Presented By

GROUP - 2

BASEL COMMITTEE ON BANKING

SUPERVISION
The Basel Committee on Banking Supervision provides a
forum for regular cooperation on banking supervisory
matters.
Its objective is to enhance understanding of key
supervisory issues and improve the quality of banking
supervision worldwide.
The Committee's members come from Argentina, Australia,
Belgium, Brazil, Canada, China, European Union, France,
Germany, Hong Kong SAR, India, Indonesia, Italy, Japan,
Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi
Arabia,
Singapore,
South
Africa,
Spain,
Sweden,
Switzerland, Turkey, the United Kingdom and the United
States.
Public consultation is an integral element of the Basel
Committee's standard setting process.

BASEL COMMITTEE ITS MAIN GOALS

Improve

the

quality

of

banking

supervision

worldwide

Promote more effective corporate governance

Close gaps in international supervisory coverage

Level the playing field among international banks

Establish a safer and sounder banking system as a

precondition for sustainable growth of an economy

COMMITTEES WORLDWIDE FOCUS

Committee tries to address issues relevant for

all jurisdictions worldwide
Committee has developed over time close
cooperation with non-members
Core Principles Liaison Group (16
jurisdictions, IMF, WB)
Sixteen Regional Groups of Banking
Supervisors
International Conferences of Banking
Supervisors (ICBS)

CORE PRINCIPLES
Committee released in 1997 a set of
Core Principles for Effective Banking
Supervision
Developed in close cooperation with
supervisors from non-member
countries
Comprehensive set of supervisory
guidelines
Methodology issued in 1999
IMF and World Bank monitor

THE BACKGROUND OF THE

BASEL NORMS:
(Why it come into picture)

On 26 June 1974, a number of banks had released

payment of Deutsche Marks (DEM - German
Currency at that time) to Herstatt ( Based out of
Cologne, Germany) in Frankfurt in exchange for US
Dollars (USD) that was to be delivered in New York.
Because of time-zone differences, Herstatt ceased
operations between the times of the respective
payments.
German regulators forced the troubled Bank
Herstatt into liquidation.
The counter party banks did not receive their USD
payments.
Cont...

THE BACKGROUND OF THE

BASEL NORMS:
(Why it come into picture)
Cont...
Responding to the cross-jurisdictional
implications
of the Herstatt debacle, the G-10 countries, Spain
and Luxembourg formed a standing committee in
1974 under the auspices of the Bank for
International Settlements (BIS), called the Basel
Committee on Banking Supervision.
Since Bank for International Settlements is
headquartered in Basel, this committee got its
name from there.
The committee comprises representatives from
central banks and regulatory authorities.
Cont...

THE BACKGROUND OF THE

BASEL
NORMS:
Basel Committee on Banking Supervision
(Why it come into picture)
Cont...
Established in 1975 in
Basel, Switzerland
Its objective is to enhance understanding of key
supervisory issues and quality improvement of
banking supervision World Wide
Published a set of minimal capital requirements for
banks: Bank capital essentially provides a cushion
against failure.
The protection against becoming insolvent.
Up until the 1990s bank regulators based their
capital adequacy policy principally on the simple
leverage ratio defined as: Leverage ratio=
Capital/Total Assets
Cont...

EVOLUTION OF THE WORK OF THE BASEL

COMMITTEE ON BANKING SUPERVISION

BASEL I:
In 1988, the Basel Committee on Banking
Supervision (BCBS) in Basel, Switzerland,
published
a
set
of
minimum
capital
requirements for banks. These were known as
Basel I.
It focused almost entirely on credit risk
(default risk) - the risk of counter party failure.
It defined Capital Requirement and Structure
of
Risk
Weights
for
banks.

Cont...

BASEL I:

Cont...

Under these norms: Assets of banks were classified and

grouped in five categories according to credit risk,
carrying risk weights of 0%(Cash, Bullion, Home Country
Debt Like Treasuries), 10, 20, 50 and100% and no rating.
Banks with an international presence are required to hold
capital equal to 8% of their risk-weighted assets (RWA) At least, 4% in Tier I Capital (Equity Capital + retained
earnings) and more than 8% in Tier I and Tier II Capital.
Target - By 1992.
The definition of capital is set in two tiers:
Tier 1 being of shareholders equity and retained earnings.
Tier 2 being additional internal and external resources
available to the bank.
Cont...

BASEL I:

Cont...

One of the major role of Basel norms is to

standardize the banking practice across all
countries.
However, there are major problems with definition
of Capital and Differential Risk Weights to Assets
across countries, like Basel standards are
computed on the basis of book-value accounting
measures of capital, not market values.
Accounting practices vary significantly across the
G-10 countries and often produce results that
differ markedly from market assessments.
Cont...

BASEL I:

Cont...

Other problem was that the risk

weights do not attempt to take
account of risks other than credit
risk, viz., market risks, liquidity risk
and operational risks that may be
important sources of insolvency
exposure for banks.

Cont...

BASEL II:

Cont...

Basel II was introduced in 2004, laid

down guidelines for capital adequacy
(with more refined definitions), risk
management (Market Risk and
Operational Risk) and disclosure
requirements.
Use of external ratings agencies to set
the risk weights for corporate, bank and
sovereign claims.
Cont...

BASEL II:

Cont...

Operational risk has been defined as the risk of loss

resulting from inadequate or failed internal processes,
people and systems or from external events.
This definition includes legal risk, but excludes
strategic and reputation risk, whereby legal risk
includes exposures to fines, penalties, or punitive
damages resulting from supervisory actions, as well as
private settlements.
There are complex methods to calculate this risk.
Disclosure requirements allow market participants
assess the capital adequacy of the institution based on
information on the scope of application, capital, risk
exposures, risk assessment processes, etc.
Cont...

BASEL II

THREE PILLARS

The new accord Basel II consists of three pillars

Minimum Capital Requirement.
Supervisory Review.
Market Discipline

Cont...

3 PILLARS OF BASEL II
FRAMEWORK

PILLAR 1 sets out the minimum capital requirements

firms will be required to meet to cover credit, market
and operational risk.
PILLAR 2 sets out a new supervisory review process.
Requires financial institutions to have their own
internal processes to assess their overall capital
adequacy in relation to their risk profile.
PILLAR 3 cements Pillars 1 and 2 and is designed to
improve market discipline by requiring firms to publish
certain details of their risks, capital and risk

BASEL III

Cont...

It is widely felt that the shortcoming in Basel II norms

is what led to the global financial crisis of 2008.
That is because Basel II did not have any explicit
regulation on the debt that banks could take on their
books, and focused more on individual financial
institutions, while ignoring systemic risk.
To ensure that banks dont take on excessive debt, and
that they dont rely too much on short term funds,
Basel III norms were proposed in 2010.
The guidelines aim to promote a more resilient banking
system by focusing on four vital banking parameters
viz. capital, leverage, funding and liquidity.
Cont...

BASEL III

Cont...

Requirements for common equity and Tier 1 capital

will be 4.5% and 6%, respectively.
The Liquidity Coverage Ratio (LCR) will require banks
to hold a buffer of high quality liquid assets sufficient
to deal with the cash outflows encountered in an acute
short term stress scenario as specified by supervisors.
The minimum LCR requirement will be to reach 100%
on 1 January 2019. This is to prevent situations like
"Bank Run.
Leverage Ratio > 3%:The leverage ratio was
calculated by dividing Tier 1 capital by the bank's
average total consolidated assets
Cont...

KEY BUILDING BLOCKS OF

BASEL III

20

IMPLEMENTATION OF BASEL III

CET1 = Common Equity Tier 1; DTAs = Deferred Tax Assets; MSRs = Mortgage Servicing

TIME SCHEDULE FOR

IMPLEMENTATION
When should Basel II be implemented?
Only national authorities can answer this
question
Timing should be determined by a countrys
own circumstances
Basel II may be a lesser priority compared to
other efforts

For a successful implementation, greater

cooperation among supervisors across
jurisdictions is necessary
22

WHAT ARE THE MAIN THEMES FOR

THE FUTURE?
Concerning capital requirements,
focus is on implementation
Avoiding regulatory overload
Enhanced coordination with global
supervisory community
More focus on other supervisory
areas

Meaning and Definitions of PA and

NPA:
The Reserve Bank has issued
directives from 31/03/1993 and
presented a new concept of Income
Recognition. This is done on the
recommendations of Narasimham
Committee.
According to these directives the
banks have to classify their credit
facilities into two parts:
Performing Assets (Standard Assets)

PERFORMING ASSETS
(STANDARD ASSETS)
Standard Asset is one which does not
disclose any problems and which
does not carry more than normal risk
attached to the business. Such an
asset is Performing Asset (PA) and
should not be an NPA.

NON PERFORMING
ASSETS (NPA)
With a view to moving towards international
best practices and to ensure greater
transparency, 90 days" overdue norms for
identification of NPAs have been made
applicable from the year ended March 31,
2004.
As such, save and except certain relaxations
mentioned for Tier I Banks and Tier II Banks as
defined below, with effect from March 31,
2004, a non-performing asset shall be a loan
or an advance where:

RELAXATIONS FOR TIER I BANKS

AND TIER II
Interest and/or installment of principal remain
overdue for period of more than 90 days in respect
of a Term Loan.
The account remains Out of Order for period of more
than 90 days, in respect of an Overdraft/Cash Credit .
The bill remains overdue for a period of more than 90
days in the case of Bills purchased and discounted.
In the case of agricultural loans, other than direct
finance to farmers for Agricultural purposes,
identification of NPAs would be done on the same
basis as non-agricultural advances.
Any amount to received remains overdue for a period
of more than 90 Days in respect of other accounts.

CASH CREDIT AND OVERDRAFT

FACILITY:
A cash credit / OD account becomes NPA if it
remains out of order for any 2 quarters in a
financial year.
Out of order means

Outstanding balance remains continuously in

excess of sanctioned limit or drawing power
whichever is lower.
Where balance outstanding is less than
sanctioned limit or drawing power

there are no credits in the account continuously for 3

months or
credits are not enough to cover interest and expenses
debited during 3 months

APPROPRIATION OF RECOVERY
IN NPAs
Interest realized on NPAs may be taken to
income account provided the credits in the
accounts towards interest are not out of fresh
additional credit facilities sanctioned to the
borrower concerned.
In the absence of a clear agreement between
the bank and the borrower for the purpose of
appropriation of recoveries in NPAs [i.e.
towards principal or interest due], bank should
adopt an accounting principle and exercise
the right or appropriation of recoveries in a
uniform and consistent manner

Assets Classification:
The primary (Urban) Co-operative
banks should classify their assets
into the following broad groups, viz.

Standard Assets:- (Performing

Assets)
Standard Asset is one which does not
disclose any problems and which
does not carry more than normal risk
attached to the business. Such an
asset should not be an NPA

Sub Standard Assets: An asset would be classified as substandard if it

remained NPA for a period less than or equal to 12
months.
In such cases, the current net worth of the
borrowers/guarantors or the current market value of
the security charged is not enough to ensure
recovery of the dues to the banks in full.
In other words, such assets will have well defined
credit weaknesses that jeopardize the liquidation of
the debt and are characterized by the distinct
possibility that the banks will sustain some loss, if
deficiencies are not corrected.

Doubtful Assets: An asset is required to be classified as doubtful, if

it has remained NPA for more than 12 months.
For tier I banks, the 12-months period of
classification of a substandard asset in doubtful
category
A loan classified as doubtful has all the
weaknesses inherent as that classified as
substandard, with the added characteristic that the
weaknesses make collection or liquidation in full,
on the basis of currently known facts, conditions
and values, highly questionable and improbable.

Loss Assets: A loss asset is one where loss has been

identified by the bank or internal or external
auditors or by the Co-operation Department
or by the RBI inspection but the amount has
not been written off, wholly or partly.
In other words, such an asset is considered
un-collectible and of such little value that its
continuance as a bankable asset is not
warranted although there may be some
salvage or recovery value.

PROVISION REQUIREMENTS

PROVISION REQUIREMENTS

PROVISION FOR P.A. & N.P.A.

PROBLEMS CAUSED BY NPA ?

Depositors do
not get
rightful
returns

Redirecting
of funds

Bank
shareholders
are
adversely
affected
Liquidity
problems
may ensue

MANAGING NON PERFORMING

ASSETS
NPAs have multifold effects on the performance of
banks. It shows the weakness of management of
bank.
It is necessary to manage Non Performing Assets
for following reasons:

To protect the interest of share holders.

To protect the interest of depositors
For profitability
High provision
Creditworthiness of the Banks
Expansion plan
Welfare of employees
In the interest of sustained economic growth

REDUCING THE NPAs:

Researcher would like to suggest following strategies to
Banks for reducing their NPAs
Rephasement of loans
Rehabilitation of potentially viable units
Acquisition of sick units by health units
Compromised with borrowers
Calling up of advances and filling of civil suits
Approaching debt recovery tribunal
Recovery of advances given under Government sponsored
programs
Settlement of claims with Deposit Insurance and Credit
Guarantee Corporation / Export Credit Guarantee Corporation
Establishment of assets recovery branches
Write off the outstanding

VARIOUS STEPS FOR REDUCING

NPAs

THANK YOU