The finance ministry has charted out a seven-point agenda for banks to get ready for the stringent Basel-II norms by March 2007.Since implementation of the new norms would necessitate greater capital requirement, the ministry has asked Reserve Bank of India (RBI) to come up with a guideline for new hybrid instruments that could be treated as capital by December-end, an informed official said today.The ministry has circulated a set of steps for estimating the capital requirement in consonance with the risks and to align with Basel-II norms. "Banks have been asked to start a new rating model to measure probability of default," the official said.Since Basel-II norms envisage providing for credit, market and operational risks, banks have been told to track the risks minutely.Banks will also have to put in place a "score-card approach" for further improving control systems and upgrading tracking system for operational risks. Though some of the banks have effective treasury management, the ministry has asked all banks to ensure active portfolio management.Banks have been asked to estimate two new parameters - loss given default (LGD) and exposure at default (EAD).A model for risk adjusted return on capital-based pricing has also been mooted for banks instead of the present practice of a mere return on capital-based pricing mechanism.
