8asel ll Accord

W 8anklng changed dramaLlcally slnce Lhe 8asel l documenL

of 1988
W Advances ln rlsk managemenL and Lhe lncreaslng
complexlLy of flnanclal acLlvlLles / lnsLrumenLs (llke
opLlons hybrld securlLles eLc) prompLed lnLernaLlonal
supervlsors Lo revlew Lhe approprlaLeness of regulaLory
caplLal sLandards under 8asel l
W 1o meeL Lhls requlremenL Lhe 8asel l accord was amended
and reflned and LlLled as " Internat|ona| Convergence of
Cap|ta| Measurement and Cap|ta| standards A rev|sed
framework" whlch came ouL as Lhe 8asel ll accord ln 2004
b[ecLlves of 8asel ll
W 1he fundamenLal ob[ecLlve was Lo develop a framework
LhaL would furLher sLrengLhen Lhe soundness and sLablllLy
of Lhe lnLernaLlonal banklng sysLem
W 1o promoLe adopLlon of sLronger rlsk managemenL
pracLlces by banks 8anks are encouraged Lo sLrengLhen
Lhelr rlsk assessmenL conLrolllng monlLorlng and
mlLlgaLlng Lools ln order Lo mlnlmlze Lhe rlsk faced by Lhem
and hence malnLaln opLlmum caplLal Lo generaLe hlgher
yleld
W 1he lnLenLlon ls Lo allgn requlred mlnlmum caplLal more
closely wlLh banks' real rlsk proflle
W Lnsure level playlng fleld for all 8anks across Lhe globe
8asel ll provldes a framework for Lhe banks world over as a
benchmark Lo global besL pracLlces
b[ecLlves of 8asel ll
W LsLabllsh a mlnlmum level of for lnLernaLlonally acLlve
banks
W 1he framework ls percelved as more forward looklng
approach and has a capaclLy Lo evolve wlLh Llme
W 1he new accord requlre banks Lo manage rlsks by noL
only allocaLlng regulaLory caplLal buL also by dlscloslng
greaLer rlsk lnformaLlon and seLLlng sLandards for rlsk
managemenL processes
W lL provldes lncenLlves for banks Lo lnvesL lncrease Lhe
sophlsLlcaLlon of lnLernal rlsk managemenL capablllLles
ln order Lo galn reducLlon ln caplLal maxlmlze
reLurns
8asel ll lllars
lllar 1
W lnLernal responslblllLy of Lhe 8ank Lo malnLaln
mlnlmum caplLal Lo Lake care of all rlsks
Computat|on of 1ota| CkAk and 1|er I
cap|ta| under 8ase| II
8ASLL I 8ASLL II
lL concenLraLed malnly on credlL rlsk
componenL
lL lncludes credlL rlskmarkeL rlsk
and operaLlonal rlsk
lL uses arblLrary rlsks and rlsk
welghLs
8lsk welghLs are llnked Lo exLernal
raLlng
DIIILkLNCL IN CCMU1A1ICN
8lsk WelghLs under 8asel ll
CredlL 8lsk
Standard|zed
Approach
Ioundat|on
Interna| kat|ng
8ased Approach
(IIk8)
Advanced Interna|
kat|ng 8ased
Approach (AIk8)
MarkeL 8lsk
Standard|zed
Mod|f|ed Durat|on
Approach
Interna| k|sk
Management
Mode|
peraLlonal
8lsk
8as|c Ind|cator
Approach
Standard|zed
Approach and
A|ternate
standard|zed
Approach
Advanced
Measurement
Approach
8asel ll lmplemenLaLlon ln lndla
W 88l has lssued flnal guldellnes for lmplemenLaLlon of Lhe new
CaplLal Adequacy framework as 27042007
W 88l has relLeraLed LhaL forelgn banks operaLlng ln lndla and
lndlan banks havlng operaLlonal presence ouLslde lndla have Lo
adopL
1he SLandardlzed Approach (1SA) for credlL rlsk
8aslc lndlcaLor Approach (8lA) for operaLlonal rlsk
conLlnue Lo apply Lhe SLandardlzed uuraLlon Approach (SuA) for compuLlng
caplLal requlremenL for markeL rlsk wlLh effecL from March 31 2008
W All oLher commerclal banks (excepL Local Area 8anks and
8eglonal 8ural 8anks) are encouraged Lo mlgraLe Lo Lhese
approaches noL laLer Lhan March 31 2009
Standard|zed Approach for Cred|t k|sk
Measurement
W 1he 8asel CommlLLee as well as 88l provlde a
slmple meLhodology for rlsk assessmenL and
calculaLlng caplLal requlremenLs for CredlL 8lsk
called SLandardlzed Approach
SLandardlzed
Approach
AsslgnmenL of
8lsk WelghLs
LxLernal CredlL
AssessmenLs
CredlL 8lsk
MlLlgaLlon
Ass|gnment of k|sk We|ghts
W ClasslflcaLlon of Lxposures lnLo varlous cusLomer
Lypes/asseL Lypes deflned by 8asel CommlLLee or 88l
such as
Soverelgns
non govL publlc secLor enLlLles
MulLllaLeral developmenL banks
Commerclal banks
CorporaLes
8eLall AsseLs
Clalms secured by resldenLlal properLy /commerclal real esLaLe
W 1hereafLer asslgnmenL of sLandard rlsk welghLs ls done elLher
on Lhe basls of cusLomer Lype or on Lhe basls of Lhe asseL
quallLy as deLermlned by raLlng of Lhe asseL for calculaLlng
Lhe 8lsk welghLed asseLs (8WAs)
8lsk welghLs Lo varlous borrowers/ asseL class are alloLLed
based on Lhe rlsk percepLlon of each cusLomer/ asseL Lype
whlch ls sub[ecL Lo revlew by Lhe regulaLor based on markeL
condlLlons and rlsk apprehenslons
C|a|ms on the 8IS the IMI the LC8 the LC and the MD8s k|sk we|ght 0
Asset type k|sk we|ght Descr|pt|on
Clalms on reLall
producLs
73 lncludes credlL card overdrafL auLo loans
personal flnance and small buslness
Clalms secured by
resldenLlal properLy
33
verdue loans 130
100
for provlslons are less Lhan 20 of Lhe
ouLsLandlng amounL
for provlslons are beLween 20 49 of
Lhe ouLsLandlng amounL
Lher asseLs 100
Lxterna| Cred|t Assessments
W 1he 88l recognlzes cerLaln rlsk raLlng agencles as
LxLernal CredlL AssessmenL lnsLlLuLlons (LCAls) such as
CredlL Analysls and 8esearch LlmlLed (CA8L)
C8lSlL llmlLed
ll1CP lndla and
lC8A LlmlLed
W 8aLlng asslgned by Lhese LCAls Lo Lhe borrowers may
be Laken as a basls for asslgnlng rlsk welghLs Lo Lhe
borrowers
W 8eLLer raLlng means beLLer quallLy of asseLs and lesser
rlsk welghL and hence less requlremenL of caplLal
allocaLlon
Cred|t k|sk M|t|gat|on 8ase|
recogn|zed Co||atera|s
W 8anks obLaln securlLles for loans/ advances Lo cover
credlL rlsk whlch are Lermed as credlL rlsk mlLlganLs
W 8asel ll accord recognlzes a wlde range of securlLles
whlch are Lermed as 8asel recognlzed collaLerals
Such as Cash and deposlL wlLh Lhe lendlng bank
Cold lL lncludes boLh bulllon and [ewellery
SecurlLles lssued by cenLral and sLaLe governmenLs
klsan vlkas aLra naLlonal Savlngs CerLlflcaLes
Llfe lnsurance pollcles wlLh a declared surrender value eLc
W 1he value of Lhese securlLles ls reduced from
Lhe gross exposure before arrlvlng aL Lhe 8lsk
WelghLed AsseLs by applylng approprlaLe rlsk
welghL on neL exposures
W Powever before deducLlng Lhe value of
securlLles from gross exposure value of
securlLy ls Lo be ad[usLed for markeL volaLlllLy
1hls ad[usLmenL ln Lhe value of securlLy ls
Lermed as PalrcuL
CA8 sLlpulaLlons by enLlLles
Lnt|ty 1ota| CAk 1|er 1
8ASLL ll 8 4 ( Core Ller 1 2)
88l 9 6
CovernmenL of lndla (lor
Su s)
12
CA8 Compllance by lndlan banks
verall (vL and ubllc secLor) CA8 20102011 1376
verall 1ler one CA8 9
Due to accret|on to reserves and fresh equ|ty |nfus|on of around 230 b||||on
supported by
WCl lnLenLlon Lo malnLaln CA8 of Su aL 12(130 bllllon lnfuslon lnLo Su s
WlnLernal norms of pvL secLor banks
lllar ll
W lnLended noL only Lo ensure LhaL banks have
adequaLe caplLal Lo supporL all Lhe rlsks ln Lhelr
buslnesses buL also Lo encourage banks Lo
develop and use beLLer rlsk managemenL
Lechnlques ln monlLorlng and managlng Lhelr
rlsks
W Supervlsors are expecLed Lo evaluaLe how well
banks are assesslng Lhelr caplLal needs relaLlve Lo
Lhelr rlsks and Lo lnLervene where approprlaLe
Areas under lllar ll
W 8lsks LhaL are noL fully capLured by Lhe lllar 1
process eg credlL concenLraLlon rlsk
W lacLors noL Laken lnLo accounL eg lnLeresL
raLe rlsk ln banklng book buslness and
sLraLeglc rlsk
W lacLors exLernal Lo Lhe bank eg 8uslness
cycle evenLs
rlnclpals of Supervlsory 8evlew
W rlnclple 1 8anks should have a process for assesslng Lhelr overall caplLal
adequacy ln relaLlon Lo Lhelr rlsk proflle and sLraLegy for malnLalnlng Lhelr
caplLal levels
W rlnclple 2 Supervlsors should revlew and evaluaLe banks lnLernal caplLal
adequacy assessmenLs and sLraLegles as well as Lhelr ablllLy Lo monlLor
and ensure Lhelr compllance wlLh regulaLory caplLal raLlos Supervlsors
should Lake approprlaLe acLlons lf Lhey are noL saLlsfled wlLh Lhe resulL of
Lhls process
W rlnclple 3 Supervlsors should expecL banks Lo operaLe above Lhe
mlnlmum regulaLory caplLal raLlos and should have Lhe ablllLy Lo requlre
banks Lo hold caplLal ln excess of Lhe mlnlmum
W rlnclple 4 Supervlsors should seek Lo lnLervene aL an early sLage Lo
prevenL caplLal from falllng below Lhe mlnlmum levels requlred Lo supporL
Lhe rlsk characLerlsLlcs of a parLlcular bank and should requlre rapld
remedlal acLlon lf caplLal ls noL malnLalned or resLored
lllar 3 MarkeL ulsclpllne
W Lncourage markeL dlsclpllne by developlng a seL of dlsclosure
requlremenLs whlch wlll allow markeL parLlclpanLs Lo assess key pleces of
lnformaLlon on Lhe scope of appllcaLlon caplLal rlsk exposure rlsk
assessmenL process and hence Lhe caplLal adequacy of Lhe lnsLlLuLlon
W When markeL parLlclpanLs have a sufflclenL undersLandlng of a bank's
acLlvlLles and Lhe conLrols lL has ln place Lo manage lLs exposures Lhey are
beLLer able Lo dlsLlngulsh beLween banklng organlsaLlons so LhaL Lhey can
reward Lhose LhaL manage Lhelr rlsks prudenLly and penallse Lhose LhaL do
noL
W 1hese dlsclosures are requlred Lo be made aL leasL Lwlce a year excepL
quallLaLlve dlsclosures provldlng a summary of Lhe general rlsk
managemenL ob[ecLlves and pollcles whlch can be made annually
lnsLlLuLlons are also requlred Lo creaLe a formal pollcy on whaL wlll be
dlsclosed conLrols around Lhem along wlLh Lhe valldaLlon and frequency
of Lhese dlsclosures ln general Lhe dlsclosures under lllar 3 apply Lo Lhe
Lop consolldaLed level of Lhe banklng group Lo whlch Lhe 8asel ll
framework applles