Deadline: Banks have to adopt Basel-II norms by March '08

NEW DELHI: Basel II may sprout a new trend — corporate borrowers opting to remain unrated. The new capital norms that kick in from March attach a lower capital charge or risk weight (100%) to unrated companies than those rated BB (150%).

Bankers fear this may encourage corporates to refrain from getting rated than acquire a rating lower than BBB.

Basel II may also intensify the race among banks to woo AAA-rated companies. The norms require banks to set aside lower capital for loans to corporates with high credit ratings. The best-rated corporates will attract a risk weight of just 20%.

For every Rs 100 lent, a AAA-rated loan carries a risk weight of 20%, which means Re 1.8 will have to be set aside. In contrast, Rs 13.5 will have to be set aside for a BB-rated loan.

Recently, the Reserve Bank of India (RBI) had warned that if banks compete to lend to best-rated corporates, it may put pressure on the margins.

“Banks need to streamline and reorient their client acquisition and retention strategies,” RBI deputy governor V Leeladhar said.

Punjab National Bank has led the initiative to implement Basel norms under the Indian Banks Association (IBA).

Local commercial banks with overseas offices have to adopt Basel II norms latest by March 2008. Banks with only local presence have time till March 2009. Basel norms have been put in place by the Bank for International Settlements (BIS), which is regarded as the central bank of all central banks.

It is estimated the new capital adequacy norms might increase the overall regulatory capital requirement. The capital allocated on account of operational risk will be 15% of the gross income.

A part of this increase can be offset by the relief due to credit risk on account of lower risk weights, say bankers. A rough estimate puts a capital requirement of Rs 50,000 crore for banks to implement these norms.