It indeed heavily impacted Indian banks’ capital adequacy and risk management after introducing Basel III norms. These new standards arising out of the global financial crisis of 2008 require higher capital requirements and improved liquidity standards in terms of building up resilience for the banking sector.

The above factor forced Indian banks to raise their capital adequacy ratios: there is an increasing equity or, more often, retained earnings, which can afford shocks much better now. Nevertheless, this has brought along certain challenges that cannot be managed by smaller banks in attracting sufficient capital.

The stricter norms for capital affected the lending practices, as the banks became more risk averse, particularly in the riskier sectors. To an extent, Basel III has permitted sustaining a higher proportion of Tier-1 capital and thus encouraged banks to be quality-specific rather than quantity-specific in lending, that is, secured loans instead of unsecured ones. Hence, though improving the quality of assets, credit growth has become slow-affecting the sectors highly bank-financed most.

On these lines, profitability has also been dealt with because larger capital is required to be deployed reduce leverage and hence the return on equity of banks. The increased focus on liquidity and risk management have also seen operational costs increase. Although, Basel III had the benign effect of stability in the Indian banking sector, it involved the cost of restricted profitability and a more conservative approach towards lending.