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    FM Project

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    Rabjoat Singh

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    © All Rights Reserved
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    FM Project

    Uploaded by

    Rabjoat Singh
    4 views7 pages

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    Fm project

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    4 views7 pages

    FM Project

    Uploaded by

    Rabjoat Singh

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    © All Rights Reserved
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    Abstract

    Over the past two decades, this growth has taken place due to regulatory
    frameworks focusing efforts towards preserving global financial stability.
    The core of this effort was in the Basel Accords, initially developed by the
    Basel Committee on Banking Supervision (BCBS), outlining international
    standards for banks' own capitals. Basel I had adopted risk-based capital
    adequacy norms, while Basel II further developed these into a
    comprehensive framework that included capital requirements, supervisory
    reviews, and market discipline. Post-2007-2008 financial crisis, Basel III
    introduced more stringent requisites for banks to get higher capital,
    higher leverage, and stronger liquidity. The adaptation of Basel norms in
    India enhanced efficiency and stability within the banking system. Fintech
    is the space that seems to be increasingly rising. It has been a revolution
    in the whole financial map since 2015. The innovations in payments,
    lending, and wealth management make technologies such as blockchain,
    artificial intelligence, or big data reduce costs, enhance efficiency, and
    expand financial inclusion. This is a change that has challenged traditional
    banking models and had propelled rapid growth in fintech-developing
    markets like India.

    Introduction to the International Financial


    System

    The international financial system has ballooned significantly over the


    past two decades or so. The objective here is to set regulatory frameworks
    to preserve global financial stability. An important part of prudential
    regulation and banking supervision has had to do with the Basel Accords.
    They were first conceived by the Basel Committee on Banking Supervision
    (BCBS). These accords set to provide global standards for regulation of
    banks to ensure that the banks have adequate capital reserves to absorb
    shock losses and contain systemic risks.

    Introduction to the Basel Framework


    The BCBS introduced the Basel Accords to ensure stability in and the
    resilience of the banking system. Basel I of the series brought in risk-
    based capital adequacy norms, which gained worldwide acceptance,
    including that of India. Capital adequacy simply means the ratio of a
    bank's capital to its risk-weighted assets, an important measure to
    determine the ability of the banks to meet their obligations . Basel I was
    fundamentally concerned with credit risk and mandated a minimum of 8%
    Capital to Risk Weighted Assets Ratio (CRAR) for banks. This helped to
    standardize the management of banks' risks and provided a global
    benchmark, in a way, for the stability of finances across the board.

    Basel I: Architecture and Key Concepts

    Capital Types
    There were two types of capital that Basel I provided for banks:

    Tier I (Core Capital): Equity capital and disclosed reserves, it is the first
    form of cushion against losses

    Tier II (Supplementary Capital): Undisclosed reserves, revaluation


    reserves, and subordinated debt which serves as an additional cushion.

    They were required to have at least 50 percent of the capital base as Tier
    I.

    Risk Weighing of Assets:


    Under these assets are placed in five risk categories, ranging from 0% to
    100% in terms of levels of risk. Examples include cash, which is at 0%
    while private sector loans sit at 100%. The larger the risk, the more in
    capital a bank must hold and thus the more in capital that banks' existing
    positions will hold the better capitalized the banks' are to meet the risk
    profile their asset portfolio.

    Market Risk Amendment:


    In 1996, Basel I was extended to include market risk, which means that
    risks includes losses arising from both a rise and fall in markets such as
    interest and foreign exchange among others. From Basel I, the approach
    for market risk is now about the point of bank's leverage for either
    standardized or internal models approach therefore Tier III Capital.
    Basel II: An All-Inclusive Framework

    In 1999, BCBS unveiled Basel II, launched in 2004, which extended the
    scope of Basel I and built upon it. Basel II introduced a far more expansive
    risk management framework through three pillars:

    1. Minimum Capital Requirements (Pillar 1): The CRAR that included


    credit, market, and operational risks.

    2. Supervisory Review (Pillar 2): Banks were strengthened through


    robust risk management systems, that enabled supervisors to review
    capital adequacy and risk profiles.

    3. Market Discipline (Pillar 3): Promoted transparency by disclosing


    details about the exposure to risks and the adequacy of capital that would
    subsequently enable market players to make well-formed decisions.

    Impact on the Indian Banking System


    India adopted Basel II norms in 2007, and it was adopted by the domestic
    banks of the country in the year 2009. All efforts were provided by RBI
    during this transition period. Basel II adopted high risk management
    system and increased capital buffers relating to operational risks.
    Inefficiencies will not affect the Indian banking system as much due to
    taking up the Basel norms since they have improved the efficiency of the
    Indian banking system in carrying out economic shocks.

    BASEL III
    Basel III is the new international regulatory framework, set up after the
    financial crisis of 2007-2008, to strengthen the banks' resilience post-
    crisis. The framework enhances capital, leverage, and liquidity
    requirements over the earlier Basel I and Basel II accords with the prime
    objective of strengthening the banks to sustain various economic stresses
    and avoiding systemic failure.

    Basel III Highlights


    1. Surcharged Capital Requirements: The minimum common equity of
    banks has now been surcharged in January 2015 from 2% to 4.5% which
    acts to provide banks with a cushion against possible losses, allowing the
    bank to absorb shocks during the downturn.

    2. Capital Conservation Buffer: A new capital conservation buffer of


    2.5% has been introduced, taking the total Tier 1 Capital requirement to a
    whopping 7%. This buffer is meant to be drawn down during times of
    financial stress so that banks can prevent their capital levels from falling
    below the minimum capital requirement during downturns.

    3. Countercyclical Buffer: The countercyclical buffer allows for an


    additional capital requirement ranging between 0% to 2.5% when the
    growth of credit is too high. This measure would aim to increase the
    banks' resiliency in case of an expansion in the economy so that they
    increase their capital buffers available at the onset of decline.

    4. Leverage Ratio: Basel III mandates at least 3% in leverage ratio of


    Tier 1 capital to be available against total assets from 2017. This would
    act as a backstop to risk-weighted capital ratios and will ensure that banks
    do not over-leverage their balance sheets.

    5. Liquidity Risk Measurement: LCR the level of good liquid assets that
    banks should maintain to cover cash out-flows over an assumed 30-day
    stress period. The minimum required ratio should be 100%

    6. Net Stable Funding Ratio, NSFR: The NSFR requires banks to have
    an asset-liability funding profile so that their assets are funded by stable
    sources of funding. Like the LCR, the NSFR aims for better bank stability
    under financial stress.

    As the norms of Basel III are more stringent, the implementation of Basel
    III would be difficult to the entire banking sector. The effects of Basel III
    would be as follows:.

    • Basel III regime would require banks to make a liquidity and capital
    surplus to hold the requirement of the given capital adequacy norms. The
    stricter definition of capital in Basel III will lead the bank's total available
    capital downwards once again.

    • Banks holding significant exposure in trading position, securitization


    portfolio, derivatives, and repo-style transactions will be going to face
    the highest impact.

    • Banks will cut their dividend since they need to restore the capital base;
    this hurts investors. Banks may not get investors in future.

    • Under Basel III, the banks would have to hold a higher amount of capital
    which would primarily consist of common equity under the new definition
    of regulatory capital under Basel III. This would reduce the ROE for the
    banks. The fall in return on equity would reduce the investor's appetite for
    the issuance of capital from the banking sector.

    • Higher capital would negatively impact the Net Interest Margin (NIM)
    and the Net profitability of the bank.

    • The most challenging task that the Indian public sector banks will have
    to face when implementing Basel III is to hold or maintain a relatively
    decent growth in the level of Capital and Leverage ratios without getting
    into too much risky business.

    • On comparing the private sector banks and public sector banks we could
    infer that private sector banks are in a better position for Basel III
    implementation as the private banks have a much higher capital
    adequacy ratio and a better asset quality than that of public sector banks.

    • As a result of this, the weighted average cost of capital will increase


    since the banks' capital requirements are on the rise. Therefore, the banks
    may have to raise the lending rates. Banks may be able to pass their
    funding cost up to the customers by raising the lending spread.

    Revolutionizing Global Finances: Fintech and Its


    Effect on the Financial Sector
    The incorporation of novel technologies in financial markets has seen
    Fintech change the global banks' landscape and influences their trend. Big
    data, blockchain, artificial intelligence, and automation have all
    transformed every trend in banking, lending, payments, wealth
    management, and insurance. Since 2015, fintech start-ups have been
    impacting financial markets in developing countries, especially India. The
    COVID-19 pandemic has accelerated the pace of embracing digital
    financial services, giving people more access to banking services and
    making a greater reliance shift from the traditional banking system.
    Fintech nowadays serves as a transformative innovation, which not only
    enhances efficiency and access for consumers and businesses but is also
    significantly impactful in altering and transforming the way businesses are
    conducting now.
    Key Areas of Fintech Impact

    Fintech and Efficiency


    Reducing Costs of Intermediation: Fintech companies have reduced
    the cost of financial products because they have tackled information
    asymmetries, which were basic in banking. The costs for firms are
    relatively cheaper than traditional banks as they use advanced
    technologies.

    Peer-to-Peer (P2P) Lending: Firms like Lending Club, Prosper, and Zopa
    link the borrower directly with the lender, avoiding the banks as
    intermediaries. The big data and algorithms for risk profiling reduce the
    cost of loans and save processing time.

    Operational Efficiency: The absence of traditional and less effective


    systems allows Fintech firms to build more efficient and streamlined
    operations. Their ability to change efficiently allows them to introduce
    newer technologies faster than traditional banks by removing the
    limitations of traditional banking systems.

    Payment Systems and Digital Disruption


    Digital Payment Platforms: Enterprises like PayPal, Apple Pay, Google
    Pay, and Amazon Pay have all transformed the forms of payments into M-
    payments. These digital payment platforms promote convenient mobile-
    based transactions.

    Blockchain and Cryptocurrency: The blockchain technology that goes


    behind cryptocurrency, like bitcoin, changes the way payments are made.
    All transactions can be made safely without any intermediary, like a bank,
    and cuts down the transaction costs and provides transparency, thereby
    allowing direct transactions between two parties by using public digital
    ledgers.

    Mobile Financial Solutions: The mobile-based payment solutions have


    enabled financial access in the unbanked populations of the low-
    penetration regions. These services also avail micro-loans and other
    financial products to clients with limited credit history, thus encouraging
    financial inclusion.

    Impact on Traditional Banks and Market Structure


    Displacement of Traditional Banking Models: Fintech firms will be
    relying on codifiable, "hard" data in making decisions regarding lending
    and investments, thereby displacing the traditional banking models where
    banks have relied on gathering "soft" information through personal
    relationships with customers.

    Avoidance of Banking Licenses: Most the fintech firms operate


    unlicensed. This avoids the regulatory and compliance cost assumed by
    traditional banks. They focus on high margin businesses including lending,
    payment, and wealth management.

    The Role of Big Tech in Disruption: Major tech companies such as


    Amazon, Google, and Apple will be able to continue disrupting the
    financial services industry. They have access to a large amount of
    consumer data and owned digital platforms, which will be leveraged into
    payments, lending, and insurance products.

    Fintech in India
    Rapid growth since 2015: The Indian wave of fintech began to pick up
    significantly in 2015 with participants like Paytm, Razorpay, and Google
    Pay transforming payments, lending, and asset management. Digital
    wallets and payment apps are now part of daily life in India.

    Impact of COVID-19: The pandemic ended up pushing India further


    towards fintech, making the country supportive of financial inclusion
    through digital payment and lending. By 2019, digital transactions in India
    reached over 32 billion, worth ₹69 trillion, and this is expected to go
    beyond ₹238 trillion by 2025.

    Financial Literacy: Fintech platforms have encouraged financial literacy


    among consumers through digital tools that calculate loan EMIs, insurance
    premiums, and other financial products.

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