Basel I, II, III…
…and, perhaps, we should be prepared for Basel IV some years down the line!
The new Basel III norms announced by the Reserve Bank of India (RBI) on
Wednesday will trigger a huge chase for capital by banks. Conservative estimates
place the additional capital required at about . 1.5 trillion. Fortunately, the new norms
come into effect in a phased manner over January 1, 2013-March 31, 2018, so that
banks have a little over five years to find the required capital. That is small
consolation, especially for public sector banks (PSBs). For, while both private and
public sector banks will need to tap the market to raise funds, Basle III has wider
implications for the latter and, by extension, for taxpayers. The reason is the
government is neither willing to relax its stranglehold on PSBs (read, reduce its stake
to less than 51% by allowing them to tap the market), nor does it have the funds to
infuse capital of this order. What does that mean for the hapless PSBs? It means they
will not be able to keep pace with the credit demands of a growing economy if the
government does not budge from its position that it wants to retain majority
ownership. In the alternative, PSBs will get the money but at the expense of the
hapless taxpayer. With the fiscal deficit, already at 5.9% of GDP, and inflation, as
measured by the consumer price index, still hovering near 9%, that’s not a fate we
would wish on the people of this country. The sensible thing for the government to do
is to bring down its stake in PSBs to, say, 26% (enough to block a special resolution)
while ensuring that shareholding is widely diversified and the RBI, as the banking
regulator, remains the final arbiter of who is ‘fit-and-proper’ to hold bank shares in
excess of 5%.
The reality is that the best of prudential norms like capital adequacy are only a buffer.
They cannot, and will not, eliminate crises brought on by human greed and folly. So,
stringent norms must be backed by an alert regulator, strong and competent
supervision and a proper incentive system to rein in the present system that allows
banks to privatise profits and socialise losses. Even then, the incidence of frauds and
crises can only be reduced, not eliminated in any foolproof manner. So here’s Basel
III, till the next crisis and Basel IV!