Indian banks, notably state-owned entities, will need Rs 11,900 crore more capital for meeting operational risks alone, and may raise Rs 18,000-20,000 crore in the medium term when they implement Basel II Capital norms from March 31, 2007, ICRA said today."Indian banks would need additional capital to the extent of about Rs 11,900 crore to meet the capital charge requirement for operational risk under Basel II," ICRA said in its impact study report.Most of the capital would be required by the PSU banks (about Rs 9,000 crore), followed by new generation private banks (about Rs 1,100 crore) and old generation private bank (about Rs 7,500 crore)."Given the asset growth witnessed in the past and the expected growth trends, the capital charge requirement for operational risk would grow 15-20% annually over the next three years, which implies that the banks would need to raise Rs 18,000-20,000 over the medium term," it said.Though the implemenation of globally stringent Basel II accord may not have any significant impact on the credit risk capital allocation, ICRA said there could be a drag on the operational risk capital allocation, even as banks could benefit from risk management.The Basel II capital accord is based on tree pillars -- minimum capital requirement, supervisory ovesight and market discipline and disclosures. The RBI has proposed that banks in India should adopt the standardised approach for measurement of credit risk and basic indicator approach for the assesment of operational risk.The basic indicator approach as suggested by Basel II specifies that banks should hold capital charge for operational risk equal to the average of the 15% of annual positive gross income over the past three years."Over the short run, banks may need to augment their regulatory capitalisation levels in order to comply with Basel II. However, over the long term, they would derive benefits from improved operational and credit risk management practices," ICRA said.The study shows that the regulatory capital allocation for credit risk for Indian banks may decline by nearly 2.4% due to lower risk weight requirements for better-rated credit exposures.For retail credit, ICRA said the existing norms prescribed by the RBI are tighter and thus would not require additional regulatory allocation. Over a period of time, when adequate risk management skills are developed, some banks may be allowed to migrate to the internal ratings based approach for credit risk measurement, it said.Though migration to Basel II will be effective from March 31, 2007, RbI has suggested that banks implement the guidelines in order to adopt a parallel run effective from April 1, 2006.
