The Hindu Business Line : ‘Basel ll regulation is data-hungry’

With the Reserve Bank of India spearheading the move to ensure adoption of Basel II accord recommendations on banking laws and regulations across India, risk management has become an all-important area.

The calculation of risk-based capital under Basel II norms is primarily a risk management process, though the delivery always requires a technological process.

However, the biggest skill shortages with regard to the Indian IT industry are in this very domain, according to Arun Pingaley, who heads the Functional Solutions and Experts Group (FSEG) at Reveleus.

Speaking to eWorld on Basel II norms and the challenges facing its adoption in India, he says most Indian IT services vendors have excellent IT skills but relatively weaker domain skills in expert areas such as risk management.

“The key to success in implementing a Basel II solution is mastery over risk management regulations, processes and best practices in the industry.”

The main objectives of Basel II norms are ensuring that capital allocation is more risk-sensitive, separating operational risk from credit risk and quantifying both and attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.

Reveleus was created by i-flex in 2002 as an independent business with sole focus on business analytics.

Its Basel II solution has been adopted by several Indian banks.

Pingaley says the area of inadequacy is lack of exposure to higher order risk management practices among risk managers in public sector banks.

“Hence, something as basic as adopting a credit rating model for standardised approach under Basel II is turning out to be a challenge.”

On the level of IT preparedness of Indian banks in this regard, he says they are significantly behind foreign banks.

“All foreign banks are fully computerised. Further, all of them have a nationwide network, making movement of data across the nation possible. Even if Indian banks have computerised a bulk of their branches, it is not necessary that all of them are on a live network.”

He cites the instance of many branches continuing in offline mode, with only an end-of-the-day process updating the bank’s network with its transactions.

Besides, the ability of Indian banks to do advanced modelling is significantly affected due to unavailability of historical data.

“Indian banks are either in the process of computerising their operations or have completed it only recently, which means that they do not have historical data.”

Since all scheduled commercial banks will have to adhere to the guidelines by March 31, 2009, they will need to implement a high level of integration between various applications.

“These include application processing, credit decision, risk rating, transaction systems and collateral management.”

Adhering to Basel II norms involves collecting and keeping track of data pertaining to every loan and maintaining them.

“The principal goal is to reduce risk in the financial system worldwide by aligning each bank’s capital requirements to accurately reflect its credit, market and operational risks,” says Pingaley.

And complying with Basel II norms will require a wide range of initiatives on the part of banks.

“Their IT processes have to be in place and a high level of automation is needed. The ability to manage multiple initiatives in a Basel II project poses a challenge.”

According to Pingaley, Basel II is a “data- hungry” regulation.

“This means, in most cases banks will need to rally together the maximum amount of data they have ever brought together, until now. If all the data is not residing on computerised systems, the challenge is greater.”

On key measures to ensure IT effectiveness, he says banks must adopt best practices in the areas of data management, automated processes, advanced modelling, transparency/auditability and automated reporting.

And IT will play a crucial role in enabling banks to put these in place.

“Establishing a data warehouse is a key measure. Besides, IT has a big role to play in automating as many processes as possible and in enabling the bank to take decisions based on advanced models.”

Also, IT systems enable better auditability of all transactions, processes and decisions in banks.

“The more effective the IT systems in a bank, the greater will be the transparency and ability to audit all operations of a bank.”

Additionally, the ability of a bank to meet all its reporting needs is a very good indicator of the effectiveness of IT within the organisation, he adds.

Pingaley foresees IT playing a key role in managing risks better, going forward.

“For instance, building credit scoring and rating solutions requires huge amounts of analysis of data using advanced stochastic approaches, where IT systems play a key role.”

IT can also provide the ecosystem for better risk management by building and maintaining large data warehouses. Underscoring the need for a comprehensive IT strategy and systems for banks, he says they will enable decision-making in the form of risk-based pricing of loans, establishing the amount of credit limit and deciding whether to enter into a credit relationship with an obligor. Reveleus commenced its first Basel II Solution implementation in 2005 and has won deals with top banks in the US and other countries.

Pingaley leads the FSEG in conceptualising, designing and developing functional solutions in the areas of risk management, customer insight and enterprise-wide financial performance measurement.

Prior to Reveleus, he was with ANZ Grindlays Bank, which has now been taken over by Standard Chartered.

He also worked with the Ministry of Finance in the area of foreign exchange law for over two years.

dmurali@thehindu.co.in