About BASEL

The Basel Committee on Banking Supervision is an institution created by the central bank Governors of the Group of Ten nations. It was created in 1974 and meets regularly four times a year. The Committee's members come from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

About BASEL
The Committee usually meets at the Bank for International Settlements (BIS) in Basel, Switzerland, where its 12 member permanent Secretariat is located. The Basel Committee formulates broad supervisory standards and guidelines and recommends statements of best practice in banking supervision. The present Chairman of the Committee is Nout Wellink, President of the Netherlands Bank.

Nout Wellink

About BASEL
Basel II is the second of the Basel Accords which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The Basel Accords refer to the banking supervision Accords (recommendations on banking laws and regulations). Basel I and Basel II issued and Basel III under development -by the Basel Committee on Banking Supervision (BCBS). They are called the Basel Accords as the BCBS maintains its secretariat at the Bank of International Settlements in Basel, Switzerland and the committee normally meets there.

INTRODUCING BASEL II
The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse.

INTRODUCING BASEL II
In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices.

BASEL II OBJECTIVES
Ensuring that capital allocation is more risk sensitive. Separating operational risk from credit risk, and quantifying both. Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.

Basel II uses a "three pillars" concept also termed as Mutually Reinforcing Pillars. 1)Minimum capital requirements (addressing risk) 2)Supervisory review and 3)Market discipline

The First Pillar

REGULATORY CAPITAL PILLAR

Deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces:Credit Risk Operational Risk Market Risk

Credit Risk component

Credit Risk can be calculated by using one of three approaches: Standardized Approach. Foundation IRB (Internal Ratings Based) Approach. Advanced IRB Approach.

The second Pillar

Supervisory Review PILLAR

The second pillar deals with the regulatory response to the first pillar, giving regulators much improved 'tools' over those available to them under Basel I. It gives banks a power to review their risk management system.

The third Pillar

Market Disclosure PILLAR The purpose of Pillar 3 - market discipline is to complement the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). This pillar Aims to promote greater Stability in the financial system requirements which will allow market participants to assess key pieces of information.

ROLE OF INDIA IN BASEL ACCORDS

Though not mandatory for non Basel II countries including India, But still India is also going to implement Basel II. This outlines some great opportunities for India coming out of Basel II implementation.

These opportunities can be classified in two categories:- Banking and Non-Banking.

ROLE OF INDIA IN BASEL ACCORDS

Though India is credited with a very strong banking system, in comparison to many peer group countries, still some better risk practices by Indian banks are required. They are lagging behind in the use of modern risk methodologies and tools in comparison to their western counterparts. The current level of Risk Based Supervision and Market disclosures are also not very satisfactory in the Indian Banking system.

ROLE OF INDIA IN BASEL ACCORDS

A Basel II compliant banking system will further enhance the image of India in the League of Nations. Introduction of Basel I coincided with the initiation of financial reforms in India in the early 1990s. The prudential norms set out by Basel I came as a timely solution to the ills affecting the Indian banks, particularly the public sector banks (PSBs) after two decades of nationalization.

BENEFITS TO OUR ECONOMY FROM BASEL II

BASEL II will lead to a spate of mergers and consolidation in the banking industry, which will improve the overall efficiency of the banking sector. BASEL II will lead to more efficient loan pricing: The loan pricing will become more finetuned and will reflect the risks and the costs involved. This will benefit the more efficient borrowers while the more risky borrowers will be penalized.

BENEFITS TO OUR ECONOMY FROM BASEL II

It will give the Reserve Bank of India (RBI) a greater say in the world forum.

Challenges With Indian Banking Industry

With the feature of additional capital requirements, the overall capital level of the banks will see an increase. But, the banks that will not be able to make it as per the norms may be left out of the global system. Another biggest challenge is re-structuring the assets of some of the banks would be a tedious process, since most of the banks have poor asset quality leading to significant proportion of NPA. This also may lead to Mergers & Acquisitions, which itself would be loss of capital to entire system.

Challenges With Indian Banking Industry

The technology infrastructure in terms of computerization is still in a nascent stage in most Indian banks. Computerization of branches, especially for those banks, which have their network spread out in far-flung areas, will be a daunting task. Penetration of information technology in banking has been successful in the urban areas, unlike in the rural areas where it is insignificant. Implementation of the Basel II will require huge investments in technology. According to estimates, Indian banks, especially those with a sizeable branch network, will need to spend well over $ 50-70 Million on this.

CONCLUSION
Assuming that the banks can get over the technological and operational hurdles, switching over to Basel II norms can no doubt turn the Indian banks, mainly the PSBs, more efficient and competitive globally.

Concluding, we can say that Basel II will have a positive impact on the Indian Banking Sector.