1. Banking andBanking and
LegalLegal
FrameworksFrameworks
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2. ContentContent
Banking Regulation Act-1949.
Reserve Bank of India Act- 1934.
Basel I, II, III.
Risk faced by Bank.
Capital Adequacy Ratio.
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3.  It empowered the Reserve Bank of India
(RBI) "to regulate, control, and inspect the
banks in India".
Framework for regulation and supervision
of commercial banking activity.
In 1965 the act was amended to cover
cooperatives banks.
 The emphasis of supervision has shifted
from CAMELS to more risk based approach.
Banking RegulationBanking Regulation
Act- 1949Act- 1949
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4. Banking Regulation Act- 1949 defines a
banking company as “a company which
transact the business of banking in India”
 Sec 7 of Banking Regulation Act prohibits a
company other than banking company from
using the word “bank”, “banker”, “banking”,
or “banking company”.
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cont...cont...

5. Reserve Bank OfReserve Bank Of
India Act-1934India Act-1934
RBI was established on 1st
April 1935.
RBI was originally Privately owned.
RBI was Nationalised in Year 1949.
Central Office was initially established in
Calcutta and moved to Mumbai in 1937.
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6. Structure of RBIStructure of RBI
 RBI Have 20 Directors :
• The Governor
• Four Deputy Governors
• One Govt. Official from Ministry of Finance.
• Ten Nominated Director, nominated by Govt.
• Four Directors to represent Headquarters at
Mumbai, Kolkata, Chennai & New Delhi.
 Appointed/ Nominated for period of Four Years.
 RBI has Head office in Mumbai & other 22 regional
offices.
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7. Function of RBIFunction of RBI
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1. Bank of Issue
2. Banker to Government
3. Bankers' Bank and Lender of the Last Resort
4. Controller of Credit
5. Custodian of Foreign Reserves
6. Promotional functions

8. Basel NormsBasel Norms
 Basel guidelines refer to broad supervisory
standards.
 Currently there are 27 member nations in the
committee.
 The set of agreement by the BCBS are called
Basel accord.
 It mainly focuses on risks to banks and the
financial system.
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9. Basel Norms cont...Basel Norms cont...
The purpose of the accord is to ensure that
financial institutions have enough capital.
 India has accepted Basel accords for the
banking system.
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10. Establishment ofEstablishment of
Basel CommitteeBasel Committee
It was formed in response to the messy
liquidation of a Cologne-based bank in 1974.
 On 26 June 1974, a number of banks had
released Deutsche Mark to the Bank Herstatt
in exchange for dollar.
 Due differences in the time zones, there was
a lag in the dollar payment.
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11. Cont...Cont...
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This incident prompted G-10 nation to form
Basel committee on banking supervision.

12. Basel I, II, IIIBasel I, II, III
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13. Basel IBasel I
In 1988, BCBS introduced capital
measurement system called as Basel 1.
It focused almost entirely on credit risk.
It defined capital and structure of risk weights
Assets (RWA)for banks.
 India adopted Basel 1 guidelines in 1999.
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14. Cont...Cont...
This classification system grouped a bank's
assets into five risk categories:
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Risk WeightsRisk Weights Asset ClassificationAsset Classification
0% Cash, government and debt and any OECD government debt
0%, 10%, 20% or 50% Public sector debt
20% Development bank debt, OECD bank debt, OECD securities
firm debt, non-OECD bank debt (under one year maturity)
and non-OECD public sector debt, cash in collection
50% Residential mortgages
100% private sector debt, non-OECD bank debt (maturity over a
year), real estate, plant and equipment, capital instruments
issued at other banks

15. Cont...Cont...
Calculation of RWA
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Assets
Category
Risk
Weight
Capital
ratio
Amount RWA Minimum
Capital
Requirement
Treasury
Bond
0% 8% $1000 $0 $0
Municipal
Bond
20% 8% $1000 $200 $16
Residential
Mortgage
50% 8% $1000 $500 $40
Unsecured
Loan
100% 8% $1000 $1000 $80

16. Pitfalls of Basel IPitfalls of Basel I
Limited differentiation of credit risk.
Static measure of default risk.
No recognition of term-structure of credit
risk .
Simplified calculation of potential future
counterparty risk
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17. Basel IIBasel II
In June ’04, Basel II guidelines were published
by BCBS.
Guidelines were based on three parameters,
which the committee calls it as pillars.
– Capital Adequacy Requirements
– Supervisory Review
– Market Discipline
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18. ChangesChanges
Banks are required to maintain a minimum
capital to Risk-weighted assets ratio (CRAR) of
9% on an ongoing basis.
Two approaches for computing RWAs for Credit
Risk:
– Standardized Approach:
– Foundational Internal Rating Approach:
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19. Cont...Cont...
Operational & Market Risk
Three approaches
– Basic Indicator Approach
– Standardized Approach
– Advanced Measurement Approach
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20. Basel II-3PillarsBasel II-3Pillars
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21. Basel IIIBasel III
In 2010, Basel III guidelines were released.
These guidelines were introduced in response
to the financial crisis of 2008.
Basel III norms aim at making most banking
activities such as their trading book activities
more capital-intensive.
The guidelines aim to promote resilient
banking system by focusing on four vital
banking parameters.
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22. Cont...Cont...
 The minimum amount of equity, as a
percentage of assets, will increase from 2% to
4.5%
 There is also an additional 2.5% "buffer"
requirement.
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23. Risks faced by BanksRisks faced by Banks
Credit risk.
Country and transfer risk.
Interest rate risk.
Liquidity risk.
Operational risk.
Settlement Risk.
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24. Capital AdequacyCapital Adequacy
RatioRatio
Definition:
Capital Adequacy Ratio (CAR) is defined as the
ratio of bank's capital to its risk assets. Capital
Adequacy Ratio (CAR) is also known as
Capital to Risk (Weighted) Assets Ratio
(CRAR).
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25. Cont...Cont...
 In1992-93 banks are required to have a
minimum capital of 8%.
In 1998-99. the CRAR to be raised to 10%.
Minimum requirements of capital fund in India:
Existing Banks 09 %
New Private Sector Banks 10 %
Banks undertaking Insurance business 10 %
Local Area Banks 15%
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26. Cont...Cont...
Concepts of Capital Adequacy Norms:
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27. Thank YouThank You
Presented By:Presented By:
Bhavini Patel - 27Bhavini Patel - 27
&&
Shradha Pereira - 32Shradha Pereira - 32
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