The Telegraph
Since 1st March, 1999
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Basel breathe-easy for banks

Mumbai, Sept. 26: The Reserve Bank of India (RBI) may extend the deadline for banks to adhere to Basel II norms.

The final guidelines on Basel II will be announced by the central bank in the next few weeks. The Basel II regulations distinguish banks on the basis of their risk profiles and are slated to take effect from March 31, 2007.

“The RBI is constantly monitoring the state of preparedness of all banks. The latest indication is that there may be a marginal extension of the date,” RBI deputy governor V. Leeladhar told newspersons on the sidelines of the Ficci-IBA conference on global banking here today. Leeladhar, however, did not reveal the new deadline.

What is Basel II'

The Basel II regulations, drafted by the Bank for International Settlements (BIS), significantly upgrades the Basel I norms that are in place since 1992-93 in India.

The main difference is the measurement of risk in Basel II, which prescribes different levels of capital allocation on assets based on their risks as opposed to the broad measurement of risk in Basel I.

Slow but steady

The RBI would impose the new regulations gradually, Leeladhar said. He told the conference that the country’s approach to reforms was to align with global best practices but at a pace suited to the economy and the environment. “Therefore, we have consciously decided to mandate the standardised approach and basic indicator approach to all scheduled commercial banks in India as the first step in migration to Basel II,” he said.

Easier norms

As part of this approach, the RBI has decided to ease some of the rigorous rules, Leeladhar said.

It has allowed in the initial phase a risk weight of 100 per cent on unrated loan assets. This comes even as the central bank has tightened its risk weightages for loan exposures. It recently put the risks on loans to SEZs on a par with real estate by assigning a weightage of 150 per cent to such loans.

The relaxation on unrated loans gives banks some breathing space since only 10 per cent of loan assets are rated by independent agencies.

Rating riddle

Elaborating on the challenges in Basel II, Leeladhar said banks wanted to use their own ratings to assess loans of corporate houses that do not have an external rating, till such time the bulk of the issues of corporate houses get an external rating. The problem arises from the practice in India of rating individual debt issues of a company rather than rating its overall borrowing capability. This suggestion was however, not “accommodated’’ by the RBI.

Pak support

Both Leeladhar and State Bank of Pakistan governor Shamshad Akhtar said there were misgivings about the impact of Basel II on the financial systems of emerging market economies. This concern is shared by global banks like Standard Chartered which find themselves in an enviable position of having to churn out a large number of reports as 92 countries switch over to the new set of rules over the next five years.

Setting speed limits

“In Europe, you can race down the autobahn at a speed of 200 kmph which I did recently. But in countries like India and Pakistan you need to regulate speed with the state of the roads and its special circumstances. We need to follow different speeds in the adoption of Basel II norms as well,” said Akhtar.

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