Fitch lauds RBI for gradual shift to Basel-II

There is a mad rush by banks in emerging markets to adopt the internal ratings based (IRB) approach for credit risks under the proposed Basel-II norms.

"Banks in Seoul, Taiwan, Hong Kong and Singapore are rushing to be IRB-compliant as the regulators have left it to banks to decide whether to go for the IRB model or the standardised approach," said Krishnan Ramadurai, senior director, Fitch Ratings.

This is in vast contrast to the Reserve Bank of India (RBI), which has decided to be prudent and adopt the standardised approach for credit risk.

Lauding RBI's decision, Ramadurai said it was more prudent given the concentration of risks faced by Indian banks and the substantial investments required in credit systems, data collections and risk management skills needed to follow the more advanced approaches.

He was speaking today at a seminar on "The Impact of Basel II on Credit Markets" in Mumbai.

Indian banks like ICICI Bank and State Bank of India (SBI), which are establishing their presence overseas, may be at a disadvantage should they adopt the standardised approach.

The RBI would allow banks to apply for IRB on a case-to-case basis. This is as many global banks would move to IRB as it would lower the capital charge.

"It may result in an "unlevel" playing field between banks that follow the standardised approach and those on the advanced approaches," said Ramadurai. The key challenges in the run up to Basel-II will be the collection and validation of data.

Global banks such as HSBC, Citibank, Deutsche Bank among a host of others would also face issues considering their operations scale across the globe.

"If the home country is on a standardised approach, overseas regulators like that in the UK, would accept this and look at individual businesses and risks of banks and then identify the capital," said Ramadurai.

The college of supervisors across the globe will take a common approach in how they will identify the capital requirement for banks operating internationally. "Movement on this front has started, and RBI would also be included," said Ramadurai.

The standardised approach will result in very similar charges to the 1988 Basel accord. Krishnan highlighted however, that there are important differences relative to Basel-I.

Retail assets in general will receive lower capital charges, which will be offset by an explicit capital charge for operational risk and a capital charge for commitments. A greater recognition of collateral for simplified and advanced approaches will benefit banks that have an effective collateral management system in place.