"In principle the bank has decided to comply with the SA [standardised approach], but in practice it has been managing its credit risks in line with the IRB framework since adopting the credit-rating method to analyse loan requests several years ago," chief financial officer Yokporn Tantisawetrat said last week.

However, the bank will continue fine-tuning its risk-management system.

Basel II requires banks to maintain minimum capital requirements for credit risk, market risk and operating risk.

For credit risk, banks can choose between two methods, the standardised approach and the IRB. The IRB employs the credit rating of each borrower.

Siam Commercial Bank does not set a minimum credit rating for each customer. The credit rating for a loan reflects its conditions, such as credit limit or interest rate, as well as the loan-loss reserve requirement for each borrower.

Yokporn said that on the credit-rating basis the bank's loan portfolio could expand or contract. Some customers might receive a higher credit line.

To analyse loan applications from corporations and SMEs, the bank uses the credit-rating method. For personal loans, credit scoring is used.

The bank is ready to comply with the standardised approach of Basel II, which is not concerned much with capital efficiency. The bank's capital-adequacy ratio is 14 per cent, of which around 11 per cent is tier-1 capital. That is higher than the Bank of Thailand's minimum requirements of 8.5 per cent and 4.25 per cent respectively.

The new international banking standard will be adopted by Thailand next year. Currently the country follows the Basel I standard.

Most banks are expected to implement the new standard with the standardised approach as most of them maintain their capital-adequacy ratio at a higher level than demanded by the central bank.

Somruedi Banchongduang

The Nation