About Basel norms

Basel is a city in Switzerland which is also the headquarters of Bureau of

International Settlement (BIS). BIS fosters co-operation among central banks
with a common goal of financial stability and common standards of banking
regulations. Currently there are 27 member nations in the committee.

Basel guidelines refer to broad supervisory standards formulated by this

group of central banks- called the Basel Committee on Banking Supervision
(BCBS). The set of agreement by the BCBS, which mainly focuses on risks to
banks and the financial system are called Basel accord.

The purpose of the accord is to ensure that financial institutions have enough
capital on account to meet obligations and absorb unexpected losses. India
has accepted Basel accords for the banking system.
So, if the Basel norms are banking standards, then who has the authority to
make them? Are they mandatory for every country?

As said earlier, the Basel Committee makes these norms. The Committee’s
decisions have no legal force. Rather, the Committee formulates supervisory
standards and guidelines and recommends statements of best practice in the
expectation that individual national authorities will implement them. In this
way, the Committee encourages convergence towards common standards
and monitors their implementation, but without attempting detailed
harmonisation of member countries’ supervisory approaches.

So, India can either accept them or reject them depending on the kind of
financial system it wants. So far, we have implemented or wished to
implement all Basel norms.
Basel I
In 1988, BCBS introduced capital measurement system called Basel capital
accord, also called as Basel 1. It focused almost entirely on credit risk. It
defined capital and structure of risk weights for banks. Naturally if the capital
with the banks is adequate to cover the risks ( e.g. a power plant) they have
invested in, then the bank is safe.

The minimum capital requirement was fixed at 8% of risk weighted assets

(RWA). RWA means assets with different risk profiles. For example, an asset
backed by collateral would carry lesser risks as compared to personal loans,
which have no collateral. India adopted Basel 1 guidelines in 1999. The Basel
norms are set up by the Basel committee on Banking supervision.
It is important to understand that the Basel accords have been the result of
cooperation by the countries over the years.

But why cooperate between member countries

when banks operate within national boundaries?
It is because these banks lend not only to its country men but also other
nations. Also, private investors and sovereign nations take loans from banks
across other nations. Further, the financial system of the world is so
interconnected that one incident of a banking collapse has its repercussions
all over the world. There can be no better example that the 2008 Global
recession.

Therefore, global cooperation on banking matters is a absolute necessity in

today’s world. And, not only cooperation but also adoption of some uniform
standards is also important.

Again, Why uniform standards?

Bankers and investors invest over the world preferably in markets where
they get best returns. The markets will give returns only when the economy
is stable. And, economy will be stable only when the banking system is
stable. Hence, it is important for investors and agencies to measure the
stability of the banking system. If all the nations adopt different standards,
then calculating stability figures will be a big headache for investors.

Also, suppose some nations run banks on better standards i.e. better risk
management, better returns, lower exposure to volatile markets etc., then
they have a better chance of getting foreign investment.

But, if all nations adopt uniform standards, then at least the investors can be
attracted by only the strength of the economy.

Hence, it is important to have uniform standards especially when it comes to

the banking system which is so complex and vast.

The Basel norms try to achieve exactly the same. Till date three different
Basel accords ( or norms) have come – each with a better safeguard than the
next one.
Basel II
In 2004, Basel II guidelines were published by BCBS, which were
considered to be the refined and reformed versions of Basel I
accord. The guidelines were based on three parameters.
1. Banks should maintain a minimum capital adequacy requirement of 8% of
risk assets,

In India, such a practice is equivalent to maintaining a Capital Adequacy ratio

(CAR).

2. Banks were needed to develop and use better risk management

techniques in monitoring and managing all the three types of risks that is
credit and increased disclosure requirements.

Increased disclosure requirements raise the confidence of investors

and depositors in the bank. The more transparent a bank is, the more
stable it is deemed to be.

3. Banks need to mandatorily disclose their risk exposure, etc to the central
bank.

This is important so that the central bank (RBI in India) is aware of the
risks that the banking system is going through.

There is a practice in India to publish bi-annual Financial Stability reports by

the RBI. The latest report published recently is of June 2014.
Basel II norms in India and overseas are yet to be fully implemented.

You will find some technical words like risk exposure etc. in the text. We do
not need to go into details. We only need to know their general meaning.
Basel III
In 2010, Basel III guidelines were released. These guidelines were introduced in
response to the financial crisis of 2008.

A need was felt to further strengthen the system as banks in the developed
economies were under-capitalized, over-leveraged and had a greater reliance
on short-term funding. Too much short-term funding makes the banks prone
to risks. Banks generally rely on short-term funding because it is profitable.

Also the quantity and quality of capital under Basel II were deemed
insufficient to contain any further risk. This was because the banking system
was growing. The world economy was growing too. Hence, what is sufficient
earlier was not sufficient now.

Basel III norms aim at making most banking activities such as their trading
book activities more capital-intensive. The guidelines aim to promote a more
resilient banking system by focusing on four vital banking parameters viz.
capital, leverage, funding and liquidity.
Again we need not go in technicalities, just the broad picture.

This is how it was broadly done.

Capital
The capital requirement (as weighed for risky assets) for Banks was more
than doubled. ( e.g. 4.5% from 2% in Basel-II accord for common equity)

Leverage
Leverage basically means buying assets with borrowed money to multiply
the gain. The underlying belief is that the asset will return the investor more
than the interest he has to pay on the loan.

Obviously doing so is risky business. Thus the Basel III puts a limit on the
banks for doing this. The numbers are not important here. Getting the
concept is important.

Funding and liquidity

Banks can be subjected to a lot of risk if all depositors come and ask all their
money at the same time. This is a hypothetical situation but it has happened
in real with Lehman Brothers – the bank whose collapse gave us the 2008
recession.

So, Basel III puts a requirement for the banks to maintain some liquid assets
all the time. Liquid assets are those which can be easily converted to cash.

In India, this practice can be correlated with that of maintaining CRR and
SLR.
Implementation of Basel III norms in India
The RBI has postponed the implementation of these norms to 2019.

It is important to note that it is not easy to implement these norms as it

requires several changes in the present banking system.

There are several challenges in the successful implementation of Basel III

norms.

1. Higher capital requirement for banks – The private banks have

the autonomy to raise capital from the markets. But the Public sector
banks have to rely on the government mostly. The government has
recently decided to infuse 12000 Cr. rupees in the PSBs. In the coming
years even more will be required.
 2. More technology deployment – Implementing the norms would
require much more sophisticated technology and management styles
that the Indian banks are presently using. Upgrading both will impose
huge cost on the banks and hurt their profitability in the coming years.

3.Liquidity crunch – Banks would need to invest more on liquid

assets. These assets do not give handsome returns usually which
would reduce the bank’s operating profit margin. Further higher
deployment of more funds in liquid assets may crowd out good private
sector investments and also affect economic growth.

The way ahead for the banks

To address these issues and to protect their profitability margins, banks need
to look beyond regulatory compliance and take proactive actions.
In this regard the following strategies need to be adopted:

1. Change in Business Mix – They will need to lend more to

profitable yet safe sectors. For e.g. corporate loans. But even corporate
loans in India have been under a lot of stress. Banks are facing
increasing NPAs (we will talk about it in the next article). Still they are
safer and more profitable than retail loans. Priority Sector lending (PSL)
however limits their options.

2. Low-Cost Funding – One of the most important factors to meet the

new regulations is to have a stable low-cost deposit base. For this,
banks need to focus more on having business
correspondents/facilitators to reach customers as adding branches will
increase costs and have an impact on the profit margin.

The RBI is thinking of introducing UID based mobile wallets to increase

the reach of the financial system. Perhaps the banks can tie up with
wallet operators based on some innovative business model. There are
many opportunities.

3. Improvement in systems and procedures – Refining the

systems and procedures may help banks economise their risk-weighted
assets, which will help reduce capital requirements to some extent. It is
possible that they would impose cost in the short-run, but they would
yield great returns in the future.

Conclusion
It is clear that the banking system in the coming times will have to go
through a lot of rough weather. Increasing operational complexities, global
interconnectedness and high economic growth worldwide will present several
challenges for the banks. While strategies like Basel III will of course address
these challenges, what is even more important is their proper
implementation. More than this, the banks will need to have a wider outlook.
They must anticipate changes in the Indian economic system and react
accordingly. Indian banking regulations are one of the most stringent and
consequently one of the safest in the world. Let us evolve each time better
and stronger

Instruments of Monetary policy[edit]

These instruments are used to control the money flow in the economy,
Open Market Operations
An open market operation is an instrument of monetary policy which involves buying or selling of
government securities from or to the public and banks. This mechanism influences the reserve position
of the banks, yield on government securities and cost of bank credit. The RBI sells government
securities to control the flow of credit and buys government securities to increase credit flow. Open
market operation makes bank rate policy effective and maintains stability in government securities
market.

CRR Graph from 1992 to 2011[3]

Cash Reserve Ratio

Cash Reserve Ratio is a certain percentage of bank deposits which banks are required to keep with
RBI in the form of reserves or balances. Higher the CRR with the RBI lower will be the liquidity in the
system and vice versa. RBI is empowered to vary CRR between 15 percent and 3 percent. But as per
the suggestion by the Narsimham committee Report the CRR was reduced from 15% in the 1990 to 5
percent in 2002. As of 4 October 2016, the CRR is 4.00 percent. [4]

SLR Graph from 1991 to 2011[5]

 Statutory Liquidity Ratio
Every financial institution has to maintain a certain quantity of liquid assets with themselves at any
point of time of their total time and demand liabilities. These assets have to be kept in non cash form
such as G-secs precious metals, approved securities like bonds etc. The ratio of the liquid assets to
time and demand liabilities is termed as the Statutory liquidity ratio.There was a reduction of SLR from
38.5% to 25% because of the suggestion by Narsimham Committee. The current SLR is 19.50%. [6]

Bank Rate Graph from 1991 to 2011

Bank Rate Policy[7]

The bank rate, also known as the discount rate, is the rate of interest charged by the RBI for providing
funds or loansto the banking system. This banking system involves commercial and co-operative
banks, Industrial Development Bank of India, IFC, EXIM Bank, and other approved financial institutes.
Funds are provided either through lending directly or discounting or buying money market instruments
like commercial bills and treasury bills. Increase in Bank Rate increases the cost of borrowing by
commercial banks which results in the reduction in credit volume to the banks and hence declines the
supply of money. Increase in the bank rate is the symbol of tightening of RBI monetary policy. As on
2nd August 2017, bank rate is 6.25 percent. [8]
Credit Ceiling
In this operation RBI issues prior information or direction that loans to the commercial banks will be
given up to a certain limit. In this case commercial bank will be tight in advancing loans to the public.
They will allocate loans to limited sectors. Few examples of ceiling are agriculture sector advances,
priority sector lending.
Credit Authorization Scheme
Credit Authorization Scheme was introduced in November, 1965 when P C Bhattacharya was the
chairman of RBI. Under this instrument of credit regulation RBI as per the guideline authorizes the
banks to advance loans to desired sectors.[9]
Moral Suasion
Moral Suasion is just as a request by the RBI to the commercial banks to take so and so action and
measures in so and so trend of the economy. RBI may request commercial banks not to give loans for
unproductive purpose which does not add to economic growth but increases inflation.
Repo Rate and Reverse Repo Rate
Repo rate is the rate at which RBI lends to its clients generally against government securities.
Reduction in Repo rate helps the commercial banks to get money at a cheaper rate and increase in
Repo rate discourages the commercial banks to get money as the rate increases and becomes
expensive. Reverse Repo rate is the rate at which RBI borrows money from the commercial banks.
The increase in the Repo rate will increase the cost of borrowing and lending of the banks which will
discourage the public to borrow money and will encourage them to deposit. As the rates are high the
availability of credit and demand decreases resulting to decrease in inflation. This increase in Repo
Rate and Reverse Repo Rate is a symbol of tightening of the policy.
 Key Indicators[edit]
As of 6 December 2017, the key indicators are[10][11]

Indicator Current rate

Inflation 3.36%

CRR 4%

SLR 19.5%

Repo rate 6.0% [13]

Reverse repo rate 5.75%

Marginal Standing facility rate 6.25%[14]

Difference Between Economic Growth and Economic Development

November 5, 2015 By Surbhi S 20 Comments

Economic
Growth refers to the rise in the value of everything produced in the economy. It implies
the yearly increase in the country’s GDP or GNP, in percentage terms. It alludes to
considerable rise in per-capita national product, over a period, i.e. the growth rate of
increase in total output, must be greater than the population growth rate.

Economic Growth is often contrasted with Economic Development, which is defined

as the increase in the economic wealth of a country or a particular area, for the welfare
of its residents. Here, you should know that economic growth is an essential but not the
only condition for economic development.

The economic trend in a country as a whole, is the major component for its business
environment. An economy whose growth rate is high provides a promising business
prospect and thus builds business confidence. In this article, you will find all the
substantial differences between economic growth and economic development.

Content: Economic Growth Vs Economic Development

1. Comparison Chart
2. Definition

3. Key Differences

4. Example

5. Conclusion

Comparison Chart

BASIS FOR
ECONOMIC GROWTH ECONOMIC DEVELOPMENT
COMPARISON

Meaning Economic Growth is the Economic Development involves rise in the

positive change in the real level of production in an economy along with
output of the country in a the advancement of technology,
particular span of time. improvement in living standards and so on.

Concept Narrow Broad

Scope Increase in the indicators like Improvement in life expectancy rate, infant
GDP, per capita income etc. mortality rate, literacy rate and poverty rates.

Term Short term process Long term process

Applicable to Developed Economies Developing Economies

 BASIS FOR
ECONOMIC GROWTH ECONOMIC DEVELOPMENT
COMPARISON

How it can be Upward movement in national Upward movement in real national income.
measured? income.

Which kind of Quantitative changes Qualitative and quantitative changes

changes are
expected?

Type of process Automatic Manual

When it arises? In a certain period of time. Continuous process.

Micro Units Development and Refinance Agency Bank (or MUDRA Bank) is a public sector financial
institution in India. It provides loans at low rates to micro-finance institutions and non-banking financial
institutions which then provide credit to MSMEs. It was launched by Prime Minister Narendra Modi on 8 April
2015.[1]

Contents
[hide]

 1Overview
 2See also

 3References

 4External links

Overview[edit]
The formation of the agency was initially announced in the 2015 Union budget of India in February 2015.[2][3] It
was formally launched on 8 April.[1]
The MUDRA banks were set up under the Pradhan Mantri MUDRA Yojana scheme. It will provide its services to
small entrepreneurs outside the service area of regular banks, by using last mile agents. About
5.77 crore (57.6 million) small business have been identified as target clients using the NSSO survey of 2013.
Only 4% of these businesses get finance from regular banks. The bank will also ensure that its clients do not
fall into indebtedness and will lend responsibly. [2][4]
The bank will have an initial capital of ₹200 billion (US$3.1 billion) and a credit guarantee fund of ₹30
billion (US$460 million).[4] The bank will initially function as a non-banking financial company and a subsidiary of
the Small Industries Development Bank of India (SIDBI). Later, it will be made into a separate company.
[1]
However, it will regulate Microfinance institutions.
The bank will classify its clients into three categories and the maximum allowed loan sums will be based on the
category:[4]

 Shishu (शशशश): Allowed loans up to ₹50,000 (US$770)

 Kishore (शकशशर): Allowed loans up to ₹5 lakh (US$7,700)

 Tarun (तरण): Allowed loans up to ₹10 lakh (US$15,000)

Government has decided to provide an additional fund of ₹1 trillion (US$15 billion) to the market and will be
allocated as

 40% to Shishu
 35% to Kishor

 25% to Tarun

Those eligible to borrow from MUDRA bank are

 Small manufacturing unit

 Shopkeepers

 Fruit and vegetable vendors

 Artisans

Microcredit
 Microcredit is the small credit facility provided to the needy people whose earning
capacity is very less. The loan is provided to the borrowers who are unemployed, lacking
collateral and whose credit history is not sound.
 The loan is mainly granted to help people earn their livelihood, especially, women who
can start their business and become independent.

 Microcredit not only increases the income level of the poor people but also raise their
standard of living and provides the financial assistance to the poor class of people in
rural areas to help them become self-employed rather than depending on loan sharks for
raising finance who charge inflated interest rates.

 The best thing about microcredit is that the loan does not require any asset as collateral.
The loan is granted for a short period only.

Microfinance
 Microfinance is a broad spectrum of financial services provided to the people of low-
income groups who cannot take bank’s assistance banking and allied services. The
service is available to extremely poor people, no matter where they live.
  The purpose of Microfinance Company Registration is to raise the earnings of low-class
people and let them access to deposits and loans. The clients may include women,
farmers, and pensioners.

 Microfinance plays a revolutionary role in any country’s economy. It helps the poor
people to fulfill their basic needs and safeguard them from any risks. It raises the per
capita income. It encourages women empowerment by providing term economic
assistance and hence promotes gender equality.

 Micro-finance institutions not only provide capital to the startups or small businessman
but also deliver such financial services to the poor people who are constantly avoided by
the formal financial sector.

The Differences Between Microcredit and Microfinance are as follows:

Sr. No. Microcredit Microfinance

Microfinance refers to the number of

Microcredit is the small loan facility provided financial services provided to the small
1. to the people with less earning, to motivate entrepreneurs and enterprises who cannot
them to become self-employed. take shelter of banks for banking and other
services.

Microcredit alludes to a small loan provided,

Microfinance means the broad spectrum of
at a low-interest rate, to the persons of
financial services such as loans,
2. below poverty line to make them self-
insurance, savings, etc. provided to the
employed, i.e., to help the small
people of low-income groups.
entrepreneurs start their own business.

Micro-finance includes credit activities and

3. Micro-credit includes credit activities non-credit activities like savings, pension,
insurance, etc.

Microfinance services help to low-income

individuals and start-up in developing
Microcredits are small size loans with countries to start running a small business,
shorter repayment periods. They are increase assets, diminish risk, raise
4.
granted for small-scale activities which direct productivity, increase return on
to serve local needs. investments, increase incomes, improve
access to education and eventually
increase the welfare.