The Committee on Banking Regulations and Supervisory Practices released revised version in the year 2004. These guidelines have been got implemented by RBI in all the banks of India. Parallel run was started from 1.4.2006. In banks having overseas presence and foreign banks (except RRBs and local area banks. Complete switchover has taken place w.e.f. 31.3.2008. In banks with no foreign branch, switchover will took place w.e.f. 31.3.2009.
Distinction between Basel I and Basel II Basel – I measures credit risks and market risks only whereas Basel II measures 3 types of risks i.e. Credit Risk, Operational Risk and Market Risk. Risk weights are allocated on the basis of rating of the borrower i.e. AAA, AA, A, BBB, BB and B etc. Basel –II also recognized CRM such as Derivatives, Collaterals etc. Three Pillars of BASEL-II Pillar –I Minimum Capital Requirement Pillar – II Supervisory Review Process Pillar –III Market Discipline
Pillar - I – Minimum Capital Requirement CRAR will be calculated by adopting same method as discussed above under Basel – I with the only difference that Denominator will be arrived at by adding 3 types of risks i.e. Credit Risks, Market Risks and Operational Risks. Credit Risk Credit Risk is the risk of default by a borrower to meet commitment as per agreed terms and conditions. In terms of extant guidelines contained in BASEL-II, there are three approaches to measure Credit Risk given as under: 1. Standardized approach 2. IRB (Internal Rating Based) Foundation approach 3. IRB (Internal Rating Based) Advanced approach
1. Standardized Approach RBI has directed all banks to adopt Standardized approach in respect of Credit Risks. Under standardized approach, risk rating will be done by credit agencies. Four Agencies are approved for external rating: 1. CARE 2. FITCH India 3.CRISIL 4. ICRA Risk weights prescribed by RBI are as under: Rated CorporateRating & Risk Percentage AAA 20% AA 30% A 50% BBB 100% BB & below 150% Education Loans 75% Retail portfolio and SME portfolio 75% Housing loans secured by mortgage 50 to 75% Commercial Real Estates 100% Unrated Exposure 100%
2. IRBA – Internal rating Based Approach At present all advances of Rs. 5.00 crore and above are being rated from external agencies in our bank. IRBA is based on bank’s internal assessment. It has two variants (Foundation and advanced). Bank will do its own assessment of risk rating and requirement of Capital will be calculated on • Probability of default (PD) • Loss given default (LD) • Exposure of default (ED) • Effective maturity. (M) Bank has developed its own rating module system to rate the undertaking internally. The internal rating is being used for the following purposes: 1. Credit decisions 2. Determination of Powers 3. Price fixing Rating by Outside Agencies The risk weights corresponding to the newly assigned rating symbols are as under: Table : PART A – Long term Claims on Corporate – Risk Weights Long Term Ratings CARE CRISIL Fitch ICRA Risk Weights (%) CARE AAA CRISIL AAA Fitch AAA ICRA AAA 20 CARE AA CRISIL AA Fitch AA ICRA AA 30 CARE A CRISIL A Fitch A ICRA A 50 CARE BBB CRISIL BBB Fitch BBB ICRA BBB 100 CARE BB & below CRISIL BB & below Fitch BB & below ICRA BB & below 150 Unrated Unrated Unrated Unrated 100