Basel Norms and Financial Inclusion

BASEL COMMITTEE

After economic crisis in 1973, World economy was going through tough Phase. In response to these and other disruptions in the international financial markets, the central bank governors of the G 10 countries established a Committee on Banking Regulations and Supervisory Practices at the end of 1974 which is latterly renamed as Basel Committee on Banking Supervision. The Committee’s decisions has no legal force. The Committee formulates minimum standards for the banking regulation and supervision of banks and expects individual countries to implement them with their own way. There are three reports are released by Basel committee as: Basel - I, Basel - II and Basel – III.

Basel – I:

Basel- I is also referred as: “The International Convergence of Capital Measurements and Capital Standards “.
Under Basel- I, a capital measurement system commonly referred to as the Basel Capital Accord (1988 Accord) was approved by the G10 Governors and released to banks in July 1988 .This Capital Accord called for minimum Capital Adequacy Ratio to 8%. But According to RBI, CAR should be more than 9%. Normally Indian banks are maintaining more than 12 %.

Capital Adequacy Ratio (CAR): Total capital (Tier I + Tier II) / Total Risk Weighted Assets.

Tier 1 Capital: Common stock, preferred stock that is irredeemable and non-cumulative, and retained earnings.
Tier 2 Capital: revaluation reserves of fixed assets and long-term holdings of equity securities, general loan-loss reserves, hybrid (debt/equity) capital instruments, and subordinated debt.
Risk Weighted Asset: Different Assets of the bank have different risk profile. Like Government security have 0% risk and Mortgage loan have 50 % risk. Let us suppose bank have Rs 100 Government security and Rs 100 Mortgage loan. Therefore, total Asset of the bank: 100 + 100 = 200. And, Total Risk Assets of the bank: 100 (0 % risk) + 100(50 % risk) = 50.

Basel – II:

In response to the banking crises of the 1990s and criticisms of Basel - I, the Basel Committee decided in 1999 to propose a new, more comprehensive capital adequacy accord.
Basel – II guidelines came in June 2004.
This accord, known formally as A Revised Framework on International Convergence of Capital Measurement and Capital Standards and informally as “Basel II”.

There are three pillars of Base -II:

Minimum capital requirements, which sought to develop and expand the standardised rules set out in the 1988 Accord.
Supervisory review of an institution's capital adequacy and internal assessment process
Effective use of disclosure as a lever to strengthen market discipline and encourage sound banking practices.

This norm has also defined three types of Risks:

Market risk means the risk that the value of your investment can fluctuate . e.g. property and shares.
Credit risk means the chance that you won't get all your money back, e.g. Mortgage.
Operating risk defines the risk that originates from an organizations people and processes. This type of risk accounts for fraudulent activity, mistakes by employees, and even legal risks.

Basel - III:

Basel - III guidelines released in 2010.
RBI set the time period for implementing Base – III from 1 April 2013 to 31st March 2019.
Basel III added a recommendation for banks to maintain an amount of tier 1 capital equal to at least 6% of total risk-weighted assets and maintain a total capital adequacy ratio of 10.5%.

Reforms under Basel- III:

Capital Conservation Buffer: Banks will be required to hold a capital conservation buffer of 2.5%. The aim of asking to build conservation buffer is to ensure that banks maintain a cushion of capital that can be used to absorb losses during periods of financial and economic stress.
Leverage Ratio: A leverage ratio is the relative amount of capital to total assets (not risk-weighted). This aims to put a cap on swelling of leverage in the banking sector on a global basis. 3% leverage ratio of Tier 1 will be tested before a mandatory leverage ratio is introduced in January 2018.
Liquidity requirements - a minimum liquidity ratio, the Liquidity Coverage Ratio (LCR), intended to provide enough cash to cover funding needs over a 30-day period of stress; and a longer-term ratio, the Net Stable Funding Ratio (NSFR), intended to address maturity mismatches over the entire balance sheet.
Additional requirements for systemically important banks, including additional loss absorbency and strengthened arrangements for cross-border supervision and resolution

FINANCIAL INCLUSION

The objective of Financial Inclusion is to provide financial services to each and every citizen of the country poor in particular.

Why financial inclusion?

As per Census 2011, 58.7% households are availing banking services in the country. There are 102,343 branches of Scheduled Commercial Banks (SCBs) in the country, out of which 37,953 (37%) bank branches are in the rural areas and 27,219 (26%) in semi-urban areas, constituting 63 per cent of the total numbers of branches in semi-urban and rural areas of the country. However, a significant proportion of the households, especially in rural areas, are still outside the formal fold of the banking system.

Government and Reserve Bank of India (RBI) are taking various initiatives to achieve financial inclusion:

Business Correspondent:

Business Correspondents are retail agents engaged by banks for providing banking services at locations other than a bank branch/ATM.
Banks had been permitted to engage individuals/ entities as BC like retired bank employees, retired teachers, retired government employees, ex-servicemen, individual etc.

Business Facilitators:

Business Facilitators can refer clients, pursue the clients' proposal and facilitate the bank to carry out its transactions, but cannot transact on behalf of the bank.

Swabhimaan Campaign:

Under “Swabhimaan” - the Financial Inclusion Campaign was launched in February 2011, Banks had provided banking facilities by March, 2012 to over 74,000 habitations .
In a big nation like India, providing banking facilities across the length and breadth of the country, especially in rural areas, has always been a great challenge for the successive governments since Independence. Even though nationalisation gave a big boost to expansion of banks in rural areas with Public Sector Banks becoming important instruments for advancement of rural banking and changing lives of rural populace.
The key idea is that there is need for village level presence – a customer-facing channel that is close to the customer preferably at a walking distance of not more than three to four kilometers. For this, it is important to have entities which are good at delivering outreach while operating in very difficult remote conditions. Besides giving access to banking, it also enables government subsidies and social security benefits to be directly credited to the accounts of the beneficiaries, enabling them to draw the money from the bank saathi or business correspondents in their village itself.
This initiative enables small and marginal farmers to obtain credit at lower rates from banks and other financial institutions. This would insulate them from exploitation of the money lenders. Government’s emphasis on bankers is to take up this task with a sense of responsibility and understanding and exercise courtesy and respect, especially to small borrowers.
The initiative is also important to protect the customers, especially the most vulnerable ones, from harsh financial practices and prevent them from being overburdened by debt. All in all, the end objective should be to empower people to achieve their own goals through enhancing their financial capabilities.

Setting up of Ultra Small Branches (USBs):

Considering the need for close supervision and mentoring of the Business Correspondent Agents (BCAs) by the respective banks and to ensure that a range of banking services are available to the residents of such villages, Ultra Small Branches (USBs) are being set up in all villages under Financial Inclusion. A USB would comprise of a small area of 100-200 sq. feet where the officer designated by the bank would be available with a lap-top on pre-determined days.

BSBDA Account:

Total credits in such accounts should not exceed one lakh rupees in a year.
Maximum balance in the account should not exceed fifty thousand rupees at any time
The total of debits by way of cash withdrawals and transfers will not exceed ten thousand rupees in a month.
Banks should offer the ATM Debit Cards free of charge and no Annual fee should be levied on such Cards..
Relaxations in KYC norms for BSBDAs.
No minimum balance criteria.

Pradhan Mantri Jan-Dhan Yojana (PMJDY)

Pradhan Mantri Jan Dhan Yojana is an scheme for financial inclusion launched by the Prime Minister of India, Narendra Modi on 28 August 2014.

Special Benefits under PMJDY Scheme :

Accidental insurance cover of ?.2.00 lac. provide life cover of ?. 30,000/- payable on death of the beneficiary.
No minimum balance required.
Life insurance cover of Rs.30,000/-
Easy Transfer of money across India
Beneficiaries of Government Schemes will get Direct Benefit Transfer in these accounts.
After satisfactory operation of the account for 6 months, an overdraft facility will be permitted
Access to Pension, insurance products.
Accidental Insurance Cover, RuPay Debit Card must be used at least once in 45 days.
Overdraft facility upto Rs.10000/- is available in only one account per household, preferably lady of the household.
Run by Department of Financial Services, Ministry of Finance.
Slogan of the Scheme is "Mera Khatha, Bhagya Vidhatha.

Pradhan Mantri Suraksha Bima Yojana (PMSBY)

Eligibility: Any person having a bank account and Aadhaar number linked to the bank account can give a simple form to the bank every year before 1st of June in order to join the scheme. Name of nominee to be given in the form. Available to people in age group 18 to 70 years with bank account.
This scheme was launched on 8th May , 2015.
Premium: Rs 12 per annum.
Payment Mode: The premium will be directly auto-debited by the bank from the subscribers account. This is the only mode available.
Risk Coverage: For accidental death and full disability – Rs 2 Lakh and for partial disability – Rs 1 Lakh.
Terms of Risk Coverage: A person has to opt for the scheme every year. He can also prefer to give a long-term option of continuing in which case his account will be auto-debited every year by the bank.
Implementing agency: The scheme will be offered by all Public Sector General Insurance Companies and all other insurers who are willing to join the scheme and tie-up with banks for this purpose.
The premium paid will be tax-free under section 80C and also the proceeds amount will get tax-exemption u/s 10(10D).But if the proceeds from insurance policy exceed Rs.1 lakh , TDS at the rate of 2% from the total proceeds if no Form 15G or Form 15H is submitted to the insurer.

Pradhan Mantri Jeevan Jyoti Bima Yojana

Eligibility: Available to people in the age group of 18 to 50 and having a bank account. People who join the scheme before completing 50 years can, however, continue to have the risk of life cover up to the age of 55 years subject to payment of premium.
This scheme was launched on 9th May , 2015.
Premium: Rs 330 per annum. It will be auto-debited in one instalment.
Payment Mode: The payment of premium will be directly auto-debited by the bank from the subscribers account.
Risk Coverage: Rs. 2 Lakh in case of death for any reason.
Terms of Risk Coverage: A person has to opt for the scheme every year. He can also prefer to give a long-term option of continuing, in which case his account will be auto-debited every year by the bank.
Who will implement this Scheme?: The scheme will be offered by Life Insurance Corporation and all other life insurers who are willing to join the scheme and tie-up with banks for this purpose.

Atal Pension Yojana:

Atal Pension Yojana was launched in June 2015 to make the geriatric population self-reliant after they have spent a lifetime working in non-pensionable jobs.
The scheme is headed to replace the Swavalamban Scheme which did not cover many people due to ambiguities in benefits after 60.

Salient Features

The subscribers of Atal Pension Yojana can receive a fixed monthly pension starting from Rs. 1000 up to Rs. 5000 after their retirement age of 60 until death.
After the death of the subscriber, the spouse will be entitled to get exact same pension amount as the subscriber, until death of the spouse.
Further, after the death of subscriber as well as spouse, the nominee will receive the entire pension amount accrued by the account holder. This amount depends on contribution made by the subscriber.
The minimum age of joining APY is 18 years and maximum age is 40 years; thus minimum period of contribution by subscriber is 20 years.
If a new subscriber starts contributing at the age of 18, he / she will need to spend Rs.42 every month to receive a pension amount of Rs.1000 after 60.
This monthly contribution differs as per the tenure of payment and depending on when the individual joins the APY scheme.
To encourage more and more people to enroll into Atal Pension Yojana scheme, the GOI is also contributing a sum towards the pension scheme for a time period of five years i.e. 2015-2020. This provision is for people who are non-tax payers, not beneficiaries of any social security scheme and have joined NPS before 31st December, 2015.