Rbi Goes Easy On New Basle Accord

The Reserve Bank of India (RBI) is not pushing Indian banks to implement the new Basle Capital Accord. The accord should initially be applicable only to internationally-active banks, said the central bank.

The internationally-active banks, in view of the RBI, will be those which have cross-border deals accounting for more than 15 per cent of their business.

This effectively excludes all Indian banks as they are not allowed to have overseas exposure of more than 15 per cent of their tier-I capital.

The central bank feels that the national supervisors should be given the discretion to implement the new accord in a phased manner.

The apex bank views that though the three-year transition period for the full compliance with the new accord would be sufficient for the internationally-active banks, other banks may need longer time.

"RBI, therefore, feels that national supervisors may be given discretion to implement the new accord, in a phased manner by banks, which are not internationally active and are engaged predominantly in traditional banking," it said.

The New Basle Capital Accord is likely to take final shape by end-2001 and is expected to be implemented in 2004. RBI, however, warned that the accord has to be modified suitably before implementation, as otherwise it will result in significant increase in the capital charges for the banks.

The central bank supports the view of the Basle committee that reciprocal cross-holdings of bank capital artificially designed to inflate capital position of banks should be deducted.

But it feels that cross-holdings of equity and other regulatory investments is to be capped as well to preserve the integrity of the financial system and to minimise the adverse effect of systemic risk and contagion.

"RBI is, therefore, of the view that the Basle Committee may consider prescribing a material limit (10 per cent of total capital) up to which crossholdings and other regulatory investments could be permitted and any excess investments above the limit would be deducted from total capital," the central bank said.

The central bank in line with the committee recommendation, views that risk weighting of banks should be delinked from sovereign rating.

"Instead, preferential risk weights should be assigned on the basis of their underlying strength and creditworthiness," the RBI said.