"When you are inspired by some great purpose, some extraordinary project, all your thoughts break their bounds. Your mind transcends limitations, your consciousness expands in every direction, and you find yourself in a new, great and wonderful world. Dormant forces, faculties and talents come alive, and you discover yourself to be a greater person by far than you ever dreamt yourself to be."
Maharishi Patanjali Yoga Sutra before 2200 years.
§Back in 2003, Someone started a rumor in
Ahmedabad that ICICI bank is going to collapse. Suddenly thousands of panicked
account holders lined up at the nearest ICICI branch to take out their money
and hence there was such a money-shortage in ICICI's Ahmedabad branches, they
had to actually call up trucks loaded with cash from their Mumbai branches.
§Things settled out after a while and it was
confined only to a few cities of Gujarat, but if it was an entire-countrywide
hoax, just imagine the fallout!
SBI: Imaginary case
§SBI takes deposits from you and me, pays us 7%
interest rate, and gives same money as loan to car-home seekers, businessmen
etc at 12% interest rate, thus earning 5% in profit.
§SBI gave Rs.1500 as loan to Kingfisher.
§SBI gave loan of Rs.4500 crores to Telecom
players for 2G auction and now the licenses are cancelled.
§What if those telecom players run away
without paying back the loan and Kingfisher goes broke?
§Adding insult to the injuries, someone starts
a systematic campaign on facebook and twitter to spread rumors that SBI itself
is going to collapse.
§Lakhs of middleclass account holders will run
to the nearest SBI branch to take out their deposited money (as it
happened in ICICI, Ahmedabad in 2003 in real-life).
§Overnight entire banking sector will collapse
and You already know about the sub-prime crisis etc: the aftershocks were felt
everywhere in every sector.
Here comes BASEL in picture
§The BASEL Norm is kinda safeguards / backup
plan for Banking sector.
§It provides internationally accepted detailed
guidelines about how much money should a bank keep aside, to deal with
such financial crisis.
§Even if loan-takers run away without paying,
Bank should have money to give back to deposit holders.
§More risk the bank takes, more money it has to
keep aside in reserve to counter the risk.
What is Tier 1 and Tier 2 Capital?
§Tier 1 and 2 capital is way too technical and
detailed, to be asked in a routine Government recruitment exam for Generalist
posts, so not much point in getting to that depth and numbers. But still for
the sake of discussion:
§Capital= Wealth in form of Money, Property,
§As we saw earlier, banks need to keep some
money aside to deal with crisis. It meant the word "capital".
§If bank keeps aside capital, in form of
real-estate investment (say buying 5 farm houses) then during the
crisis, it won't be easy to sell away farm-houses and get money within a day or
two. So this 'Capital' is not 'liquid'.
Tier 1 and 2 is way of classifying the capital of a bank.
Easily liquid. For example
§currency notes and coins in the bank value
§Stocks held by Bank, can be easily sold off in
§Not easily Liquid, for example the building or
land owned by the bank.
For BASEL norm will be something like this[technically
totally incorrect, just for the purpose of basic understanding]
21.If a Bank loans 1
crore rupee to a company with "B" Credit Rating, it must keep
capital worth 20 lakhs aside for crisis.
22.And out of that 20
lakhs, Rs. 15 lakhs must in form of Tier 1 Capital and 5 lakhs can be in form
of Tier 2.
23.If the Company has
credit rating of "AAA" then Capital worth Rs.xyz and so on.....
Governor of RBI signs on this BASEL agreement, comes back home
and forces all the Indian banks to follow these norms. Same thing will be done
by French, Chinese, Americans etc. and thus banks in every country will
function prudently thus preventing another Global financial crisis.Latest is
BASEL III accord, came in 2010. It has stringent provisions keeping in mind the
Criticism of BASEL
24.One shoe doesn't fit
25.Just because American
Banks were so imprudent in their functioning and ran into trouble, doesn't mean
WE the Indian banks need be so overcautious and keep so much of money aside for
'safety', it could be used for giving loans to needy people.
complex Monetary policies of Central Banks in each country (example RBI's CRR,
SLR, Repo etc.) make it difficult to uniformly implement BASEL norms