The Hindu Business Line : 75% of banks yet to budget funds for Basel II

Basel II was to have been on in about four months, but Indian banks got a reprieve when the Reserve Bank of India recently extended the deadline by up to two years. Perhaps our banks knew it all along that compliance with Basel II was still far away. Which explains why approximately 75 per cent of the banks have not specifically budgeted funds for their Basel II programme, as a recent survey has found.

However, nine out of ten banks surveyed believe that successful implementation of Basel II "will not only result in better compliance but will also improve efficiency of capital management, enhance shareholder value and lead to improved management of their operational risks." These findings emerge from a study by KPMG, a Big Four in providing professional services worldwide.

A positive emerging from the report titled `India: Ready for Basel II' is that banks are apparently confident in their ability to meet the RBI guidelines for achieving `the standardised approach for credit risk' and `the basic indicator approach' in respect of `operational risk'. KPMG cautions banks lagging behind to devote considerable resources in this area so that they can address the necessary requirements of the RBI, given the impending timelines for implementation of the Basel II norms.

Another positive is that 89 per cent of the banks surveyed have a `dedicated team' responsible for Basel II implementation. But, "very few banks have established the position of Chief Risk Officer with a reporting line to the CEO/Board and whose role has been defined with sufficient clarity."

Compliance with regulation is driving the Basel II implementation programme in only about one out of two banks. "Only 16 per cent of the banks surveyed have commenced the process of planning for the more advanced approaches of Basel II, including collection of loss data, risk mitigation techniques and capital modelling."

Tech preparedness

The survey finds that technology preparedness is less evident in the management of operational risks, compared to credit and market risk management. "Basel II substantially changes the treatment of credit and market risks and also requires banks to hold sufficient capital to cover their operational risks - a new risk category," said Mr Amreshwar Seth, Senior Advisor, KPMG in India. "Compared with the familiar territory of market and credit risks, operational risk although easier to understand, affects the entire organisation, and its assessment and quantification is considerably more difficult."