The higher prescription is intended to address any judgemental error in capital adequacy viz. wrong application of standardised risk weights, misclassification of asset quality etc. Also, while advanced approaches under Basel II have been strengthened, the calibration of standardised risk weights is yet to be comprehensively effected.
And more importantly, Indian banks have not so far been subjected to comprehensive pillar 2 capital add-ons under Basel II. The higher prescription is therefore intended to address possible undercapitalisation of risky exposures. Experience shows that this prudence on our part was helpful and positive on the cost-benefit calculus. How will Basel III impact the capital requirements of Indian banks?