What changed
RBI issued final guidelines for IRB approaches after incorporating stakeholder feedback on the August 2011 draft. Banks can now apply to migrate from standardized approach to IRB for credit risk capital calculation starting April 1, 2012.
What it means for you
Banks adopting IRB can use their own internal risk ratings to determine capital requirements, potentially lowering capital charges for well-managed portfolios. However, compliance requires robust credit risk systems and continuous improvement, with RBI conducting detailed scrutiny and parallel runs before final approval.
What you must do
- Assess your bank's preparedness against the final IRB guidelines attached to this circular.
- Obtain board approval and submit a letter of intention along with a self-assessment report to RBI between April 1 and June 30, 2012.
- Prepare for a detailed RBI scrutiny and parallel run if initial assessment is satisfactory.
- Ensure continuous enhancement of credit risk management processes and systems post-approval.
Who it affects
All commercial banks (excluding RRBs and Local Area Banks), Credit risk management teams, Risk and compliance departments
What is the deadline for submitting the letter of intention?
Banks must submit the letter of intention and board approval along with a self-assessment report between April 1, 2012 and June 30, 2012.
What happens after the initial submission?
RBI will assess the bank's preparedness based on the documents. If satisfied, the bank can submit a detailed application as per Section G of the guidelines, followed by scrutiny and a parallel run before final approval.
Are RRBs and Local Area Banks eligible for IRB approaches?
No, this circular applies to all commercial banks excluding Regional Rural Banks and Local Area Banks.