Setting up Basel II supervision system a daunting task: Reddy

The task of supervisory capacity building to prepare for Basel II capital adequacy norms is daunting, the Reserve Bank of India (RBI) governor, Y V Reddy, today said.

"The magnitude of the task, which is scheduled to be completed by December 2006, appears daunting since we have as many as 90 scheduled commercial banks in India," Reddy said in his address at the Institute of Bankers of Pakistan in Karachi.

He said capacity building, both in banks and the regulatory bodies, is a serious challenge, especially with regard to adoption of the advanced approaches.

RBI has initiated supervisory capacity-building measures to identify the gaps and to assess as well as quantify the extent of additional capital which may be required to be maintained by banks.

Commercial banks in India will start implementing Basel II with effect from March 31, 2007. They will adopt standardised approach for credit risk and basic indicator approach for operational risk, initially, to determine capital requirements.

After adequate skills are developed, both at the banks and also at supervisory levels, some banks may be allowed to migrate to the internal rating based approach.

Reddy said implementation of Basel II will require more capital for banks in India due to the fact that operational risk is not captured under Basel I, and the capital charge for market risk was not prescribed until recently.

Though last year has not been a very good year for banks, they are exploring all avenues for meeting the capital requirements under Basel II.

The cushion available in the system, which has a CRAR of over 12 per cent now, is, however, comforting, he said.

In the current scenario, banks are constantly pushing the frontiers of risk management.

Compulsions arising out of increasing competition, as well as agency problems between management, owners and other stakeholders are inducing banks to look at newer avenues to augment revenues, while trimming costs, he said.