Magazine

English Hindi

Index

Prelims bits

Prelims Capsule

Economy

What are BASEL III norms?

What are BASEL III norms?

Tag: GS 3 || Economy || Banking & Financial Sector || Commercial Banking

Why in news?

  • Central Bank of India (CBI) is planning to raise up to Rs 5,000 crore in the current fiscal through various means, including rights issue and FPO, to meet Basel III norms by March 2020.

Means

  • The bank will raise capital through –
    • Follow on public offer (FPO): A follow-on public offer (FPO) is also called further public offer.
      • When a listed company comes out with a fresh issue of shares or makes an offer for sale to the public to raise funds it is known as FPO.
      • In other words, FPO is the consequent issue to the public after initial public offering (IPO).
    • Rights Issue: An issue of shares offered at a special price by a company to its existing shareholders in proportion to their holding of old shares.
    • Qualified Institutional Placement (QIP): A qualified institutional placement (QIP) is, at its core, a way for listed companies to raise capital, without having to submit legal paperwork to market regulators.
      • It is common in India and other Southeast Asian countries.
      • The Securities and Exchange Board of India (SEBI) created the rule to avoid the dependence of companies on foreign capital resources.
    • Equity shares: The bank will create, offer and allot such number of equity shares up to the value of Rs 5,000 crore, whether at a discount or premium to the market price, in one or more tranches.

Basel III regulations

  • As per the Basel III regulations, Central Bank will be required to maintain –
    • minimum common equity tier I ratio of 5.50% and
    • capital conservation buffer of 2.50% in the form of equity capital, and
    • tier I ratio of 9.50% and
    • overall CRAR (capital to risk weighted assets ratio) of 11.50% by March 31, 2020.

Why?

  • To meet general business purposes: The Bank will be requiring capital to meet the prescribed capital adequacy ratio (CAR) on ongoing basis. The capital will be utilised for the general business purposes.
  • Net loss at Rs 5,641 crore: The lender registered a widening of its net loss at Rs 5,641 crore during 2018-19 as against Rs 5,105 crore in the preceding fiscal due to high level of bad loans and provisions for them.
  • GNPA: The gross non-performing loans stood at 19.29% at the end of March 2019.
  • The net bad loans ratio stood at 7.73%.
  • Net NPAs: In 2017-18, the gross bad loans were 21.48%, while net NPAs were 10%.
  • Total income during 2018-19 also fell to Rs 25,052 crore as compared to Rs 26,659 crore a year ago.
  • PCA: Due to high net NPA and negative return on assets, the RBI had put the lender under its prompt corrective action (PCA) framework in June 2017.

Mains question

  • What are BASEL III norms? Why is it critical for banks to follow these norms?