Explained: Disclosures Prescribed by RBI under Basel-III

The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters. Its 45 members comprise central banks and bank supervisors from 28 jurisdictions. Basel III reforms are the response of the Basel Committee on Banking Supervision (BCBS) to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy. The Basel Committee on Banking Supervision (BCBS) released a comprehensive reform package entitled “Basel III: A Global Regulatory Framework for more resilient banks and banking systems” (known as Basel III capital regulations) in December 2010.

 The Basel Committee on Banking Supervision (BCBS) has long believed that it is important to encourage market discipline by way of meaningful disclosure of the key risks borne by internationally active banks. To that end, Pillar 3 of the Basel Framework lays out a comprehensive set of public disclosure requirements that seek to provide market participants with sufficient information to assess an internationally active bank’s material risks and capital adequacy. The Pillar 3 standard is now part of the Basel Consolidated Framework that brings together all of the BCBS’s requirements in a single document. The BCBS will continue to update Pillar 3 disclosures as and when the Basel Committee issues or modifies its requirements.

To adhere to the Basel III, the regulatory framework released by BCBS, the Reserve Bank of India (RBI) requires banks to make several disclosures under the Basel III framework, including:

Capital to risk-weighted assets ratio (CRAR): Capital to Risk-Weighted Assets Ratio (CRAR) or Capital Adequacy Ratio is a financial ratio that measures a bank’s capital and risk. CRAR is calculated as a percentage of a bank’s risk-weighted credit exposures. The minimum Capital Adequacy Ratio (CRAR) for banks in India is 9% for scheduled commercial banks and 12% for public sector banks.

Common Equity Tier-1 ratio: The Basel III accord introduced a regulation that requires commercial banks to maintain a minimum capital ratio of 8%, 6% of which must be Common Equity Tier 1.

Tier 1 ratio: The Tier 1 capital ratio compares a bank’s equity capital with its total risk-weighted assets (RWAs). These are a compilation of assets the bank holds that are weighted by credit risk. As of March 31, 2024, the minimum Tier 1 ratio in India is 9.50%. This is in line with the Basel III guidelines, which were issued by the Reserve Bank of India (RBI) and came into effect on April 1, 2013.

Leverage ratio: The leverage ratio is a measure of a bank’s total debt about its equity. It’s calculated as the percentage of a bank’s Tier-I capital to its total exposures, which includes on-balance sheet exposures, derivative exposures, securities financing transaction exposures, and off-balance sheet items.  As of June 2019, the leverage ratio for banks in India is 4% for Domestic Systemically Important Banks (DSIBs) and 3.5% for other banks. The ratio of Tier-1 capital to total exposure must be maintained quarterly

Liquidity Coverage Ratio (LCR): The LCR measures a bank’s ability to withstand short-term liquidity disruptions. A higher LCR indicates a stronger capacity to handle potential liquidity shocks. An LCR below 100% means that a bank doesn’t have enough HQLA to cover its expected net cash outflows, which could lead to financial instability. The LCR ensures banks have enough high-quality liquid assets to survive a 30-day stress scenario. RBI proposes that with effect from April 1, 2025, Banks will need to assign a 5% higher run-off factor to retail deposits that are enabled with internet and mobile banking (IMB). This means that stable retail deposits with IMB will have a 10% run-off factor, and less stable deposits with IMB will have a 15% run-off factor.

Net Stable Funding Ratio (NSFR): The NSFR is defined as the amount of Available Stable Funding relative to the amount of Required Stable Funding. The NSFR limits overreliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance sheet items, and promotes funding stability. The above ratio should be equal to at least 100% on an ongoing basis and the NSFR ratio is binding on banks w. e. f October 1, 2021.

Undisclosed reserves: These can be included in capital if they are post-tax profits and are not encumbered by any known liability.

Restrictions on fund transfers: Any restrictions or impediments on transferring funds or regulatory capital within the banking group

Disclosure:

Banks can disclose information in financial reports or in separate Pillar 3 reports. They can use fixed or flexible format templates or tables.

Other disclosure requirements:

Banks must also have internal controls over the production of disclosures and an independent validation process.

Pillar 3 disclosure requirements – consolidated and it is recognized that the Pillar 3 disclosure framework does not conflict with requirements under accounting standards, which are broader in scope. The BCBS has made considerable efforts to see that the narrower focus of Pillar 3, which is aimed at the disclosure of bank capital adequacy, does not conflict with the broader accounting requirements. The Reserve Bank will consider future modifications to the Market Discipline disclosures as necessary in light of its ongoing monitoring of this area and industry developments.

The disclosures in this manner should be subjected to adequate validation. For example, since information in the annual financial statements would generally be audited, the additional material published with such statements must be consistent with the audited statements. In addition, supplementary material (such as Management’s Discussion and Analysis) that is published should also be subjected to sufficient scrutiny (e.g. internal control assessments, etc.) to satisfy the validation issue. Suppose material is not published under a validation regime, for instance in a stand-alone report or as a section on a website, then management should ensure that appropriate verification of the information takes place, by the general disclosure principle set out below. In light of the above, Pillar 3 disclosures will not be required to be audited by an external auditor, unless specified.