The Hindu Business Line : `Most internationally active banks are ready to meet Basel II norms'

Mangalore May 20 Mr H.N. Sinor, Chief Executive of Indian Banks' Association (IBA), is a veteran banker with four decades of experience in the industry. After retiring as Joint Managing Director of ICICI Bank in 2003, he assumed charge as Chief Executive of IBA.

Mr Sinor, who was on an official visit to the head office of Corporation Bank in Mangalore, spoke to Business Line on some of the emerging issues in the banking industry and its preparedness. Excerpts.

Is the Indian banking industry ready to meet the Basel II implementation? What is the preparedness?

Yes, most of the internationally active banks are more or less ready to meet Basel II requirements by 2008. In fact, some have prepared parallel balance sheet for 2006-07. However, that was not for any publication, but to understand what could be the impact of Basel II implementation on these banks.

The other banks, by and large in the system, would be ready by 2009. Some would be having problems, as even urban cooperative banks are included in that. Such banks may find it difficult. I am sure the Reserve Bank of India will give some more time to the weaker groups.

We are working on coming out with a separate organisation, which is a consortium of banks for pooling of data, because you need to forecast the probability of default and loss-default data. For doing this, you need to build some kind of historical data that are later on analysed and a pattern is established, so that you can access that. We are working also on that at the moment.

Mergers are not happening in the banking industry, in spite of talks on that. Why?

I would reply it differently. Consolidation in the banking system has started happening.

We had as many as 196 regional rural banks earlier. In the last one-and-a-half years, it has come down to less than 100. We had around 2,100 urban cooperative banks. They have come down to around 1,600. So quietly, some revolution is taking place in consolidation. Look at the private sector banks. Again some activities are already there.

However, activity is not taking place in the case of public sector banks. My personal view is that consolidation is necessary even in public sector banks. But there are certain extraneous factors.

Some of them are political and otherwise. As a result of that the process is slow. But at some point of time, market compulsions will push the system to consolidation, including public sector banks.

Do you see the strategic alliance of some banks as a step towards consolidation?

I would say that this is an alternate model. This is what consolidation that may not even result finally in the merger of the participating banks. This is an alternate model explored by some banks. Here you channel the energies together for some business requirement, where instead of competing you collaborate.

It is a very good model. Eventually whether merger will take place or not is not very relevant here. But somewhere you are trying to see whether two institutions can synergise in some areas.

Now credit default swaps (CDS) have been allowed by RBI. Will there be players for that? Who are going to provide this?

CDS is one hedging mechanism. Yes, there will be players. I am sure foreign banks will be very active in providing CDS. These are essentially off-balance sheet items for them. They would earn fees.

There are Indian players who are building up the assets but carrying the risks on their credit portfolio. They need to do some kind of hedging. I have seen internationally how it operates. I am sure it will be good instrument in the market.

Are home loan defaults increasing?

My own personal assessment is that it is a huge market out there. I think opportunities are plenty. I don't think we need to worry too much about the home loan portfolio.

This is a potential market for the banks. We need to still grow substantially on that. Delinquencies are there, but not in an alarming manner.

What are your views on the human resource crunch in the banking industry?

It is a big issue. But for the first time, particularly the public sector banks are facing the issue of retention of talents. Earlier, poaching was done only for the youngsters. Today it is done for senior and middle management levels, and they are also getting a good offer. It is good for the employees. Some of them, who are bright, can get market-related salary. It is the major issue that we have been debating right now.

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`Most internationally active banks are ready to meet Basel II norms'