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On Monday, the last day of their standard financial year, India, one of the world’s fastest growing economies, joined the ranks of those countries that are operating under the Basel II capital adequacy standards. From last Tuesday, all Indian banks with foreign branches, and all foreign banks in India must be compliant with the Basel II Standardised Approach to credit risk-based capital calculation, and the Basic Indicator Approach to the operational risk-based calculation. Indian banks that do not have any foreign branches have a year’s grace and must implement Basel II on April 1st, 2009. No dates have been set for any use of the advanced approaches.
However, it is understood that a number of Indian banks approached the Indian supervisor, the Reserve Bank of India, at a meeting on Tuesday and asked for more time to completely adhere to the capital requirements of the Basel II requirements. Of concern are the weightings being applied for unsupported loans.
The introduction of Basel II is expected to create major opportunities for India’s developing rating agencies. Historically many Indian companies have not used rating agencies but, with Basel II’s dependence on ratings for risk weightings this is set to change – despite the recent criticism of rating agencies following the US sub-prime crisis and the belief of many that these ratings are not the perfect solution to accurate risk-weightings. Now loan-seeking Indian companies will have no option other than to become rated – a business opportunity for rating agencies.
There are four rating agencies in India — Standard & Poor’s-backed Crisil is the largest, followed by Moody’s-backed Icra, global agency Fitch and Care Ratings – and it is reported that their business could double. Broking agencies are promoting rating agency stocks, and share prices of the agencies (only Crisil and Icra stocks are listed) have risen.
Rajesh Mokashi of Care Ratings, is quoted in Mumbai’s Daily News & Analysis as expecting substantial increases in the number of ratings. He said "Already a large number of entities are seeking to get rated. This is just the first phase. The level of penetration for ratings is still low here and there is still a huge untapped potential. More borrowers will get rated during the year and when other banks come in the Basel II framework in 2009".
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