The Reserve Bank of India is likely to ask banks to move towards a graded system of assigning risk weights depending on the quality of their assets.
This move is aimed at making capital charges more responsive to the banks' actual credit exposure. Banks may also be required to move towards making capital requirements for operational risk.
Bankers see the central bank emphasising these two areas -- credit and operational risks -- in the credit and monetary policy, which is scheduled to be announced on Tuesday.
The regime that is envisaged may give incentives to banks to reduce their regulatory capital, resulting in saving money, by improving their credit management practices.
An internal-ratings based approach to capital adequacy is seen as providing a more risk-sensitive treatment of retail exposures (such as home loans and credit card exposures) as also corporate small and medium-sized enterprises advances.
At present, all loans, barring those backed by government guarantees/cash collaterals/kisan vikas patras, etc. are assigned a risk weight of 100 per cent for capital adequacy purposes.
This strait-jacketed approach to assigning risk weights will now be done away with.
Under the new capital adequacy framework banks, based on their internal rating assessment, banks may be required to assign 20 per cent risk capital to a best rated borrower and 100-200 per cent on a sticky asset.
Assigning risk weights is a way to provide protection against the possibility of default by a bank's borrowers and its counterparties.
In this regard, banks are required to put aside regulatory capital against the loans they extend.
Credit risk is probability that a borrower or counterparty will fail to meet its obligations to a bank. Lending -- from corporate loans to credit cards -- is the largest and most obvious source of credit risk.
But credit risk in some guise exists through out bank activities, both on and off the balance sheet, from interbank transactions, trade financing and derivatives trading to guarantees and settlements.
The Basle Committee has come out with guidelines to help banks and their supervisors to put in place a comprehensive credit risk management programme.
It lays emphasis on five key areas : establishing an appropriate credit risk environment; operating under a sound credit granting process; maintaining an appropriate credit administration; measurement and monitoring process; and ensuring adequate controls over credit risk.
At present, Indian banks are not making capital charges in regard to operational risk. "The risk of fraud, guarantees which are not honoured and systems failure is quite high. The policy is expected to touch upon operational risks," pointed out a senior banker.