The Hindu Business Line : Banks need to build database fast: Experts

There is more to Basel-II than capital requirement. The `New Accord of Basel Committee of Banking Supervision', popularly known as Basel-II, is really a push towards a system that shines a light on various risks, so that the management could address them. This was the central message left by two experts - Mr James Nicholas Haigh, Managing Director and Deputy Chief Credit Officer, Private Wealth Management, Deutsche Bank, and Mr Hans Rudolf Schutter, Executive Director, Asia and Middle East, Risk Business International Ltd, Hong Kong.

The experts had come to Chennai to speak at a seminar on Basel-II held here last week by the Institute for Financial Management and Research (IFMR).

In a chat with Business Line, they were asked of their views on the relevance of Basel-II in India, where about 80 per cent of the banking system is in the public sector and generally no bank is allowed to fail. Besides, if because of Basel-II, a bank brings in a few more capital rupees for every Rs 100 lent, would it shield the bank from failure?

Not a good approach

Answering these questions, Mr Haigh and Mr Schutter said that the government backing a bank was not a good approach as it meant that taxpayers' money was being used to pay for mistakes of bank managements. They pointed out that Basel-II was not a guarantee against failure. They said that the capital requirement of Basel-II only "addressed the lack of sensitivity" of Basel-I, which was a "broad brush" agreement and called for all banks to maintain a certain level of capital, regardless of risks each bank faced.

The true benefits of Basel-II would be realised if banks meet the requirements not just to satisfy the regulator, but as a means of risk mitigation. Responding to a question, they said all banks, including those who do traditional, deposit taking-lending banking, were open to operational risks.

Banks' preference

They said that they had found that most Indian banks were keen on getting on to more sophisticated approaches for measuring the regulatory capital. (Basel-II provides two methods for calculating capital requirement and banks could adopt either of them. One is a basic formula-based method and the other involves measurement of various risks and capital allocation for each risk. It is generally believed that the second method will lead to a lower capital requirement, but would call for a large data base, which many Indian banks do not have at present.)

Noting that many Indian banks were "waiting for guidelines" for sound management practices, Mr Schutter said that there was no need for them to wait for any guidelines. `Sound management practices' have been presented in a Basel Committee publication of 2003. "If you are compliant with the 2003 paper, you are 99 per cent compliant with any guidelines that may be brought in," he said.

Observing that the RBI postponing the coming into force of Basel-II norms by a year was an indication that many banks were struggling to get their databases ready, Mr Schutter advised Indian banks not to waste the extra time, but get ahead with data collection.