The Reserve Bank of India on Friday released the final guidelines for banks wishing to migrate to the internal rating based (IRB) approach for calculating their capital charge for credit risks across asset classes.
The ‘Implementation of the Internal Rating Based (IRB) Approaches for Calculation of Capital Charge for Credit Risk’ guidelines say banks can apply for the migration from April 1 to June 30 next year.
The lenders, who are following the lone standardised approach of calculating credit risk at present, will have to check their preparedness before they apply.
The prudential Basel II framework provides for two broad methodologies to banks to calculate capital requirements for credit risk — the standardised approach (SA) and the IRB approach.
The SA measures credit risks based on external credit assessments, while the IRB approach allows banks to use their own internal estimates for some or all of the credit risk components in determining the capital requirement for a given credit exposure.
“Banks intending to move to any of the IRB approaches for computing capital charge for credit risk are advised to assess their preparedness for the same with reference to these guidelines,” the monetary authority said in the guidelines, released this evening.