Basel III bounty for India

Basel 3 may turn out to be a blessing for India- and other BRICS countries such as China and Brazil. Basel 3 will depress returns on equity in western banks by raising capital requirements. Indian banks's return on assets of 1% and return on equity of 12-18% is better than what western banks can produce and it's likely to stay at that level, thanks to financial inclusion.

Financial inclusion will force Indian banks to reach out to high-yielding small borrowers. This will entail a significant upfront cost but will yield payoffs in terms of an increase interest rate margin. Indian banks also have the potential to increase overall returns by raising fee income and by returning to credit cards and personal loans.

Thus, Basel 3 will have the effect of accelerating the process of catching up of emerging market banks with those in the west. More in my ET column, Stormy tide favours Indian banks.