Financial Daily from THE HINDU group of publications
Tuesday, Sep 06, 2005

Port Info

Group Sites

Money & Banking - Trends

Banks see lower capital needs despite Basel

C. Shivkumar

Bankers said that even after taking into account some extreme scenarios, their incremental capital requirement was likely to be minimal.

Bangalore , Sept. 5

WITH shrinking investment portfolios, large domestic banks are unlikely to face capital requirements despite the shift over to the Basel II capital charge for market risk regime from the beginning of next financial year.

Investment-deposit ratios for most banks were already below 40 per cent. Till middle of last year, this was close to about 46 per cent. Besides, bankers said that many of them had already approached the Reserve Bank of India to treat the Investment Fluctuation Reserve (IFR) as Tier I capital, the banks' owned funds. So far, the RBI has allowed only IFR above the 5 per cent prescribed above the directed limits to be treated as Tier I. IFR is a below-the-line item and is a charge on net profit. Bankers were hopeful that the entire IFR would be treated as Tier I. Most public sector banks have reached the prescribed limit well above the April 2006 deadline. Besides, most banks were progressively reducing their investment-deposit ratios from current levels through sale of securities and a process of derisking.

Derisking involved shrinking the maturity of the investment book.

Above all, bankers said that they had asked the RBI to treat only securities within the categories of "Available for Sale" and "Held for Trading" for market risks. This was because only these securities were valued on a marked to market basis.

Bankers said they wanted "Held for Maturity" categories to be kept out of the ambit of market risk.

Under the draft guidelines of the Basel II norms, there was no such distinction, because the international practice was to recognise investments as market risk and value them accordingly. Bankers said they had sought the departure from international practice, since they were expected to maintain a statutory liquidity ratio of 25 per cent.

Bankers said that the HTM component was expected to be kept out of the purview of market risk. Consequently, bankers said that the market risk component would at best be 15 per cent and for some banks it could even be lower.

Moreover, the risk weightage on some of the advances was likely to be reduced once the standardised approach of the Bank for International Settlements is implemented from March 2007. On some categories, it could rise up to 150 per cent based on this approach. But, bankers said that even after taking into account some extreme scenarios, their incremental capital requirement was likely to be minimal. In fact, based on the Internal Capital Adequacy Assessment, certain well-rated advances were likely to have a lower risk weighting.

The BIS draft guidelines had in fact prescribed risk weighting as low as 50 per cent in some of these categories of advances that are currently risk weighted at 100 per cent.

Besides, though the RBI prescribes only 75 per cent risk weighting for home loans, some banks, as a measure of prudence, were risk weighting at 100 per cent. This risk weighting was raised in October 2004 from 50 per cent as a temporary measure. The Basel II standardised approach prescribes only 50 per cent for advances backed by real estate.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Good business from bad loans?

Rupee gains 5 paise
GE Money forays into used car finance
RBI proposes one-time settlement for SMEs
SBH sees growth from infrastructure funding
Andhra Bank's 12-hr banking
PNB launches SB account for students
CAG pulls up Goa finance body for losses
Educational loans: Chidambaram concern over high interest rates
Karnataka Bank's NRE deposit rates
BoI to raise Rs 750 cr as Tier II capital
UCO Bank to host bankers' meet in Nov
Credit card frauds get high tech
Banks see lower capital needs despite Basel

The Hindu Group: Home | About Us | Copyright | Archives | Contacts | Subscription
Group Sites: The Hindu | Business Line | The Sportstar | Frontline | The Hindu eBooks | The Hindu Images | Home |

Copyright 2005, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line