ACKNOWLEDGEMENT

The experience of working in the apex bank of the country has been a great learning
curve for me. I am very thankful for the opportunity to work on such an important project
of ‘Implementation Issues of Banks regarding Basel-II in India’.
I have gained an in-depth knowledge on the topic. Apart from this I have had a wonderful
feel of the corporate environment and how organisations functions and at the same time
the project and the interaction with other banks has boosted my confidence in my
decision for specialization.
I would like to thank my Project Guide, Dr. A.S.Ramasastri, without whose guidance this
project would not have been possible. He has leaded me through the entire tenure of the
project and provided help as and when required. I would also like to extend my thanks to
Dr. G.P. Samantha for being of immense help in guiding me through the entire tenure of
the project.
I would also like to thank all the officials in the organisation, who had taken time to
answer my queries and without whose contribution, the project would have been
incomplete.
I would also like to thank all the officials in the banks I surveyed for their time and
recommendations for my report.
And I would also like to thank Miss Neha Malhotra, a fellow summer trainee in RBI,
without whose help and support it would have been impossible to complete the project.

ASHUTOSH KUMAR

1
 EXECUTIVE SUMMARY

This project undertakes to gauge the preparedness of the banks for implementing Basel II
and at the same time understand the Implementation issues of the banks. The study
required a brief survey of some selected banks to understand the current position of the
banks, the way they envisage their transition to Basel II and implementation issues
regarding Basel II. The following report follows this framework:
• Introduction.
• Basel-II Accord.
• Basel II in India.
• RBI approach to Basel-II.
• Methodology of the project.
• Analysing the preparedness of the banks.
• Feedback from the banks.
The finding from the survey point towards the fact that, all the banks surveyed are on an
equal footing and are satisfactorily placed as far as Pillar 1 (Capital Adequacy) is
concerned.
But for Pillar 2 (Supervisory Review or ICAAP) most of the banks have been found
lacking. All the banks are on different level of implementation. Also the banks are
satisfactorily placed for Pillar 3 (Market Discipline).

2
 APPENDIX

Serial Topic Page No.

No.
1. Introduction 5-6

2. Basel-II Accord 7-14

3. Basel-II in India 15-22

4. RBI approach to Basel-II 23-27

5. Methodology of the Project 28-29

6. Analysing the Preparedness of the 30-33

Banks
7. Feedback from the Banks 34

8. Bibliography 35

9. Annexure 36-39

3
 CHAPTER 1: INTRODUCTION

1.1 Background

With the gradual liberalization of the Indian financial system and growing integration of
the domestic markets with the external markets, the risks associated with the bank
operations have become complex and large requiring strategic management. Thus, the
bank supervisory authorities felt a need for certain stringent and uniform capital
regulations worldwide. Also varying approaches for capital measurement across countries
made international comparisons difficult and there was a need to evolve an
internationally consistent approach to capital measurement and reduce the international
competitive inequalities amongst the banks. Thus, with solutions to all these problems
came up the Basel Committee on Banking Supervision (BCBS).
Basel Committee on Banking Supervision (BCBS) was established by central banks of G-
10 countries in 1974. The committee today consists of central bankers and supervisory
regulators from 13 countries namely, Belgium, Canada, France, Germany, Italy, Japan,
Luxemburg, Netherlands, Spain, Sweden, Switzerland, United Kingdom and the United
States of America. A set of agreements was set up by the Basel Committee on Banking
Supervision (BCBS) to provide recommendations on international banking regulations.
The first Basel accord, Basel I was set up in 1988. In India, it was implemented in 1999.
The second Basel accord, known as Basel II came up in June 2004. The purpose of these
accords is to ensure that the financial institutions have enough capital on account to meet
obligations and absorb unexpected losses.

1.2 Basel I
The first Basel accord, known as the Basel I was set up in 1988. Since 1988, this
framework has been progressively introduced not only in member countries but also in
virtually all other countries with active international banks. It was implemented in India
in 1999. Basel I mainly focused on credit risk and market risk. Under this, banks
operating internationally were required to maintain a capital of at least 8% of the risk-
weighted assets.

1.3 Comparison between Basel I and Basel II

Basel I with its “one size fits all” approach was less risk sensitive. It focused only on
credit risk and market risk and allotted a risk weight of 100% to all corporate exposures
irrespective of their rating. Basel II, on the other hand is more risk sensitive. It takes
operational risk also into account along with credit and market risk and includes two
additional areas of Supervisory Review Process and Market Discipline.

4
Comparison between BASEL-I and BASEL-II

5
 CHAPTER 2: BASEL-II ACCORD
“Undoubtedly the discipline of risk management has significantly altered the ethos of the
banking as an economic activity. But one point I would like to stress in conclusion is that
banks should view the opportunities opened up by these complex financial instruments in
the perspective of larger systemic interest. Today internationally, when market discipline
is being considered an integral part of the regulatory framework, it is imperative for
banks to realize that they are equal partners in ensuring financial stability; and this
involves helping build up a risk management culture across all stakeholders. Any
distortions brought about by misalignment of risk needs and the product being offered to
address the risk can only harm and arrest the development of a healthy market.”

-by Dr. Shyamala Gopinath, DG, RBI, in her speech “Approach to Basel-II”

2.1 Overview

Basel II aims to encourage the use of modern risk management techniques; and to
encourage banks to ensure that their risk management capabilities are commensurate with
the risks of their business. Previously, regulators' main focus was on credit risk and
market risk. Basel II takes a more sophisticated approach to credit risk, in that it allows
banks to make use of internal ratings based Approach - or "IRB Approach" as they have
become known - to calculate their capital requirement for credit risk. It also introduces, in
addition to the market risk capital charge, an explicit capital charge for operational risk.
Together, these three risks - credit, market, and operational risk - are the so-called "Pillar
1" risks. Banks' risk management functions need to look at a much wider range of risks
than this - interest rate risk in the banking book, foreign exchange risk, liquidity risk,
business cycle risk, reputation risk, strategic risk. The risk management role of helping
identify, evaluate, monitor, manage and control or mitigate these risks has become a
crucial role in modern-day banking. Indeed, it is probably not exaggerating the
importance of this to say that the quality of a bank's risk management has become one of
the key determinants of a success of a bank.

6
This Basel II report presents the outcome of the Basel Committee on Banking
Supervision’s (“The Committee”) work over recent years to secure international
convergence, on revisions, to supervisory regulations, governing the capital
adequacy of internationally active banks. The Committee expects its members to
move forward with the appropriate adoption procedures in their respective countries.
In a number of instances, these procedures will include additional impact
assessments of the Committee’s Framework as well as further opportunities for
comments by interested parties to be provided to national authorities. The
fundamental objective of the Committee’s work to revise the 1988 Accord has been
to develop a framework that would further strengthen the soundness and stability of
the international banking system while maintaining sufficient consistency that capital
adequacy regulation will not be a significant source of competitive inequality among
internationally active banks. The Committee believes that the revised Framework
will promote the adoption of stronger risk management practices by the banking
industry, and views this as one of its major benefits. . In developing the revised
Framework, the Committee has sought to arrive at significantly more risk-sensitive
capital requirements that are conceptually sound and at the same time pay due regard
to particular features of the present supervisory and accounting systems in individual
member countries. It believes that this objective has been achieved. . The revised
Framework provides a range of options for determining the capital requirements for
credit risk and operational risk to allow banks and supervisors to select approaches
that are most appropriate for their operations and their financial market
infrastructure. In addition, the Framework also allows for a limited degree of
national discretion in the way in which each of these options may be applied, to
adapt the standards to different conditions of national markets.

2.2 Key Elements of the New Accord

1. The New Accord consists of three pillars: (1) minimum capital requirements, (2)
supervisory review of capital adequacy, and (3) public disclosure. The proposals
comprising each of the three pillars are summarized below.

Pillar 1: Minimum capital requirements

2. While the proposed New Accord differs from the current Accord along a number of
dimensions, it is important to begin with a description of elements that have not changed.
The current Accord is based on the concept of a capital ratio where the numerator
represents the amount of capital a bank has available and the denominator is a measure of
the risks faced by the bank and is referred to as risk-weighted assets. The resulting capital
ratio may be no less than 8%.

3. The current Accord explicitly covers only two types of risks in the definition of risk
weighted assets: (1) credit risk and (2) market risk. Other risks are presumed to be
covered implicitly through the treatments of these two major risks. The treatment of
market risk arising from trading activities was the subject of the Basel Committee’s 1996

7
Amendment to the Capital Accord. The proposed New Accord envisions this treatment
remaining unchanged.

4. In both cases, a major innovation of the proposed New Accord is the introduction of
three distinct options for the calculation of credit risk and three others for operational
risk. The Committee believes that it is not feasible or desirable to insist upon a one-size-
fits-all approach to the measurement of either risk. Instead, for both credit and
operational risk, there are three approaches of increasing risk sensitivity to allow banks
and supervisors to select the approach or approaches that they believe are most
appropriate to the stage of development of banks’ operations and of the financial market
infrastructure. The following table identifies the three primary approaches available by
risk type.

CREDIT RISK OPERATIONAL RISK

Standardized Approach Basic Indicator Approach
Foundation IRB Approach Standardized Approach
Advanced IRB Approach Advanced Measurement Approaches
(AMA)

Standardized approach to credit risk

5. The standardized approach is similar to the current Accord in that banks are required to
slot their credit exposures into supervisory categories based on observable characteristics
of the exposures (e.g. whether the exposure is a corporate loan or a residential mortgage
loan). The standardized approach establishes fixed risk weights corresponding to each
supervisory category and makes use of external credit assessments to enhance risk
sensitivity compared to the current Accord. The risk weights for sovereign, interbank,
and corporate exposures are differentiated based on external credit assessments. For
sovereign exposures, these credit assessments may include those developed by OECD
export credit agencies, as well as those published by private rating agencies.

6. The standardized approach also includes a specific treatment for retail exposures. The
risk weights for residential mortgage exposures are being reduced relative to the current
Accord, as are those for other retail exposures, which will now receive a lower risk
weight than that for unrated corporate exposures. In addition, some loans to small- and
medium sized enterprises (SMEs) may be included within the retail treatment, subject to
meeting various criteria.

Internal ratings-based (IRB) approaches

7. One of the most innovative aspects of the New Accord is the IRB approach to credit
risk, which includes two variants: a foundation version and an advanced version. The
IRB approach differs substantially from the standardized approach in that banks’ internal
assessments of key risk drivers serve as primary inputs to the capital calculation. Because
the approach is based on banks’ internal assessments, the potential for more risk sensitive
capital requirements is substantial. However, the IRB approach does not allow banks
themselves to determine all of the elements needed to calculate their own capital
requirements. Instead, the risk weights and thus capital charges are determined through

8
the combination of quantitative inputs provided by banks and formulas specified by the
Committee.

8. The IRB approaches cover a wide range of portfolios with the mechanics of the capital
calculation varying somewhat across exposure types. The remainder of this section
highlights the differences between the foundation and advanced IRB approaches by
portfolio, where applicable.

9. The foundation and advanced IRB approaches differ primarily in terms of the inputs
that are provided by the bank based on its own estimates and those that have been
specified by the supervisor. The following table summarizes these differences.

Data Input Foundation IRB Advanced IRB

Probability of default (PD) Provided by bank based on Provided by bank based on

own estimates own estimates

Loss given default (LGD) Supervisory values set by Provided by bank based on
the Committee own estimates

Exposure at default (EAD) Supervisory values set by Provided by bank based on

the Committee own estimates

Maturity (M) Supervisory values set by Provided by bank based on

the Committee own estimates (with an
OR allowance to exclude certain
At national discretion, exposures)
provided by bank based on
own estimates (with an
allowance to exclude
certain exposures)

Implementation of IRB
10. By relying on internally generated inputs to the Basel II risk weight functions, there is
bound to be some variation in the way in which the IRB approach is carried out. To
ensure significant comparability across banks, the Committee has established minimum
qualifying criteria for use of the IRB approaches that cover the comprehensiveness and
integrity of banks’ internal credit risk assessment capabilities. While banks using the
advanced IRB approach will have greater flexibility relative to those relying on the
foundation IRB approach, at the same time they must also satisfy a more stringent set of
minimum standards.

9
11. Clearly, an internal rating system is only as good as its inputs. Accordingly, banks
using the IRB approach will need to be able to measure the key statistical drivers of credit
risk. The minimum Basel II standards provide banks with the flexibility to rely on data
derived from their own experience, or from external sources as long as the bank can
demonstrate the relevance of such data to its own exposures. In practical terms, banks
will be expected to have in place a process that enables them to collect, to store and to
utilize loss statistics over time in a reliable manner.

Operational risk
12. The Committee believes that operational risk is an important risk facing banks and
those banks need to hold capital to protect against losses from it. Within the Basel II
framework, operational risk is defined as the risk of losses resulting from inadequate or
failed internal processes, people and systems, or external events. This is another area
where the Committee has developed a new regulatory capital approach. As with credit
risk, the Committee builds on banks’ rapidly developing internal assessment techniques
and seeks to provide incentives for banks to improve upon those techniques, and more
broadly, their management of operational risk over time. This is particularly true of the
Advanced Measurement Approaches (AMA) to operational risk described below.

13. Approaches to operational risk are continuing to evolve rapidly, but are not likely in
the near term to attain the precision with which market and credit risk can be quantified.
This situation has posed obvious challenges to the incorporation of a measure of
operational risk within pillar one of the New Accord. Nevertheless, the Committee
believes that such inclusion is essential to ensure that there are strong incentives for
banks to continue to develop approaches to operational risk measurement and to ensure
that banks are holding sufficient capital buffers for this risk. It is clear that a failure to
establish a minimum capital requirement for operational risk within the New Accord
would reduce these incentives and result in a reduction of industry resources devoted to
operational risk.

14. Internationally active banks and banks with significant operational risk exposure (for
example, specialized processing banks) are expected to adopt over time the more risk
sensitive AMA. Basel II contains two simpler approaches to operational risk: the basic
indicator and the standardized approach, which are targeted to banks with less significant
operational risk exposures. In general terms, the basic indicator and standardized
approaches require banks to hold capital for operational risk equal to a fixed percentage
of a specified risk measure.

Pillar 2: Supervisory review

15. The second pillar of the New Accord is based on a series of guiding principles, all of
which point to the need for banks to assess their capital adequacy positions relative to
their overall risks, and for supervisors to review and take appropriate actions in response
to those assessments. These elements are increasingly seen as necessary for effective
management of banking organizations and for effective banking supervision,
respectively.

10
16. The Committee has been working to update the pillar two guidance as it finalizes
other aspects of the new capital adequacy framework. One update is in relation to stress
testing. The Committee believes it is important for banks adopting the IRB approach to
credit risk to hold adequate capital to protect against adverse or uncertain economic
conditions. Such banks will be required to perform a meaningfully conservative stress
test of their own design with the aim of estimating the extent to which their IRB capital
requirements could increase during a stress scenario. Banks and supervisors are to use the
results of such tests as a means of ensuring that banks hold a sufficient capital buffer. To
the extent there is a capital shortfall, supervisors may, for example, require a bank to
reduce its risks so that existing capital resources are available to cover its minimum
capital requirements plus the results of a recalculated stress test.

17. Other refinements focus on banks’ review of concentration risks, and on the treatment
of residual risks that arise from the use of collateral, guarantees and credit derivatives.
Further to the pillar one treatment of securitisation, a supervisory review component has
been developed, which is intended to provide banks with some insight into supervisory
expectations for specific securitisation exposures. Some of the concepts addressed
include significant risk transfer and considerations related to the use of call provisions
and early amortization features. Further, possible supervisory responses are outlined to
address instances when it is determined that a bank has provided implicit
(noncontractual) support to a securitisation structure.

Pillar 3: Market discipline

18. The purpose of pillar three is to complement the minimum capital requirements of
pillar one and the supervisory review process addressed in pillar two. The Committee has
sought to encourage market discipline by developing a set of disclosure requirements that
allow market participants to assess key information about a bank’s risk profile and level
of capitalisation. The Committee believes that public disclosure is particularly important
with respect to the New Accord where reliance on internal methodologies will provide
banks with greater discretion in determining their capital needs. By bringing greater
market discipline to bear through enhanced disclosures, pillar three of the new capital
framework can produce significant benefits in helping banks and supervisors to manage
risk and improve stability.

19. Over the past year, the Committee has engaged various market participants and
supervisors in a dialogue regarding the extent and type of bank disclosures that would be
most useful. The aim has been to avoid potentially flooding the market with information
that would be hard to interpret or to use in understanding a bank’s actual risk profile.
After taking a hard look at the disclosures proposed in its second consultative package on
the New Accord, the Committee has since scaled back considerably the requirements,
particularly those relating to the IRB approaches and securitisation.

20. The Committee is aware that supervisors may have different legal avenues available
in having banks satisfy the disclosure requirements. The various means may include
public disclosures deemed necessary on safety and supervision grounds or information
that must be disclosed in regulatory reports. The Committee recognizes that the means by

11
which banks will be expected to share information publicly will depend on the legal
authority of supervisors.

2.3 Structure of BASEL-II

12
Basel II increases risk sensitivity by defining three types of risk and improving the capital
and internal efficiencies of financial institutions by defining supervisory review processes
and public disclosure norms.

There is an inverse relationship between the complexity of the approach used and capital
charge for it. As the approach becomes complex, the capital charge tends to decrease for
both credit and operational risk.

13
 CHAPTER 3: BASEL-II IN INDIA

3.1 Features of Indian Financial System

A feature, somewhat unique to the Indian financial system is the diversity of its
composition. We have the dominance of Government ownership coupled with significant
private shareholding in the public sector banks that in turn continue to have a dominant
share in the total banking system. These public sector banks are listed on the stock
exchange and their performance is reflected in their P/E ratios. The private sector banks
especially the new ones are world class. We also have cooperative banks, whose numbers
are large and pose a challenge because of the multiplicity of regulatory and supervisory
authorities. There are also Regional Rural Banks with links to their parent commercial
banks. Foreign bank branches operate profitably in India and by and large the regulatory
standards for all these banks are uniform. The process of providing financial services is
changing rapidly from traditional banking to a one stop shop of varied financial services
and the old institutional demarcations are getting increasingly blurred.

3.2 Approach to Prudential Norms: A Review

The Reserve Banks approach to the institution of prudential norms has been one of
gradual convergence with international standards and best practices with suitable country
specific adaptations. Our aim has been to reach global best standards in a deliberately
phased manner through a consultative process evolved within the country. This has also
been the guiding principle in the approach to the New Basel Accord e.g. while the
minimum capital adequacy requirement under the Basel standard is 8% in India, we have
stipulated and achieved a minimum capital of 9%. On the other hand, banks in India are
still in the process of implementing capital charge for market risk prescribed in the Basel
14
document although since 1998 we have in place several surrogates such as an Investment
Fluctuation Reserve of 5% of the investment portfolio, plus a 2.5% risk weight on the
entire investment portfolio whereas Basel norms take into account only the trading
portfolio.

3.3 RBI’s involvement in Basel II

RBI’s association with the Basel Committee on Banking Supervision dates back to 1997
as India was among the 16 non-member countries that were consulted in the drafting of
the Basel Core Principles. Reserve Bank of India became a member of the Core
Principles Liaison Group in 1998, and subsequently, became a member of the Core
Principles Working Group on Capital. Within the CPWG, RBI has been actively
participating in the deliberations on the Accord and had the privilege to lead a group of 6
major non G -10 supervisors which presented a proposal on a simplified approach for
Basel II to the Committee.

3.4 Policy Approach

In general, keeping in view the RBI’s goal to have consistency and harmony with
international standards and our approach to adopt the pace as may be appropriate in the
context of our country specific needs, the RBI had in April 2003 itself accepted in
principle to adopt the new capital accord Basel II. The RBI has announced, in its Annual
Policy statement in May 2004 that banks in India should examine in depth the options
available under Basel II and draw a road-map by end December 2004 for migration to
Basel II and review the progress made thereof at quarterly intervals. The Reserve Bank
will be closely monitoring the progress made by banks in this direction. Hence, at a
minimum all banks in India, to begin with, will adopt Standardized Approach for credit
risk and Basic Indicator Approach for operational risk. After adequate skills are
developed, both in banks and at supervisory levels, some banks may be allowed to
migrate to IRB Approach.

3.5 Regulatory Initiatives

The regulatory initiatives taken by the Reserve Bank of India include:

1. Ensuring that the banks have suitable risk management framework oriented
towards their requirements dictated by the size and complexity of business, risk
philosophy, market perceptions and the expected level of capital. The framework
adopted by banks would need to be adaptable to changes in business size, market
dynamics and introduction of innovative products by banks in future.
2. Introduction of Risk Based Supervision (RBS) in 23 banks on a pilot basis.
3. Encouraging banks to formalize their Capital Adequacy Assessment Programme
(CAAP) in alignment with business plan and performance budgeting system.
This, together with adoption of Risk Based Supervision would aid in factoring the
Pillar II requirements under Basel II.

15
 4. Enhancing the area of disclosures (Pillar III), so as to have greater transparency of
the financial position and risk profile of banks.
5. Improving the level of corporate governance standards in banks.
6. Building capacity for ensuring the regulators ability for identifying and permitting
eligible banks to adopt IRB / Advanced Measurement approaches.

3.6 Structure of Basel II

Basel II is mainly divided into three interrelated parts:

• Pillar 1: - Minimum Capital Requirement.

Banks should have capital appropriate for their risk taking activities.

• Pillar 2: - Supervisory Review.

Banks should be able to properly assess the risk they are taking, and supervisors
should be able to evaluate the soundness of these assessments.
• Pillar 3: - Market Discipline.
Banks should be disclosing pertinent information necessary to enable market
mechanism to complement the supervisory oversight function.

3.6.1 Pillar 1

The Basel Committee prescribes Capital Charge for the following risks:
• Credit Risk: Risk of default by borrowers
• Market Risk: Risk due to volatility in the markets invested.
• Operational Risk: Risk out of the following operations,
o Personnel.
o Process.
o System
External Factors (e.g. Natural disasters).

1. Calculating Credit Risk

16
 Credit
Risk

Internal Ratings Securitizatio

Standardized n
Based
Approach Framework
Approach

Foundation Advanced
Approach Approach
1. Standardized approach
- Risk weights depend on external credit ratings
2. Foundation IRB
- Banks to use internal credit ratings and supply PD
3. Advanced IRB
- Banks to use internal credit ratings and supply PD, LGD, EAD, M
Where,
PD - Probability of Default
M - Effective Maturity of exposure
LGD - Loss Given Default
EAD - Exposure at Default
But in India RBI has issued guidelines to the banks to follow the Standardised approach
initially, so as to get the banks on an equal footing. The RBI has suggested some changes
in the actual guidelines to suit the Indian scenario better.

2. Calculating Operational risk

Operational
risk

17
 Basic Advanced
Standardized
Indicator Measurement
Approach
Approach Approach

1. Basic Indicator Approach

Under the Basic Indicator Approach, banks have to hold capital for operational risk equal
to a fixed percentage (alpha) of a single indicator, which has currently been proposed to
be “gross income”.

2. Standardised Approach

The total capital charge is calculated as the simple summation of the regulatory capital
charges across each of the business lines.

3. Advanced Measurement Approach

Under the AMA, the regulatory capital requirement will equal the risk measure generated
by the bank’s internal operational risk measurement system using the quantitative and
qualitative criteria.
The RBI has given guidelines, proposing that banks undertake the Basic indicator
Approach, and the fixed percentage is set at 15%.

3.6.2 Pillar 2

The Basel Committee has prescribed supervisory review to monitor other possible risks
that may be very bank specific, due to factors like location etc.
E.g. liquidity risk, interest rate risk etc
The second pillar is based on the following for principles:
1. Banks should have a process for assessing their overall capital adequacy in relation to
their risk profile and a strategy for maintaining their capital levels.
2. Supervisors should review and evaluate banks’ internal capital adequacy assessments
and strategies, as well as their ability to monitor and ensure their compliance with
regulatory capital ratios. Supervisors should take appropriate supervisory action if they
are not satisfied with the result of this process.
3. Supervisors should expect banks to operate above the minimum regulatory capital
ratios and should have the ability to require banks to hold capital in excess of the
minimum.
18
4. Supervisors should seek to intervene at an early stage to prevent capital from falling
below the minimum levels required to support the risk characteristics of a particular bank
and should require rapid remedial action if capital is not maintained or restored.

Implementation of Basel II in India

RBI, the Central Bank of India has adopted a three-track approach to capital adequacy
regulations in India. In India, we have 85 commercial banks, which account for about
78% (total assets) of the financial sector; over 3000 cooperative banks, which account for
9%; and 196 Regional Rural Banks, which account for 3%. Taking into account the size,
complexity of operations, and relevance to the financial sector, need to ensure greater
financial inclusion and the need for having an efficient delivery mechanism, the capital
adequacy norms applicable to these entities have been maintained at varying levels of
stringency. RBI has adopted a three- track approach to capital adequacy regulations in
India. On the first track, the commercial banks are required to be on Basel II standards.
On the second track, the cooperative banks to be on Basel I and on the third track, the
Regional Rural Banks will be on non-Basel standards.
Different countries are at different stages of implementation. In India, what has been
adopted is a calibrated approach for a phased implementation of Basel II to secure a non-
disruptive migration to the new framework. With a view to ensure migration to Basel II
in a non-disruptive manner, RBI has constructed a steering committee comprising of
senior officials from 14 banks where Indian Banks Association is also represented. Also
RBI had advised banks to do a self-assessment check of their risk management systems.
RBI had earlier asked the banks to migrate to the Basel II framework by March 31, 2007.
Later, RBI extended this deadline. The RBI's decision to extend the deadline for the
implementation of Basel II demonstrates its commitment to enable Indian banks to
implement prudential measures that are in keeping with global best practices. Given the
diversity of banks in India, by providing additional time, it appears that the RBI is
determined that Basel II penetrates the entire banking industry rather than being confined
to a select few. This will create a more level playing field.
RBI issued draft guidelines on February 15, 2005 on the implementation of Pillar 1 and
Pillar 3 of Basel II. Then the draft guidelines were revised and placed in public domain
on March 20, 2007. With additional feedback, the guidelines were finalized and issued on
April 27, 2007. The pillar 2 guidelines were issued on March 26, 2008.

3.7 Benefits of Basel II

Basel II tends to provide the minimum capital requirements to serve as a cushion in times
of financial instability thereby absorbing unexpected losses. Thus, Basel II ensures to
maintain stability and soundness in the financial system by better risk management.

Developing a better understanding of the risk/reward trade-off for capital supporting

specific businesses, customers, products, and processes is one of the most important
potential business benefits banks may derive from compliance, as envisioned by the
Basel Committee.

19
Basel II includes operational risk along with the earlier credit and market risks and
includes two additional areas of Supervisory review process and market discipline.
Basel I provided a risk weight to 100% to all corporate exposures irrespective of their
rating. Since they required the same regulatory capital charge, it engendered a rather
perverse incentive for the banks to acquire higher-risk customers in pursuit of higher
returns, without necessitating a higher capital charge. Basel II provides a risk weight
depending upon the rating of the corporate i.e. a low risk weight for a better rated
corporate and thus overcomes the limitation of Basel I.

Basel II ties regulatory capital with economic capital. Once banks can attribute risk to a
potential transaction, product, or process, they can ascribe a portion of economic capital
to it (based on the risk it poses), define an expected return on it, consider how best to
price it, consider risk mitigating techniques, and thereby decide, for example, whether to
enter a transaction, engage in a business, or pursue an activity or process.

To benefit from Basel II, it’s necessary to view it much more than just a regulatory
compliance.

3.9 Challenges in achieving Basel II compliance

There are certain challenges that could emanate from the adoption of Basel II framework,
particularly, in the Indian context.

Firstly, it is understood that the Basel II framework provides for as many as about 130
areas of national discretion to be exercised by the country supervisors, as per local
conditions. Thus, it has been argued that potentially, there could be 130 variations of the
new framework under different jurisdictions. If that be the case, the international
comparability of the bank-capital standards would be difficult to achieve across the
countries and perhaps, the original objective of reducing the international competitive
inequality amongst the banks could get compromised.

Secondly, in the Indian context, the rating penetration is very low and is generally
confined to the larger corporates while the smaller entities are generally unrated. With the
adoption of the Standardised Approach in India, which places heavy reliance on the
external rating of the bank clients, a view has been expressed that the small and medium
enterprises, which are below the rating threshold, may get somewhat handicapped in
availing bank credit in the absence of credit rating. This may perhaps call for special
efforts to maintain the credit flow to this segment of the borrowers.

Thirdly, the risk sensitive approach of the Basel II Framework is likely to give rise to
pro-cyclicality in the capital requirements of the banks since in an economic downturn,
the capital requirements would rise but will decline during an economic boom. It is
argued that such an impact on the banks could accentuate the effects of the cycle and
could increase the volatility in the banking system.

20
Fourthly, Basel provides incentives for banks to transfer credit risks through instruments
such as asset-backed securities or credit derivatives, while retaining the customer
relationship. Although banks reduce their credit risk in these transactions, their
operational risk may rise. For example, a bank may choose to sell a securities portfolio to
a special purpose vehicle (SPV) or transfer credit risk via a derivatives transaction. When
it does so, the bank needs to designate separate people, processes, and IT systems to that
SPV and ensure proper management of related legal issues to mitigate risks. Moreover,
increased overall operational risk may require higher regulatory capital, which partly may
offset savings on the credit side. Banks may also discover that their best and/or largest
customers no longer need their services. Such companies can access the capital markets
directly—by issuing bonds, equity, or asset–backed securities—and are as likely to do so
as a bank. Retaining such customers could become a challenge.

A likely scenario, which might arise post-Basel II implementation, is the asymmetry in

regulatory regime amongst the competing broad segments of the financial sector viz.,
banking, securities and insurance sectors. While the commercial banking sector is
expected to migrate to the Basel II regimen soon, the other segments are not likely to be
subjected to the same or similar discipline unless they are a part of a banking group,
where Basel II regimen would apply indirectly through the parent bank. Hence, we are
likely to see some scope for regulatory arbitrage amongst the three broad segments unless
the regulators of these segments also recognise the need and relevance of a comparable
prescription for those segments. The Joint Forum has taken some initiatives in this
direction, which may have to be pursued further to achieve parity in the level of
regulatory burden across the three sectors, which compete amongst themselves for the
business of financial intermediation.

With Basel II implementation, banks average capital requirements should not change
significantly on an industry level, but an individual bank may experience a significant
change. For example, capital requirements should drop substantially at a bank with a
prime business portfolio that is well collateralized. On the other hand, a bank with a high
risk portfolio will likely face higher capital requirements and, consequently, limits on its
business potential. Those deemed “high risk” could include banks that are pure risk takers
with a buy-and-hold credit management approach, no clear customer segmentation, a lack
of collateral management as well as inadequate processes, unstable IT systems, and a
poor overall risk management function. Indeed, such entities may not be able to make the
necessary investment in compliance.

Basel II is all about risk management. To quantify risk, a portion of economic capital is to
be kept aside. This requires high quality and high frequency data. This is also one of the
biggest challenges.

Lastly, there are other challenges in achieving Basel II standards in a timely manner.
These challenges include project management and system issues, data availability,
technical interpretation, institutional awareness and training.

21
 CHAPTER 4: RBI APPROACH TO BASEL-II

4.1 Approaches to Implementation

With a view to keep consistency and harmony with the international standards it has been
decided by RBI that all the commercial banks in India (excluding Local Area Banks and
Regional Rural Banks) shall adopt Standardized Approach (SA) for credit risk and Basic
Indicator Approach (BIA) for operational risks. Also banks shall continue to apply the
Standardized Duration Approach (SDA) for computing capital requirement for market
risk.

4.2 Effective Date

Foreign banks operating in India and Indian banks having operational presence outside
India are required to migrate to the above selected approaches under the Revised
Framework with effect from March 31, 2008. All other Commercial banks (except Local
Area Banks and Regional Rural Banks) are encouraged to migrate to these approaches
under the Revised Framework in alignment with them but in any case not later than
March 31, 2009.

4.3 Parallel Run

With a view to ensuring smooth transition to the Revised Framework and with a view to
providing opportunity to banks to streamline their systems and strategies, banks were
advised by RBI to have a parallel run of the revised Framework. Banks need to apply the

22
prudential guidelines on capital adequacy both current guidelines and the new guidelines
on the Revised Framework – on an on-going basis and compute their Capital to Risk
Weighted Assets Ratio (CRAR) under both the guidelines and report to the board of the
banks at quarterly intervals. Banks also need to furnish a comprehensive assessment of
their compliance with the other requirements relevant under the Revised Framework,
which will include the following, at the minimum:
a) Board approved policy on utilization of the credit risk mitigation techniques, and
collateral management,
b) Board approved policy on disclosures,
c) Board approved policy on Internal Capital Adequacy Assessment Process (ICAAP)
along with the capital requirement as per ICAAP, Basel II Final Guidelines.
d) Adequacy of bank's MIS to meet the requirements under the New Capital Adequacy
Framework, the initiatives taken for bridging gaps, if any and the progress made in this
regard,
e) Impact of the various elements / portfolios on the bank's CRAR under the revised
framework.
f) Mechanism in place for validating the CRAR position computed as per the New
Capital Adequacy Framework and the assessments / findings/ recommendations of these
validation exercises,
g) Action taken with respect to any advice / guidance / direction given by the Board in
the past on the above aspects.

4.4 Migration to other approaches

Banks are required to obtain the prior approval of the Reserve Bank to migrate to the
Internal Rating Based Approach (IRBA) for credit risk and the Standardized Approach
(TSA) or the Advanced Measurement Approach (AMA) for operational risk.

4.5 Scope of application

The revised capital adequacy norms shall be applicable uniformly to all Commercial
Banks (except Local Area Banks and Regional Rural Banks), both at the solo level
(global position) as well as at the consolidated level. A consolidated bank should
maintain a minimum Capital to Risk-weighted Assets Ratio (CRAR) as applicable to a
bank on an ongoing basis.

4.6 Capital funds

Banks are required to maintain a minimum Capital to Risk-weighted Assets Ratio

(CRAR) of 9 percent on an ongoing basis. In terms of the Pillar 2 requirements of the
New Capital Adequacy Framework, banks are expected to operate at a level well above
the minimum requirement.

The minimum capital maintained by banks on implementation of the Revised Framework

shall be subjected to a prudential floor, which shall be the higher of the following
amount:

23
a) Minimum capital required to be maintained as per the Revised Framework.
b) A specified percent of the minimum capital required to be maintained as per the Basel
I framework for credit and market risks.
Banks are encouraged to maintain, at both solo and consolidated level, a Tier 1 CRAR of
at least 6%. Banks that are below this level are required to achieve this ratio on or before
March 31, 2010.

A bank is to compute its Tier 1 CRAR and Total CRAR in the following manner:
Eligible Tier 1 capital funds
Tier 1 CRAR= ----------------------------------------------------------------------------------
Credit Risk RWA+ Market Risk RWA + Operational Risk RWA

Eligible total capital funds

Total CRAR =
---------------------------------------------------------------------------------
Credit Risk RWA + Market Risk RWA + Operational Risk RWA

Among the public sector majors, capital adequacy ratio of Bank of Baroda reached 13.51
per cent at the end of third quarter in the FY 2007-08 as compared to 12.24 per cent in the
corresponding period of the previous year.

Punjab National Bank turned the corners by marking an increase in its CAR against a
decline in the previous financial year. Its capital adequacy ratio dropped to 12.9 per cent
24
from 13.99 per cent in Q3, 2006-07. However, in Q3, 2007-08, it saw an upward trend of
14.04 per cent against 12.90 per cent in the similar period, last fiscal.

State Bank of India managed to increase its CAR to 12.28 per cent from 11.86 per cent,
in contrast to a decline to 11.86 per cent from 12.49 per cent in the FY 2006-07. However
few players also experienced a decline in their respective CAR, but they still managed to
remain above the nine per cent limit. Capital Adequacy Ratio of IDBI Bank has
decreased to 13.31 per cent from 14.09 per cent at the end of Q3 and Union Bank’s CAR
went down to 13.03 per cent from 13.21 per cent. Also, the following table shows the
CRAR of the banks in India before the implementation of Basel-II.

25
The following table shows the CRAR of various countries in the same era when Basel-II
was not implemented.

26
 CHAPTER 5: METHODOLOGY OF THE PROJECT
The study is a survey report of banks regarding their level of preparedness and tries to
gauge the implementation issues faced by them; it also recommends some plausible
solutions to the implementation issues sighted by the banks.

The following are the details regarding the methodology:

Approach for the survey:

The data collected for this survey is qualitative as well as quantitative. The questionnaire
concentrated mainly on the preparedness and the implementation issues. 20 questions
were used to achieve the objective and are analyzed below (Detail questionnaire is
presented in Annexure).

Sources of Data:

The data collected is completely from the primary sources from the bank officials from
the banks that were included in the survey.

Method of data collection:

The data has been collected through the following methods:

• Personal interview with the bank officials
• Electronic medium (e-mail)

Sample Size:

All the banks with their branches were eligible for this survey. However, out of 48 banks
approached, only 10 responded. The banks were categorized into private and public
sector. 5 private and 5 public banks responded. Since the Basel-II team and Risk
Management team works in head office, hence only head offices were approached.

The survey was conducted at individual level. The banks surveyed were:
Public sector:
• Dena Bank
• Union Bank of India
• State Bank of India
• Bank of Baroda
• IDBI
Private sector:
• HDFC Bank
• Citi Bank
• ICICI Bank

27
 • Yes Bank
• Axis Bank

Questionnaire Design:

The questionnaire was designed in such a way that it was applicable for the banks in
which Basel-II has already been implemented and also in which it will be implemented
by March 2009. As per the RBI guidelines, the banks which are operational in India only
should be Basel-II compliant by March 2009 and the banks which are also operational
outside India should be Basel-II compliant by end-March 2008. The analysis on the basis
of the responses of the bank representatives is done in the next chapter.

28
 CHAPTER 6: ANALYSING THE PREPAREDNESS OF BANKS

1. All but 2 banks have a team solely dedicated to implement Basel II. One bank is a
Public Sector bank in which the Risk Management Dept is handling the
implementation process internally. And the other is a foreign bank that does not
envisage any difficulty as they are sufficiently progressed in their implementation
process.

2. Half of the banks surveyed are facing trouble in identifying operational risks.
Among the banks facing trouble, 3 are public sector banks and 2 are private sector
banks.

3. All the banks are maintaining the required minimum CRAR of 9% and also
criterion of minimum CRAR for Tier-1 of 6% is being fulfilled, however, 3 banks
didn’t responded to their Tier-1 CRAR. Even most of the banks have the capital
adequacy more than 12 %.

4. As per the 8 banks out of 10, the shift from Basel-I to Basel-II was expensive due
to expenditure on softwares.

5. Out of 10 banks, 3 banks feel that RBI is not providing them with enough support
and 1 bank gave no reply to this question.

6. On response to the major gains banks are expecting from Basel II, all the banks
expressed that implementation of Basel-II will mainly prevent them from Credit
risk and even one bank supported that it will also prevent them from market risk
as well as credit risk.

7. All the banks are providing training to their employees for Basel-II and the
training is generally provided at all levels. One bank out of 9 respondents, extends
training facilities only to the middle management level.

8. Banks compliance to various pillars and risks can be shown as per the following
graph, where, 5 is the highest meaning the bank is 81-100% compliant and 1 is
the lowest meaning the bank is up to 20% compliant.

29
9. Presently, all the banks are following or planning to implement the basic
approaches as stated by RBI. However, 8 out of 10 banks are planning to move on
to advanced approaches as suitable to their portfolio, though currently they are
facing few problems with respect to database as well as expertise. Specifically, for
credit all of the 10 banks are suffering from data limitation and in case of
operational risk 8 are lacking database. Also, one bank reported to having lack of
expertise in dealing with the operational risk. However, for market risk, 6 banks
are lacking in expertise and 2 are lacking in data and 2 did not respond.

10. Interestingly, almost all respondent banks report that required data for market and
credit risks (but not for operational risk) are actually available at their end in
ledger or other hard-copy medium. The difficulty they are facing is that these data
are not available in usable format.

11. Basel-II was supposed to be implemented by March 2007; however it was

postponed by 2 years and though 6 banks feel that it doesn’t affect them but the
remaining 4 were happy with the decision as it helped them gain some time and
hence collect and arrange their data in proper format.

12. There are 8 banks (out of 10 respondents) who are facing difficulties in the
implementation of Pillar 2 as the guidelines were issued on 31 march, 2008 by
RBI and hence still working on their implementation.

13. All the surveyed banks are expecting that the implementation of Basel-II will
improve their risk management and 5 banks even feel that it will provide them
with better competitive position. Even 5 banks feel that it will provide better
credit ratings and 4 banks feel it will make them better regulatory compliant and 3
banks feel it will improve their efficiency and also provide greater transparency
and 2 banks support that it will lower their capital levels and also be helpful in
pricing of their products and 1 bank state that it will improve their corporate
governance.

30
 14. However, there are few drawbacks or obstacles for implementation of Basel-II
like 5 banks feel the lack of consistent data and of right models. 4 banks find the
implementation of Basel-II expensive and few banks (3) are lacking in expertise
and 2 banks are lacking in IT system, cultural resistance and resulting higher
capital levels and even 1 bank feel Basel-II includes unclear processes and also
some other issues.

15. Out of the 8 banks those responded to this question are using SAS software for
calculating credit risk and 2 banks are using REVELEUS and 1 bank is using
D2K software to calculate credit risk. There is one bank which is even using the
software named “ORBIT” for operational risk.

16. Out of the 9 respondent banks, 7 banks feel that they are not facing any difficulty
due to credit rating agencies; however, 2 banks are facing the issues like:
• Data not available
• Insufficient coverage
• Dependent on solicitation by the client
• Inadequate information provided by rating agencies

17. There are 6 major policies that are required to be framed as per regulatory
guidelines and the response of banks regarding them is as follows:
• Board approved policy on utilization of the credit risk mitigation
techniques and collateral management: All the 7 banks that responded are
prepared for the policy for this task.
• Board approved policy on disclosures: All the 6 banks that responded are
ready for this task.
• Board approved policy on ICAAP: Out of the 6 respondents, 5 banks are
ready with this task and 1 bank is still working on this policy.
• Adequacy of Bank's MIS to meet the requirements under this new
framework: Only 6 banks replied in affirmative and 1 bank is still not ready
with the policy and others didn’t responded.
• Impact of the various elements/portfolios on the banks CRAR under the
revised framework: All the 6 banks those responded believed it will impact
their portfolios as in a bank it increased their RWA and in a bank it lowered
their CRAR by 80 basis points from 12.5 to 11.7.
• Mechanism in place for CRAR validation: All the 6 banks that replied are
ready with the mechanism for CRAR validation like audit validation.

CONCLUSION:

This survey was conducted in 48 banks, however, only 10 of them responded. From the
above data, it can be seen that Basel-II is a very supportive step taken by RBI to help the
banks in reducing/managing their risks. All banks are compliant with the regulatory
requirements with respect to Pillar-1, though most of them are facing difficulty in
identifying operational risk. Also banks require little more time to comply with Pillar-2
31
guidelines, which have been released by the RBI on March 31, 2008. As regards to Pillar-
3, scenario is quite encouraging as all of the respondent banks appear complying with the
guidelines associated with this pillar.

As per the RBI guidelines, banks operating within India are required to implement the
Basel-II by March 2009, and those banks that has operation outside India also, were
required to be Basel II compliant by end-March 2008. Thus, some of the banks still have
time to get fully prepared for the Basel II requirements.

The survey also reveals some unresolved issues still faced by some of the banks. Those
issues are as follows:
 Since the guidelines for Pillar-2 were revised on March 31, 2008, henceforth the
banks which were supposed to be Basel-II compliant by end-march 2008 are
facing certain problems and need some time to be compliant to Basel-II.
 Also many banks feel that understanding the Pillar-II guidelines is a tedious task.
 Also banks are looking forward to move on to advanced approaches which will
suit their portfolio, however, RBI is not providing permission to move on to
advanced approaches.

However, many banks are in the support of Basel-II and are satisfied with the support
provided by RBI as Basel-II guidelines enhances the risk management of the banks which
is necessary keeping in mind the recently sub-prime crisis.

Also, few feedbacks were provided by these banks which are listed in the next chapter.

CHAPTER 7: FEEDBACK FROM THE BANKS

32
These are the recommendations or the areas in which the banks surveyed want the RBI to
act or give further guidelines.

1.) Clear guidelines on ICAAP: All the banks feel that the understanding of Pillar-2
guidelines is a tedious task and since, they have been recently revised on March
31, 2008, so they need the clear and fixed guidelines for ICAAP which they can
understand and hence, follow easily.
2.) Research on calculation of EAD and PD: Few banks feel that to increase
accuracy, research is required to calculate Exposure At Default (EAD) and
Probability of Default (PD).
3.) Guidance on Advance approaches: As per RBI guidelines, it wants all the banks
to be Basel-II compliant and use basic approaches at present and the banks can
switch to advanced approaches once all the banks in India are Basel-II compliant.
Hence, affecting the performance of banks as per their portfolios.
4.) Provide a platform to facilitate enhancement in skill sets required for Basel II:
The banks expect some training or a platform which should be there by RBI to
enhance the various skill sets required for Basel-II like personnel skills, etc.
5.) Rationalisation of risk weights (particularly sensitive sectors & volatile sectors):
As few of the Banks stated that there should be rationalisation of risk weights,
especially for sensitive and volatile sectors. Sensitive sectors include agriculture
and SMEs, which need to be encouraged and hence, there should be
rationalisation of risk weights for such sectors.

BIBLIOGRAPHY
1. www.rbi.org.in

33
2. www.bis.org.in
3. A speech by Dr. Shyamala Gopinath, DG, RBI on “Approach to Basel-II” at the
IBA briefing session at Bangalore on May 12,2006.
4. A speech by Dr. Y.V.Reddy, Governor, RBI at the Seminar on “Challenges and
implications of Basel II for Asia” as a part of the Asian Development Bank's 39th
Annual Meeting of the Board of Governors in Hyderabad on May 3, 2006.
5. A speech by Smt. Kishori J. Udeshi, DG, RBI at the World Bank/IMF/US Federal
Reserve Board International Seminar on “Policy Challenges for the Financial
Sector: Basel II” at Washington D.C. on June 2, 2004.
6. A speech by Shri V. Leeladhar, DG, RBI at the Bankers’ Club, Mangalore on
March 11, 2005.
7. A research paper on “Capital adequacy regime in India: An overview” by
Mandira Sarma and Yuko Nikaido in July, 2007 for Indian Council for Research
on International Economic Relations.
8. Personal Data from Banks.

34
 ANNEXURE: QUESTIONNAIRE
Name of the bank:
Type of bank: Public Sector/Private Sector and
their existence outside India:
Name of the interviewee:

Designation of the interviewee:

Contact Information

As you are aware, according to RBI guidelines on the New Capital Adequacy
Framework, your bank needs to implement new Basel II Framework latest by March 31,
2009 or has already implemented by March 31, 2008.This questionnaire is intended to
seek information on your state of preparedness for this migration, the benefits expected
and the challenges being faced during this migration phase. None of the information
provided by the banks will be disclosed and this information is only meant for
research purposes.

1. Is there any difficulty in defining/identifying credit/market/operational risk?

• Yes

• No

If yes, what?

_________________________________________________________________
_

2. What is your present capital adequacy?

_________________________________________________________________
_

3. What is your current tier-1and tier-2 CRAR?

_________________________________________________________________
_

4. How compliant is your bank currently with Basel-II for following (1=up to 20%,
2=21-40%, 3=41-60%, 4=61-80%, 5=81-100%):

1 2 3 4 5
Credit risk
Market risk

35
 Operational
risk
Pillar 2
Pillar 3
5. What benefits do you expect or would you expect to achieve by adopting
Basel II?
Select up to three benefits.
[A] Better Risk Management
[B] Better competitive position
[C] Less volatile earnings
[D] Higher Profits
[E] Better credit ratings
[F] Higher Share price
[G] Pricing of products
[H] Lower capital levels
[I] Greater transparency
[J] Regulatory compliance
[K] Improved Efficiency
[L] Others
6. What were the biggest obstacles to implementing Basel II at your institution?
Select up to three obstacles.
[A] High Cost
[B] Lack of consistent data
[C] Lack of skilled people
[D] Unclear Processes
[E] Lack of IT system
[F] Cultural Resistance
[G] Lack of top level support
[H] Resulting higher capital levels
[I] Lack of Right models
[J] Others
[K] Not Applicable
7. Is/Was shifting from Basel-I to Basel-II too expensive for your bank and how?

• Yes

• No

_________________________________________________________________
_

8. Do you have a separate team working for Basel-II?

• Yes

• No

36
9. “Basel-II was supposed to be implemented by March 2007”. Do you think that
delay of Basel-II was a blessing in disguise for your bank and why?

• Yes

• No

(State the
reason)_________________________________________________

10. Which approaches are you planning to follow to suit your bank’s portfolio?

Credit risk Standardized IRB foundation IRB advanced

approach approach approach
Market risk Standardized- Standardized- Internal model
maturity duration approach
approach approach
Operational risk Basic indicator Standardized Advanced
approach approach measurement
approach

11. What are the difficulties for your bank to move on to more advanced techniques?

Type of Risks 1 2 3
Credit risk Permission Lack of Lack of
denied by database expertise
regulator
Market risk Permission Lack of Lack of
denied by database expertise
regulator
Operational risk Permission Lack of Lack of
denied by database expertise
regulator
12. Has your bank framed a policy/mechanism for the following regulatory
guidelines?

Requirements Yes/No/ Policy/Mechanism

Still in process
Board approved policy on
utilization of the credit risk
mitigation techniques and
collateral management
Board approved policy on
disclosures
Board approved policy on

37
 ICAAP
Adequacy of Bank's MIS to
meet the requirements under
this new framework
Impact of the various
elements/portfolios on the
banks CRAR under the
revised framework
Mechanism in place for
CRAR validation

13. Are you satisfied with the support given by RBI in respect to Basel-II?

• Yes

• No

14. Which is the major risk that Basel-II covers you from as per your bank’s
portfolio?

• Credit risk

• Market risk

• Operational risk

15. Do you agree that Internal Rating Based (IRB) approaches could result in
reduction of regulatory capital depending on asset quality and portfolio
composition of the bank and how?

• Agree

• Disagree

• Can’t say

16. In which pillar(s) is/are your bank facing difficulties right now to fulfill Basel-II
requirements?

• Pillar 1

• Pillar 2

• Pillar 3

38
 Reasons,
____________________________________________________________

17. Are you providing training to the employees?

• Yes

• No

18. If yes, then at what level?

a. Top level management

b. Middle level management

c. Bottom level management

d. Workers

19. What is the software/technology your bank currently using or contemplating to

use for the purpose of risk management and Basel-II compliance?

_________________________________________________________________
_

20. Any difficulty on being dependent up on outside credit rating agencies?

• Yes

• No

(State the problem)____________________________________________

39