The Reserve Bank of India (RBI) on Tuesday said all banks in the country will have to adopt ‘standardised approach’ (SA) for credit risk and ‘basic indicator approach’ (BIA) for operational risk with effect from March 31, 2007.The central bank said after adequate skills are developed, both in banks and at supervisory levels, a few banks may be allowed to migrate to IRB (internal rating based) approach after obtaining the specific approval of RBI.New norms will be applicable uniformly to all scheduled commercial banks (except regional rural banks), both at the solo level (global position) as well as at the consolidated level. A consolidated bank — defined as a group of entities which include a licensed bank — should maintain a minimum capital to risk weighted assets ratio (CRAR) as applicable to a bank on an ongoing basis.RBI, which circulated the Draft Prudential Guidelines on Capital Adequacy to the chairmen of all scheduled commercial banks, said in order to guide the banks towards smooth transition to the revised capital adequacy framework, they should adopt a parallel run of the revised framework with effect from April 1, 2006.The revised framework, which consists of three mutually reinforcing pillars — minimum capital requirements, supervisory review of capital adequacy, and market discipline — seeks to align regulatory capital requirements more closely with the underlying risks and its adoption is expected to promote adoption of stronger risk management practices in banks.It also offers three distinct options for computing capital requirement for credit risk, that is, SA, Foundation Internal Ratings-Based (IRB) Approach, and Advanced IRB Approach; and three other options for computing capital requirement for operational risk, which is, BIA, SA, and Advanced Measurement Approach.Banks are required to maintain a minimum CRAR of 9 per cent on an ongoing basis. Capital funds are broadly classified as Tier 1 and Tier 2 capital. Elements of Tier 2 capital will be reckoned as capital funds up to a maximum of 100 per cent of Tier 1 capital, after making deductions/ adjustments.For Indian banks, Tier 1 capital would include paid-up capital, statutory reserves, and other disclosed free reserves, if any; and capital reserves representing surplus arising out of sale proceeds of assets. For foreign banks in India, Tier I capital, among others would include interest-free funds from head office kept in a separate account in Indian books solely for meeting the capital adequacy norms; remittable surplus retained in Indian books, not repatriable so long as the bank functions in India; an interest-free funds remitted from abroad for the purpose of acquisition of property and held in a separate account in Indian books.Further, foreign banks are required to furnish to RBI (if not already done), an undertaking to the effect that they will not remit abroad the remittable surplus retained in India and included in Tier 1 capital as long as the banks function in India.In regard to revaluation reserves, RBI said, it would be prudent to consider them at a discount of 55 per cent while determining their value for inclusion in Tier II capital.The investment fluctuation reserve (IFR) will continue to be treated as Tier 2 capital. Institutions which may be deemed to be FIs for capital adequacy purposes are banks, mutual funds, insurance companies, non-banking financial/ housing finance and mercant banking companies, and primary dealers.
