Towards Basel 2- India’s Preparedness

Towards Basel 2 India’s approach to Basel 2 India’s approach to Basel 2 Current level of preparedness Current level of preparedness What needs to be done What needs to be done Some cross border issues Some cross border issues

India’s approach to Basel 2 90 day norm for NPA from March day norm for NPA from March 2004 Capital charge for market risks on par with Basel 1 from Capital charge for market risks on par with Basel 1 from Indian commercial banks fully compliant with Basel 1 as on March 31, 2005 Indian commercial banks fully compliant with Basel 1 as on March 31, 2005 Standardised approach for credit risk and basic indicator approach for operational risk for all banks Standardised approach for credit risk and basic indicator approach for operational risk for all banks Standardised duration approach to market risk Standardised duration approach to market risk

Proposed implementation by March 31, 2007 Proposed implementation by March 31, 2007 Solo as well as consolidated bank level Solo as well as consolidated bank level Internationally active/ significant banks may be permitted to move to advanced approaches depending on preparedness Internationally active/ significant banks may be permitted to move to advanced approaches depending on preparedness February draft guidelines on capital adequacy framework and Pillar 3 disclosures February draft guidelines on capital adequacy framework and Pillar 3 disclosures March draft guidance notes on operational risk March draft guidance notes on operational risk Basel 2-Time table

Basel 2 – Agenda for RBI Enhance capital raising options Enhance capital raising options Recognise rating agencies Recognise rating agencies Finalise Basel 2 guidelines Finalise Basel 2 guidelines Guidance on ICAAP - Pillar 2 Guidance on ICAAP - Pillar 2 Refinement of RBS framework Refinement of RBS framework

How prepared are Indian banks? Average CRAR of over 12 per cent and cushion for meeting capital needs for most banks Average CRAR of over 12 per cent and cushion for meeting capital needs for most banks Many banks in process of putting in place risk management systems for advanced approaches Many banks in process of putting in place risk management systems for advanced approaches

What is further required for migration to minimum approach Board and senior management involvement with focused implementation team to internalise within the bank the decision making process of linking capital to risk Board and senior management involvement with focused implementation team to internalise within the bank the decision making process of linking capital to risk Application at consolidated level Application at consolidated level Refinement of internal credit rating systems Refinement of internal credit rating systems Implement OR risk management policy Implement OR risk management policy Data needs –technology and MIS –credit, market and OR Data needs –technology and MIS –credit, market and OR Implement RBIA Implement RBIA

Basel II –Initiatives required for migration to advanced approaches Development and use of statistical models for risk management Development and use of statistical models for risk management Internal Capital Adequacy Assessment Processes - use of concept of economic capital for decision making Internal Capital Adequacy Assessment Processes - use of concept of economic capital for decision making Top management to push for improving governance transparency and compliance Top management to push for improving governance transparency and compliance

Home Host Issues Host Supervisor to obtain all relevant information on risks assumed in local operations Host Supervisor to obtain all relevant information on risks assumed in local operations Model validation Model validation  Global models:  Association of host supervisor with home supervisor for validation  Flexibility to allow modifications relevant for significant host jurisdiction  Stress test and back test with local /regional environment

Thank You

Pillar 1 - proposals Scope of application Scope of application Solo and consolidated Solo and consolidated Adjust investments > 30% Adjust investments > 30% Credit risk Credit risk Sovereign Sovereign Zero except for guarantee exposure on State Govt 20% Zero except for guarantee exposure on State Govt 20% Banks – SCB – 20%, others 100% Banks – SCB – 20%, others 100% Claim on PSEs & PDs risk weighted as corporate Claim on PSEs & PDs risk weighted as corporate Claim on Corporate Claim on Corporate 20% to 150% as per external ratings 20% to 150% as per external ratings Unrated claims 100% Unrated claims 100%

Retail – 75%- satisfy Orientation, product, granularity and low value exposure Retail – 75%- satisfy Orientation, product, granularity and low value exposure Residential mortgages – 75% Residential mortgages – 75% Past due loans – unsecured, unprovided portion Past due loans – unsecured, unprovided portion If specific provision < 20% – 150% RW If specific provision < 20% – 150% RW If specific provision 20 to 50% – 100% RW If specific provision 20 to 50% – 100% RW If specific provision > 50% – 50% RW If specific provision > 50% – 50% RW Other assets 100% Other assets 100% Credit risk mitigation – Comprehensive method Credit risk mitigation – Comprehensive method Risk mitigants – rated debt securities, listed equity, guarantees, cash, gold bullion & jewellary, LIC policies, IVP,KVP, NSC and MFs. Risk mitigants – rated debt securities, listed equity, guarantees, cash, gold bullion & jewellary, LIC policies, IVP,KVP, NSC and MFs. Pillar 1 - proposals (2)