RBI tells Indian banks to incorporate legal and brand risks in capital adequacy

RBI has recently instructed the Indian banks to incorporate legal and brand risks in their overall risk assessment and hence should set aside more capital to factor in such risks on the lines of what their counterparts in other markets have done.

Given that a majority of banks are in the process of implementing Basel-II norms, and struggling to finalize their policies, it adds more burden on them. Not only the banks will have to assess the risks arising out of legal and brand value issues (which is different from bank to bank), but they will have to set aside more capital.

The most interesting aspect is - RBI had earlier asked banks to implement the most basic Standard approach to measure the credit risk (under Basel-II) citing that banks may not have processes in place to measure the credit risk properly. But not it wants the banks to assess legal and brand risks; and it has not recommended any standard approach to do that at least in the initial phase. All the banks have different exposure to legal and brand risks and they will have to develop processes and policies to measure the same. According to me, banks will approach RBI to relax the norms or to give more time to make the changes and it is highly improbable that it will be implemented in the current fiscal year.