The Hindu Business Line : Banks asked to assess risks themselves

Mumbai, March 27 The Reserve Bank of India has asked banks make their own assessment of their various risk exposures, through a well-defined internal process, and maintain an adequate capital cushion for such risks.

The RBI on Thursday issued guidelines on the Pillar 2 of the Basel II Framework. Pillar 2 deals with Supervisory Review Process (SRP).

The objective of the SRP is to ensure that banks have adequate capital to support all the risks and also to encourage them to develop and use better risk management techniques for monitoring and managing their risks.

This calls for a well-defined internal assessment process within the banks. Banks also have to assure the RBI through active dialogue that adequate capital has been provided towards the various risks to which the banks are exposed. This process is called the Internal Capital Adequacy Assessment Process (ICAAP).

A senior official from a public sector bank said that while earlier all banks followed the rule of 9 per cent capital adequacy ratio, under Basel II each bank will have to assess the risks individually and get it approved by the supervisor from the RBI.

“Earlier it was a case of one size fits all, while now it is more like soul searching for banks,” he said.

RBI guidelines

The RBI guidelines listed some risks that banks are generally exposed to, but which are not fully captured in the regulatory capital to risk asset ratio (CRAR), such as, interest rate risk, credit concentration risk, liquidity risk, settlement risk and reputational risk, among others.

As there is no one single approach for conducting the ICAAP, the methodologies and techniques were still evolving, particularly in regard to measurement of non-quantifiable risks, such as reputational risks, strategic risks, the RBI said.

The RBI has asked banks to develop an ICCAP, commensurate with their size, level of complexity, risk profile and scope of operations. This would be in addition to a bank’s calculation of regulatory capital requirements under Pillar 1. These must be implemented with effect from March 31, 2009 by foreign banks and Indian banks with overseas operations and from March 31, 2009 by all other commercial banks, said the RBI.

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