What changed
RBI provided detailed guidance on the Supervisory Review Process (SRP) and Internal Capital Adequacy Assessment Process (ICAAP) under the New Capital Adequacy Framework. Banks are now required to assess capital adequacy for risks beyond the three Pillar 1 risks (credit, market, operational), including interest rate risk in banking book, credit concentration risk, liquidity risk, and others. An illustrative ICAAP document format was also furnished.
What it means for you
Banks must go beyond regulatory minimum capital ratios and conduct their own comprehensive risk assessments. This ensures they hold adequate capital for all material risks, including those not fully captured or omitted by Pillar 1. It encourages better risk management practices and a proactive dialogue with RBI, potentially leading to capital augmentation or risk reduction interventions.
What you must do
- Ensure your bank has a Board-approved ICAAP policy in place as required by earlier circulars.
- Conduct a thorough internal capital adequacy assessment covering all risks listed, including interest rate risk in banking book, concentration risk, liquidity risk, and others.
- Prepare the ICAAP document as per the illustrative format provided in Annex II and maintain it for supervisory review.
- Engage in active dialogue with RBI supervisors to demonstrate capital adequacy and risk management processes.
Who it affects
All commercial banks (excluding Local Area Banks and Regional Rural Banks), Risk management departments, Board of Directors and senior management, Compliance and internal audit teams
What is the purpose of the Supervisory Review Process (SRP)?
The SRP ensures banks have adequate capital to support all business risks and encourages better risk management techniques. It involves a well-defined internal assessment process (ICAAP) and active dialogue with RBI to allow timely intervention if needed.
Which risks must banks assess under ICAAP that are not fully covered by Pillar 1?
Banks must assess risks like interest rate risk in the banking book, credit concentration risk, liquidity risk, settlement risk, reputational risk, strategic risk, model risk, and residual risk of securitization, among others.
Is there a single prescribed approach for conducting ICAAP?
No, RBI recognizes that no single approach exists and best practices are still evolving. The guidelines provide broad principles, and banks can develop their own methodologies, especially for non-quantifiable risks like reputational and strategic risks.