SBI moves towards Basle II

The State Bank of India (SBI) has appointed Deloitte & Touche as consultant to prepare a roadmap for prudent risk management. With this, India's largest bank has kickstarted the process to implement Basle II norms.

Senior banking sources said the process will take time as operational risk is a new focus area for the Indian banking system. They added that the exercise is expected to take one and a half years given the need to collate adequate data before actually implementing the norms.

Industry sources said the SBI already has a credit rating model and an inspection model in place, while other public sector banks trail much behind. SBI also has undertaken work on its market risk model.

Under Basle II norms, banks have to move towards a graded system of assigning risk weights depending upon the quality of their assets.

This move is aimed at making capital charges more responsive to the banks' actual credit exposure. Banks may also be required to move towards making capital requirements for operational risk.

According to treasury heads of public sector banks, the capital adequacy of even sound public sector banks will come down by 1-2 per cent following the adoption of the norms.

The capital will be hit mostly on account of operational risk, which is yet to be quantified in terms of risk weightage. Under the proposed norms, banks will have classify risk into three categories "" credit risk, market risk and operational risk.

Credit risk requires the banks to rate their credit portfolio either through external rating methodology or internal rating system. This is likely to bring down the pressure on capital provisioning. Credit risk is risk arising from default in an account.

However, capital charge on market risk and operation risk is likely to substantially raise the capital requirement.

The Basle Committee had in July has come out with guidelines to help banks and their supervisors to put in place a comprehensive credit risk management programme, emphasising five key areas: an appropriate credit risk environment; sound credit granting process; credit administration; measurement and monitoring process; and adequate controls over credit risk. Indian banks currently do not make capital charges with regard to operational risk.