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Present Scenario in Implementing Basel II in India

The deadline for implementing Basel II, originally set for March 31, 2007, has now been extended. Foreign banks in India and Indian banks operating abroad had to meet those norms
by March 31, 2008, while all other scheduled commercial banks will have to adhere to the guidelines by March 31, 2009. But the decision to implement the guidelines remains unchanged. This is true even though the international exposure of even the major Indian banks is still limited. Whereas some of the large banks say that they are Basel II compliant with the presence of all the requirements, which Basel II recommends.

Basel II allows national regulators to specify risk weights different from the internationally recommended ones for retail exposures. The RBI had, therefore, announced an indicative set of weights for domestic corporate long-term loans and bonds subject to different ratings by international rating agencies such as Moody's Investor Services, which are slightly different from that specified by the Basel Committee.

Most of the Indian banks that have migrated to Basel II have reported a reduction in their total Capital Adequacy Ratios (CARs) due to the new operational risk-based capital charges. However, a few banks, those with high exposures to higher rated corporate or to the regulatory retail portfolio, have reported increased CARs. Given recent changes in regulatory charges, it is doubted whether this will be sustainable. Banks would find it increasingly attractive to give out loans to the small business segment that qualify as regulatory retail, given their higher lending margins and lower risk weights. In contrast, the increase in risk weight for residential mortgage loans will make this area less attractive.

Conclusion

The Basel Committee on Banking Supervision is a Guideline for Computing Capital for Incremental Risk. It is a new way of managing risk and asset-liability mis-matches, like asset securitization, which unlocks resources and spreads risk, are likely to be increasingly used. This was designed for the big banks in the BCBS member countries, not for smaller or less developed economies.

The major challenge the country's financial system faces today is to bring informal loans into the formal financial system. By implementing Basel II norms, our formal banking system can learn many lessons from money-lenders. Its implementation may involve significant changes in business model in which potential economic impacts must be carefully monitored.

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* Contributed by: -
Jagannath Mishra & Pankaj Kumar Kalawatia,
Students of PGDBM Program, Class of 2008-10,
Institute of Public Enterprises, Hyderabad.
Article posted on September 27, 2008.