Friday, 12 February 2016

BASEL Norms (Explained in Very Simple Language) - What are BASEL Norms and how they are implement?

Dear Aspirants,
Welcome to visit here. In this article we are discussing about the most important article in banking i.e. BASEL Norms. Every time we left this topic because of confusion/tough or anythings related to this. But here, we have explained it with easy examples and in very simple language to rip off the confusion. You can understand this concept easily with one reading only.

Recently we have heard many times that Government is infusing money in Public Sector Banks. But why Government is imposing money in banks, firstly we have to understand the term BASEL ACCORD.
In general, Basel is a city in Switzerland where HQ of Bureau of International Settlement (BIS) established in this city. BIS was established in 1930, is the world's oldest international financial organization. The main goal of BIS is protect banks from unexpected financial crisis and maintain financial stability in the banks.

Objective: An agreement by the BCBS (Basel Committee on Banking Supervision), which mainly focus on the risks to banks and maintain financial stability called BASEL Accord. The purpose of accord is to ensure that banks have enough capital to meet unexpected loses. India has accepted this accord and Basel Accord has given three norms- BASEL-I,II,III.

Currently, to meet the requirements of the BASEL III, Govt. is infusing money in the banks.

How BASEL Norms are implemented:

Example: Consider a hypothetical case of PNB Bank.

  • PNB gave Rs.1 Crore as a loan to ABC company.
  • PNB gave loan of Rs.3 Crores to other XYZ  company and soon license of the company cancelled.
  • What if  this XYZ company run away without paying back the loan and ABC company plunged and unable to return loan.
  • Moreover, someone has spread rumors PNB itself is going to collapsed.  
  • Mostly middle-class account holders would run to the nearest PNB branch to withdraw their deposited money .
  • Overnight entire banking sector will collapse. 
  • It provides detailed guidelines about how much money should a bank keep itself, to deal with such unexpected financial crisis.
  • Even if loan-debt persons run away or unable to return loans, Bank should have enough money to give to their deposit holders.

  • As much loan a Bank could lent to someone, as much more money should a bank have to provide to their deposit holders in case of unexpected risk.
How BASEL protects the deposit holders amount?

If a Bank gives loan to a company, it must keep some capital for unexpected crisis and out of that capital, should be divide to kept into Tier 1 and Tier 2 capital.
What is Tier  and Tier 2 Capital?
Tier 1
Means money in liquid form.
For example

  • Currency Notes and Coins in the Bank.
  • Stocks held by a Bank, can be easily sold out in the share-market.
Tier 2

  • Not in liquid form.
  • For example: the building or land owned by the bank.

We have tried our best to provide you to clear the concept. If any query or suggestion, write it in the comment section below.

Thank you and Stay tuned with us.

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