investment analyst with a vested interest in the Indian stock markets. This is for information purposes only. This should not be construed as investment advice. Investors should consult their own financial advisers before taking any investment decisions. The author blogs at:


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