63  Banking sector reforms in India: Basel norms; Risk management; NPA management

63.1 Concept and Drivers of Reform

Indian banking has undergone two waves of reform since 1991. The first wave, driven by the Narasimham Committee I (1991), dismantled the administered, controlled-credit regime — reducing CRR/SLR, introducing prudential norms (IRAC), allowing new private banks, and aligning India with international Basel norms. The second wave, driven by Narasimham Committee II (1998), deepened reforms — strengthening capital adequacy, NPA classification, corporate governance, technology, consolidation. Subsequent reforms — SARFAESI 2002, BR Amendment Acts, IBC 2016, PCA framework, asset reconstruction, PSB consolidation, and scale-based NBFC regulation (2022) — have reshaped Indian banking from a bureaucratic command-and-control system to a prudentially regulated, globally aligned sector.

63.2 Basel Norms

Basel norms are international standards for banking regulation set by the Basel Committee on Banking Supervision (BCBS) under the BIS in Basel, Switzerland.

TipBasel I, II, III, IV
Accord Year Key emphasis
Basel I 1988 First framework — Capital Adequacy Ratio; minimum 8 %; credit risk
Basel II 2004 Three pillars — Minimum capital, Supervisory review, Market discipline; added operational and market risk
Basel III 2010 (post-GFC) Higher capital + liquidity (LCR, NSFR) + leverage ratio + counter-cyclical buffer; SIBs
Basel IV / Endgame 2017 onwards Standardised approach revision; output floor; SA-CCR

63.2.1 Three Pillars of Basel II / III

TipThree Pillars
  1. Minimum Capital Requirements — covering credit, market and operational risk.
  2. Supervisory Review Process (SREP) — RBI’s internal assessment.
  3. Market Discipline — disclosure requirements.

63.2.2 Indian Capital Adequacy

TipIndian Basel III Capital Requirements
  • Capital Adequacy Ratio (CAR / CRAR): minimum 9 % in India (Basel III minimum 8 % + buffer).
  • Common Equity Tier 1 (CET1): minimum 5.5 %.
  • Tier 1 capital: minimum 7 %.
  • Capital Conservation Buffer: 2.5 %.
  • Countercyclical Buffer: 0-2.5 % at RBI’s discretion.
  • D-SIB surcharge: 0.2-0.8 % depending on bucket.

India’s D-SIBs (Domestic Systemically Important Banks): SBI, ICICI Bank, HDFC Bank (recurring list).

63.2.3 Liquidity Standards under Basel III

TipBasel III Liquidity Norms
  • LCR (Liquidity Coverage Ratio) — sufficient HQLA to cover 30-day net outflows under stress; minimum 100 %.
  • NSFR (Net Stable Funding Ratio) — stable funding for 1-year horizon; minimum 100 %.
  • Leverage Ratio — Tier 1 / Total Exposure; minimum 3-4 %.

63.3 Risk Management in Banks

TipMajor Risks in Banking
Risk Type Working content
Credit risk Default by borrower; biggest in Indian banking
Market risk Interest-rate, FX, equity-price moves
Operational risk Internal process / system / human failure; fraud
Liquidity risk Cannot meet payments when due
Reputational risk Brand damage
Country / Sovereign risk Default by foreign country
Legal / Compliance risk Litigation, regulatory penalty
Cyber risk Hacks, data breaches

63.3.1 Risk Management Process

TipFive-Step Risk Process
  1. Identify — risks the bank faces.
  2. Measure / Assess — quantify (VaR, scenario analysis).
  3. Monitor — ongoing tracking.
  4. Manage — mitigate, transfer, accept, avoid.
  5. Report — to management and regulator.

63.4 NPA Management

Non-Performing Asset (NPA) is a loan or advance for which principal or interest payment remains overdue for 90 days or more. (For agriculture: 2 crop seasons / 1 long crop.)

63.4.1 IRAC Norms — Classification

TipAsset Classification
Category Working
Standard Performing
Sub-standard NPA for ≤ 12 months
Doubtful NPA for > 12 months
Loss Asset identified as loss; no security or non-realisable

63.4.2 Provisioning Norms (Indicative)

TipProvisioning Requirements
Asset class Provision (indicative)
Standard 0.25-1.00 %
Sub-standard (secured) 15 %
Sub-standard (unsecured) 25 %
Doubtful (secured) 25-100 % (graded by age)
Loss 100 %

63.4.3 NPA Recovery Channels

TipMain NPA Recovery Channels
  • Lok Adalats — settlement up to ₹20 lakh.
  • Debt Recovery Tribunals (DRTs) — RDB Act 1993; for claims ≥ ₹20 lakh.
  • SARFAESI Act 2002 — secured creditors can seize collateral without court intervention.
  • Asset Reconstruction Companies (ARCs) — buy distressed assets.
  • Insolvency and Bankruptcy Code (IBC) 2016 — most powerful tool now; time-bound resolution at NCLT.
  • Bad Bank / National Asset Reconstruction Company (NARCL) — set up 2021; aggregates stressed assets > ₹500 cr.
  • PCA framework — Prompt Corrective Action for stressed banks.
  • CDR, SDR, S4A, etc. — earlier restructuring schemes (now mostly superseded).

63.5 Prompt Corrective Action (PCA) Framework

RBI’s PCA framework imposes restrictions on weak banks breaching thresholds on: - Capital (CRAR). - Asset quality (Net NPA). - Profitability (ROA / leverage).

Restrictions include caps on dividends, branch expansion, lending, and management compensation. Reviewed 2017, 2021 (latest).

63.6 SARFAESI Act 2002

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002:

TipSARFAESI Powers
  • Banks/FIs can take possession of secured assets without going to court (Sec 13).
  • Set up Asset Reconstruction Companies (ARCs) — regulated by RBI.
  • Central Registry (CERSAI) — register of security interests.
  • Applicable to secured loans only; threshold ₹1 lakh (raised from ₹1 lakh).

63.7 IBC 2016 — Restructuring Game-Changer

The Insolvency and Bankruptcy Code 2016 transformed corporate insolvency:

TipIBC Highlights
  • Single, time-bound process — 180 days extendable to 330 days.
  • NCLT adjudicates corporate insolvency.
  • IBBI regulates Insolvency Professionals (IPs).
  • Information Utilities (NeSL).
  • Committee of Creditors (CoC) decides resolution plan with 66 % vote.
  • Waterfall under §53 — secured creditors and workmen pari passu; equity at bottom.
  • Pre-pack insolvency for MSMEs (since 2021).

flowchart TB
  R[Banking Reforms] --> N[Narasimham I 1991]
  R --> N2[Narasimham II 1998]
  R --> B[Basel I/II/III]
  R --> S[SARFAESI 2002]
  R --> I[IBC 2016]
  R --> P[PCA / PSB Consolidation]
  R --> NA[NARCL 2021 Bad Bank]
    classDef default fill:#003366,color:#ffffff,stroke:#ffcc00,stroke-width:3px,rx:10px,ry:10px;

NoteDistractor warning

PYQs ask: India’s CRAR floor is 9 % (Basel III says 8 % global; India sets 9 %). NPA definition — 90 days overdue (2 crop seasons for agriculture).

63.8 Practice Questions

Q 01NarasimhamEasy

Narasimham Committee I was set up in:

  • A1991
  • B1998
  • C2002
  • D2016
View solution
Correct Option: A
**N-I 1991**; N-II 1998.
Q 02Basel IMedium

Basel I was issued in:

  • A1974
  • B1988
  • C2004
  • D2010
View solution
Correct Option: B
**Basel I 1988** — first capital adequacy framework.
Q 03CAR IndiaMedium

Minimum Capital Adequacy Ratio (CAR) in India under Basel III is:

  • A8 %
  • B9 %
  • C10 %
  • D12 %
View solution
Correct Option: B
**9 %** — India is stricter than Basel III 8 %.
Q 04Basel III pillarsMedium

Three pillars of Basel II/III are:

  • AMinimum capital, Supervisory review, Market discipline
  • BCapital, Liquidity, Leverage
  • CCredit, Market, Operational
  • DCRR, SLR, Repo
View solution
Correct Option: A
**Three pillars** — capital, supervision, disclosure.
Q 05NPA defEasy

A loan becomes NPA in India when overdue for:

  • A30 days
  • B60 days
  • C90 days
  • D180 days
View solution
Correct Option: C
**90 days** overdue → NPA.
Q 06SARFAESIMedium

SARFAESI Act was enacted in:

  • A1993
  • B2002
  • C2016
  • D2021
View solution
Correct Option: B
**SARFAESI 2002** — secured creditors can seize collateral without court.
Q 07IRACMedium

Under IRAC norms, NPA for more than 12 months is classified as:

  • AStandard
  • BSub-standard
  • CDoubtful
  • DLoss
View solution
Correct Option: C
**Doubtful** — NPA > 12 months. Sub-standard — up to 12 months.
Q 08DRTMedium

Debt Recovery Tribunals were established under:

  • ARDB Act 1993
  • BSARFAESI 2002
  • CIBC 2016
  • DCompanies Act 2013
View solution
Correct Option: A
**Recovery of Debts due to Banks and FIs Act 1993**.
Q 09IBCMedium

IBC corporate insolvency must conclude within:

  • A90 days
  • B180 days (extendable to 330 days)
  • C365 days
  • D3 years
View solution
Correct Option: B
**180 days** initially; extendable to **330 days**.
Q 10Bad BankMedium

India's "Bad Bank" — NARCL — was set up in:

  • A2016
  • B2018
  • C2021
  • D2023
View solution
Correct Option: C
**NARCL — National ARC Limited 2021**; aggregates stressed assets > ₹500 cr.
Q 11LiquidityHard

Liquidity Coverage Ratio (LCR) under Basel III ensures:

  • AHQLA covers 30-day net outflows under stress
  • BCRR is met
  • C1-year stable funding
  • DTier 1 capital threshold
View solution
Correct Option: A
**LCR ≥ 100 %** — 30-day stress coverage. NSFR = 1-year stable funding.
Q 12D-SIBHard

India's D-SIBs typically include:

  • ASBI, ICICI, HDFC Bank
  • BPunjab National Bank only
  • CAxis Bank only
  • DAll scheduled banks
View solution
Correct Option: A
**SBI, ICICI Bank, HDFC Bank** — recurring D-SIBs.
Q 13PCAMedium

RBI's PCA framework restricts banks based on which three parameters?

  • ACapital, asset quality, profitability/leverage
  • BSize, profit, deposits
  • CGeography, sector, asset mix
  • DCRR, SLR, repo
View solution
Correct Option: A
PCA — capital (CRAR), asset quality (Net NPA), profitability/leverage.
Q 14CET1Hard

India's CET1 minimum under Basel III is:

  • A4.5 %
  • B5.5 %
  • C7 %
  • D9 %
View solution
Correct Option: B
**India CET1 ≥ 5.5 %** (Basel III global is 4.5 %).
Q 15Risk CategoriesMedium

Which is **not** a category of risk for banks?

  • ACredit
  • BMarket
  • COperational
  • DAcquisition
View solution
Correct Option: D
Acquisition is not standard banking-risk category.
Q 16CoC IBCHard

Under IBC, the Committee of Creditors approves resolution plan with:

  • A51 %
  • B66 %
  • C75 %
  • D100 %
View solution
Correct Option: B
**66 %** vote required (reduced from 75 %).
Q 17CERSAIMedium

CERSAI under SARFAESI 2002 maintains:

  • ACentral Registry of security interests
  • BCentral credit information
  • CGovernment bond list
  • DInsurance database
View solution
Correct Option: A
**CERSAI** — Central Registry of Securitisation Asset Reconstruction and Security Interest.
Q 18Basel YearMedium

Basel III was issued post:

  • AAsian crisis 1997
  • BGlobal Financial Crisis 2008
  • CCOVID 2020
  • DEurozone crisis
View solution
Correct Option: B
**Basel III 2010** — post-GFC response.
Q 19RecoveryMedium

Match each recovery mechanism with its description:

Mechanism Description
(i) Lok Adalat (a) Court-free seizure of collateral
(ii) DRT (b) Time-bound insolvency at NCLT
(iii) SARFAESI (c) Tribunal for ≥ ₹20 lakh claims
(iv) IBC (d) Settlement up to ₹20 lakh
  • A(i)-(d), (ii)-(c), (iii)-(a), (iv)-(b)
  • B(i)-(a), (ii)-(b), (iii)-(c), (iv)-(d)
  • C(i)-(c), (ii)-(d), (iii)-(a), (iv)-(b)
  • D(i)-(b), (ii)-(c), (iii)-(d), (iv)-(a)
View solution
Correct Option: A
Lok Adalat — small; DRT — ≥ ₹20 lakh; SARFAESI — seizure without court; IBC — NCLT time-bound.
Q 20Sub-stdMedium

A loan that has been NPA for **up to 12 months** is classified as:

  • AStandard
  • BSub-standard
  • CDoubtful
  • DLoss
View solution
Correct Option: B
**Sub-standard** = NPA ≤ 12 months.

63.9 Quick Recall

ImportantQuick recall
  • Reform waves: Narasimham I (1991), N-II (1998); SARFAESI 2002, IBC 2016, PSB consolidation 2017-20, NARCL 2021 (Bad Bank).
  • Basel I 1988 → Basel II 2004 (three pillars) → Basel III 2010 (post-GFC; LCR, NSFR, leverage) → Basel IV 2017+.
  • India Basel III floor: CAR 9 %, CET1 5.5 %, Tier 1 7 %, CCB 2.5 %.
  • D-SIBs: SBI, ICICI Bank, HDFC Bank.
  • Risks: Credit, Market, Operational, Liquidity, Reputational, Legal, Cyber.
  • NPA = 90 days overdue; IRAC: Standard, Sub-standard (≤ 12 m), Doubtful (> 12 m), Loss.
  • Recovery: Lok Adalat, DRT (RDB Act 1993), SARFAESI 2002, ARCs, IBC 2016 (180/330 days; CoC vote 66 %), NARCL 2021.
  • PCA framework — CRAR + Net NPA + ROA/leverage.