Towards Basel 2- India’s Preparedness

1. Towards Basel 2- India’s Preparedness

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

3. India’s approach to Basel 2 • 90 day norm for NPA from March 2004 • Capital charge for market risks on par with Basel 1 from 2004-05 • 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 duration approach to market risk

4. Basel 2-Time table • Proposed implementation by March 31, 2007 • Solo as well as consolidated bank level • Internationally active/ significant banks may be permitted to move to advanced approaches depending on preparedness • February 2005 - draft guidelines on capital adequacy framework and Pillar 3 disclosures • March 2005 - draft guidance notes on operational risk

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

6. How prepared are Indian 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

7. 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 Refinement of internal credit rating systems Implement OR risk management policy Data needs –technology and MIS –credit, market and OR Implement RBIA What is further required for migration to minimum approach

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

9. Home Host Issues • Host Supervisor to obtain all relevant information on risks assumed in local operations • 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

10. Thank You

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

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