Dear Aspirants
Gs paper is very analytical in nature. Therefore scoring in this paper depends upon perspective. It is important for the students to inculcate pragmatic & policy based understanding of the issues of relevance . It is our endeavor to organize your efforts in this direction.
In this module we have continued with synoptic review along with drafted articles .That will help students in following ways
1. This will provide beforehand understanding of the articles
2. It will make memorization & revision of material easy
3. Now a days Prelims paper is analytical in nature
Synoptic review will help students to inculcate objective analytical content of the article in the first reading
Synoptic review will help students to inculcate objective analytical content of the article in the first reading
4. Point format presentation will help students to develop mains answer writing sills
Sample of Synoptic review with drafted article.
Impact of implementation of BASEL 3 guidelines ON Indian Banks .
- Indian Banks are well placed to meet higher capital requirements and indeed can strengthen their competitive position vis-à-vis international banks
- The BIS has set the deadline for full implementation as 2019; the RBI would like Indian banks to comply by 2017.
Analysis
- total regulatory requirement of total capital + capital adequacy ratio
- depress banks’ profitability-high yielding products + fee income
- the low prices of stocks in the Indian market
- the government’s shareholding in PSBs
- Basel 3, with its enhanced capital requirements, is likely to improve the competitive advantage of banks in India and some other emerging markets.
Details
Issue under scan
With the RBI flagging off the implementation of Basel 3 guidelines, Indian banks will have to plan for more capital in the years ahead. They are well placed to meet higher capital requirements and indeed can strengthen their competitive position vis-à-vis international banks — provided the government can deliver on its own responsibilities towards public sector banks.
- The RBI has set a more demanding schedule for Basel 3 implementation than the Bank for International Settlements. The BIS has set the deadline for full implementation as 2019; the RBI would like Indian banks to comply by 2017.
Analysis
· The total regulatory requirement of total capital (tier 1 and tier 2) in India is 9%, higher than the BIS norm of 8%. It will remain so under the new guidelines. Under Basel 3, two important changes happen.
- One is that the quality of the 9% capital required is higher. At present, bank capital is split almost evenly between tier 1 and tier 2. Under Basel 3, tier 1 will constitute 7% out of the total 9%.
- The other change is that banks will be required to have a capital conservation buffer, comprising common equity, of 2.5%. That takes the total capital requirement to 11.5%.
- Also, between 2013 and 2017, banks will be expected to operate at a minimum tier 1 leverage ratio of 5%.
- At the regulatory requirement of 9%, Indian banks were operating with a capital adequacy ratio of 13% in 2011 (under Basel 1). At a regulatory minimum of 11.5%, banks can be expected to be operating with capital in the range of 15-17%. This is the new bottom line where capital is concerned. Indian banks will have to make their plans for capital accordingly.
Are they equal to the task?
There are several reasons for optimism.
- First, investor appetite is likely to be healthy because returns to primary issues of Indian banking stocks, including PSB stocks, over the years have been good.
- Secondly, banks are seen as a play on the economy. In putting money in banks, investors are looking at an economy with a growth potential of 8-9% and bank loan growth upwards of 20%.
- Thirdly, return on assets in Indian banking is among the highest in the world today: it has been above 1% every year since the subprime crisis. While banking systems in the west are still reeling under the impact of the crisis, it is almost as if no crisis happened in Indian banking.
Western bankers have expressed two big concerns about the higher capital requirements imposed by Basel 3.
- One, it will depress banks’ profitability.
- Two, it will depress economic growth because some of the higher cost of capital will be passed on to borrowers.
Neither is particularly worrying in India.
· Increases in capital have made little dent on banks’ net interest income (as a proportion of assets) over the years. Any impact in coming years will be small, if at all, because there are still numerous high yielding products that are still open to banks on both wholesale and retail sides: SMEs, vehicle loans, personal loans, credit cards, etc.
· Besides, PSBs have only recently woken up to the potential for fee income. Increases in fee income will sustain return on assets even if net interest income is dented.
- For the same reasons, the impact on corporate borrowers and hence on economic growth will be negligible. (Even in western economies, BIS estimates the impact on growth to be a mere 0.04% per year). High growth and high returns will continue to make Indian banks attractive to investors in India and abroad.
- Some banks, such as HDFC Bank, are generating substantial surpluses and hence may not need a great deal of capital from the market.
- Overall, capital is unlikely to be a constraint for Indian banks in the coming years.
There could be constraints arising from one or two other factors.
- One is the low prices of stocks in the Indian market: banks may not find it attractive to issue capital at current prices. A possible answer is to raise small sums through rights issues in such periods and approach the broader market when things look up.
- A bigger constraint is the government’s shareholding in PSBs. As SBI finds to its cost, the government may not find it easy to contribute its share in order to retain its shareholding. It may not be willing to reduce its shareholding below 51% either. If majority government ownership is to stay, the annual budget must factor in annual requirements towards bank capital.
Basel 3 is likely to impact western and Indian banks in very different ways.
- Banks in the west are raising their capital adequacy levels through deleveraging, that is, by shrinking their balance sheets. In India, in contrast, banks will be raising capital to finance growth.
- The fear with Basel 2 was that large international banks would increase their competitive advantage by using advanced risk management models that would lower their capital requirement. In contrast, Basel 3, with its enhanced capital requirements, is likely to improve the competitive advantage of banks in India and some other emerging markets.
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