Basel II recommendations involve forming rigorous risk and capital management systems designed to ascertain that a bank holds capital reserves appropriate to its related risks. Therefore, it is very essential that a healthy risk management system like Basel II should be given its due in today's Indian banking scenario. This even becomes important if Indian banks are to scale up with the ever-changing economic trends and secure a competitive edge in the global market. In fact these recommendations are aimed at protecting the international financial system.
At the function organized by the Bankers’ Club Greater Kochi Mukesh Agarwal, director-business development, Crisil said many public sector banks are stepping up to implement Basel II norms.
He said several private sector banks had no strategy in place for adopting the norms. “If a bank has high quality credit exposures, it will save capital on account of credit risk. Conversely, a bank with relatively lower rated credit exposure will have to provide more capital.”
It is true, there are limitations that banks face while implementing Basel II. These include siloed technology, scarcity of skilled resources and limited scope of few rating agencies. In addition to this there is also a cost limitation.
Saloni Ramakrishna, principal architect, risk and compliance solutions and head, business development, Reveleus & Mantas (an i-flex business), Japan & Asia Pacific as she recommended the implementation of the revised international capital framework - Basel II, underlined the viewpoint that there is a need to identify it as a strategic initiative for competitive advantage rather than look at it as another compliance regulation.
Emphasizing on the need for upgrading the banking system she added, "Banks that cannot attain Basel need to merge with larger banks". This means a capital profile change.
Under the Basel II credit rating will not be mandatory. All the same, banks will be able to save capital if their loan portfolios are rated.
In case a bank chooses to keep some of its loans unrated, perhaps it may have to provide a risk weight of 150 per cent for credit risk on such loans.
After April 1, 2008 fresh unrated disbursals and renewals greater than Rs.500 million will attract a risk weight of 150 per cent after April 1, 2008. This minimum size will be further reduced to Rs.100 million bringing many more loans within the 150 per cent risk weight bracket from April 1, 2009.
According to Mukesh by getting loans rated, banks will be able to save capital on loans in the higher rating categories.
He said rating is not a precondition for a loan sanction or for renewal of working capital facilities.
Yet a bank can insist on a rating for the loan before sanction or renewal, as it will help the bank in saving capital.
A company will have the option to accept or reject the ratings assigned to it by the rating agencies like Crisil.
Once the rating is approved, a rating letter will be issued by Crisil which will be posted it on the website and carry it in its monthly ratings publication.
He added only ratings that are available in the public domain can be used by banks for calculating risk weights.
R.Ramachandra Warrier, president of the club, and K.Balakrishnan, secretary, also expressed their views on this.