www.pwc.

com

Basel III Impact on Foreign Banks in India Discussion note

May 2012
May 2012

RBI guidelines on Basel III Key components

Tighter definitions for regulatory capital Capital buffer requirements Enhanced Enhanced liquidity counterparty credit standards risk controls

Leverage ratio

Redefined Core, Tier Capital conservation 1, Tier 2 capital: buffer: Banks must Qualifying asset types are maintain a buffer above restricted and tier is the minimum capital structure is rationalized requirements

Strengthened Short-term liquidity Non-risk weighted counterparty credit coverage ratio: Banks measure of exposure: risk management: must meet funding Banks must keep the ratio Banks must include obligations for 30 days of Tier 1 capital to grossStressed inputs, credit under an acute liquidity exposures, including offvaluation adjustments stress scenario balance sheet exposures, Public disclosure Countercyclical and wrong-way risk in at specific conversion requirements: Banks capital buffer: Banks Long-term net stable risk modelling and rates, above 4.5% must reconcile regulatory must maintain an funding ratio: Banks conduct robust back(current RBI guidelines) capital to audited additional capital buffer must hold adequate testing financial statements during times of excessive longer-term stable credit growth Strengthened funding sources in terms Higher levels of collateral mgmt of the liquidity profile of capital: Common equity Framework for standards: Banks must their assets requirement increased capital buffer improve collateral from 2% to 5.5%, plus a replenishment: Banks operations and apply 2.5% conservation. Tier 1 are constrained in longer margining periods capital ratio increased to distributing earnings if for derivatives exposures 8% buffers under-funded Contingent capital: Banks must hold further debt securities that can convert to equity in times of stress Incentives for central clearing of OTC Products: Centrally cleared products are given low risk weightings

As RBI guidelines on Basel III impact heavily on capital, liquidity and overall leverage, they will necessitate changes to the business and operational strategy of several banks
PwC 2

Capital Base Transitional arrangements : RBI guidelines on Basel III

Jan 1, 2013 Min Common Equity Tier 1 Capital conservation buffer Min common equity + cap conservation buffer Minimum Tier 1 Capital Minimum Total Capital * Min Total Capital + cap conservation buffer Phase in of deductions from Common Equity Tier 1 Capital instruments that no longer qualify as Tier 1 or Tier 2 4.5% Mar 31, 2014 5.0% Mar 31, 2015 5.5% 0.625% 6.125% 7.0% 9.0% 9.625% 60% Mar 31, 2016 5.5% 1.25% 6.75% 7.0% 9.0% 10.25% 80% Mar 31, 2017 5.5% 1.875% 7.375% 7.0% 9.0% 10.875% 100% Mar 31, 2018 5.5% 2.5% 8.0% 7.0% 9.0% 11.5% 100%

4.5% 6.0% 9.0% 9.0% 40%

5.0% 6.5% 9.0% 9.0% 40%

Phased out over 10 year period starting January 2013

* The difference between the minimum total capital requirement of 9% and the Tier 1 requirement can be met with Tier 2 and higher forms of capital.
PwC 3

RBI guidelines on Basel III Impact on foreign banks in India (1)

Common equity and retained earnings should be the predominant component of Tier 1 capital instead of debt-like instruments, well above the current 50% rule Gradual phase-out of hybrid Tier 1 components including many of the step-up / innovative / SPV issued Tier 1 instruments used by banks Minimum common equity Tier 1: Increased from 2% to 5.5%

Tighter definitions for regulatory capital

Plus capital conservation buffer of 2.5%

Bringing total common equity requirements to 8.0% Minimum total capital: Increased from 9.0% to 11.5% (including conservation buffer)

To be phased in from 2013 to 2018

Capital buffer requirements

Capital conservation buffer of 2.5 % in addition to minimum capital requirements Counter-cyclical capital buffer being developed which is expected to be implemented by increases to the capital conservation buffer during periods of excessive credit growth. RBI will issue further guidelines on CC, this may lead to marginally additional capital requirement
4

PwC

RBI guidelines on Basel III Impact on foreign banks in India (2)

Enhanced counterparty credit risk controls Improved counterparty risk management standards in the area of collateral management and stress-testing Encouraging use of Central Counterparties (CCPs) for standardised derivatives The liquidity coverage ratio will help ensure that banks have sufficient high-quality liquid assets to withstand a stressed funding scenario specified by RBI For liquidity coverage ratio, assets get a liquidity based weightage varying from 100% for government bonds and cash to 0%-50% for corporate bonds For net stable funding ratio, required and available funding amounts are determined using weighing factors, reflecting the stability of the funding available and the duration of the asset LCR & NSFR For net stable funding ratio, the weightage factors for assets vary from 0% and 5% for cash and government bonds, to 85% for retail loans and small business loans (remaining maturity < 1 year) and 100% for other assets

Enhanced liquidity standards

Leverage Ratio

The leverage ratio is implemented on a gross and un-weighted basis (banks total assets including both on and off-balance sheet assets) as a proportion of the banks total capital. This does not take into account the risks related to the assets. Final leverage ratio requirement would be prescribed by RBI after the parallel run taking into account the prescriptions given by the Basel Committee Banks which at present have the leverage ratio below 4.5% may endeavor to bring it above 4.5% as early as possible

PwC

Thank you

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Private Limited, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 2012 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Private Limited (a limited liability company in India), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.