If the new draft guidelines issued by the Reserve Bank of India to banks on risk management are anything to go by, banks across the board will take a major hit on their capital.
In line with the Basle committee recommendations, the draft guidelines require banks to put a capital charge on each and every item of investment in their portfolio.
Under the current guidelines, banks have to uniformly provide capital at the rate of 2.5 per cent irrespective of the nature of the risk associated with it.
Under the new proposed method, specific risk of each security whether long or short has to be assessed independently.
Thus, exposure in government bonds, foreign exchange-denominated investments, metals like gold will have to be assessed at the current market value and then capital will have to be provided on the combined risk emerging out of it.
This will not only reduce the capital adequacy of individual banks but also bring down the profit to a large extent.
To be precise, under the new norm, banks' overall minimum capital requirement will be a combination of capital charge for credit risk and a capital charge for market risk of the portfolio.
While RBI proposes to implement the draft guidelines after discussions with the banks, bankers feel that under the present circumstances, where there is no demand for credit, investments are the only major source of revenue.
These norms will cut down the risk taking capacity of banks as each amount of risk taken will have to be backed by sufficient capital. Most of the banks are just about meeting the minimum 9 per cent capital adequacy norm.
Although foreign banks have sound in-house risk management practices, they also harbour the view that it will take sometime to graduate to the market-related capital charging methodology.
Most of the nationalised banks with a portfolio of long term papers will be hit significantly as the risk increases with the maturity.
Banks' appetite for government bonds will also come down as each investment decision will have to be backed with adequate capital.
Bankers said that while some foreign banks follow international rating based methodology to manage the risk in the portfolio, Indian banks have a traditional way of just assigning 2.5 per cent risk weight.
If the new norms come, they will have to put in place internal rating based approach to calculate the risk.
