RBI for Basel II rollout on consolidated basis

The Reserve Bank of India (RBI) has asked commercial banks to apply Basel II capital adequacy norms on a consolidated basis to include subsidiaries and overseas operations to get a clear picture of risks, capital charge and reporting requirements.

Indian banks are preoccupied with assessing the Basel II impact at the bank level and need to shift to an assessment at the consolidated level, RBI executive director Anand Sinha said in his address at a seminar on Basel II organised by the National Institute of Bank Management.

The apex bank has been conducting meetings with banks on to get their feedback on their preparations for Basel II. The Basel II norms, which are more stringent than the earlier capital adequacy regulations, now include capital allocation for operational risk.

It would be applied to standalone entity as well at the group level, Sinha said. Some banks may have to provide more resources to develop skills and manpower to implement these norms.

Referring to the health of the domestic banking sector, he said most of the banks would be able to comply with Basel II norms if they are applied now.

The average capital adequacy ratio of domestic banks was about 12.8 per cent at the end of March 31, 2005. After applying Basel II norms, the overall capital adequacy would decline by about two per cent. Still there would be enough space to adapt to the rigour of Basel II, he said.

Some domestic banks are eager to adopt internal ratings and other advanced approaches to compute capital adequacy needs, while the RBI has decided to opt for the basic indicator approach to begin with.

"Nobody should rush into it (to adopt sophisticated approach) till the banks and the supervisor (RBI) are ready for it," Sinha added.

The apex bank would soon spell out the details about new instruments which banks could use to raise tier-I capital.

The new instruments would be of great help for public sector banks as the government has decided not to dilute its stake below 51 per cent in government banks.

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GETTING READY

THE BASEL II norms ore stringent than earlier capital adequacy regulations, now include capital allocation for operational risk.

MORE RESOURCES have to be provided by banks to develop skills and manpower to implement these norms

THE RBI would soon spell out the details about new instruments which banks could use to raise tier-I capital