Banks jittery as Basel II era nears

Revised capital adequacy norms impact being assessed.

As the deadline for implementing the Basel II norms is nearing, bankers are realising that the revised capital adequacy requirements could get scary and are, therefore, still running through the Reserve Bank of India's (RBI) draft guidelines on its implementation with effect from March 31, 2007.

They are now asking questions over the requirement of applying haircuts to cover volatility in the value of security over and above the margins, higher risk weights for non-AAA rated exposures and maturity mismatch concept to collaterals.

RBI was earlier petitioned for lowering the minimum capital adequacy ratio to 8 per cent from 9 per cent, to align it with Basel II. They had also questioned the requirement of having to provide capital for operational risk at an estimated 12-15 per cent of gross interest income.

Haircut mean banks will be required to lower the value of collaterals based on market volatility of securities over and above the margins maintained while lending against them. Applying haircuts would lead to higher provisioning needs.

Bankers feel since "sufficient" margin is already maintained while lending, further stringency in the form of haircuts is not required. They suggest that the margin held should be higher of the haircut or the margin prescribed by banks.

In the Basel II draft guidelines issued in February 2005, RBI has prescribed risk weights above the Basel II stipulations.

Basel II is an improvement over the current capital adequacy requirements by the Basel Committee on Banking Supervision. The guidelines are called "International Convergence of Capital Measurement and Capital Standards: A Revised Framework".

RBI has proposed 20 per cent risk weight for triple A rated corporate exposures as in Basel II. The Indian regulator wants banks to have 50 per cent risk weight for double A rated exposures against 20 per cent under Basel II, 100 per cent for single A rated corporates against 50 per cent and 150 per cent for triple B and below rated exposures against 100 per cent.

At 9 per cent capital adequacy for credit risk, a risk weight of 100 per cent translates into capital allocation of Rs 9 for every Rs 100 lent and a 50 per cent risk weight into Rs 4.5 capital for every Rs 100.

Bankers contend that collaterals generally remaining with banks till an exposure is outstanding. In case of collaterals like deposits maturing before the maturity date of the exposure, they are renewed as per the undertaking furnished by the borrower at the time of availing the credit facility.

They, therefore, don't want RBI to take the maturity mismatch concept into account. Indian Banks' Association's (IBA) standing committee on Basel II implementation and risk management has decided to refer these issues to the RBI.

Though Basel II norms are to be implemented from March 31, 2007 as per the draft guidelines, RBI is yet to issue the final guidelines. RBI has already suggested that it might "marginally" postpone the implementation date and bankers have taken this as an indication that the deadline would be extended by a quarter or so.