Wednesday, February 1, 2012

Bank Branch Audit 2011-12 and Basel III an intrduction

Bank Branch Audit-Quick Review of verification of Advances and other issues.
CA.T. R. Chandrasekaran.
Almost all banks unanimously follow as far as branch audit is concerned one uniform system that is predetermined date for completion of the audit as well as placing the annual audited accounts to their Boards. In this context a quick review of the audit procedures to be adopted by the branch auditors without offending the RBI instructions and the responsibilities of the auditors are discussed below.
Chartered Accountants may be aware that RBI is considering whether the statutory branch audit can be dispensed with in view of the Core Banking Solution advantage or at least raise the cut off limit for advances to Rs 5 crore /Rs 10 crore in which case number of branches required to be audited will be reduced and in turn reduce the opportunities for chartered Accountants for doing Bank Audit.
A. General Guide lines for Branch audit.
Certain amount of planning is necessary before the commencement of the audit which includes:-
1) Ensuring the availability of audit staff for quick completion;
2) Getting conversant with the latest circulars issued by RBI and respective banks;
3) Updating the knowledge about Accounting Standards issued by the ICAI as applicable to banks;
4) Collecting the information relating to the business size of the branches to be audited in order to ascertain the manpower requirements and the number of days required to complete the audit;
5) Knowing the location of the branches, availability of transport and tickets, nearby hotels, timings of the branches etc.,
6) Selecting the audit team should include persons who have the knowledge of the use of computers and the various computer operating systems.
System of keeping books and the nomenclature used by banks are not identical among banks. Moreover all banks are now under Core Banking Solutions system where transactions of the branch are processed only at the processing centres. In such branches the statements required for the purpose of audit are auto generated and require special knowledge for verifying the same .In the case of banks since there is a good system of internal control and audit, hence the auditor need not spend much of his time on verification of deposit items and interest calculations, random test audit may be resorted to. However more vigil and verification is required in-respect of credit related disbursement made by the bank. Similarly, unadjusted suspense accounts both debit and credit entries requires greater scrutiny from the point of true and fair view concept. In carrying out audit and verification, the auditor should keep in mind the concept of 'materiality' and items which do not materially affect the overall presentation of the financial statements may be ignored. 

 Master Circulars of RBI (2011-12)
Reserve Bank of India issued numerous circulars on Income Recognition, asset Classification and on provisions since april,1992. Many of these circulars are now outdated, consolidating all the earlier circulars issued by them, RBI is issuing a master circular every year. The circular issued for the year 2011-12 which is more relevant for the purpose of branch audit is listed here. This circular can be downloaded from the RBI's official website
DBOD.No.BP.BC.12 /21.04.048/2011-12 dt. 01 07 2011
Master Circular
Prudential Norms on Income Recognition Asset Classification and provisioning pertaining to advances
Certain basic details about the classification of advances and provisioning norms are given below
Non-performing assets
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.
A non-performing asset (NPA) is a loan or an advance where;
i) interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,
ii) the account remains 'out of order' as mentioned below in respect of an Overdraft/Cash Credit (OD/CC),
iii) the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
(iv) the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops,
(v) the instalment of principal or interest thereon remains overdue for one crop season for long duration crops.
Banks should, classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.
'Out of Order' status
An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'.
Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank.
Income recognition – Policy.
The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts. Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit. If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised.
Reversal of income
If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also. In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.
Categories of NPAs
Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:
a) Sub-standard Assets
b) Doubtful Assets
c) Loss Assets
Sub-standard Assets
With effect from 31 March 2005, a sub-standard asset would be one, which has remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrower/ guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterized by the distinct possibility that the banks sustain some loss, if deficiencies are not corrected.
Doubtful Assets
An asset would be classified as doubtful if it has remained in the sub-standard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, - on the basis of currently known facts, conditions and values - highly questionable and improbable.
Loss Assets
A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollected and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.
The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines. In conformity with the prudential norms, provisions should be made on the nonperforming assets on the basis of classification of assets into prescribed categories as detailed below. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against substandard assets, doubtful assets and loss assets as below:
Loss assets
Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.
Doubtful assets
i. 100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.
ii. In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 25 percent to 100 percent of the secured portion depending upon the period for which the advance has remained” doubtful” category:
Provision Requirement
Up to one year 25%
One to three years 40%
More than three years 100%
Note: Valuation of Security for provisioning purposes
With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors.

Substandard assets
(i) A general provision of 15 percent on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available.
(ii) The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance. However, in view of certain safeguards such as escrow accounts available in respect of infrastructure lending, infrastructure loan accounts which are classified as sub-standard will attract a provisioning of 20 per cent instead of the aforesaid prescription of 25 per cent. To avail of this benefit of lower provisioning, the banks should have in place an appropriate mechanism to escrow the cash flows and also have a clear and legal first claim on these cash flows.
The provisioning requirement for unsecured ‘doubtful’ assets is 100 per cent.
Unsecured exposure is defined as an exposure where the realisable value of the security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, ab-initio, of the outstanding exposure. ‘Exposure’ shall include all funded and non-funded exposures (including underwriting and similar commitments). ‘Security’ will mean tangible security properly discharged to the bank and will not include intangible securities like guarantees (including State government guarantees), comfort letters etc.
(iii) In order to enhance transparency and ensure correct reflection of the unsecured advances in Schedule 9 of the banks' balance sheet, it is advised that the following would be applicable from the financial year 2009-10 onwards:
a) For determining the amount of unsecured advances for reflecting in schedule 9 of the published balance sheet, the rights, licenses, authorisations, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured.
b) However, banks may treat annuities under build-operate-transfer (BOT) model in respect of road / highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities subject to the condition that banks' right to receive annuities and toll collection rights is legally enforceable and irrevocable.
c) Banks should also disclose the total amount of advances for which intangible securities such as charge over the rights, licenses, authority, etc. has been taken as also the estimated value of such intangible collateral. The disclosure may be made under a separate head in "Notes to Accounts". This would differentiate such loans from other entirely unsecured loans.
Standard assets
(i) The provisioning requirements for all types of standard assets stands as below.. Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis:
(a) direct advances to agricultural and Small and Micro Enterprises (SMEs) sectors at 0.25 per cent;
(b) advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;
(c) housing loans extended at teaser rates and restructured advances as as indicated below
Provisioning for housing loans at teaser rates
It has been observed that some banks are following the practice of sanctioning housing loans at teaser rates i.e. at comparatively lower rates of interest in the first few years, after which rates are reset at higher rates. This practice raises concern as some borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years, becomes effective. It has been also observed that many banks at the time of initial loan appraisal, do not take into account the repaying capacity of the borrower at normal lending rates. Therefore, in view of the higher risk associated with such loans, the standard asset provisioning on the outstanding amount has been increased from 0.40 per cent to 2.00 per cent with immediate effect. The provisioning on these assets would revert to 0.40 per cent after 1 year from the date on which the rates are reset at higher rates if the accounts remain ‘standard’.
Restructured Advances:
i. Restructured accounts classified as standard advances will attract a provision of 2 per cent in the first two years from the date of restructuring. In cases of moratorium on payment of interest/principal after restructuring, such advances will attract a provision of 2 per cent for the period covering moratorium and two years; and
ii. ii. Restructured accounts classified as non-performing advances, when upgraded to standard category will attract a provision of 2 per cent in the first year from the date of up gradation
(d) All other loans and advances not included in (a) (b) and (c) above at 0.40 per cent
(ii) The provisions on standard assets should not be reckoned for arriving at net NPAs.
(iii) The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet.
(iv) It is clarified that the Medium Enterprises will attract 0.40% standard asset provisioning. The definition of the terms Micro Enterprises, Small Enterprises, and Medium Enterprises shall be in terms of Master Circular RPCD .SME & NFS .BC. No. 9/06.02.31/2010-11 dated July 1, 2010 on Lending to Micro, Small & Medium Enterprises (MSME) Sector
State Government guaranteed exposures.
Reserve Bank of India has recently revised the requirements of invocation of State Government guarantee for asset classification and provisions norms for these exposures. As per the revised guidelines, a State Government guaranteed advance shall be classified as substandard or doubtful or loss, if interest and / or principal or any other amount due to the bank (even without invocation of the Statement Government Guarantee) remains overdue for more than 180 days and attract appropriate provisioning norms.
With effect from the year ending March 31, 2006, a State Government guarantee advance shall be classified as substandard or doubtful or loss, if interest and / or principal or any other amount due to the bank (even without invocation of the State Government Guarantee) remains overdue for more than 90 days and attract appropriate provisioning norms.
Central Govt. Guaranteed accounts
Advances Guaranteed by the Central Govt. may be treated as performing assets until the guarantee is invoked and repudiated. This exemption from classification of Government guaranteed advances as NPA is not for the purpose of recognition of income.
Agricultural Advances
For Agricultural direct advances (a) a loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons. (b) a loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season. For agricultural advances various guide lines were issued by RPCD and DBOD of RBI with respect to restructuring and additional facilities to such direct advances affected by natural calamities.
RBI vide their Circular DBOD. NO. BP.BC.21/21.04.048/2006 dt.12/07/07 has issued fresh guide lines for making additional provisioning in respect of certain advances. In terms of the above circular, the general provisioning requirement on standard advances in specific sectors, i.e., personal loans, loans and advances qualifying as capital market exposures, residential housing loans beyond Rs.20 lakh and commercial real estate loans has been increased from 0.40 per cent to 1.0 per cent, for the funded outstanding on portfolio basis. Agricultural (direct) and SME sector 0.25
Write-off at Head Office Level
Banks may write-off advances at Head Office level, even though the relative advances are still outstanding in the branch books. However, it is necessary that provision is made as per the classification accorded to the respective accounts. In other words, if an advance is a loss asset, 100 percent provision will have to be made on such advances.
Additional Provisions for NPAs at higher than prescribed rates
The regulatory norms for provisioning represent the minimum requirement. A bank may voluntarily make specific provisions for advances at rates which are higher than the rates prescribed under existing regulations, to provide for estimated actual loss in collectible amount, provided such higher rates are approved by the Board of Directors and consistently adopted from year to year. Such additional provisions are not to be considered as floating provisions. The additional provisions for NPAs, like the minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAsS
Treatment of interest suspense account
Amounts held in Interest Suspense Account should not be reckoned as part of provisions. Amounts lying in the Interest Suspense Account should be deducted from the relative advances and thereafter, provisioning as per the norms, should be made on the balances after such deduction.
Provisioning Coverage Ratio
i. Provisioning Coverage Ratio (PCR) is essentially the ratio of provisioning to gross non-performing assets and indicates the extent of funds a bank has kept aside to cover loan losses.
ii. From a macro-prudential perspective, banks should build up provisioning and capital buffers in good times i.e. when the profits are good, which can be used for absorbing losses in a downturn. This will enhance the soundness of individual banks, as also the stability of the financial sector. It was, therefore, decided that banks should augment their provisioning cushions consisting of specific provisions against NPAs as well as floating provisions, and ensure that their total provisioning coverage ratio, including floating provisions, is not less than 70 per cent. Accordingly, banks were advised to achieve this norm not later than end-September 2010.
iii. Majority of the banks had achieved PCR of 70 percent and had represented to RBI whether the prescribed PCR is required to be maintained on an ongoing basis. The matter was examined and till such time RBI introduces a more comprehensive methodology of countercyclical provisioning taking into account the International Standards as are being currently developed by Basel Committee on Banking Supervision (BCBS) and other provisioning norms, banks were advised that :
a) the PCR of 70 percent may be with reference to the gross NPA position in banks as on September 30, 2010;
b) the surplus of the provision under PCR vis-a-vis as required as per prudential norms should be segregated into an account styled as “countercyclical provisioning buffer”, computation of which may be undertaken as per the format given RBI in the Master circular.
c) this buffer will be allowed to be used by banks for making specific provisions for NPAs during periods of system wide downturn, with the prior approval of RBI.
iv. Some of the banks that had been granted extension of time beyond the stipulated date i.e. September 30, 2010 for achieving the PCR of 70 percent on their request, should calculate the required provisions for 70 percent PCR as on September 30, 2010 and compute the shortfall there from. This shortfall should be built up at the earliest and these banks should reassess the further time required beyond March 31, 2011, if any, to build up the buffer and seek approval from RBI.
v. The PCR of the bank should be disclosed in the Notes to Accounts to the Balance Sheet.
Accounts where there is erosion in the value of security/frauds committed by borrowers
In respect of accounts where there are potential threats for recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment the asset should be straightaway classified as doubtful or loss asset as appropriate:
i. Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets.
ii. If the realisable value of the security, as assessed by the bank/approved valuers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. It may be either written off or fully provided for by the bank.
Advances under consortium arrangements
Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books.
C. Tax Audit Report
Tax Audit Report to be given by the auditors in the case bank/branches of the bank are same as that is applicable to any corporate assessee.
Form 3 CA and form 3 CD prescribed under the Income Tax rules are applicable
Certain particulars in Form 3 CD can not be filled up at the branch level which can be filled up only at the Head Office level. In such cases Branch auditor has to indicate in the Form 3 CD such details have to be filled up at H.O. Level. Examples of such details are Bonus paid, contribution to PF, Gratuity etc., and Section 269SS is not applicable to banks, but section 269T is applicable.
The following points in the Form 3 CD has got greater impact on the banks and the auditors have to bestow more attention to the same while finalising Tax Audit Report
i) Particulars of each repayment of loan or deposit in an account exceeding the limit specified in section 269T made during the previous year
Name, address and permanent account number (if available with the assessee) of the payee, Amount of repayment, Maximum amount outstanding in the account at any time during the previous year, Whether the repayment was made otherwise than by account payee cheque or account payee bank draft
ii)(a) Whether the bank has complied with the provisions of Chapter XVII-B regarding deduction of tax at source and regarding the payment thereof to the credit of the Central Government. [Yes/No]
(b) If the provisions of Chapter XVII-B have not been complied with, please give the following details*, namely:-
(i) Tax deductible and not deducted at all
(ii) Shortfall on account of lesser deduction than required to be deducted
(iii) Tax deducted late
(iv) Tax deducted but not paid to the credit of the Central Government
*Please give the details of cases covered in (i) to (iv) above.
D .Long Form Audit Report (LFAR)
LFAR is not a question and answer format and usage of "yes' and “no" to be avoided. If the space provided is not adequate separate sheets has to be used.
Format for Branch LFAR is different from the Banks LFAR and Branch auditors have to be familiar with that also, so that Branch auditors can furnish feedback to the Statutory Central Auditors in order to enable them to incorporate such remarks in the banks LFAR. All details required for finalising the branch LFAR has to be collected before leaving the branch as the auditor is not entitled to claim separate TA and HA. Regarding the advances collection of all the details required for filling up the LFAR would be much helpful to the Branch Auditor to complete his LFAR. It is better that LFAR to be completed at the branch itself and discuss with manager and finalise after incorporating his views also.

Base - lII—Norms and its applicability to Banks.
An Introduction
Basel standards are developed by the Basel Committee on Banking Supervision1974, now comprises, a group within the Bank for International Settlements in Basel, Switzerland. The committee, which was set up by the Group of Ten countries from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.
In the United States, four federal regulatory agencies are represented on the Basel Committee on Banking Supervision: the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision
In light of the recent global financial crisis. The Basel III accord more than triples the amount of capital banks must keep on hand to absorb losses in tough times.
Indian banks will have to start finding maintain adequate capital to sustain themselves during periods of economic strain.
Banks across the world will have to follow Basel III accords for disclosing the size and quality of their capital safety buffers from ways to preserve capital and use it more efficiently, to comply with regulators capital regulations minimum tier-I capital of 7 per cent, while total capital must be at least 9 per cent of risk-weighted assets under the Basel III draft guidelines.
Implementation of the minimum capital requirements will begin from January 2013 and should be fully implemented by March 31, 2017.This lengthy implementation. Period is meant to reduce the pressure on banks to race to raise capital.
Indian banks whose Tier-I capital includes instruments, which no longer qualify as regulatory
Capital instruments will be forced to raise funds over the next 2 years. .

Who is subject to Basel III, and what is required?
The Basel accords are voluntary agreements among national banking authorities. The countries signing on to the accords agree to implement the standards through national laws or regulations, and have considerable discretion in how they go about it. The standards have also been implemented by countries that are not parties to the accord.
Basel II, for instance, was applicable to all countries in the Organization for Economic Co-operation and Development, but not all countries applied the standards in the same way.
How does Basel III differ from Basel I and Basel II?
The original Basel Capital Accord -- or Basel I -- was developed in 1988 to strengthen the stability of the international banking system and maintain sufficient consistency in the regulation of capital requirements. Critics of Basel I saw it as leaving banks too much latitude in interpreting the standards, enabling them to take excessive risks in lending. The model framework was also criticized for leading to regulatory arbitrage.
The much more complicated Basel II standards (formally titled the “International Convergence of Capital Measurement and Capital Standards: A Revised Framework”) replaced Basel I in 2004. They focused on improving risk management among internationally active banks and further improving the consistency of capital regulations. Basel II also required banks to consider the ability of corporate borrowers to repay loans when lending capital. Banks were required to look at a corporate borrower’s risk management and governance structure as well as its credit rating and history.
Basel III establishes more stringent capital requirements, tripling the amount of capital banks must keep on hand to absorb losses during financial crises. It requires banks to maintain higher common equity than before, including a capital conservation buffer of 2.5% of their assets.
Are the standards and practices under the Basel accords enforceable by law, and how are they enforced?
The Basel Committee on Banking Standards has no enforcement authority. Each nation is expected to implement the Basel standards through national laws or regulations, as best suited to its own system.
What are the penalties for noncompliance with Basel III?
Each nation (or group of nations, such as the European Union) that signs the Basel accords implements its own supervisory and enforcement system. Regulatory authorities can use the threat of fines or revoked licenses to encourage compliance with Basel standards.
Under Basel III, if a bank fails to maintain the required capital conservation buffer, it could face restrictions on payments to executives and shareholders.
The capital requirement as suggested by the proposed Basel III guidelines would necessitate Indian banks1 raising Rs. 600000 crore in external capital over next nine years, besides lowering their leveraging capacity. It is the public sector banks that would require most of this capital, given that they dominate the Indian banking sector. Further, a higher level of core capital could dilute the return on equity for banks. Nevertheless, Indian banks may still find it easier to make the transition
to a stricter capital requirement regime than some of their international counterparts since the regulatory norms on capital adequacy in India are already more stringent, and also because most Indian banks have historically maintained their core and overall capital well in excess of the regulatory minimum.

As for the liquidity requirement, the liquidity coverage ratio as suggested under the proposed Basel III guidelines does not allow for any mismatches while also introducing a uniform liquidity definition.
Comparable current regulatory norms prescribed by the Reserve Bank of India (RBI), on the other hand, permit some mismatches, within the outer limit of 28 days.
The key elements of the proposed Basel III guidelines include the following:
1. Definition of capital made more stringent, capital buffers introduced and Loss absorptive capacity of Tier 1 and Tier 2 Capital instrument of internationally active banks proposed to be enhanced.
2. Forward looking provisioning prescribed
3. Modifications made in counterparty credit risk weights
4. New parameter of leverage ratio introduced
5. Global liquidity standard prescribed
The Basel committee is expected to finalise the Basel III guidelines by December 2011, following which a six year phase-in period beginning 2013 is likely to be prescribed. This lengthy process is only to assess the impact of the proposed Basel III guidelines on Indian banks” capitalization profile and their liquidity position till 2018”. The impact of the suggested norms relating to forward looking provisioning and counterparty risk weights are not captured in this note, since for that more granular data would be required and these are not available currently in the public domain. The norms on “leverage ratio” and “net stable funding ratio” are also not discussed in this note as they are likely to be implemented not before 2019.

In India Reserve Bank of India has issued a draft circular DBOD.BP.BC.71/21.06.701/2011-12 dt.,30/12/2011 to all the commercial bank with request to send feed back/suggestions on or before 15/02/2012.
Minimum Capital Requirements
• Common Equity Tier 1 (CET1) capital must be at least 5.5% of risk-weighted assets (RWAs);
• Tier 1 capital must be at least 7% of RWAs; and
• Total capital must be at least 9% of RWAs.
Capital Conservation Buffer
• The capital conservation buffer in the form of Common Equity of 2.5% of RWAs.
Transitional Arrangements
• It is proposed that the implementation period of minimum capital requirements and deductions from Common Equity will begin from January 1, 2013 and be fully implemented as on March 31, 2017.
• Capital conservation buffer requirement is proposed to be implemented between March 31, 2014 and March 31, 2017.
• The implementation schedule indicated above will be finalized taking into account the feedback received on these guidelines.
• Instruments which no longer qualify as regulatory capital instruments will be phased-out during the period beginning from January 1, 2013 to March 31, 2022.
Enhancing Risk Coverage
• For OTC derivatives, in addition to the capital charge for counterparty default risk under Current Exposure Method, banks will be required to compute an additional credit value adjustments (CVA) risk capital charge.
Leverage Ratio
• The parallel run for the leverage ratio will be from January 1, 2013 to January 1, 2017, during which banks would be expected to strive to operate at a minimum Tier 1 leverage ratio of 5%. The leverage ratio requirement will be finalized taking into account the final proposal of the Basel Committee.