30 April 2024 20:16

About Reserve Bank of India (RBI):

- The RBI was established on April 1, 1935 in accordance with the provisions of the RBI Act, 1934.
- Royal Commission on Indian Currency and Finance – also known as Hilton-Young Commission
(1926) - recommended the creation of a central bank for India to separate the control of currency
and credit from the Govt and to augment banking facilities throughout the country
- Starting as a private shareholders’ bank, the Reserve Bank was nationalized in 1949.

 Structure of RBI:
- Central Board of Directors:
○ It is at the top of the Reserve Bank’s organizational structure.
○ Appointed by the Government under the provisions of the RBI Act, 1934 - for 4 years
○ Functions - General superintendence and direction of the Bank's affairs
○ It delegates specific functions to the Local Boards and various committees.
○ It consists of - Governor + Max 4 deputy Governors + Non official members
- Board for Financial Supervision (BFS):
○ It was constituted in November 1994, as a committee of the Central Board, to undertake
integrated supervision of different sectors of the financial system (including all banks,
NBFCs, LABs etc)
○ Thus RBI has constituted a separate unit for supervision in the form of BFS
○ Governor is the Chairman of the BFS
○ BFS was initially given the mandate for supervision of commercial banks, Financial
Institutions and NBFCs. Later, urban cooperative banks and primary dealers were also
brought under the purview of the BFS
- Local Boards:
○ Constituted for Western Area, Eastern Area, Northern Area and Southern Area (at Mumbai,
Kolkata, Delhi and Chennai respectively)
○ Local Boards in Western, Eastern and Southern Area are not functioning due to lack of
quorum.
- Subsidiaries of RBI:
○ Deposit Insurance and Credit Guarantee Corporation of India (DICGC),
○ Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL),
○ Reserve Bank Information Technology Private Limited (ReBIT),
○ Indian Financial Technology and Allied Services (IFTAS),
○ Reserve Bank Innovation Hub (RBIH).

 Asset and Liabilities of RBI:

- Assets:
○ Gold Reserves
○ Foreign Exchange Reserves
○ Investment in Govt Securities (Loan to GoI)
○ Investment in Foreign Securities
○ Loan to Banks
○ Loan to Central Govt, State Govt, NABARD etc
- Liabilities:
○ Currency notes held in Banking Department
○ Currency notes held by Public
○ Vault Cash held by Commercial Banks
Deposits of Commercial Banks, Scheduled State Co-operative Banks & Other Banks with RBI

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 ○ Deposits of Commercial Banks, Scheduled State Co-operative Banks & Other Banks with RBI
○ Deposits of Central Govt & State Govt with RBI
- Note - Paid up capital of any bank is a liability of bank

 Dividend to Govt:
- Section 47 of the RBI Act states that profits made by the RBI from its operations must be given to
the Centre in the form of Dividend
- RBI in November 2018 → 6 member commi ee → Chair - Dr Bimal Jalan, to review the current
Economic Capital Framework (ECF), after the Min of Finance asked the central bank to follow
global practices.
- This was formed to determine - how much % of surplus will be given as dividend to govt
- Bimal Jalan Committee:
○ Distinction between the two components of RBI's economic capital, realised equity and
revaluation balances, was needed.
○ Realised Equity - earning of RBI from interests of loans or equity etc.
○ Revaluation Balances - appreciation of gold and currency
○ It asked to maintain Contingent Risk Buffer (CRB) within 5.5% and 6.5% of total assets
(comprising 5.5 to 4.5% for monetary and financial stability risks and 1% for credit and
operational risks)
○ Anything over and above this buffer will be transferred to govt
○ Usha Thorat Committee (2004) - RBI should maintain 18% of its total assets as reserves
- About Realized Equity and Revaluation Balances:
○ Realized equity - This refers to the portion of economic capital that comes from the RBI's
retained earnings, which are the profits it has earned over time. The committee suggested
that this realized equity should be used to handle any unexpected situations or financial
challenges.
○ Revaluation balances - This refers to the unrealized gains that the RBI has made on its
assets, mainly due to changes in market prices. The committee proposed that these
revaluation balances should not be distributed or used to cover losses but rather kept aside
to safeguard the RBI against potential future market fluctuations.

 Supervision of Banks:
- The supervisory jurisdiction of the RBI extends over banks, urban cooperative banks, NBFCs,
payment banks, small finance banks, local area banks, credit information companies and select all
Indian financial institutions (AIFIs).
- RBI undertakes continuous supervision of SEs with the help of on-site inspections and off-site
monitoring
- Prior to the Global Financial Crisis, banks were supervised under the CAMELS model - Issue with
model - treated all banks on same level - same CRAR for all
- Note - Guidelines regarding Know Your Customer is issued by the RBI through the Banking
Regulation Act, 1949 Section 35A
- CAMELS Model consists of 6 components namely
 Capital Adequacy,

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  Capital Adequacy,
 Asset Quality,
 Management,
 Earnings Quality,
 Liquidity and
 Sensitivity to Market risk
- High Level Steering Committee - 2011 (Chairman: Shri K C Chakrabarty) → shi towards Risk Based
Supervisory (RBS) Framework
- SPARC (Supervisory Program for Assessment of Risk and Capital):
○ RBS Framework as adopted by RBI is called SPARC
○ It is risk-based, forward-looking, proactive and dynamic in identifying risk and prompting
early response.
- CRILC Database System:
○ RBI has a Central Repository of Information on Large Credits (CRILC) database system where
the banks report their exposure of Rs 5 crore and above which is used for monitoring
purposes

Banks Classification:

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Banks Classification:

Regional Rural Banks Local Area Bank

- Based on M. Narasimhan's Committee on Financial - Based on Budget-1996 by Finance Minister
Inclusion in 1970s Manmohan Singh
- Setup under the provisions of RRB act 1976 & its - Unlike RRBs, they're not setup by Union or State
amendment in 2015. govts or by any special act or pmt, but by pvt. entities
- Mission of RRBs is to fulfil the credit needs of the simply applying to RBI under Banking Regulation Act.
relatively unserved sections in the rural areas, - Present in Max. 3 geographically contiguous districts.
small and marginal farmers, agricultural labourers only 1 urban centre per district.
and socio-economically weaker sections. - They're Non-Sch. Banks so while CRR, SLR, PSL etc
- Owners of RRBs: apply but every norm with caveats.
○ Central Govt – 50% - Initially 4:
○ State Govt – 15% • Coastal Bank Andhra Pradesh (first to setup in
○ Sponsoring Bank – 35% 99),
- Subjected to CRR, SLR norms but RBI could • Krishna Bhima Samruddhi(Andhra & Kar)

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- Subjected to CRR, SLR norms but RBI could • Krishna Bhima Samruddhi(Andhra & Kar)
prescribe separate norms + PSL - 75% • Subhadra LAB, Kolhapur;
- Their loan interest rates can't be more than • Capital LAB: Punjab (Largest).
prevailing lending rates of Cooperative Banks in - But later Capital LAB converted into SFB (2016) and
the area. RBI cancelled the license of Subhadra LAB (in Dec
- Restricted to few districts - Eg - Baroda Gramin 2020) - so at present only 2 LABs
Bank branches confined to Gujarat's southern - Only RBI regulates them.
districts
- Ultimate regulator - RBI but immediate regulator
NABARD.
- Eligibility criteria for RRBs:
○ Net worth of at least ₹300 crore in each of
the preceding 3 years
○ Minimum CRAR above the regulatory
requirement of 9% in each of the preceding
3 years
○ RRBs should have return on equity of
minimum 10% in three out of preceding 5
years
○ Return on assets of minimum 0.5% in three
out of preceding five years
- Issues with RRBs:
○ Procedural Rigidities
○ Urban-Orientation of Staff
○ Slow Progress in Lending Activity
○ Difficulties in Deposit Mobilisation
○ Haste and Lack of co-ordination in branch
expansion

Small Finance Banks Payment banks

- Recommended by - Usha Thorat Committee - Recommended by - Nachiket
- Registered as a public limited company under CA, 2013 Mor Committee
- Target consumers - Unserved, Underserved Farmers, Micro, Small - CRR, SLR and Repo - Same as
industries Indian private banks - but
- Can accept deposits without any restrictions + can also give credit caveats in SLR
unlike payment banks - 25% access points must be in
- CRR, SLR and Repo - Same as Indian private banks rural areas like Business
- As of 2022 - total 12 SFBs in India correspondence (BC), Kirana
- Requirements: Stores
 Minimum paid-up capital/net worth - Rs.200 crore - Target consumers - Promoting
 Minimum CRAR of 15% Small savings Remittance of
 Must have 25% branches in unbanked rural areas migrant labours, low income
 PSL - 75% households, unorganized sector,
 At least 50% of loans and advances should be up to Rs.25 lakh small business.
 Eligible promoters - should have 10 yrs of experience at senior - Can accept only Demand
level Deposits (unlike NBFCs which
- Examples - Capital Small Finance Bank (Punjab), Ujjivan (Karnataka), accept only time deposit)
Utkarsh (UP) - Max. balance Rs.1 lakh per
- Guidelines for SFBs On-Tap Licensing: customer. (In 2021- limit
 Minimum paid-up capital/net worth - Rs.200 crore increased to ₹2 lakhs)
 At least 50% of loans and advances should be up to Rs.25 lakh - Can't loan, So no PSL + They are
 For UCBs to SFBs - initial requirement of net worth shall be at Rs required to invest all deposits in
100 crores, which will have to be increased to Rs. 200 crores G-sec, T-Bill and in other SCBs

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 100 crores, which will have to be increased to Rs. 200 crores G-sec, T-Bill and in other SCBs
within 5 years - 6 at present - Airtel (1st), India
 For Payments Banks to SFBs - can apply for conversion after 5 Post, FINO, Paytm, Jio, NSDL
years of operations - After 5 years can become Small
 Scheduled Bank to SFBs - SFBs will be given scheduled bank Finance Bank, If RBI is satisfied
status immediately upon commencement of operations with their record
- For SFB - looking to deal in FOREX business (to become Authorized
Dealer Category-I):
 Min. 2 years operations as AD Category-II
 Min, NW → Rs. 500 Crore
 Min. CRAR → 15%
 Net NPA → Max. 6%
 Not defaulted in meeting CRR/SLR in last 2 years
 Profitable in last 2 years
- RBI guidelines released in 2016 for SFBs:
 Equity shares of SFBs should be listed on recognised stock
exchange(s) within 3 years from the date the net worth of SFB
reaches Rs 500 crore.
 If a promoter of SFB holds > 40% stake in its subsidiary - it should
be brought down to 40% within 5 years from the date of
commencement of banking operations
- Case of Equitas SFB:
 Recently, RBI issued a No-Objection Certificate (NOC) with
certain conditions on the voluntary merger of Equitas Holdings
Ltd (EHL) and its subsidiary, Equitas SFB Ltd (ESFBL).
 The merger is being carried out to comply with the RBI norms on
SFBs, which mandates the promoter to reduce its stake in the
subsidiary to 40% within 5 years of commencement of operations
by the SFB.

 Note:
- CRR, SLR - All banks + but on NBFC only SLR
- PSL - All banks except Rural cooperative, Payment Banks and NBFCs
- Repo, MSF - All banks except NBFCs (recently LTRO announced for NBFCs)
- BASEL Norms - All banks including NBFCs

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 About Cooperative Banks:
- 2 types - Rural Cooperative + Urban Cooperative Banks
- RBI regulates only - UCBs + DCCBs and State CBs
- Rural Cooperative Credit Institutions:
○ Regulation by RBI and Supervision by NABARD
○ 2 types - Short Term + Long Term (Loans)
○ STCCS (Short-term cooperative credit structure)
 Hierarchy - PACS (at rural level) → DCCB (at dt level) → State CB (at state level)
 It provide crop and other working capital loans primarily for a short period to farmers
and others
○ LTCCS (Long-term cooperative credit structure)
 It has the State Cooperative Agri and Rural Dev Banks (SCARDBs) at the apex level and

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  It has the State Cooperative Agri and Rural Dev Banks (SCARDBs) at the apex level and
the Primary Cooperative Agri and Rural Dev Banks (PCARDBs) at the district or block
level.
 These institutions focus on providing typically medium to long-term loans for making
investments in agriculture, rural industries, and lately housing.
- About UCBs:
○ Also referred as Primary Cooperative Banks
○ Only under RBI + they cater to both urban and semi-urban areas
○ Section 5 of Banking Regulation Act, 1949 defines UCBs as a co-operative society, other than
PACS and satisfying the following conditions:
 Primary object or principal business is the transaction of banking business
 Paid-up share capital and reserves should not less than Rs 1 lakh
 Bye-laws do not permit admission of any other co-operative society as a member
○ UCBs are primarily registered as Co-operative Societies under the provisions of either the
State Co-operative Societies Act of the respective State or the Multi-State Co-operative
Societies Act, 2002
○ Banking laws were made applicable to co-operative societies only in March 1966 through an
amendment to the Banking Regulation Act, 1949 by insertion of Section 56 (Part V), which is
colloquially known as Banking Regulation Act, 1949 (AACS – As Applicable to Co-operative
Societies)
○ Issues
 Management (political interventions)
 Regulatory (multiple bodies)
 Structural issues (Single branch, small capital)
 Operational (Competition, No clear cut loan policy)
○ Recommendations:
 Independent external Auditors (Madhava Rao Com)
 More powers to CBs; Financial awareness among poor (R Gandhi Com)
 RBI can prepare scheme for amalgamation or reconstruction of UCBs (NS Viswanathan
Com)
○ Revised Regulatory Framework for UCBs:
 Based on the expert committee formed in 2021 under N. S. Viswanathan
 Categorization of UCBs (for a transition to higher tier - glide path of 3 years):
- Tier 1 - All unit UCBs (single branch) and salary earner's UCBs (irrespective of
deposit size), and all other UCBs having deposits up to Rs 100 crore
- Tier 2 - UCBs with deposits → Rs 100 crore - Rs 1000 crore
- Tier 3 - UCBs with deposits between → Rs 1000 crore - Rs 10,000 crore
- Tier 4 - UCBs with deposits → > Rs 10,000 crore
 Applicability:
- Applicable to all UCBs
- Instructions will come into effect from April 1, 2023.
 Minimum NW requirement
- Tier 1 (single district): ₹2 crore
- All other UCBs: ₹5 crore
- Target to be achieved till Mar 2028
 CRAR:
- Tier 1 - CRAR – 9% (as per Basel 1)
- Tier 2, 3 and 4 - CRAR – 12%
- Target to be achieved till March 2026
 For Financially sound and well managed (criteria required):
- Minimum CRAR → at least 1% above prescribed CRAR
- Gross NPA→ <7% + Net NPA→ <3%
- Continuous net profit for last 3 years
- Sound internal control system

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 - Sound internal control system
- At least 2 professional directors
 Automatic route for branch expansion:
- If bank is financially sound and well managed (above criteria) - then banks can
open new branches up to 10% of the number of branches as at the end of the
previous FY [subject to minimum of 1 branch and maximum of 5 branches]
- Co-operative Credit Societies v/s Co-operative Banks:
○ 7th Schedule (Constitution): ‘Co-operative societies’ appear at Entry 32 in the State List,
whereas ‘Banking’ appear at Entry 45 in the Union List
○ Co-operative Credit Societies (CCS) primarily cater to the credit needs of its members by
mobilizing deposits from their own members.
○ Also CCS are not regulated by RBI
○ CCS, which are licensed to carry out banking activities function as a co-operative bank and
are eligible to accept deposits from the public
- Steps taken for UCBs -
 Revise Supervisory Action Framework
 SC held that Cooperative banks can use SARFAESI Act
 PSL Target for UCB increased to 75%;
 Brought under CRILC (Central Repository of Information on Large Credits) - it is a centralized
database maintained by RBI, which collects, stores, and disseminates credit information on
large borrowers of banks and financial institutions.
 Management and appointment powers with RBI
 Classification of UCBs in 4 tiers
- 4 important initiatives have been taken to strengthen 1,514 UCBs in the country (May 2023):
○ UCBs can now open new branches up to 10% (max 5 branches) of the number of branches in
the previous FY without prior approval of RBI in their approved area of operation
○ RBI has decided to extend the timeline for UCBs to achieve PSL targets (75%) by 2 years i.e.
up to Mar 31,2026
○ UCBs can also do one Time Settlement at par with Commercial Banks
○ RBI has recently notified a nodal officer as well - to meet long pending demand of the
cooperative sector for closer coordination and focused interaction
- UCBs satisfying the following criteria shall be considered for inclusion in the 2nd Schedule of RBI
Act:
○ CRAR of at least 3% more than the minimum CRAR requirement applicable to the UCB; and
○ No major regulatory and supervisory concerns
- Banking Regulation (Amendment) ordinance 2020:

 About IPPB (2017)

- Public limited company
- 100% owned by dept of posts

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 - 100% owned by dept of posts
- HQ - New Delhi

 Recent News:
- LAF and MSF for RRB
○ Till now RRB were not permitted
○ Primary Dealers (PDs) and NBFCs are also eligible to participate in auction

About NBFCs:
- NBFC is a company registered under the Companies Act, 1956
- NBFCs do not form part of the Payment and Settlement System
- It is engaged in the business of loans and advances, acquisition of shares/ stocks/ bonds/
debentures/securities issued by Govt or local authority
- Min CRAR required - 15%
- Classification of NBFCs - recently done by RBI:
○ NBFC-Top Layer
○ NBFC-Upper Layer
○ NBFC-Middle Layer
○ NBFC-Base Layer

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 Regulatory changes for NBFCs:

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  Regulators of NBFCs:
- By RBI - MUDRA + IDF (Infra debt Fund) + IFC (Infra Finance companies) + CICs (Core investment
companies) + CIC (Credit Info Companies) + ARC + HFCs (recently taken over from NHB) + AT-1
- By SEBI - MF + AIF + VCF (part of AIF-1) + INVITs/REITs + CRA (Credit rating) + Stock broker
- By Min of Corporate Affairs & RBI - NIDHI Companies, Microfinance Companies
- By State Govt - Commodity Spot Market + Chit Funds (under Concurrent list + prohibited from
accepting deposits)
- By IRDAI - Life Insurance companies e.g. LIC, HDFC Standard Life Insurance + Non-Life (General)
insurance companies e.g. IFFCO-Tokyo General Insurance
- PFRDA - Regulates all Pension Funds, except EPFO
- Shadow Banking:
○ Operate fully or partially outside traditional banking system
○ In India - HFCs + LDMFs + Retail NBFCs

Performance of PSBs and Privatization Issue:

- At present - 12 PSBs compared with 27 in 2017
- Post 2013 - PSB growth has declined (2019 - PSB's total loss > 65k cr; >90% fraud in PSB)
- Recent RBI FSR - PSBs had net NPA of 1.8% compared to 0.8% of Private sector Banks
 Consolidation and Privatization of PSBs:
- Privatization
IDBI Bank → Purchased by LIC (2018)

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 ○ IDBI Bank → Purchased by LIC (2018)
○ 2014 - RBI’s P.J. Nayak Committee → Govt should exit shareholding in smaller PSBs → ↑
efficiency
○ Many committees had proposed bringing down the government stake in public banks below
51% — the Narasimham Committee proposed 33% and the P J Nayak Committee suggested
below 50%.

 Recent Bank mergers:

- Vijaya Bank and Dena Bank merged with - Bank of Baroda in 2019
- Andhra Bank and Corporation Bank merged with - Union Bank of India
- Allahabad Bank merged with - Indian Bank
- Syndicate Bank merged with - Canara Bank
- Oriental Bank of Commerce and United Bank of India merged with - Punjab National Bank (PNB) in
2020
- Recent Privatization of Banks - Union govt along with LIC invited preliminary bids for selling
60.72% stake in IDBI Bank in Sep

NPA Issues of Banks:

- SMA-0,1,2,3 → NPA (> 90 days or 3 months) → Sub-Std asset (NPA for 1 yr) → Doub ul Asset (SSA
for 1 yr) → Loss Asset (No value of DA)
- Stressed Asset - NPA + Loan write off + Restructured loans
- Recent RBI FSR - PSBs had net NPA of 1.8% compared to 0.8% of Private sector Banks + overall
average net NPA was 1.3%
- As per RBI data - Gross NPAs of all banks for the year 2020-21 was around Rs. 8.41 lakh crores

 Steps taken for NPAs (detailed discussion given below):

- SARFAESI Act 2002 - est DRT + attach property of defaulters
- IBC 2016 - for settlement of NPAs
- Bad Banks or ARCs - take up bad loans from banks
- Credit Rating Agencies or CICs - assign ratings to individual borrowers and companies
- Project Sashakt - Inter Creditor Agreement for (50-500 cr)
- D-SIBs - identifying large banks - that are too big to fail
- PCA Framework of RBI - NPA + Tier-1 Leverage ratio + CRAR
- Regulatory forbearance - RBI allow relaxation of some norms during crisis
- Digital Public Credit Registry - Help lenders to get 360 degree profile of borrower
- LEI number - unique code for each company which is party to financial transaction
- DICGC Act 1961 - insure loans of public upto Rs 5 lkh
- BASEL III norms - 8% CRAR
- Leverage Ratio - How much loan can be given by banks

 SARFAESI Act (2002):

- Attach property + Not for farm loans
- Approach DRT (then DRAT) + Only secured creditors

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 - Approach DRT (then DRAT) + Only secured creditors
- Powers (Banks + Cooperative banks + HFCs + some NBFCs)
- Before this act - banks were required to go to court to attach the property of defaulters - but now
there is no need to go to court and 60 days time period is given to defaulters to repay the loan and
they can directly attach the property of defaulter
- Limitations of SARFAESI Act:
○ The DRTs & DRATs are understaffed - 1 lakh+ cases pending (2016), so, case will go on for
years and the debtor will remain in possession of asset.
○ This leads to erosion of asset-value (machinery, vehicles) even when DRT allows auction at a
later time.
○ In some businesses, auction or liquidation may not yield the best returns for the banks.
○ E.g. hotel resort in remote area, where no other hoteliers are keen to invest. In such cases, if
the loans were restructured (i.e. reducing % interest rate, extending tenure, finding new
partners), then banks could salvage more value.
○ But, SARFAESI act doesn’t facilitate such arbitration. So, Govt. came up with a new law: IBC
- Recently, Supreme Court has ruled that the provisions of the SARFAESI Act, 2002, will be
applicable to state and multi-state cooperative banks.
- The Apex court has also ruled that the Cooperative Banks have also come under Banks' definition
under Banking Regulation Act, 1949.

 About ARCs/Bad Banks:

- NBFC regulated by RBI + statutory backed by SARFAESI Act + Incorporated under companies act
- Union Budget 2022-23 proposed new ARC/Bad bank
- It is a financial institution - that buys the NPAs from banks and FIs at mutually agreed value (at
discount rate) - thus bad bank will take number of measures to take out money from the borrower
- It helps banks in cleaning up their balance sheets → Thereby, concentrate on normal banking
activities.
- Set up by PSBs or Private banks
- Currently min net owned fund for them is Rs. 100Cr (recently increased to Rs 300 cr) and CRAR is
15%
- Different from IBC - IBC aims at the resolution and reorganization of insolvent companies.
Whereas, ARCs are set up for clearing up NPAs
- As per RBI data - Gross NPAs of all banks for the year 2020-21 was around Rs. 8.41 lakh crores.

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 - As per RBI data - Gross NPAs of all banks for the year 2020-21 was around Rs. 8.41 lakh crores.
- Sudarshan Sen Committee - RBI set up this Committee to review the working of ARCs
comprehensively
- Sources of Funds:
○ An ARC can issue bonds, debentures, and security receipts to meet its funding requirements.
○ Security Receipts - It is a receipt that an ARC issues to a Qualified Institutional Buyer (QIB) -
to raise fund from them - ARC uses this fund to buy the discounted bad debts from banks +
also QIB receives the title, right, or interest in the financial asset that ARC buys
- Regulatory Framework for ARCs:
○ RBI (2021) → set up a Commi ee (Sudarshan Sen Commi ee) to undertake a
comprehensive review of the working of ARCs
○ Recently, based on the Committee’s recommendations - regulatory framework for ARCs has
been amended
○ Provisions:
 Min Net Owned Fund Requirement under the SARFAESI Act has been increased to 300
crore (from 100 cr at present) by March 2026 (200 cr by March 2024)
 Deployment of Surplus Funds - ARCs are now permitted to deploy surplus funds in
short-term instruments (money market instruments) - capped at 10% of the NOF
 It permit ARCs to undertake those activities as a Resolution Applicant (RA) under IBC
which are not specifically allowed under the SARFAESI Act - conditions (min NOF of Rs
1,000 crore)

 Credit Rating Agencies and Credit Bureau (or Credit Information Companies):
- A company that rates debtors on the basis of their ability to pay back their interests and loan
amount on time and the probability of them defaulting.
- A credit rating agency does not perform an audit but relies on information provided by the issuer
and collected by the analysts
- While CRA assign ratings to instruments issued by companies, Credit Bureaus (also called CICs)
assign ratings to individual borrowers which is useful for bank, other lenders and govt.
- Credit Rating Agency provides an opinion relating to future debt repayments by borrowers. Credit
Bureau provides information on past debt repayments by borrowers
- Credit Rating Agencies are regulated by SEBI under the powers derived from the Securities and
Exchange Board of India (Credit Rating Agencies) Regulations, 1999.
- The actions of Credit Information Companies (CICs) is regulated by the Credit Information
Companies Regulation Act, 2005, enacted by the GoI
- Major CRA in India (Recently released list by RBI)
1. Acuite Ratings & Research Limited (Acuite)
2. Credit Analysis and Research Limited (CARE)
3. CRISIL Ratings Limited
4. ICRA Limited
5. India Ratings and Research Private Limited (India Ratings)
6. INFOMERICS Valuation and Rating Pvt Ltd
- Currently there are 4 CBs or CICs in India
1. CIBIL
2. CRIF High Mark Credit Information Services Pvt Ltd.
3. Equifax Credit Information Services Pvt Ltd
4. Experian Credit Information Company of India Pvt Ltd

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 About IBC 2016:
- It covers all individuals, companies, LLPs etc.
- 3 persons can approach NCLT:
○ Operational Creditors = Suppliers, customers, contractors etc.
○ Financial Creditors = banks, NBFC, bond & other debt security holders, + Home buyers.
○ Corporate itself
- Process (FC approach NCLT → IP's resolution plan (180-270 days) → if x% of FC accepts RP then
implemented otherwise liquida on of assets) → Appeal to:
○ For individual and PF - DRT and DRAT
○ For Company - NCLAT
- Not applicable to wilful and Incapable defaulter → covered under SARFAESI
○ Wilful defaulter (capacity but not repaying + diverted funds + sold assets without informing
banks)
○ Incapable defaulter
- Waterfall Mechanism - priority to secured FC over unsecured creditor
- IBBI
○ Statutory body (2016)
○ Under MCA
○ Selects IPs + Chairman (eligible for reappointment)
- Project Sashakt - Inter Creditor Agreement for (50-500 cr) - Banks itself work it out {recommended
by the Sunil Mehta-led committee.}
○ To address the problem of resolving bad loans
○ 5 pronged strategy to resolve bad loans
○ Above ₹500 independent AMC need to be set up
- Issues:
○ Low recovery - Out of total corporate debt of 14 lakh crore only 20% has been recovered
○ Delays in the process - around 1900 applications were pending till 2022 + 66% of cases
took >270 days for completion + Inadequate benches of NCLT - to resolve process quickly
○ Large firms ending up in Liquidation - only 14% cases culminated by resolution plan + 47%
cases ended up in liquidation
○ Dilution of IBC - through amendments + IBC (amendment) bill of 2021 - it sought to reverse
one of the unique features of the IBC - “moving away from the ‘debtor-in-possession’
regime to a creditors-in-control’ regime - for MSMEs affected by pandemic
○ Inadequate NCLT benches
○ Low approval rate of resolution plans
- Economic Survey
○ Need to increase NCLT benches
○ Use of ICT
○ PSBN (it can act as Fin Tec hub)
- IBC Code (first) Amendment Act (2019)

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 - IBC Code (first) Amendment Act (2019)
○ Must finish entire process within 330 days, instead of earlier 180-270 days limit
- IBC Code (second) Amendment Bill 2019)
○ IBC complaints can be made only if the loan amount is minimum “x” or minimum lenders
are “y”.
○ This is to discourage frivolous complaints by lenders.
- IBC Ordinance to suspend new cases:
○ 2020-June: Govt issues ordinance to amend IBC Code.
○ No fresh case will be registered in IBC code for next 6 months starting from the pending
loans of March 2020 onwards. Because Corona = business is down, difficult to work out any
resolution plan
○ Before: Insolvency bankruptcy code proceeding could be initiated for business loans default
of minimum ₹1 lakh/>.
○ After - Minimum ₹1 crore/> So even after suspension is lifted, most of the small
businessmen will be spared from IBC proceedings

 D-SIBs:
- As per latest list, India’s D-SIB’s are SBI (bucket 4), HDFC (bucket 2) and ICICI Bank (bucket 1)
- Their asset value is >2% of GDP
- FSB asked countries to set up D-SIB - to reduce risk in them
- P.J. Nayak Committee suggested Bank Investment Company (BIC) - for Bank Recapitalization.
- D-SIBs has to maintain 0.60% Additional CET-1 requirement as a percentage of Risk Weighted
Assets
- Bucket 1 banks have to maintain lowest CET1 i.e. 0.20% and Bucket 5 have to maintain highest CET
i.e. 1%
- Indicators (alongwith weightage):
○ Size (40%)
○ Interconnectedness (20%)
○ Lack of readily available substitutes or financial institution infrastructure (20%)
○ Complexity (20%)

 About PCA Framework:

- By RBI (2002) - action on 4 parameters:
○ NPA
○ CRAR
○ Tier-1 Leverage Ratio
○ RoA (removed in 2021)
- PCA is intended to help alert the regulator as well as investors and depositors if a bank is heading

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 - PCA is intended to help alert the regulator as well as investors and depositors if a bank is heading
for trouble.
- The idea is to intercept problems before they attain crisis proportions.
- Earlier Central Bank of India was under PCA - it has also been recently removed from PCA - thus
currently no bank is under PCA
- Earlier Indian Overseas Bank and UCO bank were also removed from PCA framework
- Only for commercial banks:
○ In case of Co-operative - Supervisory Action Framework (SAF)
- Recently RBI unveiled PCA framework for NBFCs

 Other Reforms:
- Digital Public Credit Registry
○ Recommended by Yeshwant Deosthalee committee
○ Help lenders to get 360 degree profile of borrower
○ Under RBI
- LEI number
○ By G20 (FSB)
○ For taking loans from outside
○ More explained below
- DICGC Act 1961:

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 - DICGC Act 1961:
○ 100% owned by RBI + insures upto Rs 5 Lakh + Differential Premium System + Timeframe
within 90days
○ Cover - 51% by Value and 98% by volume of deposit
○ It covers - all bank deposits (FD, RD etc.) + covers all commercial banks including foreign
banks in India, SFB, LAB, RRB etc.
○ Not cover - PACS + NBFCs + Foreign Govt + Centre/State Govt + Inter-Bank Deposits
○ The authorized capital of the Corporation is 50 crore, which is fully issued and subscribed by
the RBI
- BASEL III norms
○ 8% CRAR (In India - 9% + but for PSBs it is 12%)
○ Net Stable Funding Ratio (NSFR) part of Basel III; >100% mandated by RBI
- Leverage Ratio:
○ How much loan can be given by banks
○ Recently relaxed by RBI
- KV Kamath Committee - for restructuring of loans during pandemic
- NaBFID - DFI owned by CG; To set up new DFI - license from RBI; Can borrow from domestic as
well as foreign market
- Bad Banks (recently revived the idea of bad bank by FM in Budget speech)
- RK Mohanty committee - Bank License to corporates
- B.N. Srikrishna committee on FSLRC - Mooted for Unified Financial regulator - limiting the role of
the RBI to monetary management.

 About LEI (Legal Entity Identifier):

- A Legal Entity Identifier (LEI) is a unique code assigned to a company or organization that operates
in the financial market. The code is used to identify the entity and is necessary for reporting
financial transactions and regulatory purposes.
- It is a 20-character alpha-numeric code used to uniquely identify parties to financial transactions
worldwide.
- For Eg - consider a company named ABC Inc. that operates in the stock market. To identify the
company and its financial transactions, a unique 20-character code, is assigned to ABC Inc. as its
Legal Entity Identifier. This code is used by financial institutions and regulators to track the
company's transactions and to monitor its compliance with financial regulations.
- LEI has been introduced by the Reserve Bank in a phased manner for participants in the over OTC
derivative, non-derivative markets, large corporate borrowers and large value transactions in
centralised payment systems
- In India - LEI number is provided by Legal Entity Identifier India Limited (LEIL), which is a wholly
owned subsidiary of CCIL (LEIL has been recognised as an issuer of LEI by RBI under the Payment
and Settlement Act, 2007)
- In other country - LEI is provided by any Local Operating Units (LOUs) accredited by the GLEIF
(Global Legal Entity Identifier Foundation)
- Introduction of Legal Entity Identifier (LEI) for Cross-border Transactions:
○ Recently RBI has decided that, all Authorized Dealer (AD) Category I banks in India are
required to obtain an LEI number from their resident non-individual clients who are
undertaking capital or current account transactions of worth INR 50 crore or more (per
transaction) under the FEMA), 1999.
○ For Eg - if a Indian company want to do foreign investment of ₹60 crore. Before the
transaction takes place, the AD Category I bank handling the transaction must obtain the LEI
number of the resident company. The bank will use the LEI number to identify and track the
transaction
○ This requirement is effective from October 1, 2022. The purpose of this requirement is to
ensure that all large-value transactions in the financial system can be easily traced and
monitored for financial stability and regulatory purposes.
However, in case of non-resident counterparts LEI is not mandatory and AD Category I bank

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 ○ However, in case of non-resident counterparts LEI is not mandatory and AD Category I bank
may still process the transaction to avoid disruptions.
○ Presently, RBI mandates non-individual borrowers having aggregate exposure of above Rs
25 crore to obtain LEI code.

 About CCIL (Clearing Corporation of India):

- CCIL plays a crucial role in the financial markets in India. It is a subsidiary of RBI and was
established in 2001 to provide clearing and settlement services for various financial markets in the
country.
- CCIL acts as a central counterparty (CCP) to all transactions in its markets, which includes money
market instruments, government securities, foreign exchange, and derivatives.
- The main role of CCIL is to promote the stability and efficiency of the financial markets in India by
providing guaranteed settlement services for all transactions in its markets.

 Micro-Financing in India:
- Microfinance is a form of financial service (small ticket loans) which provides small loans and other
financial services to poor and low-income households
- These are collateral free loans
- There are around 6 crore borrowers of micro-finance in India - having around 3 lakh crores loan
amount
- 82% of the loan portfolio is concentrated in 10 states
- Microcredit is delivered through a variety of institutional channels
○ Scheduled Commercial Banks (SCBs) including - SFBs, RRBs, lending through BCs and SHGs
○ Cooperative banks + NBFC-MFIs (or standalone MFIs)
○ Other NBFCs
- RBI recently released guidelines:
○ Applicability:
 All Commercial Banks (including SFBs, LABs, and RRBs) excluding Payments Banks
 All Primary (Urban) Co-operative Banks/ State Co-operative Banks/ DCCBs
 All NBFCs (including MFIs and HFCs)
 These are referred to as ‘Regulated Entities (REs)’
○ Definition of Microfinance Loan - A microfinance loan is defined as a collateral-free loan
given to a household having annual household income up to 3 lakh (Earlier, it was - 1.25 lakh
for rural and 2 lakhs for urban and semi-urban borrowers)
○ Limit on Loan Repayment Obligations of a Household - limit of max 50% of the monthly
household income (means - in monthly loan repayment, household should not be forced - to
repay > 50% of his monthly income)
○ Each RE shall provide timely and accurate data to the Credit Information Companies (to
check credit worthiness)
○ Pricing of Loans - Interest rates and other charges on microfinance loans should not be
usurious. These shall be subjected to supervisory scrutiny by the Reserve Bank.
○ Loan amount:
 NBFC-MFIs cannot extend microfinance loans exceeding 75% of its total assets (earlier
it was 85%)
 For other NBFCs it is 25% of its total assets (earlier it was 10%)
○ Net Owned Fund (for NBFC-MFIs):
 Current NOF - Rs. 5 crore (Rs. 2 crore in NE Region)
 By March 31, 2025 - Rs. 7 crore (Rs. 5 crore in NE Region)
 By March 31, 2027 - Rs. 10 crore

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  By March 31, 2027 - Rs. 10 crore

 Different Benchmarks:
- Mumbai Interbank Outright Rate (MIBOR):
○ It is the overnight lending offered rate for Indian commercial banks.
○ It is the rate at which banks borrow unsecured funds from one another in the interbank
market.
○ FBIL announces the benchmark rate for Overnight Mumbai Interbank Outright Rate (MIBOR)
on a daily basis, except Saturdays, Sundays and local holidays.
- Mumbai Interbank Forward Outright Rate (MIFOR):
○ It is a benchmark rate that is used by commercial banks for setting prices on forward rate
agreements and derivatives.
○ It is a mix of the London Interbank Offered Rate (LIBOR) and a forward premium derived
from Indian foreign exchange markets.
- London Interbank Offered Rate (LIBOR):
○ LIBOR is a benchmark interest rate at which major global banks lend to one another in the
international interbank market for short-term loans.
○ LIBOR will be phased out by June 30, 2023 - therefore RBI issued advisory to transition from
LIBOR to other widely accepted alternative reference rate (AAR) like AONIA (Australian
Interbank Overnight Cash Rate) and SARON (Swiss Average Rate Overnight).
○ SOFR has been proposed as a replacement for it.
 The secured overnight financing rate (SOFR) is an inter-bank lending rate which based
on data from observable transactions in US treasury market.
 Unlike LIBOR which is based on the estimated borrowing rates, SOFR is based on data
from extensive trading in the Treasury report market.
 For instance, there were roughly 1,500 times transaction (SOFR) in comparison to
LIBOR as of 2018.
 Thus, theoretically it makes SOFR more accurate indicator of borrowing costs.
 As LIBOR was an unsecured measure which included an element of bank credit risk.
Thus, it may result in
higher rate than SOFR, particularly in times of severe market stress.

 Important Committees:
- Usha Thorat Committee - for SFBs
- Nachiket Mor Committee - for Payment Banks
- N. S. Viswanathan - for Categorization of UCBs
- PJ Nayak Committee - PSB Reforms (reduce shareholding of govt in PSBs)
- Sudarshan Sen Committee - ARCs/Bad Banks
- Yeshwant Deosthalee committee - Digital Public Credit Registry
- Injeti Srinivas Committee - Cross Border Insolvency
- KV Kamath Committee - for restructuring of loans
- RK Mohanty committee - Bank License to corporates
- Malegam Committee - for Microfinance
- Raja Chelliah Committee - for tax reforms
- UK Sinha Committee - for MSME Reforms

Money and Banking Page 22

 Risk Provisioning Account of RBI:
- Contingency Fund (CF):
○ A specific provision meant for meeting unexpected and unforeseen contingencies, including
depreciation in value of securities, risks arising out of exchange rate policy operations,
systemic risks and any risk arising on account of special responsibilities enjoined upon RBI.
- Currency and Gold Revaluation Account (CGRA):
○ Maintained to take care of currency risk, interest rate risk and movement in gold prices.
- Investment Revaluation Account Foreign Securities (IRA-FS):
○ Unrealized gains or losses on revaluation in foreign dated securities.
- Investment Revaluation Account-Rupee Securities (IRA-RS):
○ Unrealised gains or losses on revaluation in Rupee Securities.

 National Asset Reconstruction Company Limited (NARCL) and India Debt Resolution Company
Limited (IDRCL)
- About NARCL:
○ It is India's first-ever "Bad Bank".
○ It has been incorporated as an ARC under the Companies Act of 2013.
○ It is an ARC - It will acquire assets by making an offer to the lead bank.
○ Ownership - Majorly owned by PSBs (51%) with Canara Bank as Sponsor + Rest of the share
(49%) will be held by other Financial Institutions (Fls) and debt management companies.
○ NARCL will have a finite life of 5 years with IDRCL term being co-terminus to NARCL.
- About IDRCL:
○ It is a service company/operational entity which will manage the asset and engage market
professionals and turnaround experts.
○ It means the IDRCL role will come only after acquisition of the assets by NARCL.
○ Ownership - Majorly owned by Private Sector Banks (51%), rest with PSBs
- Resolution Process:
○ NARCL will acquire assets of around ₹2 lakh crore by making an offer to Lead Bank, with
Lead Bank to run a ‘Swiss Challenge’ process to invite other ARCs/Bidders to better NARCL
anchor offer, before NARCL being declared as a preferred bidder.
○ The assets will be acquired by NARCL in the underlying trusts, with IDRCL to prepare and
suggest the proposed restructuring/resolution plan, strategies, etc. for each of them.
○ The asset acquisition and resolution will happen within the RBI Framework for ARCs.
○ E.g. Asset acquisition within the extant regulations of RBI under 15:85 structure (15% in
Cash and 85% in Security Receipts or SRs).
Based on international practices like Malaysia and UK, SRs issued by NARCL will be backed

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 ○ Based on international practices like Malaysia and UK, SRs issued by NARCL will be backed
by Government (up to ₹30,600 crore) for credibility and providing a contingency buffer.
○ Valid for 5 years, the government will charge a guarantee fee on the amount it guarantees,
which will increase annually to incentivize early and timely resolution.

 About NaBFID (National Bank for Financing Infrastructure and Development):

- NaBFID was set up as a Development Finance Institution (DFI) to provide long-term infrastructure
finance.
- Parliament enacted NaBFID Act, 2021 which received assent of the President in March, 2021
- It is regulated and supervised as an all-India financial institution by the RBI
- It is the fifth such institution after the EXIM, NABARD, NHB, and SIDBI
- Currently it is headquartered at SIDBI office in Bandra Kurla Complex, Mumbai.

 Reserve Bank - Integrated Ombudsman Scheme, 2021:

- It was launched in November 2021.
- The Scheme integrates the existing 3 Ombudsman schemes of RBI namely
○ Banking Ombudsman Scheme, 2006;
○ Ombudsman Scheme for NBFCs 2018;
○ Ombudsman Scheme for Digital Transactions, 2019.
- In addition to integrating the three existing schemes, the Scheme also includes under its ambit
Non- Scheduled Primary Co-operative Banks with deposit size of Rs 50 crores and above.
- Under the recent amendments to the Banking Ombudsman Scheme, 2006, all commercial banks,
RRBs, and scheduled primary co-operative banks are under the ambit of the Banking Ombudsman
- The Scheme, framed by the RBI will provide cost-free redress of customer complaints involving
deficiency in services rendered by entities regulated by RBI, if not resolved to the satisfaction of
the customers or not replied within a period of 30 days by the regulated entity.

Risk Management in the Banking Sector:

 About Risk:
- An activity which may give profits or result in loss may be called a risky proposition due to
uncertainty or unpredictability of the activity of trade in future
- As risk is directly proportionate to return, the more risk a bank takes, it can expect to make more
money
- Reasons for emphasis on Risk management by banking sector:
○ Deregulation:
 Privatization of Banks
 It has given banks more autonomy in areas like lending, investment, interest rate
structure etc.
 This has made it imperative for banks to pay more attention to risk management
○ Technological innovation:
 Technological innovations have provided a platform to the banks for creating an
environment for efficient customer services
 In fact, it is technological innovation that has helped banks to manage the assets and
liabilities in a better way
 However, all these developments have also increased the diversity and complexity of
risks, which need to be managed professionally so that the opportunities provided by
the technology are not negated.
- About Risk Premium:
○ A risk premium is the return in excess of the risk-free rate of return that an investment is
expected to yield.
○ Eg - if normal interest rate is 10% and the risk interest rate is 15% - then 5% is the risk
premium

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 premium

 Type of Risks in Banking Sector:

- Liquidity Risk:
○ Liquidity risk arises when bank does not have enough money to pay back to its lenders.
○ For Eg - There is a rumour that PNB does not have enough money in its accounts. This
would lead to large number of people withdrawing money the next day which can result in
PNB not having money to pay back.
○ 3 types of Liquidity Risks:
 Funding Risk
 Time Risk
 Call Risk
- Interest Rate Risk:
○ Interest Rate Risk arises due to movement in Interest rates
○ Example: Bank has given money for 20 years at 8% Rate but borrowed it for 5 years at 7.5 %.
Here the bank is assuming that after 5 years it would again borrow at 7.5 %. But if after 5
years the borrowing rate is increased to 9%. In such a case bank would make loss due to
Interest rate movements
- Market Risk:
○ Also known as Price Risk
○ The market risk arises due to unfavourable movement in market prices in the investments
done by bank.
○ Suppose bank has invested in Equities (Stock market) but stock market crashes then banks
would make a loss.
○ Banks generally invests in products which are related to price of Commodities, Shares,
Currency movement - So investment in such products can lead to market risk.
○ Interest rate risk is also a type of market risk
○ Example of Currency Risk: This is also called Forex Risk. Suppose bank has invested 1000
Dollars in US bank. When it invested each dollar was of Rs. 60 which means bank invested
Rs. 60,000. But after certain days the dollar becomes of Rs. 58 which means bank will get
only Rs. 58,000 on that day
- Default or Credit Risk:
○ Credit risk is more simply defined as the potential of a bank borrower or counterparty to fail
to meet its obligations in accordance with the agreed terms
○ 2 types:
 Counterparty Risk - it is related to non-performance of the trading partners due to
counterparty’s refusal and or inability to perform + it is same as time risk
 Country Risk - non-performance of a borrower or counterparty arises due to
constraints or restrictions imposed by a country
○ Credit Risk can’t be avoided but has to be managed by applying various risk mitigating
processes - such as - Banks should assess the credit worthiness + There should be maximum
limit exposure for single/ group borrower
- Operational Risk:
○ Operational loss has mainly 3 exposure classes namely people, processes and systems.
○ In other words in arise due to bad intentions of staff, hacking of systems or wrong systems
in place to meet the compliance
○ 2 types:
 Transaction Risk
 Compliance Risk
- Other Risks:
○ Strategic Risk - Arising from adverse business decisions, improper implementation of
decisions or lack of responsiveness to industry changes
○ Systematic Risk - The risk inherent to the entire market or an entire market segment.
Systematic risk, also known as undiversifiable risk. It affects the overall market, not just a

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 Systematic risk, also known as undiversifiable risk. It affects the overall market, not just a
particular stock or industry. For example if you invest all you money in equities then there is
a risk that if equity markets crash, all your investments will go into loss.

 Assets and Liabilities of Bank:

- Liabilities
○ Deposits
○ Borrowings
○ Subordinated debt
○ Common equity - Share capital + Preference share capital
- Assets
○ Cash
○ Loans
○ Investments

 Role of RBI in Risk Management in Banks:

- CAMELS Framework
○ Board for Financial Supervision (BFS) has been using CAMELS rating to evaluate the financial
soundness of the Banks.
○ CAMELS Model consists of 6 components namely
 Capital Adequacy,
 Asset Quality,
 Management,
 Earnings Quality,
 Liquidity and
 Sensitivity to Market risk
○ Supervisory authorities assign each bank a score on a scale, and a rating of 1 is considered
the best and the rating of 5 is considered the worst for each factor given above
○ This framework was recommended by Basel Committee on Banking Supervision (BCBS) of
the Bank for International Settlements (BIS)
○ About BIS:
 BIS established in 1930, is the world's oldest international financial organization. BIS
has 60 member countries
 The head office is in Basel, Switzerland.
 The mission of the BIS is to serve central banks of different nations in their pursuit of
monetary and financial stability, to foster international cooperation in those areas and
to act as a bank for central banks
 BCBS was formed in 1974, by 10 member countries, to supervise banking standards. It
was formed after the failure of Bretton Woods System.
- Basel norms:
○ Central Bank Governors of the Group of 10 countries formed a Committee of banking
supervisory authorities
○ Discussed below
- PCA (Prompt Corrective Action) Framework:
○ PCA Framework consists of following three parameters
 Capital to risk weighted assets ratio (CRAR),
 Net non-performing assets (NPA)
 Tier-1 Leverage ratio
○ The Reserve Bank takes some actions and put some restrictions on the bank as soon as the
value for any one of these parameters goes beyond a certain limit

 Basel Norms:
- BCBS has introduced Basel Norms which are known as Basel Accord.
- Till date 3 Basel norms have been released which are collectively called Basel accords:

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- Till date 3 Basel norms have been released which are collectively called Basel accords:
○ Basel 1 - 1988
○ Basel 2 - 2004
○ Basel 3 - 2010
- Objectives of Basel norms:
○ Resilience of banks from economic and financial shocks
○ To promote transparency in banking operations
- Basel 1:
○ Basel 1 mainly catered to the credit risk - that is the risk of borrowers defaulting on
Loans/Bonds/debt etc.
○ Basel 1 defines Capital Ratio = (Tier 1 Capital + Tier 2 Capital)/Risk Weighted Assets
○ Risk-weighted assets are the loans and other assets of a bank, weighted (that is, multiplied
by a percentage factor) to reflect their respective level of risk of loss to the bank.
○ Tier 1 capital (core capital)
 Paid up capital or share capital
 Undistributed profit
 Preference share capital
○ Tier II capital
 Revaluation reserves
 Subordinated debt
○ There are 5 credit risk weights: 0% (for govt loans), 10%, 20% (for OECD), 50% and 100% (for
govt loans)
○ As per Basel I norms the minimum capital ratio should be 8%. India RBI recommends it to be
9%. So any bank in India having capital ratio of less than 9% is deemed to be risky
- Basel 2:
○ Basel 2 norms has 3 pillars
○ Pillar 1 - Minimum capital requirements
 The capital ratio remain the same i.e. 9% as in Basel 1
 Tier 1 - 4% - CE (2%) + AT-1 (2%)
 Along with Credit Risk - it also take into account Market Risk and Operational Risk
while calculating the minimum capital
 Risk weighted in the assets - is now calculated differently (Eg - different for each
consumer loans based on rating)
○ Pillar 2 - Supervisory review process
 It also recognizes the necessity of exercising effective supervisory review of banks’
internal assessments of their overall risks
 An important outcome of pillar 2 is ICAAP (Internal Capital Adequacy Process) - It is an
umbrella activity that encompasses the governance, management and control of all
risk and capital management functions and the linkages therein
○ Pillar 3 - Market discipline
 It is about effective management of banking system - such as degree of transparency
in banks’ public reporting.
 Thus, adequate disclosure of information to public in timely manner brings in market
discipline and in the process promotes safety and soundness in the financial system.
- Basel 3:
○ Basel III is intended to strengthen bank capital requirements by increasing bank liquidity and
decreasing bank leverage
○ Pillar 1 - Minimum Capital Requirements:
 The overall capital ratio is unchanged at 8%
 Tier1 Capital ratio individually needs to be above 6% and Tier 2 Capital ratio
individually needs to be above 2%
 Tier 1 capital - 6% - CE (4.5%) + AT 1 (1.5%)
○ Pillar 2 - Risk management and supervision:
 Capturing risk of off-balance sheet exposures and securitisation activities

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  Capturing risk of off-balance sheet exposures and securitisation activities
 Managing risk concentrations
 Corporate governance
○ Pillar 3 - Market discipline
 Disclosure relating to securitisation exposures and sponsorship of off-balance sheet
vehicles
○ Capital conservation buffer:
 It is designed to ensure that banks build up capital buffers during normal times which
can be drawn down as losses are incurred during a stressed period
 The requirement is based on simple capital conservation rules designed to avoid
breaches of minimum capital requirements
○ Leverage Ratio:
 Basel III introduced a minimum "leverage ratio".
 This is a non-risk-based leverage ratio and is calculated by dividing Tier 1 capital by the
bank's average total consolidated assets
○ Liquidity Coverage Ratio:
 The "Liquidity Coverage Ratio" was supposed to require a bank to hold sufficient high-
quality liquid assets to cover its total net cash outflows over 30 days.

Basel 2 Basel 3 RBI guidelines

CE 2% 4.5%
Tier 1 4% 6%
Total 8% 8%

 About Tier-1 and Tier-2 Capital of Banks:

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 Note:
- Tier-1 Capital - it is the core capital + if it is lost then also bank continues to function with only tier
2 capital remaining
- Senior Debt - includes Secured creditors + Unsecured creditors
- Sub-ordinated debt and Preferred equity - referred as Other Forms of Capital (OFC)

 Counter Cyclical Capital Buffer:

- With the CRAR, the Basel Committee also took a prudent step of mandating banks to have Capital
Conservation Buffer @ 2.5%
- Capital Conservation Buffer (maintain at a fixed rate of 2.5%) and Countercyclical capital buffer
(maintain additional reserves between 0 to 2.5%)
- Internal Working Group of the RBI under the Chairmanship of Shri B Mahapatra had submitted the

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- Internal Working Group of the RBI under the Chairmanship of Shri B Mahapatra had submitted the
final Report on the implementation of Countercyclical Capital Buffer (CCCB) in July, 2014
- Lower threshold of the credit-to-GDP gap (where the CCCB is activated) shall be set at 3% points
- Upper threshold where the (CCCB reaches its max) shall be kept at 15% points of the credit-to-
GDP gap
- Once the upper threshold of the credit-to-GDP gap is reached, the CCCB shall remain at its
maximum value of 2.5 per cent of RWA, till the time a withdrawal is signalled by the RBI
- In between 3 and 15% points of credit-to-GDP gap, the CCCB shall increase gradually from 0 to
2.5% of the RWA of the bank but the rate of increase would be different based on the
level/position of credit-to-GDP gap between 3 and 15% points
- If the credit-to-GDP gap is below 3 percentage points then there will not be any CCCB requirement

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