In an effort to set global standards for risk management in banks, the Bank for International Settlements set up the Committee on Banking Supervision (BCBS), which has devised the Basel norms. The main contribution of Basel I lay in generating awareness of the importance of capital in managing banking risk, while its major weakness was its ‘one size fits all’ approach. Basel II adopted a more comprehensive risk management approach for the banking system and tried to ensure that the capital recognized in capital adequacy measures provided adequate protection to depositors. Basel III emerged against the background of the global banking crisis of 2007, and primarily aims to boost banks’ capital, get banks to move away from disclosures. The RBI has recently announced its guidelines for Indian banks’ transition to Basel III. Implementing the new norms will involve raising more capital, greater provisioning, and overall better quality capital, and an upgradation of banks’ risk management systems. Indian banks will face the challenge of meeting the credit needs of a growing economy, as also the needs of socially responsible banking, while adjusting to a more stringent regulatory regime.
