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In a research report issued last week, Fitch Ratings said that Basel II has brought about a welcome focus on risk management in India. However Fitch expressed concern that the reduction in capital in areas such as consumer loans could increase risks.
Indian banks implemented the standardised approach on credit risk and the basic indicator approach for operational risk on 31 March 2008, a year later than originally planned. In the report entitled "Indian Banks: Impact of Basel II Implementation", Fitch discusses the business impact of the new Basel II guidelines on the capital ratios of the Indian banking system, including local changes made by the Indian regulator such as a zero risk weight for direct exposures to Indian central and state governments, and higher risk weights on residential mortgage loans.
Most of the Indian banks that have migrated to Basel II have reported a reduction in their total capital adequacy ratios (CARs) due to the new operational risk-based capital charges. However a few banks, those with high exposures to higher rated corporates or to the regulatory retail portfolio, have reported increased CARs. Given recent changes in regulatory charges, Fitch doubt this will be sustainable. Fitch also comment that banks will find it increasingly attractive to give out loans to the small business segment that qualify as regulatory retail, given their higher lending margins and lower risk weights. In contrast, the increase in risk weight for residential mortgage loans will make this area less attractive.
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