BASEL II India

25
th
November 2010
Pre Basel II Indian Norms
All banks operating in India to maintain minimum Capital Funds at 9% of Total Risk
Weighted Assets.
Capital Funds is an addition of Tier-I Capital (consisting of Capital, Permanent Reserves
and Profits retained for this purpose) and Tier-II Capital (consisting of Subordinated
Debt, General Reserves, Hybrid Debt Capital Instruments )
Total Risk Weighted Assets is computed on the basis of risk weights assigned for
different asset types and obligors:
Government - 0%
Banks - 20%
Others - 100% [except Housing (50-75%), Consumer (125%) loans,
equity/ capital market exposure (125%) and Venture capital funds (150%)]
Market Risk Capital Charge is based on modified duration methodology.
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Capital Adequacy Guidelines issued by RBI Basel I
Basel II - Changes
Previous norms prescribed single credit risk factor across a class of obligors thus ignoring the
default probability or risk rating of different obligors. This results in assigning same amount of
capital for exposures to AAA rated and BB rated corporate.
Under Basel II, Risk Weights are more risk sensitive being based on risk rating of the obligor and
tenor of the loan. E.g. AAA 20%, AA 30% etc.
Three approaches for computing RWAs for Credit Risk:
Standardized Approach: Risk Weights linked to external ratings of obligors and tenor of the loan. Range
between 0% to 150%. Unrated exposures to be assigned 100% risk weight. We are currently using this
approach.
Foundational Internal Rating Approach: Risk Weights assigned on the basis of obligors PD (Probability of
Default).
Advanced Internal Rating Approach: Banks to use internal rating model for key statistical data: credit
ratings (probability of default or PD), Loss given Default (LGD) and Exposure at default (EAD). Road
map for migrating to these approaches is issued.
To start with RBI has asked all banks to follow Standardized approach and use external ratings
assigned by any of the RBI approved local and international rating agencies.
Roadmap for migration to Advanced approaches has been issued. We will migrate to advanced
approaches in once Citi decides to roll out advanced approaches for local jurisdictions.
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Credit Risk
Basel II - Changes
Operational Risk is defined as the risk of loss arising from inadequate or failed internal processes, people
and systems or from external events.
Basel II requires Banks to compute capital charge for Operational Risk.
It defines three approaches for this calculation:
Basic Indicator Approach: Capital Charge computed at 15% of Gross Income of the Bank.
Standardized Approach: Capital Charge ranges between 12-18% of gross income of different
business lines.
Advanced Measurement Approach: Banks to use internal model for computing potential
operational loss.
To start with RBI has asked all banks to apply the Basic Indicator Approach. Basic Indicator Approach is
required to be implemented by all banks operating in India. Roadmap for Advanced approaches is
prescribed by RBI. We will migrate to advanced approaches in once Citi decides to roll out advanced
approaches for local jurisdictions.
Broadly no changes in the computation of Market risk capital charge under Basel II except a few minor
differences.
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Operational Risk & Market Risk
Basel II - Implementation
Reserve Bank of India had formed steering committees involving various bankers to
finalise on approaches to be used by Banks operating in India. Citi was member of one
of the committees.
Draft guidelines on Basel II framework issued by RBI in February 2005 for public
response.
Final guidelines released in April 2007.
Quarterly parallel runs continue till December 31, 2007.
Live since March 31, 2008.
Three successful quarterly parallel runs before going live.
Regional Reveleus system was customised to meet India Basel II requirements.
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Indian Position
Basel II - Implementation
Pillar One:
Minimum capital requirements similar to Basel I, i.e. 9% except that credit risk calculation is
reformed and a new charge for Operational Risk to be added. Generally, Banks have seen a
reduction in risk weights for credit risk offset by an increase in the form of charge for Operational
Risk.
Pillar Two:
Banks have to establish Internal Capital Adequacy Assessment Process which shall be subject to
rigorous Supervisory Review Process.
Pillar Three:
Public disclosures to enhance market transparency. Specific list includes capital structure, capital
adequacy, composition of loan/credit portfolios by risk rating and detailed risk parameters for each
risk-rating category, market risk in Trading Book, Interest rate risk in the Banking Book,
Operational risk.
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Three Pillars
Basel II - Implementation
Original Basel Accord
Applies to all internationally active banks and
on a consolidated basis to majority-owned or
controlled banking entities, securities entities
and financial entities, not including insurance.
The total capital ratio must be no lower than
8%
Banks have been permitted to adopt the
Standardized method, Internal Rating Based or
Advanced Measurement Approach
RBI Guidelines
Applies to all scheduled commercial banks both
at solo and consolidated level and group
entities, which include a licensed bank.
Banks are required to maintain a minimum
capital to Risk-weighted assets ratio (CRAR) of
9%on an ongoing basis.
Banks mandated to use
Standardized Approach for credit
risk and Basic Indicator
Approach for operational risk.
Banks to make a road map for migration to
advanced approaches only after obtaining
specific approval of RBI.
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Original Accord & Indian Position a broad comparison
Basel II - Implementation
Original Basel Accord
Claims on sovereigns to be risk weighted from
0% to 150% depending upon the credit
assessments AAA to B-
Claims on banks Risk weights can Either be
one notch less favourable than the sovereign of
the country or based on credit assessment of
the banks AAA to B-
Claims on securities firms at par with banks
provided the securities company is subject to
supervisory and regulatory arrangements.
Orientation criterion for inclusion under
regulatory retail portfolios is exposure to small
business
Value of absolute threshold for inclusion as
retail exposure kept at Euro 1MM
RBI Guidelines
Exposures to domestic sovereigns (Central &
States) rated at 0%
Banks in India (incl Foreign bank branches)
20% if CRAR is >= 9% else higher risk weights
Exposure to banks outside India - 20% to
150% depending upon the credit assessment of
the banks.
Claim on Primary Dealers treated as claims on
corporates
Orientation criterion is different, small business
is defined to mean where the annual turnover
of last three years is less than Rs. 50
crores ($12.5 MM). Each
individual obligor not to
contribute more than 0.2% of
total retail portfolio.
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Original Accord & Indian Position a broad comparison
Basel II - Implementation
Original Basel Accord
Lending against fully secured mortgages on
residential property will be risk weighted at
35%.
In the case of past due loans where specific
provision are no less than 50% of the
outstanding amount of the loan the risk
weights of 100%.
RBI Guidelines
Lending against fully secured mortgages if the
loan to value ratio (LTV) is not more than 75%,
on residential property will be risk weighted at
75%, except where loan value is below
Rs.30 lacs which is risk weighted at 50%.
Lending for acquiring residential property,
which meets the above criteria but have LTV
ratio of more than 75 percent, will attract a risk
weight of 100 %.
In the case of past due loans where specific
provision are less than 20% of the outstanding
amount of the loan the risk weights of 150%
will be applied.
In the case of past due loans where specific
provision are at least 20% of the outstanding
amount of the loan the risk weights of 100%.
Will be applicable.
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Original Accord & Indian Position a broad comparison
Original Basel Accord
Six Criteria defined for eligibility of external
credit rating institution
Banks have a choice to adopt standard
supervisory hair-cuts or own-estimate haircuts.
RBI Guidelines
In the case of past due loans where specific
provision are no less than 50% of the
outstanding amount of the loan the risk
weights of 50%.
Reserve Bank has approved four local and three
international credit rating agencies for rating
local and international exposures, respectively.
Banks should use only solicited ratings and not
unsolicited ratings.
Banks in India allowed to use only standard
supervisory haircuts for exposure and
collateral. Table set forth based on the issue
rating and sovereign status of counterparty.
Basel II - Implementation
Original Accord & Indian Position a broad comparison
Basel III
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Whats Next?