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Why Indian Banks Need to Adopt the Basel III Internal Ratings-based Approach
As Indian banks are becoming bigger due to consolidation and through business expansion, it is necessary to adopt the advanced Basel III version for better utilisation of scarce capital and improve efficiency. The importance of Basel III internal ratings-based approach that may be adopted by the banks to strengthen their internal credit risk management framework is highlighted in this article. A better understanding of risk inherent in business will not only improve the banks’ underwriting standards but also enable them to accelerate growth and enhance risk adjusted performance.
Risk-taking is a natural part of banking transactions. The regulatory agency is responsible for creating a sound financial environment by setting the regulatory framework where the supervisory agency monitors the financial viability of banks and checks compliance with regulations. The pitfalls associated with the regulatory capital requirements (cherry-picking capital arbitrage) led to the development of more risk-based or internal model-based Basel III internal ratings-based (IRB) approach.
Combining the principles of risk management with those of shareholder analysis allows the lender to exploit the strengths of each for better strategic planning. Risk management makes bankruptcy less likely, by making us aware of the volatility of overall cash flows. It reduces the cost of financial distress and gives a bank better access to capital markets.
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