Synopsis

Topic: Implementation of BASEL II in Indian Banks: Issues, Perspective & Future

directions.

Introduction:

The Basel I & II recommendations of the Bank of International Settlements (BIS) have been
framed with the objective of ensuring adequate capitalization of banks assets and lessen the
credit and operational risks faced by the banks.

The principal solecism in the Basel I proposal was that it dealt with credit risk only. Other types
of risks faced by a bank like interest rate risk, foreign exchange risk and operational risks were
not dealt with at all. Hence there was an inadequate estimation of the overall risks faced by a
bank under Basel I. This could result in under-capitalization of the banking sector as a whole and
could give rise to systemic risk and bank crises in the long run. One cannot possibly imagine the
effects on the world financial system due to the collapse of banks like Citigroup or J.P. Morgan
Chase. Basel II tries to address exactly this (systemic risk) and other forms of risks like credit
risk, operational risk and market-risk.

The Basel II recommendations are based on three pillars; Minimum Capital requirement:
supervisory review: Market Discipline. The design is to evaluate the risks scientifically and
provide incentives to banks to evolve and adopt more sophisticated techniques by means of
autonomous risk assessment. In long term these recommendations by means of various measures
would be able to influence Corporate Governance and better risk management through self-
assessed needs. The issues of Basel II are multiple and can vary from country to country
depending on the banking environment of each state.

Systemic risk

Credit risk

BASEL II
Market risk

Operational
risk
Need of the study:

There are many problems which Indian banks are facing in implementation of BASEL II. Some
of them are –

1. Good risk management involves a high degree of cultural changes. Embedding good risk
management practices into the day to day business processes will be a daunting task.

2. Sophisticated risk management techniques, particularly under the advanced approaches,

require human resources with appropriate skill sets and proper training. With average age of 45
and above of Public Sector Bank officers, the task becomes much more challenging.

3. Capital requirement under Basel II will increase

4. Limited number of rating agencies and insignificant level of penetration of ratings.

Objective: To identify the problems in implementation of BASEL II in Indian Banks.

 To identify solution of the problems in implementation of BASEL II.
To give my suggestions for the preparation of BASEL III.

Research Design: An Exploratory research method will be used to do this study and research
will be based on the fact findings.

Data Collection:

Primary Data: In the context of Banking Regulation Act, 1949 and Reserve Bank of India Act,
1934 (Banking Secrecy Act) banks are not allowed to disclose any information about the
accounts and account holders. Therefore no use primary data will be there in the study.

Secondary Data: Secondary data will be collected from the journals, newspapers, articles,
magazines, RBI website, websites of different banks and other official websites.

Sample Size: Major nationalized banks and some major private banks

Analysis: Facts & figures will be studied, wherever applicable quantitative and qualitative
research tools will be applied in order to analyze the data.

Conclusion & recommendations:

Conclusion will be in the form of whether the BASEL II implementation proved to be fruitful for
Indian banks or not. Whether the Indian banks are ready for BASEL III or not and
recommendations for BASEL III.