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Part - II

In India, RBI will implement it after taking into account the experience of the more advanced G7 nations. Initially it should be restricted to the more efficient banks to take stock of the intricacies and problems and help in a more full-fledged transition towards implementation of Basel-II.

The Basel II implementation will affect the Indian banks in various ways. It will involve high costs, have an effect on Loan pricing, possibly alter the current business model of banks or give rise to consolidations. In effect, it will involve a lot of trade offs for the banks and the banking sector as a whole. Our paper will have a look at some of the issues involved.

Impact on Loan Pricing, Portfolio Composition, Bank Performance and the Lending Process as a Whole

It will lead to more efficient loan pricing: The loan pricing will become more fine-tuned and will reflect the risks and the costs involved. This will benefit the more efficient borrowers while the more risky borrowers will be penalized. The most important cost element after the transition to Basel II will be the addition or the reduction in capital requirements for lending to various sectors. This is possible as Basel II involves an individual analysis of the risks for the various sectors and hence the resultant capital required.

The risk appetite of the entire banking sector should decrease with the shift to Basel II. There would be a shift towards higher quality borrowers over time and hence the risk of the overall portfolio should decrease.

Further since the pricing of the loans will be based on the risks assessment and will be done only after proper and thorough screening of the borrower, the efficiency of the entire lending process should improve. Loans will be granted to only good borrowers. The more risky borrowers will have difficulty in finding banks that are willing to lend to them. This should results in reduced Non Performing Assets for the banking sector as a whole resulting in better solvency of the Indian banking system.

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* Contributed by -
Harshdeep Jolly & Anurag Ghuwalewala,
PGP 2,
IIM Bangalore.