Are the Banks in India Comfortable on the Eve of Basel III?

Abstract

Non-occurrence of the banking crises in India like those in the mature economies of Germany, Japan, Norway, Spain, UK, and USA is not because Indian banks are strong in terms of risk management expertise and healthy in terms of capital, but because the public sector undertaking banks holding majority of businesses in terms of deposits and loans get solutions or waivers from the regulator for the problems they cannot manage and get capital infusion from the government. In these circumstances, their fear of default during economic slowdown is making the credit-financed trading and exporting activities suffer from resource dry-up. Against this backdrop, this chapter throws light on (1) the relationship between credit risk premium on loans and risk free rates, (2) credit rating migration during economic slowdown, (3) the fall-out of maturity-mismatch between assets and liabilities on basis risk and yield curve risk, and (4) the level of preparation of Indian banks for Basel III implementation in terms of enhanced requirements of capital.