Credit Growth of Banking Sector-A Caution in Basle-III Regime

The Financial Sector reforms initiated during 1991 are based on twin principles of operational flexibility and functional autonomy so as to enhance efficiency, productivity and profitability of the financial institutions and in turn accelerating the growth of real sector of the economy. The committee on Banking Regulations and Supervisory Practices (Basel Committee) had released the guidelines on capital measure and capital standards in July 1988 (called Capital Accord I) which were accepted by Central Banks of various countries including Reserve Bank of India. In India, it was implemented with effect from April 01, 1992. Further the committee released the revised version in June 2004 (called Capital Accord II)for adoption. The fundamental objective behind this revision is to further strengthen the soundness and stability of international banking system. The third installment of the Basel Accords (Basel III) was developed in December 2010, in response to the deficiencies in financial regulation revealed by the financial crisis of 2007–08. Basel III reforms strengthen the bank-level i.e. micro-prudential regulation, with the intention to raise the resilience of individual banking institutions in the periods of stress. Besides, the reforms have a macro-prudential focus also, addressing system wide risks, which can build up across the banking sector, as well as the pro-cyclical amplification of these risks over time. The macro prudential aspects of Basel III are largely enshrined in the capital buffers. The capital conservation buffer and the countercyclical buffer both are intended to protect the banking sector from periods of excess credit growth. It can be observed that where there is high credit growth, Credit to GDP gap is positive and where the credit growth is low or declined, the credit to GDP gap is negative. The framework assigns the credit-to-GDP gap a prominent role as a guide for policymakers