Reserve Bank of India (RBI) has come out with guidelines asking Indian Banks to keep adequate capital to meet wide areas of risks, including those that can damage their reputation, as apart of Basel II norms.
The guidelines issued on Supervisory Review Process (SRP) ask banks to make provision for risks relating to credit concentration, liquidity, settlement risk, reputation, strategy, and under-estimation of credit risk that were not specified earlier.
Already, the RBI had issued two guidelines on minimum capital ratio and market disciplines for Basel II norms, called Pillar I and Pillar III. While minimum capital ratio recognizes three risks-credit, market and operational risks, the new guidelines issued specify new risks as well.
With this, banks will be insulated against the risks that are not completely captured by the minimum capital adequacy ratio and caused by external factors.
The guidelines also aim at encouraging banks to develop and use better techniques for monitoring and managing their risks.
Banks would be required to have a well-defined internal assessment process to assure RBI that adequate capital is held towards various risks they are exposed to.
Foreign banks and those Indian banks that have operations outside the country have to implement the Basel II norms from March 31, 2008, while for all other commercial banks, excluding the local area banks and regional rural banks, the rules will come into effect from March 31, 2009.