The Reserve Bank of India has set up an experts committee to implement Basel II accord by 2006 to strengthen the financial health of banks by adopting globally accepted norms for capital adequacy.
In its busy season monetary and credit policy, the RBI on Tuesday said in view of "complexities in migrating to Basel-II, a steering committee- comprising members from banks, IBA and RBI has been constituted.
The measure is expected to make the Indian banking sector more competitive with sound financial base so that it can withstand any international scrutiny and have global acceptability.
Credit Policy 2004-05:Complete Coverage
The steering committee would further form sub-committees for the purpose of assisting it on various matters concerning the Basel-II norms.
The RBI would later prepare draft guidelines to put in place the stringent norms after going through inputs provided by the committee.
The Basel II accord offers a new set of standards for minimum capital requirements for banking operations capital adequacy, supervisory review and market discipline.
The RBI said banks were advised to undertake a self assessment of their existing risk management systems in view of three major risks covered under Basel-II and to concurrently initiate appropriate measures to upgrade them to match up to minimum standards prescribed in the accord.
The second accord was prepared by the Basel Committee on Banking Supervision, a group of central banks and the bank supervisory authorities in the G-10 countries, which developed the first standard in 1988.
According to sources, initially all banks would have to at least adopt a standardised approach for credit risk and basic indicator approach for operational risk.
After adequate skills were developed, both in banks and at supervisory level, some banks may be allowed to migrate to internal rating-based approach.
Initially, banks are required to assign a risk weight of 2.5 per cent for market risk on the entire securities portfolio, including government papers and 100 per cent on foreign exchange position.
Banks had been advised to maintain capital charge for market risks as per the standardised duration approach of Basel Capital accord in a phased manner over two years.
By March 31, 2005, the banks would have to set aside capital for market risks on securities included in the held for trading category, open gold position, open foreign exchange position, trading position in derivatives and derivatives entered into for hedging trading book exposures.
In the second phase, banks would have to make enough capital for market risks on securities included in the available for sale category by March 31 2007.