From : E-Group, STC, Salt Lake, Kolkata Dear Member, Kindly double click on the enclosed attachment to read it. With regards, Anup Sen, Moderator E-Group, STC, Salt Lake, Kolkata email : stcsaltlake@xxxxxxxx We are receiving emails from our members advising that they are not receiving emails from us. In this regard we like to inform our members that there may be two reasons for non receipt of the emails as under: 1. If mails are returned from your mail box (due to hard bounce) as there is no space in the mail box, our system automatically delete your email from the list. To avoid these, please ensure to download regularly the mails sent by us and keep enough space in the mail-box. 2. Some of the e-mail servers (e.g. yahoo.com, sify.com, rediff.com or hotmail.com etc) may treat our mails as "SPAM" and delete the mails. Some of them put these mails in the "Bulk Folder". If such is the case, please take up the matter with your respective e-mail service provider to sort out the problem. However, if you do not receive our mails please contact us. We shall be glad to receive your feedbacks through emails regarding the mails being sent to you through this e-group. This message is intended only for the use of the Addressee and may contain information that is PRIVILEGED and CONFIDENTIAL. If you are not the intended recipient, dissemination of this communication is prohibited. If you have received this communication in error, please erase all copies of the message and its attachments and kindly arrange to notify stcsaltlake@xxxxxxxx immediately.Title: State Bank of India, Staff Training Centre, Salt Lake, Kolkata. : : stcsaltlake@xxxxxxxx : :
Yesterday we had very
absorbing discussions on macro issues, regulatory perspectives and risk
management challenges relating to Basel II. We are now not debating whether to
go forward with Basel II but how to implement Basel II. In fact, understanding
Basel II concepts is one step away from agreeing to it in principle.
Implementing Basel II is another long step away from understanding it. Let me
briefly detail some implementation issues with specific reference to India. Features of Indian
Financial System A feature, somewhat
unique to the Indian financial system is the diversity of its composition. We
have the dominance of Government ownership coupled with significant private
shareholding in the public sector banks which in turn continue to have a
dominant share in the total banking system. These public sector banks are
listed on the stock exchange and their performance is reflected in their P/E
ratios. The private sector banks especially the new ones are world class. We
also have cooperative banks, whose numbers are large and pose a challenge
because of the multiplicity of regulatory and supervisory authorities. There
are also Regional Rural Banks with links to their parent commercial banks.
Foreign bank branches operate profitably in India and by and large the
regulatory standards for all these banks are uniform. The process of providing
financial services is changing rapidly from traditional banking to a one stop
shop of varied financial services and the old institutional demarcations are
getting increasingly blurred. Approach to
Prudential Norms: A Review The Reserve Bank?s
approach to the institution of prudential norms has been one of gradual
convergence with international standards and best practices with suitable
country specific adaptations. Our aim has been to reach global best standards
in a deliberately phased manner through a consultative process evolved within
the country. This has also been the guiding principle in the approach to the
New Basel Accord e.g. while the minimum capital adequacy requirement under the
Basel standard is 8% in India, we have stipulated and achieved a minimum
capital of 9%. On the other hand, banks in India are still in the process of
implementing capital charge for market risk prescribed in the Basel document
although since 1998 we have in place several surrogates such as an Investment
Fluctuation Reserve of 5% of the investment portfolio, both in the AFS and HFT
categories plus a 2.5% risk weight on the entire investment portfolio ? whereas
Basel norms take into account only the trading portfolio. RBI?s involvement in
Basel II RBI?s association
with the Basel Committee on Banking Supervision dates back to 1997 as India was
among the 16 non-member countries that were consulted in the drafting of the
Basel Core Principles. Reserve Bank of India became a member of the Core
Principles Liaison Group in 1998 and subsequently became a member of the Core
Principles Working Group on Capital. Within the CPWG, RBI has been actively
participating in the deliberations on the Accord and had the privilege to lead
a group of 6 major non G -10 supervisors which presented a proposal on a
simplified approach for Basel II to the Committee. The Basel Committee
on Banking Supervision is yet to issue the final Basel II document. The Reserve
Bank?s comments on the 3rd consultative document on the New Capital
Accord on the basis of the quantitative impact studies (QIS 3) undertaken in co-ordination
with select banks has brought out the need for more simplicity and greater
flexibility on account of the different levels of preparedness of the banking
system in India. Policy Approach In general, keeping
in view the RBI?s goal to have consistency and harmony with international
standards and our approach to adopt the pace as may be appropriate in the
context of our country specific needs, the RBI had in April 2003 itself
accepted in principle to adopt the new capital accord Basel II. The RBI has
announced, in its Annual Policy statement in May 2004 that banks in India
should examine in depth the options available under Basel II and draw a
road-map by end December 2004 for migration to Basel II and review the progress
made thereof at quarterly intervals. The Reserve Bank will be closely
monitoring the progress made by banks in this direction. Hence, at a minimum
all banks in India, to begin with, will adopt Standardized Approach for credit
risk and Basic Indicator Approach for operational risk. After adequate skills
are developed, both in banks and at supervisory levels, some banks may be
allowed to migrate to IRB Approach. Regulatory
Initiatives The regulatory
initiatives taken by the Reserve Bank of India include: o
Ensuring that the banks have suitable
risk management framework oriented towards their requirements dictated by the
size and complexity of business, risk philosophy, market perceptions and the
expected level of capital. The framework adopted by banks would need to be
adaptable to changes in business size, market dynamics and introduction of
innovative products by banks in future.
Challenges Envisaged
Against the above
background and the complexities involved as also the areas of
"constructive ambiguity" in concepts and their application we
envisage the following regulatory and supervisory challenges ahead: ·
India has three established rating
agencies in which leading international credit rating agencies are stakeholders
and also extend technical support. However, the level of rating penetration is
not very significant as, so far, ratings are restricted to issues and not
issuers. While Basel II gives some scope to extend the rating of issues to
issuers, this would only be an approximation and it would be necessary for the
system to move to ratings of issuers. Encouraging ratings of issuers would be a
challenge.
o
Whether the internal models approved by
their head offices and home country supervisor adopted by the Indian branches
of foreign banks need to be validated again by the Reserve Bank or whether the
validation by the home country supervisor would be considered adequate?
·
Basel II could actually imply that the
minimum requirements could become pro-cyclical. No doubt prudent risk
management policies and Pillars II and III would help in overall stability. We
feel that it would be preferable to have consistent prudential norms in good
and bad times rather than calibrate prudential norms to counter
pro-cyclicality.
o
Banks adopting IRB Approach will be much
more risk sensitive than the banks on Standardised Approach, since even a small
change in degree of risk might translate into a large impact on additional
capital requirement for the IRB banks. Hence IRB banks could avoid assuming
high risk exposures. Since banks adopting Standardised Approach are not equally
risk sensitive and since the relative capital requirement would be less for the
same exposure, the banks on Standardised Approach could be inclined to assume
exposures to high risk clients, which were not financed by IRB banks. As a
result, high risk assets could flow towards banks on Standardised Approach
which need to maintain lower capital on these assets than the banks on IRB
Approach.
These issues would
need to be addressed satisfactorily. Conclusion In conclusion, I
would say that keeping in view the cost of compliance for both banks and
supervisors, the regulatory challenge would be to migrate to Basel II in a
non-disruptive manner. We would like to continue the process of interaction
with other countries to learn from their experiences through various
international fora. I may mention that India is one of the early countries
which subjected itself voluntarily to the FSAP of the IMF and our system was
assessed to be in high compliance with the relevant principles. With the
gradual and purposeful implementation of the banking sector reforms over the
past decade, the Indian banking system has shown significant improvement on
various parameters, has become robust and displayed ample resilience to shocks
in the economy. There is therefore, ample evidence of the capacity of the
Indian banking system to migrate smoothly to Basel II. |