Equity related lending for banks could get prohibitively costly (in terms of provisioning) if they opt for RBI stipulated risk weights prescribed in its draft paper on internal rating based approach for credit risk.
RBI last week sought comments on implementation of the Internal Rating Based Approaches (IRB) for calculation of capital charge for credit risk.
The intention to have such stringent risk weightage is to ensure that banks curb their exposure to equity and focus on their core business of accepting deposits and lending.
Methods
“Regulators worldwide have started discouraging banks from deploying depositor money in equity or venture capital. The US has in fact, gone a step ahead and directed banks to use funds in their proprietary book for equity exposures,” said Mr Alok Tiwari, CEO of risk management consultancy firm, Aptivaa Consulting Solutions.
RBI has spelt out two approaches to calculate risk weights for equity — namely, the market based approach and the probability of default/ loss given default (PD/LGD) approach.
Banks using the first approach have to set a 300 per cent risk weightage for listed equity and 400 per cent for unlisted equity if they use the “simple approach.”
A variant of the first model (internal models method) brings down the weightage component to 300 per cent and 200 per cent respectively for listed and unlisted equity.
The second model probability of default/ loss given default (PD/LGD) pegs the risk weight to be assigned at 1,250 per cent for equity exposures.
Indian banks' equity trading book is on an average less than five per cent of their total investment book, said experts.
“To minimise problems of provisioning that surface when debt restructuring takes place or when banks invoke a pledge, the RBI has suggested such stringent guidelines,” said a banking analyst of a multinational brokerage.