These numbers are based on a provisioning as a percentage of the net funded exposure as follows - 0.25 per cent for low-risk, 2.5 per cent for medium-risk, and 20 per cent for high risk. While absolute provisioning numbers as of now may be small, in the coming days all this may well change with RBI putting out a discussion paper on the subject based on which new operational norms are to be in place by next March-end.
“At present, some of the banks have computed their country-risk exposures only with reference to their inter-bank exposures, as envisaged under the risk management guidelines issued in October 1999. Hence, the actual provisioning burden may be slightly higher when the banks reckon all relevant requirement has been worked out on net funded country exposures. One of the items permitted to be netted from the gross exposure on any country is the banks’ dues to the respective countries,” notes RBI.
The draft guidelines state that banks should formulate ‘country risk management’ (CRM) policies with board approval. The CRM policy should address the issues of identifying, measuring, monitoring and controlling country exposure risks. The policy should specify the responsibility and accountability of the various levels for the CRM decisions. They should have in place contingency plans and clear exit strategies, which would be activated at times of crisis. Country risk element should be explicitly recognised while assessing the counter-party risk.
As far as the scope is concerned, banks should reckon both funded and non-funded exposures from their domestic as well as foreign branches. The scope would be confined to the domestic branches for foreign banks operating in the country. Banks should take into account indirect country risk. For example, exposures to a domestic commercial borrowers with a large economic dependence on a certain country may be considered as subject to indirect country risk. Exposures should be computed on a net basis, gross exposure minus collaterals and guarantees.
To begin with, banks may adopt the sovereign ratings of global credit rating agencies. However, banks should eventually put in place appropriate systems to move over to internal assessment of country risk within a prescribed period, say by 31 March 04 - before new capital accord is implemented. Further, the frequency of periodic reviews of country-risk ratings should be more than once a year and depend on the importance and complexity of the bank’s business.
Bank boards may set country exposure limits in relation to their regulatory capital (Tier-1 plus tier-2) with sub-limits, if considered necessary for products, branches or maturity.
The Basel committee on banking supervision has been in the forefront of the international attempt to develop standards and establish a framework for bank supervision towards strengthening financial stability throughout the world. In 1997, in consultation with the supervisory authorities of a few non G-10 countries including India, it drew up the 25 ‘core principles for effective banking supervision’ which were in the nature of minimum requirements intended to guide supervisory authorities which were seeking to “strengthen their current supervisory regime”.
While RBI is committed to the full implementation of the core principles, the domestic banking system is largely compliant with most of the same, but it is still non-compliant in respect of principle No:11, which provides that “banking supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring and controlling country risk and transfer risk in their international lending and investment activities, and for maintaining appropriate reserves against such risks”.
The October 1999 risk management guidelines had required that banks, in connection with their inter-bank exposures, should use the country ratings of global rating agencies and classify the countries into low risk, moderate risk and high risk and endeavour for developing an internal matrix that reckons the counterparty and country risks.
The advisory group on banking supervision headed by former SBI chairman MS Verma had submitted its report last July on the level of compliance with the above core principle.