Another Delay in Basel II Implementation

Source: RBI may defer Basel II kickoff

The Reserve Bank of India (RBI) had originally set March 31, 2007, as the deadline for Indian banks to implement the revised capital adequacy guidelines, known as Basel II. However, implementation has proven to be a more daunting task than once expected. Although RBI, India’s central bank, is close to issuing the final guidelines of Basel II, the implementation deadline looks like it will be delayed six months to a year.

RBI has adopted a plan to slowly phase in Basal II implementation. Foreign banks and internationally active Indian banks will be first to implement the new guidelines. Next, implementation will infiltrate to other banks in the country.

Under Basel II, banks will be required to have their loan accounts rated by rating agencies in order to properly allocate capital according to the bank’s perceived level of risk. One of the biggest hurdles of Basel II implementation has been empanelling new rating agencies, since current credit rating capacity is not enough to satisfy the new rating requirements under Basel II.

To help with the higher demands for rating agencies, RBI has proposed that “banks need not get ratings for loans below certain amounts and allocate capital for such loans as prescribed for unrated exposure.” RBI has also adopted the more standardized approach of measuring capital adequacy and has decided not to adopt the more sophisticated internal ratings-based approach when the banks and regulators make the necessary preparations.


Questions:

1. By not adopting the more sophisticated procedure to measure capital requirements, which would decrease the banks’ necessary capital holdings, will the Indian banks be at a disadvantage to the international banks who do adopt the more sophisticated approach?

2. Is RBI’s cut-off strategy that will enable banks to not obtain ratings for loans below a certain threshold amount a good strategy for Indian banks? Should other countries’ central banks adopt a similar approach?