Basel II and Indian Bank

By

Satarupa Misra
Assitant Professor
Presidency Business School
Bangalore
 

Banking sector has undergone phenomenal changes in structure, growth and innovation.
Banks are now aggressively going into credit card business, different loan schemes, deposits schemes and many more. Rather in recent trend each day is a new day to launch new product or services in the market. But there are some risks that create hindrances on the growth and operation of banking sectors. These risks are in the form of credit risk, market risk, inflation risk etc. These risks are broadly two types i.e. Business risk where all the above risk will come. Apart from this any other danger of loss is known as operation risk. So operational risk can be defined as "the risk of loss, resulting from inadequate or failed internal processes, people or systems, or from external events". Credit risk plays a major role particularly in banking sectors. Credit risk arises when banks face a loss due to non-recovery of its credit. In the year 2001-2002 many public sector as well as private sectors banks faced high level of unrecovered debt or non-performing asset (NPA). Some times it has so happened that to manage the risk banks have undergo strategic changes like mergers and acquisitions. Risk is inevitable in any sector.  So when banking sector is concerned risk management is the key activity.

Risk management is the process where we can minimize controllable risk and should take precautions for uncontrollable risks.

Banking operations are complicated and are difficult for supervisor to monitor and control. It is always not only mandatory that bank should have adequate capital to cover their risk but also that they employ better risk management practices.

As risk has become a predominant factor, Basel II norms find some solutions for risk management. Basel committee has given Risk Based Supervision (RBS). The focus of RBS is on the assessment of inherent risks in the business undertaken by a bank and efficacy of the systems to identify, measure, monitor and control the risks.

Basel II norms include the wide area of risk measurement and risk management. Many foreign banks have started adopting Basel II as their risk management tool. It helps in pricing of loan in against with their actual risk. It follows advanced techniques and software for calculation of risk. As in today's situations almost all the banks and its branches are computerized .So risk can be better managed by adopting these advanced technologies.

Basel II is a unique approach for banks to modernize and upgrade their risk practices. Basel II is popular for its three pillars. The first pillar is compatible with the credit risk, market risk and operational risk. The regulatory capital will be focused on these three risks. The second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it also casts responsibility on the supervisors to review and validate banks' risk measurement models. The third pillar on market discipline is used to leverage the influence that other market players can bring. These are aimed at improving the transparency in banks and improve reporting.

Basel II norms can be summarized as follows. Basically it specifies the minimum regulatory capital requirement and contains new rules to calculate more refined risk weights for different kinds of loans. Secondly these norms specify supervisor where there should be methodical evaluation of risk. And supervisory authority should have expertise in quantitative and qualitative terms. Thirdly it speaks about market discipline through enhance disclosure of banks.

So when banks will adopt new Basel capital accord that is designed to facilitate and more comprehensive, sophisticated and risk sensitive approach; then they will be in the position to integrate their risk management and financial reporting solution into unified, seamless whole.
 

Satarupa Misra
Assitant Professor
Presidency Business School
Bangalore
 

Source: E-mail April 5, 2006

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