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To ensure smooth migration
to Basel II, a consultative and participative
approach has been adopted by Reserve Bank of India (RBI) for both - designing
and implementing Basel II. 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.
Three track approach to capital adequacy in banks-Migration to Basel-II
According to RBI, Preliminary analysis indicates that the
combined capital adequacy ratio of select banks
is expected to come down by about 100 basis
points when these banks apply Basel II norms.
In view of the size and complexity
of operations of the banking system [commercial
(public, private, foreign) and co-operative banks;
single and multiple state co-operative banks; duality
of control; and deposit taking non-banking
companies], the capital adequacy norms applicable
to these entities have been maintained at varying
levels of stringency. Therefore, a three-track approach has
been adopted by RBI with regard to capital adequacy.
On
the first track, commercial banks would be required
to maintain capital for both credit and operational
risks as per Basel II framework. Commercial banks
are already required to maintain capital for market
risk as per Basel I framework; capital charge for
market risk has not been modified under Basel II.
The co-operative banks, on the second track, are
required to maintain capital for credit risk as per
Basel I framework and through surrogates for
market risk; and the regional rural banks, on the
third track, have a minimum capital requirement.
Reserve Bank of India has also enabled issue of several instruments
by banks, viz., innovative perpetual debt
instruments, perpetual non-cumulative preference
shares, redeemable cumulative preference shares
and hybrid debt instruments to enhance their
capital raising options.
Steps taken by RBI for implementation of Basel II and the emerging issues...Click here
Challenges and implications of Basel II for Asia ...Click here
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