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Part - VII

Introduction of Basel I coincided with the initiation of financial reforms in India in the early 1990s. The prudential norms set out by Basel I came as a timely solution to the ills affecting the Indian banks, particularly the public sector banks (PSBs) after two decades of nationalization. That these banks despite the differences in their strengths and weaknesses could switch over to the international standards without much hiccups has surprised many a critic.

There was so much talk of weak banks, merger of banks, and closure of overseas branches and so on when the reforms began. But the same banks in question are now posting impressive profits year after year, opening new overseas branches and are even looking for banks to take over. Evidently, it is this successful switchover that has made the country eager to adopt the Basel II framework as well.

Conclusion

Putting Basel II in place is going to be far more challenging than Basel I. Assuming that the banks can get over the technological and operational hurdles, switching over to Basel II norms can no doubt turn the Indian banks, mainly the PSBs, more efficient and competitive globally. This, in turn, will help strengthen the financial sector to undertake further reforms including capital account convertibility more confidently. At the same time, the question needs to be answered whether too much regulation will stifle bank credit growth, which is already decelerating. Recent developments such as the Sarfaesi Act and the shrinking of the loan impairment period to 90 days are believed to have had a dampening effect on the demand for bank credit. Rushing into Basel II might make it worse. As the G-10 governors have rightly suggested, other countries could adopt the new framework "at their own pace, based on their own priorities".

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