Mumbai, March 27: The Reserve Bank of India has issued guidelines asking banks to set aside adequate capital to mitigate various risks, including those that can damage their reputation.

The move is seen as the RBI’s effort to prepare domestic banks for new risk management norms under Basel II.

The guidelines have been issued under the supervisory review process (SRP) and the internal capital adequacy assessment process.

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

This in turn will require a well-defined internal assessment process within banks through which they can assure that adequate capital is set aside to tackle various risks to which they are exposed.

“The process of assurance could also involve an active dialogue between the bank and the RBI so that, when warranted, appropriate intervention could be made to either reduce the risk exposure or augment/restore its capital,’’ the RBI said in a notification issued today.

According to the central bank, banks are exposed to risks related to liquidity, settlement and reputation. Some risks are strategic in nature.

Banks may have to keep additional capital, considering the possibility of under-estimation of risks and the quality of risk management.

The RBI had earlier issued two guidelines on minimum capital ratio and market disciplines to prepare banks for Basel II norms.

Foreign and domestic banks having operations outside the country have to implement the Basel II norms from March 31, this year. For all other commercial banks, excluding local area banks and regional rural banks, the rules will come into effect from March 31, 2009.