[sbinews] SBI moves towards Basle II (Business Standard)

  • From: "Rajendra S. Pai" <rs.pai@xxxxxxxxx>
  • To: <sbinews@xxxxxxxxxxxxx>
  • Date: Thu, 19 Aug 2004 08:19:28 +0530

SBI moves towards Basle II
(Business Standard)
 Anindita Dey & Freny Patel / Mumbai August 17, 2004

The State Bank of India (SBI) has appointed Deloitte & Touche as consultant
to prepare a roadmap for prudent risk management. With this, India's largest
bank has kickstarted the process to implement Basle II norms.

Senior banking sources said the process will take time as operational risk
is a new focus area for the Indian banking system. They added that the
exercise is expected to take one and a half years given the need to collate
adequate data before actually implementing the norms.

Industry sources said the SBI already has a credit rating model and an
inspection model in place, while other public sector banks trail much
behind. SBI also has undertaken work on its market risk model.

Under Basle II norms, banks have to move towards a graded system of
assigning risk weights depending upon the quality of their assets.

This move is aimed at making capital charges more responsive to the banks'
actual credit exposure. Banks may also be required to move towards making
capital requirements for operational risk.

According to treasury heads of public sector banks, the capital adequacy of
even sound public sector banks will come down by 1-2 per cent following the
adoption of the norms.

The capital will be hit mostly on account of operational risk, which is yet
to be quantified in terms of risk weightage. Under the proposed norms, banks
will have classify risk into three categories - credit risk, market risk and
operational risk.

Credit risk requires the banks to rate their credit portfolio either through
external rating methodology or internal rating system. This is likely to
bring down the pressure on capital provisioning. Credit risk is risk arising
from default in an account.

However, capital charge on market risk and operation risk is likely to
substantially raise the capital requirement.

The Basle Committee had in July has come out with guidelines to help banks
and their supervisors to put in place a comprehensive credit risk management
programme, emphasising five key areas: an appropriate credit risk
environment; sound credit granting process; credit administration;
measurement and monitoring process; and adequate controls over credit risk.
Indian banks currently do not make capital charges with regard to
operational risk.

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