In line with the Basle committee recommendations, the draft guidelines require banks to put a capital charge on each and every item of investment in their portfolio.
Under the current guidelines, banks have to uniformly provide capital at the rate of 2.5 per cent irrespective of the nature of the risk associated with it.
Under the new proposed method, specific risk of each security whether long or short has to be assessed independently.
Thus, exposure in government bonds, foreign exchange-denominated investments, metals like gold have will have to be assessed at the current market value and then capital will have to be provided on the combined risk emerging out of it.
This will not only reduce the capital adequacy of individual banks but also bring down the profit to a large extent.
