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Three track approach to capital adequacy in banks-Migration to Basel-II

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.

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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