Basel III is the international capital and liquidity standard issued by the Basel Committee on Banking Supervision (BCBS) after the 2008 global financial crisis. In India, RBI implemented Basel III for all Scheduled Commercial Banks (excluding Payments Banks, Small Finance Banks, and RRBs) through its Master Circulars. For bank promotion exams, Basel III is tested at every scale from Scale II to Scale V — expect 6 to 10 questions covering CRAR, Tier 1/Tier 2, D-SIBs, LCR, NSFR, and the three pillars.

Why Basel III? — The Background in One Paragraph

Basel I (1988) set a flat 8% CRAR. Basel II (2004) added risk sensitivity and the three-pillar framework. Both failed to prevent the 2008 crisis because they allowed thin capital buffers, excessive leverage, and over-reliance on short-term funding. Basel III (2010–2013, implemented in India from April 1, 2013 in phases) addressed this by raising the quality and quantity of capital, adding liquidity ratios, and introducing a leverage ratio backstop. The BCBS finalised “Basel IV” (the Basel III reforms) in December 2017; RBI’s implementation begins April 1, 2027.

The Capital Adequacy Framework — Numbers You Must Know

Capital Component	Minimum (% of RWAs)	With CCB
Common Equity Tier 1 (CET1)	5.5%	8.0%
Tier 1 Capital (CET1 + AT1)	7.0%	9.5%
Total CRAR (Tier 1 + Tier 2)	9.0%	11.5%
Capital Conservation Buffer (CCB)	2.5% — entirely in CET1; triggers distribution restrictions if breached
Countercyclical Capital Buffer (CCCB)	0–2.5% in CET1; activated by RBI during excess credit growth — currently 0%

India vs Global: RBI sets the minimum CRAR at 9%, one percentage point above the global Basel III floor of 8%. This is a deliberate conservative position — tested frequently in exams.

Capital Components — CET1, AT1, Tier 2

Tier 1 Capital — Going-Concern Capital

Tier 1 capital absorbs losses while the bank is a going concern (still operating). It has two sub-components:

Sub-component	What Qualifies	Cap / Key Rule
CET1 — Common Equity Tier 1	Paid-up equity, share premium (equity), statutory reserves (Sec. 17 BR Act), retained earnings, disclosed free reserves, qualifying AOCI	No cap — highest quality capital; first loss absorber
AT1 — Additional Tier 1	Perpetual Non-Cumulative Preference Shares (PNCPS), Perpetual Debt Instruments (PDIs — AT1 bonds)	Capped at 1.5% of RWAs; discretionary coupons; can be written down or converted

CET1 Deductions (items deducted before computing CET1): Goodwill, other intangibles, deferred tax assets (DTAs) above threshold, shortfall in provisions, investments in own shares, securitisation gains on sale, investments in subsidiaries beyond threshold.

Tier 2 Capital — Gone-Concern Capital

Tier 2 absorbs losses only in liquidation (gone concern). Key instruments and rules:

• Subordinated debt (minimum original maturity 5 years; amortised at 20%/year in final 5 years; excluded when residual maturity < 1 year)
• General provisions and loan loss reserves — up to 1.25% of credit risk RWAs
• Perpetual Cumulative Preference Shares (PCPS), Redeemable Non-Cumulative/Cumulative Preference Shares (RNCPS/RCPS)
• Subordinated debt limited to 50% of Tier 1 capital; total Tier 2 cannot exceed 100% of Tier 1
• All non-equity instruments must include Point of Non-Viability (PONV) clauses — RBI can direct write-off or conversion to equity

AT1 Bonds — Loss Absorption Triggers

AT1 bonds (Perpetual Debt Instruments) are a key exam topic, especially after high-profile write-downs globally:

Trigger	Threshold	Action
Going-concern trigger	Bank’s CET1 falls below 6.125% of RWAs	AT1 instruments written down or converted to equity
Point of Non-Viability (PONV)	RBI determines the bank has reached or is near non-viability, OR requires public capital injection	RBI directs full write-down of AT1 (and Tier 2) — gone-concern trigger

Risk-Weighted Assets (RWAs) — How CRAR is Calculated

CRAR = (Tier 1 Capital + Tier 2 Capital) ÷ Total RWAs × 100

RWAs are computed for three risk types under Pillar 1:

Risk Type	Approaches Available (Current)	Replacing From April 2027
Credit Risk	Standardised Approach (SA), Foundation IRB, Advanced IRB	Revised SA (Basel IV SA-CR Directions 2026) — more granular risk weights
Market Risk	Standardised Measurement Method, Internal Models Approach	FRTB — timeline for India TBD
Operational Risk	Basic Indicator Approach (BIA), Standardised Approach, AMA	Single BIC-based Standardised Approach (April 2027)

The Three Pillars of Basel III

Pillar	Name	What It Covers	Key Tools
Pillar 1	Minimum Capital Requirements	Quantitative minimum CRAR against Credit, Market, and Operational Risk RWAs	CRAR formula, risk weights, capital buffers
Pillar 2	Supervisory Review Process (SRP)	Bank-specific capital add-ons for risks not fully captured in Pillar 1 (concentration risk, IRRBB, liquidity risk, reputational risk, strategic risk)	ICAAP (by bank) + SREP (by RBI)
Pillar 3	Market Discipline	Public disclosures to allow investors and depositors to assess a bank’s risk profile and capital adequacy	Quarterly/annual disclosures — CRAR, risk exposures, capital structure, remuneration

ICAAP vs SREP — The Most Tested Pillar 2 Distinction

Feature	ICAAP	SREP
Full form	Internal Capital Adequacy Assessment Process	Supervisory Review and Evaluation Process
Done by	The bank itself	RBI (the supervisor)
Purpose	Bank assesses ALL risks it faces (beyond Pillar 1) and determines capital needed	RBI evaluates adequacy of the bank’s ICAAP; can impose bank-specific Pillar 2 add-ons
Scope of risks	Credit, market, operational + concentration risk, IRRBB, liquidity, strategic, reputational	Entire risk governance, stress testing quality, capital planning
Outcome	Internal capital target for the bank	RBI may require CRAR above regulatory minimum
Frequency	Annual (minimum)	Based on RBI’s supervisory cycle

D-SIBs — Domestic Systemically Important Banks

D-SIBs are banks whose failure could destabilise the entire financial system. RBI identifies them annually under its D-SIB framework (first published 2014). They face higher capital requirements and more intensive supervision.

Bank	D-SIB Bucket (2024–25)	Additional CET1 Surcharge	Effective Date
State Bank of India (SBI)	Bucket 4 (highest)	0.80% of RWAs	April 1, 2025
HDFC Bank	Bucket 3	0.40% of RWAs	April 1, 2025
ICICI Bank	Bucket 1	0.20% of RWAs	Ongoing

SBI’s total CET1 requirement for FY2025-26: 5.5% (minimum) + 2.5% (CCB) + 0.80% (D-SIB surcharge) = 8.80% of RWAs

G-SIBs (Global SIBs): BCBS identifies global systemically important banks. No Indian bank features in the G-SIB list as of 2026. Exam sometimes asks this — answer is “none.”

Liquidity Standards — LCR and NSFR

LCR — Liquidity Coverage Ratio

LCR = High Quality Liquid Assets (HQLAs) ÷ Total Net Cash Outflows over 30 days ≥ 100%

Purpose: Ensure a bank can survive a severe 30-day liquidity stress scenario (run on deposits, loss of wholesale funding) using only its stock of HQLAs without central bank support.

Feature	Detail
Minimum LCR	100% on an ongoing basis
HQLAs (Level 1)	Cash, excess CRR, government securities (G-Secs, T-Bills) eligible for RBI’s LAF — no haircut on Level 1
HQLAs (Level 2A)	15% haircut; government/PSU bonds rated AA– or above
HQLAs (Level 2B)	50% haircut; equities in key indices (limited eligibility in India)
Revised norms (April 1, 2026)	Digital retail deposits: +2.5% additional run-off; Non-financial entity funds: run-off reduced to 40% (from 100%)
Net impact of revised norms	Aggregate LCR of SCBs expected to improve by ~6 percentage points

NSFR — Net Stable Funding Ratio

NSFR = Available Stable Funding (ASF) ÷ Required Stable Funding (RSF) ≥ 100%

Purpose: Ensure banks maintain a stable funding profile relative to the maturity of their assets. Limits over-reliance on short-term wholesale funding. Effective in India from October 1, 2021.

	LCR	NSFR
Time horizon	30 days (short-term stress)	1 year (medium-term structural)
Measures	Stock of liquid assets vs net outflows	Stable funding available vs stable funding required
Problem addressed	Acute liquidity crisis (deposit run)	Structural over-reliance on short-term wholesale funding
Minimum	100%	100%

Leverage Ratio — The Non-Risk-Based Backstop

Leverage Ratio = Tier 1 Capital ÷ Total Exposure (on + off balance sheet) × 100

Unlike CRAR, the leverage ratio does not risk-weight assets — it is a simple, transparent measure that prevents banks from building up excessive leverage even when risk weights are low. Minimum: 4.0% for D-SIBs; 3.5% for all other SCBs.

Capital Conservation Buffer (CCB) — Dividend Restrictions

When a bank’s CET1 dips into the CCB zone (between 5.5% and 8.0%), it faces restrictions on distributions:

CET1 Range	Maximum Payout Ratio (Dividends + Buybacks + Discretionary Bonuses)
7.625% – 8.0%	40% of earnings
7.25% – 7.625%	20% of earnings
6.875% – 7.25%	0% — no payouts permitted
5.5% – 6.875%	0% — no payouts permitted
Below 5.5%	Bank breaches minimum CET1 — immediate RBI intervention

Basel IV — What Changes from April 1, 2027

BCBS finalised the Basel III reforms (popularly called “Basel IV”) in December 2017. RBI issued the Commercial Banks – Capital Charge for Credit Risk – Standardised Approach Directions, 2026, effective April 1, 2027. Key changes for India:

• Revised Standardised Approach for Credit Risk (SA-CR): More granular, risk-sensitive risk weights by asset class — sovereigns, banks, corporates, MSMEs, retail, residential real estate, commercial real estate, off-balance sheet. Expected to reduce capital requirements for MSME and home loan portfolios.
• Operational Risk: All three existing approaches (BIA, SA, AMA) replaced by a single Business Indicator Component (BIC)-based standardised approach.
• ECL Provisioning: Expected Credit Loss model to replace IRACP’s incurred loss model — announced by RBI Governor, effective April 1, 2027.
• Output Floor and FRTB (Market Risk): India-specific implementation timelines not yet finalised as of 2026.