CAIIB BFM Unit 11 - BASEL (II)

The Committee on Banking Regulations and Supervisory Practices released revised version in the year 2004. These guidelines have been got implemented by RBI in all the banks of India. Parallel run was started from 1.4.2006. In banks having overseas presence and foreign banks (except RRBs and local area banks. Complete switchover has taken place w.e.f. 31.3.2008. In banks with no foreign branch, switchover will took place w.e.f. 31.3.2009.

Distinction between Basel I and Basel II
Basel – I measures credit risks and market risks only whereas Basel II measures 3 types of risks i.e. Credit Risk, Operational Risk and Market Risk. Risk weights are allocated on the basis of rating of the borrower i.e. AAA, AA, A, BBB, BB and B etc. Basel –II also recognized CRM such as Derivatives, Collaterals etc.

Three Pillars of BASEL-II

Pillar –I Minimum Capital Requirement
Pillar – II Supervisory Review Process
Pillar –III Market Discipline

Pillar - I – Minimum Capital Requirement
CRAR will be calculated by adopting same method as discussed above under Basel – I with the only difference that Denominator will be arrived at by adding 3 types of risks i.e. Credit Risks, Market Risks and Operational Risks.

Credit Risk
Credit Risk is the risk of default by a borrower to meet commitment as per agreed terms and conditions. In terms of extant guidelines contained in BASEL-II, there are three approaches to measure Credit Risk given as under:

1. Standardized approach
2. IRB (Internal Rating Based) Foundation approach
3. IRB (Internal Rating Based) Advanced approach

1. Standardized Approach
RBI has directed all banks to adopt Standardized approach in respect of Credit Risks.
Under standardized approach, risk rating will be done by credit agencies. Four Agencies are approved for external rating:

1. CARE 2. FITCH India 3.CRISIL 4. ICRA

Risk weights prescribed by RBI are as under:
Rated Corporate

Rating  & Risk Percentage
AAA 20%
AA 30%
A 50%
BBB 100%
BB & below 150%
Education Loans 75%
Retail portfolio and SME portfolio 75%
Housing loans secured by mortgage 50 to 75%
Commercial Real Estates 100%
Unrated Exposure 100%

2. IRBA – Internal rating Based Approach
At present all advances of Rs. 5.00 crore and above are being rated from external agencies in our bank. IRBA is based on bank’s internal assessment. It has two variants (Foundation and advanced). Bank will do its own assessment of risk rating and requirement of Capital will be calculated on
• Probability of default (PD)
• Loss given default (LD)
• Exposure of default (ED)
• Effective maturity. (M)

Bank has developed its own rating module system to rate the undertaking internally. The internal rating is being used for the following purposes:
1. Credit decisions
2. Determination of Powers
3. Price fixing

Rating by Outside Agencies
The risk weights corresponding to the newly assigned rating symbols are as under:

Table : PART A – Long term Claims on Corporate – Risk Weights
Long Term Ratings
CARE CRISIL Fitch ICRA Risk Weights (%)
CARE AAA CRISIL AAA Fitch AAA ICRA AAA 20
CARE AA CRISIL AA Fitch AA ICRA AA 30
CARE A CRISIL A Fitch A ICRA A 50
CARE BBB CRISIL BBB Fitch BBB ICRA BBB 100
CARE BB & below CRISIL BB & below Fitch BB & below ICRA BB & below 150
Unrated Unrated Unrated Unrated 100