Annual Policy Statement for the Year 2010-11- 20th April 2010
Part B. Development and Regulatory Policies
V. Regulatory and Supervisory Measures for
Strengthening the Resilience of the Banking Sector
90. In December 2009, the Basel Committee on Banking Supervision (BCBS) had issued two consultative documents for public comments. The document on ‘Strengthening the Resilience of the Banking Sector’ contains proposals for raising the quality, consistency and transparency of the capital base, enhancing risk coverage, prescribing leverage ratio and containing pro-cyclicality. The second document on ‘International Framework for Liquidity Risk Measurement Standards and Monitoring’ focuses on measures for further elevating the resilience of internationally active banks to liquidity stress across the globe as well as increasing international harmonisation of liquidity risk supervision. The Basel Committee is presently undertaking a Quantitative Impact Study (QIS) of these proposals. The QIS will form the basis for calibrating reforms proposed in the above two documents to arrive at an appropriate level and quality of capital and liquidity. The fully calibrated set of standards is expected to be developed by end-2010 with the aim of implementation by end of 2012. Ten large Indian banks are participating in the QIS.
Working Group on Valuation Adjustment and Treatment of Illiquid Positions
91. In the Second Quarter Review of October 2009, it was proposed to issue appropriate guidelines to banks for implementation of enhancements and revisions to Basel-II framework finalised by the Basel Committee in July 2009. Accordingly, the Reserve Bank issued guidelines to banks in February 2010. These guidelines require banks to make specified valuation adjustments for various risks/costs in their portfolios including derivatives, which are subject to ‘mark to market’ requirement and also for illiquidity of these positions. These guidelines also permit banks to follow any recognised models/methods for computing the amount of valuation adjustment. In order to ensure that a consistent methodology is adopted by banks for the purpose, it is proposed:
to constitute a Working Group with members from the Reserve Bank, FIMMDA, the IBA and a few banks to recommend an appropriate framework in this regard.
Convergence of Indian Accounting Standards with International Financial Reporting Standards
92. As part of the efforts to ensure convergence of the Indian Accounting Standards (IASs) with the International Financial Reporting Standards (IFRSs), the roadmap for banking companies and non-banking financial companies (NBFCs) has been finalised by the Ministry of Corporate Affairs in consultation with the Reserve Bank. As per the roadmap, all scheduled commercial banks will convert their opening balance sheet as at April 1, 2013 in compliance with the IFRS converged IASs.
93. However, with regard to UCBs and NBFCs, a gradualist approach is considered appropriate. The roadmap envisages UCBs having net worth in excess of Rs. 300 crore and NBFCs which are part of NSE-Nifty 50 and BSE-Sensex 30 as well as those NBFCs having net worth in excess of Rs.1,000 crore to converge with IFRSs in tandem with the time schedule given for scheduled commercial banks. UCBs having net worth in excess of Rs. 200 crore but not exceeding Rs. 300 crore and other listed NBFCs as well as unlisted NBFCs having a net worth in excess of Rs. 500 crore shall convert their opening balance sheets as on April 1, 2014 in compliance with the IFRS converged IASs. Remaining UCBs, unlisted NBFCs not falling in the above categories and regional rural banks (RRBs) need to follow only the notified IASs which are not converged with IFRSs.
94. Considering the amount of work involved in the convergence process, it is expected that banks and other entities concurrently initiate appropriate measures to upgrade their skills, management information system (MIS) and information technology (IT) capabilities to manage the complexities and challenges of IFRSs. The implementation poses additional challenge as certain aspects of IFRSs, especially the standards on financial instruments, are under review and would take some time before they are finalised. In order to facilitate smooth migration to IFRSs, it is proposed:
to undertake a study of the implications of the IFRSs convergence process and also to issue operational guidelines as appropriate.
to disseminate information through learning programmes with a view to preparing banks and other entities to adhere to the roadmap.
95. With a view to meeting the increasing financing needs of infrastructure development, the Reserve Bank has taken a number of measures to facilitate adequate flow of bank credit to this sector. In order to give a further thrust to infrastructure financing by banks, some further measures are felt necessary.
96. In terms of extant instructions, rights, licenses and authorisations of borrowers, charged to banks as collateral in respect of project loans (including infrastructure projects) are not eligible for being reckoned as tangible security for the purpose of classifying an advance as secured loan. As toll collection rights and annuities in the case of road/highway projects confer certain material benefits to lenders, it is proposed:
to treat annuities under build-operate-transfer (BOT) model in respect of road/highway projects and toll collection rights, where there are provisions to compensate the project sponsor if a certain level of traffic is not achieved, as tangible securities subject to the condition that banks’ right to receive annuities and toll collection rights is legally enforceable and irrevocable.
97. Till June 2004, the Reserve Bank had prescribed a limit on banks’ unsecured exposures. As a step towards deregulation, the above limit was withdrawn to enable banks’ Boards to formulate their own policies on unsecured exposures. The provisioning requirement for unsecured sub-standard exposures, however, was increased to 20 per cent consequent to the withdrawal of limits on banks’ unsecured exposures (the provisioning requirement for secured sub-standard exposures stands at 10 per cent). In view of certain safeguards such as escrow accounts available in respect of infrastructure lending, it is proposed that:
infrastructure loan accounts classified as sub-standard will attract a provisioning of 15 per cent instead of the current prescription of 20 per cent. To avail of this benefit of lower provisioning, banks should have in place an appropriate mechanism to escrow the cash flows and also have a clear and legal first claim on such cash flows.
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