The Hindu Business Line : `Basel II delay is a blessing in disguise'

As watchers of the banking scene know, `schedule for compliance' has been redrawn for Basel II. The recent Mid-term Review of Annual Policy for the Year 2006-07 from the Reserve Bank of India (RBI) conceded that March 31, 2007 as the intended date for adoption of Basel II had to be postponed by two years, `taking into account the state of preparedness of the banking system.'

The delay is `a blessing in disguise,' says Mr Amreshwar Seth, Senior Adviser, KPMG. "The extension of the Basel II implementation deadline is unlikely to slow down the process; in fact, it could provide some much-needed time to adequately execute the guidelines." Here is his take on a few questions from Business Line.

Why Basel II?

Managing risk effectively has always been of primary importance to banks. Basel II is intended to improve the safety of the financial system by placing increased emphasis on banks' internal control and risk management processes and models, supervisory review process, and market discipline.

What changes does Basel II implementation call for?

To implement Basel II adequately, most banks will need to rethink their business strategies and the underlying risks. Indeed, to calculate capital requirements under Basel II a bank will have to implement a comprehensive risk management framework across the institution. Over a period of time, the risk management improvements, which are the intended result of Basel II, may be rewarded by lower capital requirements. However, these changes will also have wide-ranging effects on a bank's information technology systems, processes, people and business - beyond the regulatory compliance, risk management, and finance functions.

Is the postponement of Basel II a retrograde move?

The RBI's decision to extend the deadline for the implementation of Basel II demonstrates its commitment to enable Indian banks to implement prudential measures that are in keeping with global best practices. Given the diversity of banks in India, by providing additional time, it appears that the RBI is determined that Basel II penetrates the entire banking industry rather than being confined to a select few. This will create a more level playing field.

How will Basel II benefit banks? And what should banks do in the `extra time' now available?

The real business benefits of Basel II are gained when accompanied by a risk awareness programme and suitable changes to the culture within the organisation. Banks should use this additional time to align their Basel programme with other risk management initiatives, gather better quality loss data, train their staff, and manage the change process. These factors are critical to the success of this complex project.

What is the main challenge of Basel II?

Basel II needs to be viewed as much more than mere regulatory compliance. Implementation of Basel II calls for a deeper understanding of the underlying principles. The main challenge is to avoid an underestimation of the complexities involved.