Only major banks to follow Basel-II
RESERVE BANK OF INDIA ANNUAL REPORT 2005-06
| While leading domestic banks will be the first to implement the revised capital adequacy (popularly known as Basel-II) norms in 2007-08, the smaller (weaker) ones will be allowed to continue with the current (Basel-I) guidelines. |
| The implementation of the revised capital adequacy framework "� stipulated by the Basel committee of the Bank for International Settlements "� will require more capital for banks in India. |
| This is because operational risk is not captured under Basel-I and the capital charge for market risk was not prescribed until recently. |
| The cushion currently available in the system in the form of an over 12 per cent CRAR (capital-to-risk weighted assets ratio) offers some comfort. |
| The Reserve Bank of India (RBI) said in the post-March 2007 scenario, Basel II, Basel-I and non-Basel entities would be operating simultaneously in the domestic banking system. |
| The three-track approach will not only ensure a greater outreach of the banking business but also, in the present high growth scenario, enable banks to usefully lend to the disadvantageous sections and successfully pierce the informal credit segment. |
| The Basel-II capital norms are basically meant to be implemented by banks with global operations but have been left to the discretion of national banking regulators to extend it to other banks, as well. |
| The RBI recognises that the three-track approach to Basel-II implementation can pave the way for regulatory arbitrage within the banking system. |
| But it is not much concerned over the relatively insignificant size of the non-Basel-II entities and their relevance from the systemic perspective. |
| The central bank, however, has not indicated anywhere which banks need not implement Basel-II norms from March 31, 2007, the date it has mentioned in the draft guidelines on Basel-II. |
| All commercial banks in the country are required to adhere to the Basel-I norms, but other financial sector players are required to follow non-Basel regulations given the size, complexity of operations and relevance to the financial sector. |
| Banks in India will initially adopt the standardised approach for credit risk and the basic indicator approach for operational risk under the Basel-II norms. The standardised approach involves common capital allocation standards for all banks, irrespective of the quality of assets. |
| After both banks and supervisors develop adequate skills, some banks may be allowed to migrate to IRB (internal ratings-based) approach, which is expected to ensure much more efficient capital allocation with higher allocation for weaker assets and lower allocation for good assets. |