RBI may defer Basel II kickoff

Empanelment of rating agencies by banks seen as big hurdle.

The Reserve Bank of India (RBI) is likely to defer the deadline for implementation of revised capital adequacy guidelines (popularly known as Basel II) by six months to a year.

The central bank is close to issuing the final guidelines. In the draft Basel II guidelines issued over a year back, the RBI had suggested March 31, 2007 as the date for banks to shift to Basel II capital adequacy norms.

The central bank may also prefer a phased implementation of the Basel norms starting with foreign banks and internationally active Indian banks and then gradually moving to other banks.

Banking sources said empanelment of rating agencies is understood to be a big hurdle in going ahead with Basel II norms as the current credit rating capacity is not enough to cover all loan accounts of banks. Banks would be required to have their loan accounts rated by rating agencies under Basel II for allocation of capital according to the perceived level of risk.

The RBI is also proposing a cut-off whereby banks need not get ratings for loans below certain amounts and allocate capital for such loans as prescribed for unrated exposure. The RBI also has to work out a standardised structure for rating agencies.

The RBI has decided to adopt the standardised approach for credit risk and move to more sophisticated internal ratings based approach later when both the banks and the regulator makes the necessary preparations.

Under the standardised risk, banks have to follow ratings assigned by external agencies. Apart from credit risk, Basel II prescribes enhanced capital allocation for market risks and operational risk.

Banking analysts estimate that the impact of the revised capital adequacy framework on the banking sector's capital adequacy would be around 2 percentage points, which would pull down the sector's combined capital adequacy to less than 11 per cent.

The new framework would require banks to provide less capital for credit risk and higher capital for market and operational risks.

For credit risk, the capital adequacy ratio is 9 per cent. Basel II has stipulated a 20 per cent risk weight for AAA-rated exposure, 50 per cent for AA exposure, 75 per cent for A-rated exposure, 100 per cent for BBB, 150 per cent for BB and below and 100 per cent for unrated exposures.