THE INDIAN APPROACH TO BASEL

NORMS

Basel Accords
Financial standards and codes,drafted by the Bank
for International Settlements led (BIS) Basel
Committee on Banking Supervision(BCBS),has
evolved over time as one of the key responses to the
challenges faced by the prevailing international
financial architecture which has met with the
recurrent financial crisis since the early 1980’s.In
June 1974,a large number of banks in the OECD had
released Deutsche Marks to Bank Herstart in
Frankfurt against payments in the US dollars,to be
delivered in New York.Because of a difference in the
time zones,there was a delay (in dollar payments to
counter-party banks in the US) over which the Bank
Herstart was liquidated.This incident prompted the G-
10(G-13) countries to form the Basel Committee on
Banking Supervision,under the auspices of the
BIS.Formed in the end of 1974,the committee
included experts from the Central bank of the BIS
member-countries and other officials at the BIS.
To address the above issues,the recently drafted
Basel II Accord by the BCBS seems to address the
following goals:
• A comprehensive coverage of credit risks,market
risks and operationals risks.
• A Three-Pillar approach with due recognition of
the role of supervisory review and market
discipline.
 • A menu of options,both for estimating regulatory
capital and to bridge the gap between regulatory
and economic capital.

Indian Approach to Basel Norms

The Indian approach to standards and codes is

guided by the Standing Committee(on International
Financial Standards and Codes) that was set up by
the Reserve Bank of India (RBI) in consultation with
the Government of India in December 1999.The
Advisory Group on Banking Supervision has gone
ahead with international standards in respect of
Basel core principles,corporate governance,internal
control,credit risk,loan accounting,financial
conglomerates and cross border banking.

Banking in Post Independence Years

Following Independence ,the development of rural

India was given a high priority.To cater to the needs
of the rural areas,an official committee was created
which recommended that the Imperial Bank which
was the functioning bank in India,should be taken
over by a state-partnered and state-sponsered
bank.By an act of the parliament the State Bank Of
India was constituted on July 19,1955.With its
creation, more than a quarter of the resources of the
Indian banking system thus,passed to the direct
control of the state.Subsequently in 1959,the state
bank of India(subsidiary Bank)Act was
passed,enabling the SBI to take over eight former
state-associate banks as its subsidiaries (later named
associates).This marked a significant step in the
launch of a state-controlled banking system in India.

Simultaneously as above,Agricultural Refinance Act

of 1955 allowed the setting up of a specialized bank
for agriculture,the National Bank for Agriculture and
Rural Development(NABARD) which catered
exclusively to agriculture.Subsequent to these
developments,the state felt the need for a wider
diffusion of banking facilities including bank
lending.The problem was apparent with the
proportion of credit for industry and trade moving
up,from 83 percent to 90 percent between 1951 and
1968. The rise was clearly at expense of crucial
segments of the economy like agriculture and small-
scale industry.More critically,bank failures and
mergers were rather rampant,with the number of
banks dropping from 648 (including 97 scheduled
commercial banks or SCB’s and 551 non SCB’s) in
1947 to 89 in 1969(comprising 73 SCB’s and 16 non
SCB’s.

Bank Nationalisation-Accent on ‘Social

Control of Credit’(1969-1991)

‘Social control’ of bank credit flows,with priority

sector lending as a major aspect,was an important
objective of bank nationalization .it introduced
restrictions on advances by banking companies,in
order to ensure that bank advances were confined
not only to large scale industries and big business
houses,but were also directed,not only to large-scale
industries and big industries and big business
houses,but were also directed,in due proportion to
important sectors such agriculture,small scale
industries and exports.Since 1969, there has been a
significant spread of the banking habit in the
economy with banks able to mobilize a large amount
of savings.However,by the 1980’s there was a
general perception that the operational efficiency of
banks in India was on the downturn with low
profitability ,growing non-performing assets (NPAs)
which were already high and a low capital base.Poor
internal controls and the lack of proper disclosure
norms led to many problems which were kept
undercover.The quality of customer service did not
keep pace with the increasing expectations.All these
factors led to the next phase of nationalization in
1980 which raised the public sector banks’ share of
deposit from 86 percent (1969() to 92 percent
(1980).However, a reversal of the process of large-
scale banking de-regulation and reforms in the
banking sector as part of the overall economic
liberalization in India in 1991.

Given the relatively underdeveloped capital market

in India with little internal resources,firms and
economic entities rely,to a large extent,on financial
intermediaries to the meet their financial
requirements.The major institutional intermediaries
which supply credit in India include banks and non-
bank financial institutions(that is,development
finance institutions or DFIs),other Financial
Institutions(FI’s) and Non Bank Finance
Companies(NBFC’s).The non-institutional or
unorganized sources of credit include indigenous
bankers and moneylenders.Informations about the
unorganized sector is limited and not readily
available.

Banks in India can be broadly classified as regional

rural banks or RRB’s,scheduled commercial banks or
SCB’s ,and cooperative banks.The SCB’s for the
purpose can be classified into the following three
categories :
1.Public sector banks or PSB’s (SBI and its
associations,and nationalized banks) which are the
major banks ;
2.Private sector banks(old and new); and
3.Foreign banks.

At the end of the Financial year 2004, these SCB’s

had a network of 54,275 offices, and total assets
worth Rs.19,750 billion,making them the most active
and dominant financial intermediaries in the country.
As for concentration in the Indian banking sector,it
has declined gradually over the last few years.