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Part - V

The objective of the recommendation of Basel II on credit risk is that banks should be more risk-sensitive than hitherto in their lending/investment activity and derive the benefit from lesser capital engagement for high quality credit risks. In addition to credit risk, Basel II recognizes the operational risks arising out of the day-to-day running of banks in the form of service quality shortcomings, non-adherence to policy and procedures, staff malfeasances, and so on, the capital charge for which is linked to operational income through a multiplier to be given by the regulator based on its assessment of the quality of banks operational instructions, style of functioning, control of top management and audit quality.

So how are banks progressing? It has been found that European banks are further ahead than their US and Asian counterparts. Most banks expect significant organizational and corporate governance changes to result from a combination of Basel II and other initiatives (e.g. Sarbanes-Oxley). Basel II is expected to significantly affect the competitive landscape, with increased competition in retail lending, and shake-outs in corporate lending, specialized lending and emerging markets. Banks see substantial benefit from more economically rational allocation of capital and more robust risk-based pricing as a result of Basel II. Planned spending on Basel II seems lower than documented in previous studies as banks seek to ensure maximum re-use of existing systems and look to adopt more centralized solutions where new systems are required. While spending on IT infrastructure and resources are the major costs, many programmes in the US and Asia appears to lack sufficient IT involvement.

Indian Factor

The Basel I recommendations on minimum capital requirement were accepted by most countries for adoption by the banks operating within their boundaries. In India, too, a minimum MRC was accepted and a timetable prescribed for banks to exceed the minimum capital requirement prescribed by the Basel Committee. Today, banks in India take pride in indicating in their balance sheets the extent to which they exceed the minimum Capital Adequacy Requirement (CAR). Banks in India also adopted the asset classification and provisioning norms prescribed by the Basel Committee and as directed by the Reserve Bank of India. The general belief now is that the commercial banks' balance sheets are comparable with most of the banks in the developing world and many in the developed world too.

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* Contributed by -
Vipul Mittal & Saurabh Singh,
Ist Year, MBA (Global),
Institute of Management Technology (IMT), Nagpur.