Until now, banks were busy in calculating minimum capital they needed to take care of credit, operational and market risks. But there can be a change in the scenario with the Reserve Bank of India (RBI) asking banks also to internally assess how much additional capital they would need to manage risks from factors like interest rate, liquidity and reputation.
The capital requirement might exceed as compared to the minimum capital adequacy ratio.
The guidelines have been issued by the banking regulator for the Supervisory Review Process and Internal Capital Adequacy Assessment Process (ICAAP), which form the second pillar of the Basel-II capital adequacy framework. Both are appropriate for quantifying capital requirement and putting in place sound risk assessment and management systems.
The foreign banks operating in India and Indian banks with international presence, which have to be Basel-II-compliant by March 2008, will be required to submit their ICAAP plans by June 2008. While other banks, including regional rural banks, have time till the next March to submit their plans.
“The banks are advised to develop and put in place, with the approval of their boards, an ICAAP commensurate with their size, level of complexity, risk profile and scope of operations,” RBI said.
However RBI has already issued guidelines for the minimum capital adequacy ratio (pillar I) and market discipline (pillar III).
While the ICCAP will capture risks like reputation, interest rate, which are not covered by pillar I. Whereas, the SRP will ensure that the banks have adequate capital to support all the risks in their business, encourage them to develop and use better risk management techniques for monitoring and managing their risks.
Currently, there is no common approach for conducting ICAAP. These guidelines, are attempt to provide only broad principles for banks to develop their ICAAP.