shri v leeladhar : regulation and risk management - implementing basel ii speech by mr shri v leeladhar, deputy governor of the reserve bank of india, delivered at the platinum jubilee celebrations of the south indian bank ltd, thirussur, 9 july 2005. * * * it is indeed an honour to be amongst you on the occasion of the platinum jubilee celebrations of the south indian bank ltd. today we remember the founders and pay homage to their vision and drive that led to the establishment of this bank. it is not only a day to feel proud, it is a day to reflect, a day to share, and a day to celebrate. it is also an opportunity to re - emphasise what the institution stands for, which not only helps in projecting its corporate culture and identity, but also constitutes an integral part of the institutions ’ brand building exercise. in it ’ s more than 75 years of existence, the bank has traversed a long journey from a unit bank set up in thrissur, with a capital of rs. 22, 000 contributed by 44 shareholders to a bank with capital funds of rs. 474 crore contributed by 90, 000 shareholders, and a branch network spread over 17 states / union territories. the south indian bank ltd. has thus become a major old generation private sector bank with a regional origin and national presence. i am told that as on 31 march 2005, the south indian bank ltd. had recorded a total gross business turnover of rs. 14, 000 crores with deposits of rs. 8523 crores and advances of rs. 5727 crores. gross npa ratio of the bank stood at 6. 61 % and net npa ratio at 3. 87. the bank will have to work on reducing the level of existing npas, and put in place proper risk management systems to ensure a low level of incremental npas in future. this is essential for ensuring that the bank is in a position to compete successfully with the other banks in the post basel ii era. this brings me to the topic of my address - regulation and risk management : implementation of basel ii. regulation and risk management friends, it is clear that we are at the beginning of a new phase in the indian banking. the last decade has witnessed major changes in the financial sector : new banks, new financial institutions, new instruments, new windows, and new opportunities and, along with all this, new challenges. the most prominent on our minds in the context of banking these days

under pillar 1. moreover pillar 1 provides for a menu of approaches for computing capital adequacy and banks have the freedom to choose the approach they would like to adopt. basel ii requires that all the three pillars need to be implemented and, therefore, each pillar is as important as the other one. as you would be aware, india has decided that all the commercial banks would have to be basel ii compliant by adopting at a minimum, the standardized approach for credit risk and basic indicator approach for operational risk under pillar 1, with effect from march 31, 2007. the adoption of irb approach may be permitted by rbi in due course after adequate skills are developed, both in banks and at supervisory levels. implementation of the simplified approaches also requires preparation on the part of the banks, banking regulators and the rating agencies. banks have to gather data relating to the rated exposures the basel committee on banking supervision is a committee of banking supervisory authorities that was established by the central bank governors of the group of ten countries in 1975. it consists of senior representatives of bank supervisory authorities and central banks from belgium, canada, france, germany, italy, japan, luxembourg, the netherlands, spain, sweden, switzerland, the united kingdom, and the united states. it usually meets at the bank for international settlements in basel, where its permanent secretariat is located. basel committee on banking supervision, “ international convergence of capital measurement and capital standards - a revised framework ”, june 2004. in order to risk - weight them accordingly and track the ratings migrations of these exposures. the rating agencies have to demonstrate that they adhere, on an ongoing basis, to the six parameters laid down under basel ii for their recognition, viz., objectivity, independence, international access / transparency, disclosure, resources and credibility. the rating agencies have also to develop frameworks for assigning issuer rating instead of the issue rating that they have carried out so far. pillar 2 - supervisory review pillar 2 is meant not only for ensuring adequate capital to support all the risks in a bank, but also to encourage banks to adopt better risk management. it is the prime responsibility of the bank management to ensure that the bank has adequate capital commensurate with its risk profile and control environment. the role of supervisors is to evaluate whether or not the banks are assessing their capital requirements under pillar 2 properly in relation to their risks & if necessary the supervisors may intervene to mandate a higher capital requirement. however, it is important to note that increased capital