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Basel-II will have a major impact on the banking industry. With capital requirements loaded in favour of larger banks having better systems and consequent ability to benefit from the lower capital that goes with implementing more advanced approaches, the banking industry will witness a spate of large scale mergers, especially between internationally active banks, in their struggle to remain competitive.
Basel-II would ensure a greater amount of financial stability in the economy. The Capital requirement for each bank would be more closely tailored to various risks run by each bank. It provides incentives to adopt the latest advances in the field of risk management. A fine-tuned credit assessment processes will help the banks to 'risk price' their loan products better.
Basel-II also suffers from various criticisms. It is said that risk-sensitive approaches will have pro-cyclical effects that will aggravate the booms and busts and thereby affect the real economy. The capital requirements will drop at the peak of economic cycles and increase at the bottom of cycles when capital can be more scarce and expensive. Basel-II is applicable only to Scheduled Commercial Banks in India. It should be applicable uniformly to all banks and development financial institutions. Basel provides freedom to local regulators to implement the process by stage wise approaches. Despite its shortcomings Basel-II is forward looking and will be implemented in India from 31st March 2007.
Concluded.
* Contributed by -
Nishant Bachkheti & Nilesh Maheshwari,
Core Committee Members, Fin-Niche,
IMT, Ghaziabad.
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