BASEL-III Norms

Context:

Exercising power under Section 45L of the RBI Act 1934 RBI has mandated All India Financial Institutions (AIFIs) to maintain a capital adequacy ratio (CAR) of 9% by April 2024 (July 2024 for NHB).

5 AIFIs regulated by RBI:

• EXIM Bank (Export-Import Bank of India)
• NABARD (National Bank for Agriculture and Rural Development)
• NaBFID (National Bank for Financing Infrastructure and Development)
• NHB (National Housing Bank)
• SIDBI (Small Industries Development Bank of India)

About BASEL-III Norms:

• Basel-III norms were adopted by financial regulators to improve the banking sector’s ability to absorb shocks arising from financial and economic stress.
• It was developed by Basel Committee on Banking Supervision in the aftermath of the financial crisis of 2007-08.
• It mandates banks to maintain a CAR or Capital to Risk-weighted Assets (CRAR) at least 8%.
• RBI mandates banks to maintain a minimum CAR of 9%.
• It created 2 liquidity ratios –
  • Liquidity Coverage Ratio (LCR):
    • It 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.
    • This is to prevent situations like “Bank Run”.
    • Aim – To ensure that banks have enough liquidity for a 30-days stress scenario if it were to happen.
  • Net Stable Funds Rate (NSFR):
    • It requires banks to maintain a stable funding profile in relation to their off-balance-sheet assets and activities.
    • It requires banks to fund their activities with stable sources of finance (reliable over the one-year horizon).
    • The minimum NSFR requirement is 100%.
    • Therefore, LCR measures short-term (30 days) resilience, and NSFR measures medium-term (1 year) resilience.

CRAR is a ratio that compares the value of a bank’s capital (or net worth) against the value of its various assets weighted according to risk.

Source: The Hindu

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Previous Year Question

Despite being a high saving economy, capital formation may not result in significant increase in output due to

[UPSC Civil Services Exam – 2023 Prelims]

(a) weak administrative machinery
(b) illiteracy
(c) high population density
(d) high capital-output ratio

Answer: (d)

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