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SUMMARY

The financial crisis of 2008 was the largest global economic crisis since the Great Depression. It brought
down major institutions such as Lehman Brothers and Bear Stearns, led to a rush to bail out many other
banks, and revealed a plethora of flaws in the financial system. The response of the Basel Committee and
the G20 was to introduce a set of regulations that aimed to overhaul the financial industry
On September 12, 2010, the Basel Committee for banking Supervision endorsed the Basel III accord. The
new regulations aspire to make the banking system safer by redressing many of the flaws that became
visible in the crisis.
These regulations will force financial institutions to make considerable changes to the way they are run,
because of the costs imposed not only by the increase in assets that have to be held, but also by the
increased resources that many functions, but principally risk and compliance, will require to expand to
meet regulatory ratios and reporting requirements. Financial institutions will need to perform more
calculations and submit more data to regulators than ever before, while coming under greater pressure to
raise capital, liquid assets, and collateral. With such an increase in regulations, the danger for many
financial institutions is that the regulatory workload will consume an ever-greater proportion of resources,
preventing functions such as risk and finance from pursuing business goals.
Financial institutions ought to consider how transitioning to Basel 3 can help them, not the regulators. To
adapt to the pressure on resources and the impact of new regulations, financial institutions will therefore
need to make a number of changes to improve their performance. This paper aims to explore and
investigate the new capital regulations under Basel III proposed by the Basel Committee. In this project
the total capital requirement and hence the CRAR ratio for 2012-2103 have been calculate according to
the norms. Then in the second part of analysis the relationship between the capital adequacy ratio and its
determinants. Due to the fact that the new regulations are going to be a game changer for the banking
sector, an assessment is being done to estimate the effects of the enhanced capital requirements on the
sampled banks. A quantitative analysis is done to explore the relationship between CRAR and the
various factors related with three types of risk i.e. Credit Risk, Operational Risk and Market Risk. The
analysis on minimal capital requirements reveals that, most banks in the study are sufficiently capitalized
or are bit lower to meet the requirements. For the purpose of my project I have stick to Pillar I of Basel III
mainly. However, balance sheet restructuring will have to be undertaken with a change of banks business
models being considered in order to comply with the extra liquidity requirements. From the findings,
Indian Banks will have to enhance their additional tier I ratio by a great deal to meet the requirement

because most of the Bank are lacking on this front. Most probably in turn, banks will pass on these costs
to consumers in terms of higher lending rates and constraint lending. For PSBs government will also
have to infuse more resources and for Private Banks they might go for fresh offering of shares. They also
have to bring down their risk weighted asset. The significance of Basel 3 cannot be overestimated. The
measures will considerably increase the capital cushion banks must hold, impose major short-term costs
on banks, and change the way banks manage themselves.
Thesis Objective:
To know the various Provisions of Basel III .
To see the changes between Basel II and Basel III.
To understand the structure of how the capitals for CRAR is calculated under Basel III.
To see whether Indian Banks are able to be committed by the Regulatory Capital Requirements
defined by the BASEL-III framework.
To find a significant relationship between the capital adequacy ratio and its determinants.
The new rules were published in December 2009, and afterwards, Basel III was released in
December 2010. In parallel, the European Commission launched a legislative process to issue its
fourth Capital Requirement Directive (CRD IV), which was to be enacted in 2010.
Analysis
The new framework continues to build upon the three pillars as in Basel II with major changes occurring
in pillar 1. In this pillar, the Committee has proposed significant changes to capital in terms of
composition and capital ratios. The aim is to enhance the quality and increase the quantity of capital.
Another major innovation is the introduction of global liquidity standards which has two aspects; namely
Liquidity Coverage Ratio and the Net Stable Funding Ratio that banks must maintain as a minimum,
however RBI have not included in these two ratio in their directives to be followed.
In the previous frameworks, the Committee only gave recommendations regarding sound liquidity risk
management practices for financial institutions. The Committee further recommends changes to Pillar 2
(banks internal assessment of capital and supervisory review risk of risk management and capital
assessment), and pillar 3 (market discipline). This project is basically based on Pillar I of Basel III. As for
the constraint of space here the detailed explanation of norms are given in the main report submitted by
me and only the explanation part is dealt here. PSU group comprises of Punjab National Bank, State
Bank Of India,United Bank of India and Bank Of Baroda. The Private group comprises of ICICI Bank,
HDFC Bank, Yes Bank, South Indian Bank.
The analysis is aimed at investigating the impact on banks capital ratios (i.e., whether the respective
banks are sufficiently capitalized to comply with the new capital ratios given their current status.)

retrieved from the respective annual financial accounts and risk reports for 2012-2013. Therefore,
changes in the financial reports that occurred after this period are not taken into account.
The analysis is initiated on ten large Indian Lending banks; that is, those banks that derive a larger
proportion of their operating income from lending activities (either retail or wholesale). The analysis is
done by dividing banks in two groups-1) PSUs where majority of the banks equity is held by
Government of India., 2)Private which is owned and managed by Private Promoters. PSU group
comprises of Punjab National Bank, State Bank Of India,United Bank of India and Bank Of Baroda. The
Private group comprises of ICICI Bank, HDFC Bank, Yes Bank, South Indian Bank.
The analysis is aimed at investigating the impact on banks capital ratios (i.e., whether the respective
banks are sufficiently capitalized to comply with the new capital ratios given their current status.)
retrieved from the respective annual reports for 2012-2013. Therefore, changes in the financial reports
that occurred after this period are not taken into account. I have decided to apply the risk-weighted assets
as calculated under Basel II. This might lead to a reduction of reported risk-weighted assets for large
banks, since they employ more sophisticated risk models.
There are assumption which is necessary since it is not possible to completely ascertain the given
criteria to fully meet the Basel III requirements for inclusion in CET1, AT1 &Tier 2 capital. The
countercyclical buffer and extra capital surcharge for systemically important banks are not put into
consideration when assessing the individual banks compliance with Basel III. This is because the precise
application of the buffer is yet to be finalized . The format on which I have taken out these capital
ratio is provided by the PNB to me.
Group 1 (PSB):
The Red Colour figures show those amounts that are below the required limit.
PNB
ITEMS
% of
RWA
TOTAL
AMOUNT
ACTUAL
AMOUNT
actual
amount
according to
Basel 3
% ACTUA
OF RWAL DIFFERENCE
Minimum Common Equity Tier I
(CET 1) 4.50% 146074409 145221807 145221807 4.47373456 -852601.78
Maximum Additional Tier I capital 1.50% 48691469.6 20205000 20205000 0.62243962 -28486470
Minimum Tier I Capital 6.00% 194765878 165426807 165426807 5.09617419 -29339071
Maximum Tier 2 Capital 2.00% 64921959.5 115745031 64921959.46 2 50823072
Minimum Total Capital / CRAR 9.00% 292148818 281171838 230348766.5 7.09617419 -10976980
Table 1: Capital Ratios of PNB
PNB is the third largest bank in India in terms of asset size. Despite this Most Of Its Ratio except Tier 2
are below required level. Good thing for them is that it is slightly less. Their core capital i.e. CET are
4.47% and the needed is 4.5% which is .03% less, which makes most of the part of Total Capital. The

basic problem for the PNB is their Additional Tier I capital, this is because their debt capital instruments
are not up to the par. According to Mr. K.R. Kamath, PNB's Chairman and Managing Director, they can
get some income by focusing on recovery, and other way is if the interest rate cycle reverses , the bank
would be able to unlock certain treasury profits.
SBI
ITEMS
% of
RWA
TOTAL
AMOUNT
ACTUAL
AMOUNT
actual
amount
according to
basel 3
% ACTUA OF
RWAL DIFFERENCE
Minimum Common
Equity Tier I (CET 1) 4.50% 584711370.3 762911814 762911814 5.871449296 178200443.7
Maximum Additional Tier
I capital 1.50% 194903790.1 55578125 55578125 0.427735076
-
139325665.1
Minimum Tier I Capital 6.00% 779615160.3 818489939 818489939 6.299184372 38874778.65
Maximum Tier 2 Capital 2.00% 259871720.1 3520287200 339045970.8 2.609333333 3260415480
Minimum Total Capital /
CRAR 9.00% 1169422741 4338777139 1157535910 8.908517705 3169354398
Table 2 :Capital Ratios of SBI
Although the total capital ratio is less than the required amount but this too is slightly less than the
required limit. It has a very healthy CET ratio and is all set to meet its 5.5% requirement by 2018.
According to experts, some of the required money will come through internal accruals and some part will
have to be raised from the market. The government is likely to infuse Rs 4,000 crore into the bank this
fiscal out of the Rs 14,000 crore planned towards recapitalizing the nationalized banks this fiscal.
BOB
ITEMS
% of
RWA
TOTAL
AMOUNT
ACTUAL
AMOUNT
Actual
Amount
with Basel
3 norms
% ACTUA OF
RWAL DIFFERENCE
Minimum Common Equity Tier I
(CET 1) 4.50% 137140537.5 178322315 178322315 5.85129993 196482478.7
Maximum Additional Tier I capital 1.50% 45713512.5 19117000 19117000 0.627287172
-
141832091.7
Minimum Tier I Capital 6.00% 182854050 197439315 197439315 6.478587103 54650386.98
Maximum Tier 2 Capital 2.00% 60951350 101917755 79236755 2.6 3257073578
Minimum Total Capital / CRAR 9.00% 274281075 299357070 276676070 9.078587103 3311723965
Table 3 : Capital Ratios of Bank Of Baroda
As seen from the Table its complying with all the limits now itself thus justifying the status of second
largest bank of India. Only Additional tier I capital ratio is less than prescribed., but compared to earlier
two banks its slightly in a better position. The government has a shareholding of about 57% , so they can
lay-off a small stake if needed.

UBI:
ITEMS
% of
RWA
TOTAL
AMOUNT
ACTUAL
AMOUNT
% ACTUA
OF RWAL DIFFERENCE
Minimum Common Equity Tier I
(CET 1) 4.50% 28122377.3 31929184 31929184 5.109145876 3806806.699
Maximum Additional Tier I capital 1.50% 9374125.767 11000000 10644840.59 1.7033 1625874.233
Minimum Tier I Capital 6.00% 37496503.07 42929184 41303309.77 6.609145876 5432680.933
Maximum Tier 2 Capital 2.00% 12498834.36 26970087 14165345.61 2.266666667 14471252.64
Minimum Total Capital / CRAR 9.00% 56244754.6 69899271 55468655.37 8.875812543 13654516.4
Table 4 : Capital Ratios for united Bank Of India
Though a small bank in terms of operations, it is the only bank which is complying with all the ratio,
except the total capital requirement , that too by a small margin but that can be settled by the additional
capital in tier II and additional tier I capital. This can be done because Basel has allowed it. United Bank
of India has also raised R500 crore through tier-2 bonds for complying with the Basel-III guidelines
GROUP 2 (Private) :
HDFC
ITEMS
% of
RWA
REQUIREDTOTAL
AMOUNT ACTUAL
ACTUAL amt
according to
Basel 3
ACTUAL %
RWA DIFFERENCE
%
DIFFERENCE
Minimum
(CET 1) 4.50% 137645500.5 165,468,748 165,468,748 5.41 27,823,248 20.2136992
Maximum
AT 1 capital 1.50%# 45881833.5 2000000 2000000 0.07 -43,881,834
-
95.6409763
Minimum
Tier1 Cap 6.00% 183527334 167,468,748 167,468,748 5.48 -16,058,586
-
8.74996964
Maximum
Tier2 Cap 2.00%# 61175778 165852776 73546879.77 2.40 12,371,102 20.2222222
Minimum
TotalCapital/
CRAR 9.00% 275291001 333,321,524 241,015,628 7.88 -34,275,373 -12.450597
Table 5:Capital ratios for HDFC
HDFC is complying with the CET I ratio limit but is not very comfortable with other ratios. Here also we
can see that Rs 43,881,834 thousands are needed only for additional tier I, which is 95% less than the
required. Although the Tier II capital does some balancing act but still the total required capital is around
12.45% less than required amount.
YES Bank
Although with a strong prospect the bank seems to be struggling to comply with the Basel III ratio, with
non of its ratio in line with the norms. This could happen because Bank is still in growing phase and the
risk weighted asset are high to increase growth. The major reason for their non compliance is their CET

ratio which is way below required level, though their tier II ratio are pretty good which can handle the
pressure a bit but they seriously need to build up their CET 1and Additional tier I ratio.
Table 6:Capital ratios for YES Bank
ICICI Bank
ITEMS
% of
RWA
TOTAL
AMOUNT
ACTUAL
AMOUNT
actual
amount
according to
Basel 3
% ACTUA
OF RWAL DIFFERENCE
Minimum Common Equity Tier
I (CET 1) 4.50% 198874800 276692391 276692791 6.260811121 77817991
Maximum Additional Tier I
capital 1.50% 66291600 13010000 92218981.33 2.086666667 25927381.33
Minimum Tier I Capital 6.00% 265166400 289702391 368911772.3 8.347477788 103745372.3
Maximum Tier 2 Capital 2.00% 88388800 387063837 122958641.8 2.782222222 34569841.78
Minimum Total Capital / CRAR 9.00% 397749600 676766228 491870414.1 11.12970001 94120814.11
Table 7:Capital ratios for ICICI Bank
With all the ratio sitting nicely above the required amount ICICI is very much set to implement the full
fledged Basel III norms by 2018. But they also have to go to investor for raising capital.
South Indian Bank
ITEMS
% of
RWA
TOTAL
AMOUNT
ACTUAL
AMOUNT
% ACTUA
OF RWAL DIFFERENCE
Minimum Common Equity Tier I (CET 1) 4.50% 10360837.53 1344730 0.584053652 -9016108
Maximum Additional Tier I capital 1.50% 3453612.509 0 0 -3453613
Minimum Tier I Capital 6.00% 13814450.04 1344730 0.584053652 -12469720
Maximum Tier 2 Capital 2.00% 4604816.679 4604816.679 2 0
Minimum Total Capital / CRAR 9.00% 20721675.05 5949546.679 2.584053652 -14772128
Table 8 :Capital ratios for South Indian Bank
ITEMS
% of
RWA
TOTAL
AMOUNT
ACTUAL
AMOUNT
% ACTUA
OF RWAL DIFFERENCE
Minimum Common Equity
Tier I (CET 1) 4.50% 30254552.91 13279535 13279535 1.975171
-
16975017.91
Maximum Additional Tier I
capital 1.50% 10084850.97 7781425 7781425 1.157393 -2303425.97
Minimum Tier I Capital 6.00% 40339403.88 21060960 21060960 3.132564
-
19278443.88
Maximum Tier 2 Capital 2.00% 13446467.96 85995984 13446468 2 0
Minimum Total Capital /
CRAR 9.00% 60509105.82 107056944 34507428 5.132564
-
26001677.86

The compliance issue with the Basel Norms is one of the biggest issue they have right now
because except Tier II ratio, no other Ratio are complying with the Basel norms. The two major
reason for this are very low CET1 ratio and Nil Additional Tier capital.
Regression Analysis:
In the second part of the analysis I have a taken a model to see the relationship the factors that determine
the key capital ratio the CRAR in Indian banks.The Independent variable here is CRAR (Capital Risk
Adjusted Ratio) and Independent variables which show three types of Risk(market risk, credit risk and
operational risk) are CRAR, Deposits, Number Branches, Business Per Employee, Profit per
employee, Advances, Return on Equity, Net Non Performing Asset,Capital, Credit deposit Ratio
The purpose of regression is to find those variables among the given variables on which influence CRAR,
so that banks can concentrate on these variables to improve CRAR.
Model Summary
Model R R Square Adjusted R Square Std. Error of the
Estimate
1 .935
a
.874 .820 1.58512
a. Predictors: (Constant), Cap, deposits, Off_emp, NNPA, Bus_emp, OFFICE.
R square is equal to 0.874, so we can say that 87.4% of the variations in the model can be explained by the
variables. So we can say that model is apt to explain the relationship.

Coefficients
Model Unstandardized Coefficients Standardized
Coefficients
t Sig.
B Std. Error Beta
1
(Constant) 15.658 1.895

8.265 .000
deposits .017 .007 .630 2.336 .035
OFFICE -.002 .001 -.916 -2.688 .018
Bus_emp -.766 .134 -.879 -5.731 .000
Prof_emp 71.051 10.081 1.008 7.048 .000
NNPA .001 .000 .367 1.958 .070
Cap .003 .001 .263 2.332 .035
a. Dependent Variable: CRAR
From the above table we get the equation:
CRAR= 15.678 + .017(deposits) - 0.002(Office) - 0.766(Business per Employee) +
71.051(Profit per Employee) + 0.001(NNPA ) + 0.003 (Capital)


This model means that if deposits increase by 1thousand crores the CRAR will increase by .017.,
similarly if number of office increases by 100 branches the CRAR will decrease by .002, and so on.
The negative sign of the coefficients for the Number of Offices and Business Per Employee clearly
indicate how larger number of offices and more business per employee can also contribute to
operational risk. From the profitability point of view Profit Per employee is the most significant factor in
influencing CRAR. If profit per employee increase by .1 then CRAR increases by 71.051, as we can see
Profit per employee has most significant effect on CRAR. As we can see NNPA is having a small but
positive effect on the CRAR. This can be explained as NNPA increases banks increase their Capital and
hence CRAR ratio to be on safer side. The significance level taken for the analysis is 1%.
By seeing this equation Banks can concentrate on these six factors for improving their CRAR.
Conclusion:
Recommendations:-
Apart from just attaining compliance with the new regulations, banks especially those with high internal
standards and demands will go beyond compliance and take measures to restore profitability. Numerous
actions with different duration and range are available to achieve these objectives.
The basic mode of action which can be taken are divide under three important headings but dealt in detail
in the main report submitted.
Operational Responses
Basel III creates incentives for banks to improve their operating processes not only to meet
requirements but to increase efficiency and lower costs.
Tactical Responses
Besides the rather short-term operational responses banks have a number of more far-reaching tactical
actions they can take to respond, especially to profitability concerns. The focus of tactical responses
should be on the areas of pricing, funding and asset restructuring. While tactical responses by definition
do not address long-term strategic issues, they may be extremely helpful in relieving pressure
on profitability.
Strategic Responses
In reviewing their strategic responses to Basel III and to the dangers of reduced profitability, banks have
the opportunity to effect major changes throughout all areas of the institution.
These include fairly straightforward initiatives such as retaining earnings to increase Tier 1 Capital
but also encompass a broad range of far reaching possibilities explained in main report.
Besides above for raising Capital banks can do the following :
The first would be to introduce the concept of golden share for Indian banks as Margaret Thatcher the
then Prime Minister of Britain did it in the 1980s for privatizing public sector entities. As a concept

golden share means, reducing the stake in a company below 50% but retaining the majority voting
rights. It basically delinks voting rights from ownership. So, as a solution the government can take up
golden share to retain the voting rights but bring in funds from private players and reduce their stake
below 50% in public sector banks.
An alternative to this is to create a banking sector holding company in which the Government will
hold the majority stake, and the holding company in turn will hold majority stake in public sector
banks. This was briefly outlined by the Finance Minister of India in his Union budget speech in
March 2012. The Government can raise capital for the banking holding company through various
means including a public offering. If implemented successfully this could be the biggest structural
change in the Indian banking sector since nationalization in 1969 and 1980. Indian banks will have to
learn the art of balancing growth with capital requirements. The ability to efficiently manage the tier 1
and tier 2 capital will be critical to manage return on equity. Indian banks should move quickly to
advanced approaches of risk estimation from the formula based approaches to avoid over-estimation
in capital requirements for credit and operational risk. The Basel committee is also proposing to
increase the credit conversion factor of off-balance sheet items from 20% to 100%. This will mean
that the banks will have to set aside more capital against asset backed loans, thus reducing their
leverage and bringing in more stability in the banking sector.
Learning and conclusion:
In this thesis I have studied the Basel frameworks and gained particular insight in to the Basel III
framework. Since the new liquidity and capital standards are still in its initial stage
I found it interesting and relevant to make a quantitative assessment of Indian Banking institutions
ability to comply with the Basel Committees proposals.
The liquidity requirements were not possible to assess on individual banks. The reduction is tied to the
unfavorable treatment of mortgage bonds as liquid assets. The mortgage bond market is important for the
Moreover, the analysis shows that the Banking institutions need to restructure their balance sheets and
change the maturity structure of their liabilities and issued bonds. In the end it can be expected that there
will be more expensive to finance activities.
Furthermore, the institutions flexibility in obtaining funds will be reduced.
The quantitative assessment of the ability to comply with the capital requirements reveals that the
majority of the banks in the study are almost sufficiently capitalized. However, capital levels will be
reduced as most institutions include hybrid capital and subordinate debt in their capital base.
The policy of holding buffer capital as an extra precautionary measure indicates a counter cyclical focus
by banks. However, that is at the cost of the size of business. Banks need to grow sufficiently to
balance the pressure of additional buffer capital. Retaining higher capital is costly, but for some countries
like India and Indonesia where bank lending is growing at 20-25 percent per annum banks can fund
additional capital required.

For other types of hybrid and subordinate capital there is still some uncertainty on the eligibility as
regulatory capital. Nevertheless, there is no doubt that credit institutions will have lower capital levels
with the new Basel rules effective. How much additional capital the institutions need to raise will to some
extend depend on individual solvency needs and own capital targets. Moreover, external investors and
rating agencies may require the banks to hold capital levels that are higher than the requirements set out
by the Committee. The governments large fiscal deficit will limit its ability to inject capital into
government-owned banks, which currently have less capital adequacy than the private and foreign banks
operating in India
According to an ICRA report, public and private sector banks would require an additional capital of
600000 crore, assuming a 20% growth in risk-weighted assets. Out of the total requirement 75-80% will
be required by the public sector banks. Thus the burden will fall on the cash-stripped government which
will need to infuse massive amount of capital to maintain its shareholding of 58%.This looks difficult to
achieve seeing the current state of the government financials with high fiscal deficit of 4.8% in 2012-13
and massive subsidy burden.
Reserve Bank of India had estimated total capital requirement (including tier-1 and tier-2) for the Indian
banks at Rs 5 lakh crore. It had estimated Rs 3.25 lakh crore of equity capital and Rs 1.75 lakh crore of
nonequity capital for Basel-3 requirements.
With the implementation of BASEL III the banks will move to risk-averse mode which could severely
impact the Indian economy, which needs large amounts of credit especially the infrastructure sector with
requirements of 1 trillion over next five years. The big question is whether it is right to implement the
same kind of stringent measures to economies which are inherently differently in their risk appetite.
While the developed world aims at avoidance of the 2008 crisis, for the developing world and the
emerging markets the objective is growth to meet the needs of increasing population.So BASEL III
should provide a solution which is tailored made for the developing economies.Thus ,though BASEL III
will make banks more capable of handling a financial crisis, it will have a negative impact on the GDP of
the economies like India , which should be a matter of concern.
It should be noted that the analysis is based on the Basel framework as it was presented in December
2010. Moreover, the Basel Committee has announced that the framework is subject to calibration. Credit
institutions should anyway prepare for stricter legislation and start to consider ways to comply with
capital and liquidity requirements.

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