Banks to adopt Basel II norms from Mar '07:RBI

All commercial banks will have to adopt Basel-II norms from March next year, the Reserve Bank has said in its Annual Report for 2005-06.

"All commercial banks in India are required to start implementing Basel II with effect from March 2007," RBI said.

Implementation of Basel II will require more capital for banks in India, due to the fact that operational risk is not captured under Basel I and the capital charge for market risk was not prescribed until recently.

"The cushion available in the system, which at present has a Capital to Risk Assets Ratio (CRAR) of over 12%, provides for some comfort but the banks are exploring various avenues for meeting the capital requirements under Basel II," it said.

In view of more capital requirement by banks, they were permitted to raise capital through new instruments like innovative perpetual debt (Tier I), debt capital instruments (upper Tier II), perpetual non-cumulative and redeemable cumulative preference shares (Tier I).

In the context of sharp credit growth to certain sectors, RBI has tightened prudential measures for specific sectors to safeguard the health of the banking sector.

Accordingly, the risk weight on bank's exposure to the commercial real estate was increased from 100% to 125% in July 2005 and further to 150% in April 2006.