RBI Releases Draft Guidelines on Internal Risk Based (IRB) Approach for Calculating Credit Risk Capital Charge

The Reserve Bank of India today released on its website, draft guidelines on Internal Rating Based (IRB) Approach for calculating credit risk capital charge. Comments/feedback on the draft guidelines may please be emailed before September 9, 2011 or mailed to the Chief General Manager-in-Charge, Department of Banking Operations and Development, Reserve Bank of India, Central Office Building, 12th Floor, S.B. Singh Marg, Mumbai-400001.

The Reserve Bank had announced timeline for implementation of advanced approaches for computation of regulatory capital under the Basel II framework in India in July 2009. As per the timeframe, banks could apply for migrating to Internal Rating Based (IRB) Approach for calculating credit risk from April 1, 2012 onwards.

The guidelines for the standardised approach (TSA)/alternate standardised approach (ASA) for operational risk were issued in March 2010, those for internal models approach (IMA) for market risk were issued in April 2010 and those for Advanced Measurement Approach (AMA) for operational risk were issued in April 2011.

Draft Guidelines:

DBOD.No.BP. /21.06.001/2011-12

The Chairmen and Managing Directors /
Chief Executive Officers of All Commercial Banks
(excluding Regional Rural Banks and Local Area Banks)

Dear Sir/Madam,

Implementation of the Internal Rating Based Approaches (IRB) for
Calculation of Capital Charge for Credit Risk – Draft Guidelines

Please refer to our circular DBOD.BP.BC.23/21.06.001/2009-10 dated July 7, 2009, inter alia, advising banks that they can apply for migrating to Internal Rating Based Approach (IRB) for Credit Risk from April 1, 2012 onwards.

2.  The Basel II Framework presents three methods for calculating credit risk capital charges in a continuum of increasing sophistication and risk sensitivity:

(i)  Standardised Approach (SA);
(ii)  Foundation IRB Approach (FIRB); and
(iii) Advanced IRB Approach (AIRB).

Presently, banks are calculating credit risk capital charge under SA.

3. In the Annual Monetary Policy Statement 2011-12, announced on May 3, 2011, it was mentioned vide paragraph 109 on ‘Implementation of Advanced Approaches under Basel II Framework’ that Guidelines for Internal Rating Based Approach (IRB) for credit risk was under preparation. Accordingly, the draft guidelines for computing credit risk capital charge under IRB are furnished in the Annex.

4. You are requested to send your comments on the draft guidelines to email latest by September 9, 2011.

Yours faithfully,

(Deepak Singhal)
Chief General Manager-in-Charge

Encl – As above

DBOD.BP.BC.No. 23 /21.06.001/2009-10

July 7, 2009

The Chairman and Managing Directors/
Chief Executive Officers of
All Scheduled Commercial Banks
(Excluding RRBs and LABs)

Dear Sir,

Introduction of Advanced Approaches of Basel II Framework in India Time Schedule

Please refer to our circular DBOD.No.BP.BC.90/20.06.001/2006-07 dated April 27, 2007 on the New Capital Adequacy Framework in terms of which foreign banks operating in India and Indian banks having operational presence outside India have migrated to the simpler approaches available under the Basel II Framework since March 31, 2008. Other commercial banks have also migrated to these approaches from March 31, 2009. Thus, the Standardised Approach for credit risk, Basic Indicator Approach for operational risk and the Standardised Duration Approach for market risk (as slightly amended under Basel II framework) have been implemented for the banks in India.

2. Having regard to the necessary up-gradation of risk management framework as also capital efficiency likely to accrue to the banks by adoption of the advanced approaches envisaged under the Basel II Framework and the emerging international trend in this regard, it is considered desirable to lay down a timeframe for implementation of the advanced approaches in India. This would enable the banks to plan and prepare for their migration to the advanced approaches for credit risk and operational risk, as also for the Internal Models Approach (IMA) for market risk.

3. Keeping in view the likely lead time that may be needed by  the banks  for creating the requisite technological and the  risk   management  infrastructure,  including the required databases, the MIS and the skill up-gradation, etc., it is proposed to lay down the following time schedule for implementation of the advanced approaches for the regulatory capital measurement:




The earliest date of making application by banks to the RBI

Likely date of approval by the RBI


Internal Models Approach (IMA) for Market Risk

April 1, 2010

March 31, 2011


The Standardised Approach (TSA) for Operational Risk

April 1, 2010

September 30, 2010


Advanced Measurement Approach (AMA) for Operational Risk

April 1, 2012

March 31, 2014


Internal Ratings-Based (IRB) Approaches for Credit Risk (Foundation- as well as Advanced IRB)

April 1, 2012

March 31, 2014

4. The banks are advised to undertake an internal assessment of their preparedness for migration to advanced approaches, in the light of the criteria envisaged in the Basel II document, as per the aforesaid time schedule, and take a decision, with the approval of their Boards, whether they would like to migrate to any of the advanced approaches. The banks deciding to migrate to the advanced approaches may approach us for necessary approvals, in due course, as per the stipulated time schedule. If, the result of a bank™s internal assessment indicates that it is not in a position to apply for implementation of advanced approach by the above mentioned dates, it may choose a later date suitable to it based upon its preparation.

5. It may please be noted that the banks, at their discretion, would have the option of adopting the advanced approaches for one or more of the risk categories, as per their preparedness, while continuing with the simpler approaches for other risk categories, and it would not be necessary to adopt the advanced approaches for all the risk categories simultaneously. However, the banks should invariably obtain prior approval of the RBI for adopting any of the advanced approaches.                    

Yours faithfully,

(B. Mahapatra)
Chief General Manager

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