Basel II - A reality check

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: countries, the RBI's approach is very prudent. Claims secured by mortgages on commercial real estate may attract a risk-weighting higher than the 100% proposed, as RBI has increased the risk-weightings for such lending to 150% in April 2006 in view of the rapid expansion in credit to this segment.

As proposed under the Basel II standardised approach, the RBI guidelines have also defined an "other retail category," which would attract a 75% risk-weighting, provided certain conditions are met. To qualify for this lower risk-weighting, the exposure may either be to individuals or SMEs, but the portfolio should be sufficiently diversified with no aggregate exposure to one counterparty exceeding 0.2% of the overall regulatory retail portfolio. The maximum aggregate retail exposure also has an absolute threshold limit (less than Rs 5 crore or about $1.11 million) and the SMEs should have an annual turnover of less than Rs 50 crore ( $11.1 million). As for corporate exposures, under the supervisory review process (Pillar II), the RBI would evaluate at periodic intervals the risk-weights assigned to the retail portfolio against the default experience for such exposures, and may make appropriate modifications in future, if necessary.

Summary

Discussions with the RBI and some of the major banks reveal that most banks will enjoy some "capital relief" on their credit portfolio under the Basel II regime. The bulk of the capital relief will arise due to the use of national ratings on their highly rated ('AA' and above) corporate portfolio. The unrated corporates will attract similar risk-weightings as under Basel I and therefore, the impact of such loans will be capital neutral. Interestingly, and contrary to the experience of other standardised banks globally, retail assets of Indian banks would largely continue to attract the same capital treatment as in Basel I unless the RBI revises some such risk-weightings under Pillar II at some point in future.