Nepal Rastra Bank (NRB), the banking sector regulator, is further strengthening shock absorbing capacity and quality of liquid resources of banks and financial institutions by rolling out Basel III framework -- a globally accepted standard created to enhance banking sector´s risk management capacity. “If things go according to plan, we will float a consultative document (on Basel III) within the first quarter of the next fiscal year (beginning mid-July) to get feedbacks on new regulatory requirements,” a high-ranking NRB official told Republica. He, however, did not disclose when the new rules would be phased in. Basel III accord, which was introduced by the Basel Committee on Banking Supervision in September 2010, is an advanced version of the Basel II framework. Basel II basically focused on minimum capital requirements, supervisory review process and market discipline. In short, the framework not only encapsulated credit and market risks but also operational risk. Although Nepal has not embraced all Basel II provisions due to the non-complexity of the business here, it has complied with whatever was deemed necessary to enhance the performance of the banking sector and insulate it from possible dangers. “Since Basel II is a building block for Basel III, many established banks are not worried about implementation of Basel III norms as they are in a position to meet the new requirements,” a banker told Republica on condition of anonymity. “But this might not be the case for new commercial banks that are vulnerable to various risks.” One of the focuses of the Basel III framework is raising the capital reserves to enable them to absorb various shocks. Under Basel III, banks must raise core tier 1 capital -- which comprises paid-up capital (cash injected by shareholders) and general reserves (like retained earnings) -- from 4.5 percent of the total risk weight exposure in January 2013 to six percent by January 2015. Since it is mandatory for commercial banks based in Nepal to maintain tier 1 capital of six percent at present, the new provision is not expected to make any difference to the banking sector. Likewise, minimum capital fund requirement, which should stand at eight percent of the total risk weight exposure under Basel III framework, currently stands at 10 percent for commercial banks. This means banks based in Nepal are capable of meeting Basel III capital requirements. “But what might come as a bit of surprise is the portion of equity in the core capital,” the NRB official said. Basel III accord says at least 82.3 percent of the tier 1 capital must comprise common equity, or paid-up capital. In addition, common equity will also be required to build ´capital conservation buffer´. This means banks that do not meet these requirements should inject additional capital or issue rights or bonus shares to raise capital. Otherwise, they may be restricted from distributing dividends, according to Basel III accord. “Another challenge that banks might face is maintaining liquidity standard,” the NRB official further said. Under this, banks must hold sufficient high quality liquid resource to survive at least one month of crisis. Similarly, banks would also be encouraged to fund their activities with more stable sources of fund so as to make them resilient. "These requirements may compel many banks to diversify their deposit portfolio as those depending too much on institutional deposits may face difficulties while complying with these rules," the official said. "Others, like those generating huge profits, may also call some of the Basel III provisions as counterproductive, as they will have to set aside funds to create buffers to counter economic cycle." But in the end these measures will contribute to long-term sustainability of banks and ensure sstability in the financial sector, the official further said, clarifying, “Not all Basel III provisions would be embraced by Nepal.”
Posted on: Thu, 27 Jun 2013 09:59:05 +0000
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