RBI issues draft guidelines to banks for calculating credit risk based on internal rating

10 Aug 2011

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The Reserve Bank of India (RBI) today released draft guidelines for banks on internal rating based (IRB) approach for calculating credit risk capital charge.

The draft guidelines, announced as early as July 2009, had set the timeline for implementation of advanced approaches for computation of regulatory capital under the Basel II framework in India.

As per the timeframe, banks could apply for migrating to internal rating based approach for calculating credit risk from 1 April 2012 onwards.

The guidelines for the standardised approach (TSA) and the alternate standardised approach (ASA) for operational risk were issued in March 2010 while those for internal models approach (IMA) for market risk were issued in April 2010 and those for advanced measurement approach (AMA) for operational risk were issued in April 2011.

Under Basel I framework, assets were assigned uniform risk weights based on their category. For example, exposures to sovereigns were assigned a risk weight of 0 per cent. Claims against banks were given a risk weight of 20 per cent. Advances to corporates, individuals and firms were assigned 100 per cent risk weight. The rating or health of the counterparty was not taken into account. Exposures to some of the banks can be riskier than exposures to some of the corporates. However, all banks enjoyed the risk weight of 20 per cent and all corporates had a 100 per cent risk weight.

This situation was corrected under Basel II. Under the revised accord, along with the category of a customer, his credit rating is given due importance. Banks are permitted a choice between two broad methodologies for calculating their capital requirements for credit risk.

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