basel 3 & private indian banks

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BASEL III Implementation InIndian Private Banks

March 05, 2014

Presented by:

Nitin Khattri

Amar Deep

Anadi Kaistha

Manish Pandey


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Agenda

CAR of Major Private Sector Banks

BASEL-III and Private Banks

Benefits of BASEL-III Compliant Banks

BASEL-III Transitional Phase

Private Sector Banks (Old and New)

Impact of BASEL-III implementation


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Indian Private Sector Banking

Industry

ate Sector Banking Industry

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Initially, during 1921, the private banks like bank of

Bengal, bank of Bombay and bank of Madras were in

service, which all together formed Imperial Bank of

India.

At present total 20 private sector bank are active in

India (source : RBI)

In FY 2011-12 Cumulative private sector banks

Gross NPA was ` 183145.5 mio and total advances `

8804452.7 mio.


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(Rs in mio) Gross NPAs Gross Advances

Gross NPAs to

GrossAdvances Ratio

(%)

Public Sector Banks 1124890 35503890 3.17

Private Sector Banks 183146 8804453 2.08

Foreign Banks 62922 2347096 2.68

Total 1370956.90 46655438.40 7.93

In 2012 Gross Advances and NPA details of INDIAN BANKING

SECTOR (source RBI data base)

Gross NPAs to Gross Advances Ratio - 2.08%


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Private Sector Vs Public Sector

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Where does Private sector banks stand

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Capital adequacy ratio of selected private sector

banks in India


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The private sector banks have recorded a positive

growth with regard to their CRAR position, the rate

of growth differs between the select banks.

The lowest average of 12.42 per cent was recordedin case of Axis Bank.

Kotak Mahindra maintained a the highest average

of 16.12%.


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To strengthen their capital positions :

Banks have sought to reduce risk weightedassets

Increase focus on secured lending

Improve loan to deposit ratio

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Comparative Study:


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ICICIs loan book grew by 17.27 %, driven by a

healthy growth in SME, agriculture and overseas

loans .

The gross advances of HDFC Bank grew by 22.15

% to INR1,954 billion, driven by an increase of

33.70 % in retail advances and an increase of

10.50 % in wholesale advances. The total advances of Axis Bank increased by 19.21

% to INR1,698 billion.

KMB witnessed loan growth of 33.24 % with

increased focus on collateralized lending and high-

end quality corporate clients.

For IIB, overall advances grew by 34.01 %


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Why We Need Basel 3:

Some of the major causes of the global financial

crisis were:

too much leverage,

too little capital,

and inadequate liquidity buffers.Other factors also responsible for this crisis were:

shortcomings in risk management, corporate

governance, market transparency and quality of

supervision.

These have pinpointed the systemic loopholes in the

Basel II framework.

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BASEL 3:

Basel III was designed to address the weaknesses of

the past crisis and to make the banking sector much

stronger and efficient enough to face any crisis. The

major thrust area of Basel III is improvement ofquantity and quality of capital of banks, with stronger

supervision, risk management.

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Basel III and Private Banks Position

19.28%

19.15%

18.36%

17.44%

15.89%

15.80%

15.39%

15.33%

14.91%

12.85%

17.31%

12.92%

16.92%

13.26%

12.79%

11.18%

12.42%

9.65%

10.11%

11.84%

17.31%

12.12%

16.92%

13.13%

12.79%

10.89%

12.42%

9.65%

9.62%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Yes Bank

Kotak Group

ICICI Group

Federal Bank

HDFC Bank

Jammu & Kashmir Bank

Axis Bank

South Indian Bank

Indusind

ING Vysya Bank Common Equity Tier 1

Tier-1 (Net of Deduction) %CRAR


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As per the available dataset

The Average Common Equity Tier 1 capital ofPrivate Banks is 12.67% and average CRAR is

14.91%.

The Private Banks are well cushioned above the

Basel III defined Core (Common Equity Tier 1)capital

The Maximum and minimum of the core capital

(common equity tier 1) are 17.31% and 9.62%.

The CRAR of all the private banks is above 10.5%.


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Under Basel III ,Aim to put restriction on banksability to distribute

earnings .

Indian banks are subjected to more stringent capitaladequacy requirements than their international

counterparts .

The expected growth in the risk weighted assets

along with the requirement of more stringent capitaladequacy norms would also require banks to

mobilize additional capital

Movement of capital requirement and

triggers under various scenarios


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In case of 20% annualized growth in risk-weighted

assets Rs 600000 crore additional capital would be

required by the banking sector (excluding foreignbanks) as a whole over the next nine years ending

March 31, 2019

Of this, the public sector banks would require 75-

80% and private banks 20-25%.

Various scenarios and CAR movement ---- Pictorial

representation


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Benefits to private sector banks from

BASEL III Norms

Private banks are moving towards Advanced

Approaches, especially as they expanded their

overseas presence, which banks to manage their

capital more efficiently and improve their profitability.

Effective implementation of Basel III by private

banks would demonstrate confidence amongst

regulators, customers, and shareholders that the

private banking system is recovering well from theglobal financial crisis of 2008 and has been

developing resilience to future shocks.


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Helps in delivering a much safer financial system in

private banks with reduced probability of failure at

affordable costs in longer terms.

For private banks restructuring of balance sheet and

business model could mitigate 40% of Basel IIIs

impact on equity.

Less impact on landing rates in comparison of public

sector banks, provide potential to increase business.

Would help in reducing the cost Shadow Bankingarrangements, which was high in private banks.


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Impact on Private Sector Banks

Higher Capital Requirement

Pressure on Return on Equity

Pressure on Yield on Assets

Strategies needed to be adopted

Change in Business Mix

Change in Customer Mix

Low-Cost Funding

Improvement in systems and procedures

Impact on Banks & Strategies needed

to be followed


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Time Line for Implementation of BASEL III


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RegulatoryCapital may not be effective if Banks

do not assess their risk periodically and take timelycorrective action when the risk exceeds the

threshold limit.

Dynamic Risk Management Strategy Proper Risk

culture-Every employee acts as risk manager intheir own area.

The link between nonperforming assets (NPA)

capital adequacy and provisioning is well known tobe highlighted here. The challenge is to provide

incentives for banks /financial institutions to

recognize losses on account of NPAs as per Basel

norms.

Conclusion


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Risk Capital may be the necessary safety cushion for

Banks.

The lack of transparency, credibility in banksbalance

sheet fuels a vicious circle. When investors cannot

trust the books, lenders cant raise capital and may

have to fall back on their home countriesgovernmentsfor help.

Finally, it is significant to note that new and private

sector banks, with their high capital adequacy ratios,

enhanced proportion of common equity and better IT

and other modern financial skills of the personnel, are

well placed to comply with Basel III norms in general.


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It is interesting to note that though risk capital may be

the necessary safety cushion for banks, capital alone

may not be sufficient to protect them from anyextreme unexpected loss events. In reality, risk

capital will remain only a number and may not be

effective if banks do not assess their risk periodically

and take timely corrective action when the riskexceeds the threshold limit.

Thus, whether it is Basel II or Basel III, it is crucial

that a bank does not depend solely on

"regulatory capital". What is needed is a dynamic

risk mitigation strategy.


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basel 3 & private indian banks

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