RBI revises risk management norms to banks
28 Mar 2008
Mumbai: The Reserve Bank of India (RBI) has issued new risk management norms as part of efforts to prepare Indian banks for compliance with Basel II norms for risk management.
Under the revised guidelines, the central bank has raised the capital adequacy level for banks to cover extended areas of risks, including those that could damage the reputation of banks. The new guidelines, issued under the RBI's 'Supervisory Review Process', makes it obligatory for banks to make provision for risks relating to credit concentration, liquidity, settlement risk, reputation, strategy, and under-estimation of credit risk that were not specified earlier. Banks will now have to keep additional capital to cover possible risks which are underestimated as also to ensure quality of risk management.
Already, the Reserve Bank (RBI) has issued two guidelines on minimum capital ratio and market disciplines for Basel II norms, called Pillar I and Pillar III.
The RBI now issued guidelines for an Internal Capital Adequacy Assessment Process (ICAAP), which form the second pillar of the Basel-II capital adequacy framework.
While the existing Basel II guidelines recognise three risks - credit, market and operational risks - the guidelines issued today specified new risks as well. Banks will now be insulated against the risks that are not completely captured by the minimum capital adequacy ratio and caused by external factors, according to the new guidelines.
The guidelines also aim at encouraging banks to develop and use better techniques for monitoring and managing their risks. Banks would be required to have a well-defined internal assessment process to assure RBI that adequate capital is held toward various risks they are exposed to.
However, these norms provide only broad principles to help banks in developing their Internal Capital Adequacy Assessment Process, RBI said. Basel II norms required banks to make provisioning for wider range of risks than under the earlier norms that talked about credit risks alone.
Foreign banks and those Indian banks that have operations outside the country have to implement the Basel II norms from 31 March 2008, while for all other commercial banks, excluding the local area banks and regional rural banks, the rules will come into effect from 31 March 2009.
''The banks are advised to develop and put in place, with the approval of their boards, an ICAAP commensurate with their size, level of complexity, risk profile and scope of operations,'' RBI said.
At present, there is no common approach for conducting ICAAP. These guidelines, therefore, attempt to provide only broad principles for banks to develop their ICAAP, the regulator said.
