Mumbai: As part of efforts to prepare Indian banks for compliance with new risk management norms under Basel II, sector regulator Reserve Bank of India (RBI) on Thursday issued guidelines asking them to keep adequate capital to meet wide areas of risks, including those that could damage their reputation.

The guidelines issued on the supervisory review process (SRP) ask banks to make provision for risks relating to credit concentration, liquidity, settlement risk, reputation, strategy, and under-estimation of credit risk that were not specified earlier.

As such, banks may have to keep additional capital, considering the possibility of under estimation of risks and the quality of risk management, the guidelines stated.

Already, the RBI has issued two guidelines on minimum capital ratio and market disciplines for Basel II norms called Pillar I and Pillar III.

While minimum capital ratio recognises three risks—credit, market and operational risks, the guidelines issued on Thursday specified new risks as well.

With this, banks will be insulated against the risks that are not completely captured by the minimum capital adequacy ratio and caused by external factors, according to the new guidelines.

The guidelines also aim at encouraging banks to develop and use better techniques for monitoring and managing their risks.

Banks would be required to have a well-defined internal assessment process to assure RBI that adequate capital is held toward various risks they are exposed to.

However, these norms provide only broad principles to help banks in developing their internal capital adequacy assessment process.

Foreign banks and those Indian banks that have operations outside the country have to implement the Basel II norms from March 31, 2008, while for all other commercial banks, excluding the local area banks and regional rural banks, the rules will come into effect from March 31, 2009.

Source : DNA