Thursday, October 21, 2010

Reckoning Basel-III Norms!

Following the recent financial meltdown, the leaders of the group of G-20economies asked the Basel Committee on Banking Supervision{BCBS} to reach the new rules needed to prevent another financial crisis in future. The aim was to mitigate the greed ridden financial crisis instead to block the real factors behind it; real notion of Basel-III norms could be sensed out with the statement of Hant Wellink, head of Basel Committee on Banking Supervision-“Partly banks will have to retain profit for years which they can not use to pay shareholders or bonuses.
For another part, this will vary from bank to bank; they will have to get it from the capital market. I think it will make a new crisis less likely. Chances are much smaller, we have made calculations on this but we can’t rule it out completely”. Last Para reflect the genuine apprehension ahead in financial market…so; life even after the Basel-III norms wouldn’t remain indifferent from regulatory considerations.

Basel-III norms, with its underlying proposition of insulating banks from adverse shocks by adequately enhancing the amount of its own capital holding compared to overall deposits and other borrowing can be regarded as an improved and standard set of rules over the existing Basel-II norms. Rule of Basel-III norms written by the Bank of International Settlement’s Committee on Banking Supervision {BCBS} with lucid mandates to define the reform agenda for the banking sector across the world. The new rule comprehensively entails how to asses risks and capital management anticipating theirs risk bearing.
On September20,2010 {Sunday}, agreement finally taken place on Basel-III at a meeting of Central bank Governors and top Supervisors from 27 countries chaired by ECB President, Jean Clande Trichet. They reached to the consensus with focusing on prevention of any further International Credit Crisis with provisioning more than triple of top quality capital as reserve for addressing any meltdown sort of occurrences.

Predominant component of capital is common equity and retained earnings-new rules restrict inclusion of items such as deferred tax assets, mortgage-servicing rights and investments in financial institutions to no more than 15%of the common equity component. Here strong bank would avail an edge as now they can put excess cash to better use though with ample transition period for raising funds to compliance shouldn’t be any big issue for even smaller banks. The new norms are centered around the renewed focus of Central bankers on Macro-prudential stability. The global financial meltdown following the crisis in U.S Sub-prime market has shaped the entire propositions. Earlier guidelines, popularly known as Basel-II was focused on Macro prudential regulation, those features being carried out in Basel-III norms as well with added advanced support. That systemizes the changed motives of regulators now-they have eagle eyes on financial stability of the system in totality rather than Micro regulation of any individual bank.
Under the Basel-III norms, Key Capital Ratio has been raised to 7%of risky assets-Tier-I capital that includes common equity and perpetual preferred stock will be raised from 2 to 4.5% starting in phases from January2013 to be accomplished by January2015. Moreover, banks will have to set aside another2.5%as a contingency for future stress, taking the overall capital ratio or Capital Conservation Buffer to 7%. Banks that would fail to comply after the stipulated timeline would be unable to pay dividends, though they will not be forced to raise cash.

A further counter-cyclical buffer in average of 0%-2.5%of common equity is to be imposed depending on specific circumstances of an economy to protect the banking sector from periods of excess aggregate credit growth. In addition, a liquidity buffer, much like our Statutory Liquidity Ratio {SLR} is to be made mandatory by January2018 to check the risk based measures and higher capital norms for systemically important bank. On paper, Basel-III will triple the quantum of capital, banks will need to maintain but whether it will risk-proof the banking sector is doubtful. So, regulation would decide whether Basel-III norms is light touch set of rule or indeed an effective panacea for hassle free and ethical functioning of banking system.

Impact on Indian banks: - RBI Governor, D.Subbarao is stoutly confident that Indian banks not likely to be adversely impacted by the new capital rules. At the end of June30, 2010; the aggregate capital to risk –weighted assets ratio of the Indian banking system stood at 13.4% of which Tier-I capital constituted 9.3%. So, it wouldn’t leave any pressure on Indian banks in near future albeit there may be some negative impact arising from shifting some deductions from Tier-I and Tier-II capital to common equity.
Despite strong fundamentals, RBI should ensure even more capital than essentially stipulated limit under the Basel-III norms; besides stress must be given on long term capital inflow rather on risky short term investments. Besides, innovative credit policies, RBI should also stringently ensure the well capitalized subsidiary structure for foreign banks and financial institutions operating in India, since the stability of Indian banking system have lot to with it.

Young Committee that recommended for the establishment of Bank of International Settlements {BIS} in1930 had enough sense for volatility in International financial market and greed’s of bankers. Actual effects of even best designed rules are of no value if lacked by the competent, proactive and fearless supervision. Strengthening the global banking system should be and must be the aim of every new financial rules but it’s equally imperative to stop the adverse lobbying that makes regulation nothing more than a print order. We can easily assume this from recently enacted Dodd Frank Act {Wall Street and Consumer Protection Act} in U.S.A which loosing its effects under the stern pressure from affluent lobbyist.
Regulation couldn’t have any parallel while enforcing a law; our regulatory strength has recently tested during the world wide financial meltdown-Indian banking relatively emerged unscratched comparing the western counterparts. More attention is needed from developed world for compliance of rules envisaged under the Basel-III norms-make or break of this rule would be decided by the both Individual as well collective performances of economies. Co-operation at international level would be the real bone of contention for an ambitious rule like Basel-III…meanwhile let’s watch the movements around the financial circle!
Atul Kumar Thakur
October20, 2010, Wednesday, New Delhi

Development-Essential theme for Bihar

The Bihar Legislative Election of 2010 is going to be remarkable on many counts; especially it would leave a high shot ground for acid test among the peoples of this state. Aspirations that led to ending of fifteen years parochial rule during the 2005 election and succession of a trusted man called Nitish Kumar is still very much resonant and relentless for completion of turnaround in the Bihar. The three spoiler stakeholder in Bihar politics since 1990-Congress, Lalu Prasad Yadav and Ramvilas Paswan accounted for irreparable socio-economic losses that completely broken the soul of this region and forced to camouflage the state into a mockery institution.
Peoples were dragged to clown status under the black sordid political state of affairs…hopelessness were as rampant as loss of opportunities inside the state-institutional proposals like opening of IIM in Patna used to be ridiculed by non the other than Chief Minister Lalu Prasad Yadav; crime had overt patronization from CM office and enterprises under this Dickensian collaboration were fixed ransom and other inhumane trade.

The pseudo assertion of social justice flashed much in start during the early nineties when simultaneously Mr.Yadav has started demeaning the party structure for a lethal nexus of caste and religion. Surprisingly, in spite of partial treatment to Muslim-Yadav combine and staggering statistics in terms of their representation, plight of common folks from these communities as well didn’t remain indifferent from rest of oppressed Bihari. Power and prestige used to be the prerogative of either the close one from kinship or die-hard sycophants without having personal character for judgment between right or wrong.
Caste remained a factor in the politics of Bihar albeit it was never so blind folded before the nineties…worst of all, confusion among the Communist brigade and theirs parasiteness over Congress finally consumed their impressive base in north and middle Bihar that fuelled the situation further. Their’s stake didn’t remain the same again after the mid nineties…meanwhile once a sporadic performer in state, BJP emerged as a substantial force following their strategic alliance {NDA}accession in Delhi-theirs paradox partnership with disillusioned Nitish Kumar started from here. I am reiterating over the word “paradox” since despite representing contrast views on some crucial issue; they could remain together with eyeing the path of development as major plank for politics in Bihar.

Before the British colonialism, terrains of present Bihar known for the all good reasons; later the Bengal presidency proved to be worst on development indices-following the shifting of British base from Calcutta in 1911.However, the state of this region, Assam, Bihar, Meghalaya, Orissa, Tripura, West Bengal improved a lot for at least next two decades after the independence but in present scenario, only Bihar could be figured out on the healthy development criteria.
Once “An Area of Darkness” termed by “The Economist”, Bihar today is a beacon of fair change among the Indian state with consistently relying upon the sole framework of development. Despite facing the massive floods and successive two years of drought with spiraling two-digit inflation, state did fairly well in improving physical infrastructure, law&order, education, primary health facilities etc-besides growth of service sector and checking an outbound migration is Herculean accomplishment.

With the less volatile contribution of tertiary sector {59.5%}, State GDP growth registered an average 11.35%in the last five years against an average of merely 3.5%in the RJD rule-Per Capita Income rose from Rs7, 442 in year2004-05 to Rs13, 559 in 2008-09. Poverty rate too halted at 38%-a satisfactory level even if not an ideal figure; these statistics are not manipulated as the State’s Economic Survey2010 has been closely monitored by the Central agencies and other think tanks working in the sphere of economic research. Apart from political compulsions, Nitish Kumar government has shown enough willingness for change with appropriation of dynamicism and innovation that were a long due.
He emphatically focusing on the balance prospect of growth, especially in the social domain-after five years, he is indeed now more capable to lead Bihar towards a bright economic prospects; if he would come back whose chances are very strong than state of affairs will touch an unprecedented positive pace. For me, it’s a matter of great exuberance that at least Bihar among the Indian States is banking upon the theme of development. From Kashmir to Kanyakumari and Arunachal Pradesh to Rajasthan –themes of politics are different and governance is being put aside. Development of Bihar is essential for itself and whole nation…hope the political laboratory of India would manufacture some sensible inferences out of the verdict in this election.
Atul Kumar Thakur
October20, 2010, Wednesday, New Delhi

Tracing Aspirations for Nepal

The Constituent Assembly’s failure to deliver a Constitution on stipulated time-line and even after and Parliament’s failure to elect a Prime Minister despite prolonging the exercise for double digit rounds raising serious concern over the accountability of political parties in Nepal. Following perplex state of action in absence of any outcome makes an observers side completely drudgery and concomitant despair for all concerned components.
With unkept promises, political class especially Maoists are now being seen as hellion with their brusque attitude towards the ground realities and needs of nation. No denying the fact, that Maoists are not alone accountable for the quivering domestic political scenario though with putting upon theirs ostensible demand after putsching the Monarchies quintessentially makes them a catalyst in entire persisting deadlock.

Signing twelve point understanding in November2005 in New Delhi with the Indian mediation for anti-Monarchy movement was a hurried step that couldn’t be adequately sensed by the Maoist or other seven pro-democracy parties from Nepal. Instant reason for Indian involvement in anti-Monarchy movement was shaped through the aberration created by King Gyanendra during the 2005 SAARC Summit where he laid the proposal for China as an observer which was unanimously accepted by the member nations-without any mediation, indeed it was a sort of unofficial breach that caused deep insecurity in Indian diplomatic side.
Given the historically trusted and entwining relationship between India and Nepal, it was unbearable for India to see China’s unnatural involvement with its very dear Himalayan state. China has been so far played feeble and inconsistent role in Nepal but the Maoists emergence at Centre-stage suddenly given them a level playing field against India which now fuelling the rivalry of engagement.

As a very close entity in varied terms, Nepal must understand the growing insecurities of India from its strategic point of views and instead of pushing both superpower for negative engagement at the domestic turf; it would be quite better to engage with both of them without forgetting its natural akinness for India. It would leverage Indian role in forming conducive environment both at domestic arena in Nepal as well as at international juncture-positive involvement would give India too a chance to strengthen its diplomatic ties with Nepal by giving its actual due to the Himalayan state. Energized co-operation with spillover of goodwill would forge better environment of concord and prospects of democracy.
Nepal here must have to prefigure the China’s dual playing at its every crucial juncture; from1950 to 1989{during trade blockade by India which lasted for twenty months that badly affected its economy}-at both the crucial occasion, China checked them with realistic visualization and kept reiterating India’s natural closeness to Nepal. Even in 2006, when India along with the Nepalese democratic forces was poised for heading-on with Monarchy, China was feeding the King with arms and ammunition to crackdown on Maoists and other demonstrating political parties-thanks laudable collective efforts, China’s plan of bloodshed didn’t worked out in Nepal. Nepal must be reckon with its strategic standing without too much reshuffling some of its conventional basic lesson of diplomacy-otherwise, contemplation of experiments wouldn’t be ended more than deadpan per se following the ambitious dualism.

The most inevitable thing that Nepal has to do the figuring out of its people’s aspiration as now Maoists too sounds pragmatic about the prospective merger of Armies and noticeably on the role of Monarchy. Without deviating under any forcible ideological compulsions, it would be prudent for Nepalese political parties to delve with the best possible options suitable for theirs quest for democratic establishment and supremacy of Constitution.
This would be true healing touch from democratic political forces who have been disappointing the mass Citizens since 1920-if Maoist Supremo ”Prachanda” sensing the blunder of abrupt abolition of Monarchy without giving them even a minimum Constitutional prerogative, that remorseness must be seen in true light and without contentious convictions. Prolongingness of deadlock in Nepal is neither feasible not ideal for the sake of peoples genuine aspirations…there is need of rebuilding the confidence among the mass Nepalese for a brighter prospect of this beautiful nation.
Atul Kumar Thakur
October20, 2010, Wednesday, New Delhi