After ensuring successful implementation of basic Basel II norms by banks, Reserve Bank of India (RBI) today unveiled a timeframe to adopt advanced approaches to manage credit, market and operational risks.
Banks can make application to RBI to use Internal Models Approach (IMA) for market risk from April 1, 2010. The central bank is likely to approve such plans by March 2011.
Similarly, banks can approach with a proposal for Standardised Approach for operational risks from April 2010 and for using advanced approach to manage operational risks beginning of April 2012.
RBI advised banks to approach with proposal to use internal-rating based approach for credit risks from April 1, 2012. These applications would be cleared by March 31, 2014.
This schedule will help banks to plan and prepare for their migration to the advanced approaches for credit risk and operational risk, as also for the Internal Models Approach (IMA) for market risk, RBI said in a communication to banks.
By March 2009, all Indian commercial banks as well as foreign banks operating in India have already implemented the Standardised Approach for credit risk, Basic Indicator Approach for operational risk and the Standardised Duration Approach for market risk.
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Meanwhile, bank financial assistance to companies for setting up captive special economic zones will not
be treated as Commercial Real Estate (CRE), according to the RBI draft guidelines.
Banks should keep in mind the substance of the transaction rather than the form. It is possible that an SEZ may be developed by a single company entirely or mainly for its own use.
The repayment of loans in such cases will depend on the cash flows generated by the economic activities of the units in the SEZ and the general cash flow of the company rather than the level of real estate prices. Such should not then be classified as CRE, RBI said.
Similarly, there can be co-developers in an SEZ who undertake a specific job such as provision of sewerage, electrical lines etc. “If their repayment is not dependent on the cash flows generated by the CRE asset, such exposures would not be classified as CRE,” RBI added..
This illustratively would be the case where the co-developer is paid by the main developer based on progress in work.