Indian banks are still in the early stages of understanding the complexities and opportunities arising from the proposed revised capital adequacy framework, popularly known as Basel II.
According to a survey by consulting firm KPMG of 32 banks, which account for 61 per cent of the total banking assets in India. The survey shows wide variation among respondents in relation to the key elements of their Basel II project.
Banks have shown little progress thus far on the more advanced elements such as the use of key risk indicators, modelling loss data, scenario analysis and risk mitigation.
The respondents have indicated reasonable progress on basic elements such as strategies and policies, risk definition and organisation and governance structures.
Seventy-four per cent of banks believe that their documented risk management policy addresses basic Basel II requirements. KPMG said in our experience globally, banks have been required to make significant efforts in enhancing their documented risk policy to make it in line with the requirements of the more advanced approaches of Basel II.
Basel II substantially changes the treatment of credit and market risks. It also requires banks to have sufficient capital to cover their operational risks - a new risk category.
More specifically, under the Basel Accord, a bank's regulatory capital will be tied directly to its internal and external risks.
The Reserve Bank of India has said Indian banks with overseas presence and branches of foreign banks in India will adopt Basel II norms with effect from March 31, 2008 and other banks not later than March 31, 2009.
The survey points to the fact that compliance with regulation is driving the Basel II implementation programme in 46 per cent of the banks surveyed.
New private sector banks ranked enterprise risk management over compliance as their key driver. About 75 per cent of the banks' surveyed have not specifically budgeted funds for their Basel II programme.
KPMG said 89 per cent of the banks surveyed indicated that they have a 'dedicated team' responsible for Basel II implementation. However, very few banks have established the position of chief risk officer with a reporting line to the CEO/Board and whose role has been defined with sufficient clarity.
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