Introduction Of Basel
Capital is the starting point for any business and, similarly, in a bank, capital is one of the most critical factors which decide its financial soundness. In the banking industry, there are three major risks i.e. Credit, Market and Operational. Based on its risk appetite, each bank prepares its business plan. It is important to monitor a Bank’s financial soundness on a regular basis on some common measurable criteria. A sufficiently justifiable capital level is fair yard stick for a stakeholder, including the regulator, to assess the overall financial position of the bank. Also from the bank’s perspective, there is always a cost of capital. Hence, it will try to leverage its capital at optimum level. Having said that, it is important for the bank to maintain sufficient capital for foreseeable future, else it will impact the growth of the business.
Capital Adequacy ratios need to be Computed and reported as per applicable Basel III norms for Scheduled Commercial Banks and Foreign banks for the year 31.03.2017. Details of earlier applicable Basel II norms can be seen from the Guidance Note on Audit of Banks 2016 edition for reference. However, it is to be noted that calculation of Capital Adequacy Ratio as per Basel II norms is still applicable to Urban Co-operative Banks.
Basel III norms are more risk-sensitive than the erstwhile regime and aims to significantly reduce the incentive for capital arbitrage. Higher risks will at least, in principle, result in higher risk weights and, thus, higher capital requirements.