Basel 3 Norms UPSC Notes: Purpose, Importance & Implementation in India

Basel III norms are a comprehensive set of reform measures developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision, and risk management within the banking sector. These norms aim to improve the banking sector's ability to absorb shocks arising from financial and economic stress, enhance risk management and governance, and strengthen banks' transparency and disclosures.

Basel 3 Norms UPSC is one of the most important topics for the UPSC IAS exam. It covers a significant part of the Economy subject in the General Studies Paper-3 syllabus and current events of national importance in UPSC prelims.

In this article on the Basel 3 norms UPSC, let us look at the Basel Accords, the Basel committee, Basel 3 Norms, the pillars of Basel 3, and its advantages and drawbacks for the UPSC IAS Exam.

Also, check the article on the World Bank here.

What are Basel Norms or Basel Accords?

Basel Norms refer to international banking regulations to promote financial stability and minimize risks in the banking sector. They are named after the city of Basel in Switzerland, where the Basel Committee on Banking Supervision developed these standards. The Basel Norms provide guidelines for capital adequacy, risk management, and regulatory supervision of banks.

The most well-known Basel norms are Basel I, Basel II, and Basel III, with each subsequent version introducing stricter regulations and risk management requirements. These norms establish minimum capital requirements for banks based on the risk profile of their assets and operations. They also determine the approaches used for calculating credit, market, and operational risk exposure. The broad goal of the Basel Norms is to provide banks with sufficient capital for potential losses and to be able to maintain its position in case the financial system falters. Banking regulators typically expect banks to conform to the Basel Norms and use them as a benchmark for banking standards globally. 

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Need for Basel Norms in India

The Basel Norms are needed to address various concerns and ensure the stability and soundness of the global banking system. Banks lend money obtained from the market and people's deposits, as a result of which they occasionally experience losses. As a result, banks must set aside a specific amount of capital to protect against the risk of non-recovery to handle such situations. The Basel Committee created the Basel III banking regulations to address this danger.

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The Basel Committee

The Basel Committee on Banking Supervision (BCBS), constituted in 1974 by the central bank governors of the G10 countries responding to the financial market disturbances, was established as a platform where members could discuss banking matters.

• The Basel Committee ensures financial stability by enhancing regulation, supervision, and other global banking practices.
• The BCBS reports to the Group of Central Bank Governors and Heads of Supervision (GHOS) in Basel, Switzerland, at the Bank for International Settlements (BIS).
• Since creating the committee, it has devised Basel I, Basel II, and Basel III norms. Member countries of the Basel Committee agreed on the Basel III accord in November 2010 after issues with the initial accord became apparent throughout the banking crisis.

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What are Basel 3 Norms in India?

Basel 3 Norms are international banking regulations to strengthen the banking sector's resilience and stability. The Basel Committee on Banking Supervision introduced them as an update to the previous Basel II framework. Basel III Norms require banks to maintain higher capital adequacy ratios and quality of capital to withstand financial stress and economic downturns. The norms introduce stricter regulations for banks' risk management, liquidity management, and leverage ratios. They enhance the measurement and management of risks such as credit risk, market risk, and operational risk.

Also, check out the Ease 2.0 banking reforms index here.

Goal of Basel 3 Norms

Basel III brought about changes intended to reduce risk in the financial system. The goal of the Basel III agreement is to hold greater security in reserve before collecting funds. It strives to improve the banking regulatory framework outlined in the previous Basel agreements. It placed emphasis on enhancing banks’ resilience by taking financial and risk management into account and conducting stress tests in difficult circumstances. It ensures that banks are strengthened when there is a liquidity crisis and the economy is struggling.

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Is Basel 3 Norms Implemented in India?

Yes, Basel 3 norms have been implemented in India. In India, the Reserve Bank of India (RBI) adopted Basel III guidelines aiming to improve the banking sector's ability to deal with financial and economic stress, enhance risk management, and strengthen the banks' transparency. The RBI initially planned to phase in the Basel III norms from April 1, 2013. The full implementation was originally scheduled for March 31, 2019. However, the timeline has been extended on several occasions to allow banks more time to build up their capital reserves.

Under Basel III, Indian banks are required to maintain higher minimum capital requirements. This includes a Common Equity Tier 1 (CET1) capital ratio of 4.5% of risk-weighted assets, a Tier 1 capital ratio of 6%, and a total capital adequacy ratio of 8%. Additionally, banks are required to hold a capital conservation buffer of 2.5% and a counter-cyclical buffer in times of excessive credit growth.

Moreover, Basel III introduces more stringent liquidity norms. The Liquidity Coverage Ratio (LCR) ensures that banks have an adequate stock of unencumbered high-quality liquid assets to cover potential net cash outflows over a 30-day stress period. The Net Stable Funding Ratio (NSFR) requires banks to maintain a stable funding profile in relation to their off-balance sheet activities.

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Pillars of the Basel III Norms in India

The Basel III norms in India are based on three pillars: Minimum Capital Requirements, which enhance the quality and quantity of banks' capital; Supervisory Review Process, which focuses on regulatory oversight and risk management practices; and Market Discipline, which aims to improve transparency and disclosures to promote market discipline.

Pillar 1: Minimum capital requirements

Pillar 1 requires banks to maintain a minimum capital adequacy ratio of 8%. However, the Basel III norms also need banks to maintain many additional capital buffers. This includes the countercyclical capital buffer and a capital conservation buffer.

Pillar 2: Supervisory review process

Pillar 2 requires banks to have a process in place to identify, assess, and manage all of the risks they face. This process is reviewed by the bank's supervisor.

Pillar 3: Market discipline

Pillar 3 requires banks to disclose information about their capital adequacy and risk management practices to the market. This information is used by investors and other stakeholders to assess the risk of investing in the bank.

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Basel 3 Norms and India

The Basel 3 norms implementation in India was set at the deadline of March 2019. The Reserve Bank of India (RBI) decided to extend the Basel III Capital framework to All India Financial Institutions (AIFIs) for all the Banks in India.

Advantages of Basel 3 Norms

• The Indian banks will be less likely to shut down, becoming highly stable.
• An advanced approach can help banks manage their capital and improve their profits.
• Implementing the Basel 3 norms will allow banks to grab better financial opportunities.

Disadvantages of Basel 3 Norms

• An increased credit demand makes the banks grow more in terms of capital requirements. However, this will not be entirely possible under Basel III norms because having a capital backup is compulsory.
• The Basel III norms involve an additional implementation cost that will have an impact on the bank’s returns as well as profitability.
• Indian Banks have still not entirely updated to Basel II norms. The advantage of Basel III norms can only be availed by gradual upgradation to these norms. This is very important for banks with an international presence.
• Risk-weight model weaknesses: The accords’ reliance on historical risk weights may encourage regulatory arbitrage and weaken forward-looking resilience.
• Continued vulnerabilities in big banks: Basel III doesn't eliminate reliance on internal risk models, meaning systemic risk persists among large financial institutions deemed "too big to fail."
• Procyclicality and credit restraint: Higher capital surcharges for systemically important banks may inadvertently tighten credit during downturns—hindering economic recovery.

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Global Phase-in (‘Endgame’) & Its Implications

The Basel III “Endgame” forms the final phase of reforms globally:

• "Endgame" rollout (2025–2028): Targeted at the world’s largest banks (assets > USD 100 billion), with stricter standards to increase capital resilience and uniformity.
• Implementation challenges in global contexts: delays and disagreements: For example, Canada and the UK have delayed certain rules in their respective jurisdictions stating the impact of economic conditions and pressures from tariffs.
• Lack of preparedness in India: Indian banks are still resolving their implementation of phase one of the Basel III capital standards and must now prepare for a phase of higher capital requirements while making sure they are ready to comply at the international level.

Challenges & Costs of Implementation in India

While Basel III aims to bolster banking resilience, its implementation in India has been fraught with challenges:

• High operational and technological costs: Globally, banks (especially G-SIBs) are investing substantially—often over USD 100 million—to meet requirements like FRTB, data management, and system upgrades.
• Structural weaknesses in Indian banks: Public sector banks grappling with elevated NPAs and limited market capitalization have found it tough to raise sufficient capital and meet the liquidity norms.
• Profitability pressure: The enhanced capital and buffer requirements, while improving stability, squeeze Return on Equity—especially for banks already burdened by poor asset quality.
• Need for regulation to be tailored specifically: Experts have argued that the Basel III normative standards are intended for banks in advanced economies and so will have to be tweaked to apply to India. It is understood that risk weights and Tier-1 thresholds need to be India-specific.
• Long-term cost-benefit: While the upfront compliance costs are high, studies reveal that private banks with stronger leverage management have improved profitability and financial resilience post-implementation.

Conclusion

Basel III Norms are crucial to the economy. Basel III was a boon in disguise during the 2008–2009 financial crisis. Although Basel III’s main goal is to tighten bank regulation, supervision, and risk management, some gaps still need to be closed, and banking supervision needs to take decisive action.

We hope all your doubts regarding the Basel 3 Norms have been addressed. Testbook provides study material for various competitive examinations. Ace your UPSC preparation with the UPSC Online Coaching and the Testbook App!