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Basel II is a New Capital Adequacy Framework (NCAF) applicable
to Scheduled Commercial Banks in India, as mandated by Reserve
Bank of India (RBI). `Basel Capital Accord' is in respect
of Capital Measurement and Capital Standards, which align
regulatory capital requirements more closely with underlying
risks. The accord has been accepted by over 100 countries
including India. `Capital Adequacy' is the ratio of capital
funds (own funds or networth, in other words) to risk weighted
assets. Under the old Basel I framework, all assets used
to get a one-size-fits-all treatment and were given a uniform
risk weightage of 100%, while the stipulated minimum Capital
Adequacy Ratio (CAR) for a bank was 9%. The RBI issued final
guidelines on `NCAF' during April 2007. As per the final
guidelines, all commercial banks in India were required
to follow the standardized approach for credit risk, standardized
duration approach for market risk and basic indicator approach
for operational risk. Foreign banks and the banks which
have operational presence outside India were required to
migrate to these approaches with effect from March 31, 2008.
All other commercial banks are required to adopt these approaches
by March 31, 2009. The first deadline of March 31, 2008
has passed, and the specified banks have successfully implemented
Basel II guidelines. The Basel II guidelines aim to align
the bank's capital to risks and works on arriving at the
regulatory capital for banks based on credit risk, market
risk and operational risk. Most banks in India have done
a considerable advance preparation for Basel II implementation,
with executive level committees headed by senior management.
A major challenge for implementing the standardized approach
for credit risk is getting the loan portfolio rated from
a recognized External Credit Assessment Institution (ECAI).
To achieve expeditious rating coverage of borrowers, many
banks have entered into MOUs for facilitating rating coverage
of borrower accounts with the four approved ECAIs. As of
August 2008, the four ECAIs had reported completed about
1,000 borrower loan ratings, and more ratings are expected
to be covered during the current fiscal.
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