The Hindu Business Line : Banks to adopt uniform credit risk norms from 2007

MOVING closer to the adoption of Basel II and international best practices, the Reserve Bank of India has said all banks in the country should adopt a standardised approach for credit risk and a basic indicator approach for operational risk, effective March 31, 2007.

In its draft prudential guidelines on capital adequacy, the central bank said, after adequate skills are developed in the banks and at the supervisory levels, some banks may be allowed to migrate to an internal rating based approach after obtaining the RBI approval.

Claims on corporates shall be risk weighted as per ratings assigned by the rating agencies registered with the SEBI and recognised by the RBI.

Banks have to assign a risk weight of 20 per cent for AAA-rated corporates, 50 per cent for AA-rated corporates, 100 per cent for A-rated corporates, 150 per cent for BBB and below rated corporates and 100 per cent for unrated corporates.

The standard risk weight for unrated claims on corporates will be 100 per cent. No claim on an unrated corporate may be given a risk weight preferential to that assigned to its sovereign of incorporation.

The RBI will increase the standard risk weight for unrated claims where a higher risk weight is warranted by an overall default experience.

As part of the supervisory review process, the RBI will also consider whether the credit quality of unrated corporate claims held by individual banks warrants a standard risk weight higher than 100 per cent.

The draft guidelines are intended to ensure migration to Basel II in a non-disruptive manner and have been drawn by the RBI throughconsultation with a representative sample of 14 banks including public, private and foreign banks.

The Basel Committee on Banking Supervision released the ``International Convergence of Capital Measurement and Capital Standards: A Revised Framework'' on June 26, 2004.

The revised framework, popularly known as Basel II, has been designed to provide options for banks and banking systems, to determine the capital requirements for credit risk and operational risk, and enables bank supervisors to select approaches that are most appropriate for their operations and financial markets.

It is expected to promote adoption of stronger risk management practices in banks.

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