Basel Norms & Indian Banking law
Amidst globalisation Banking system in India has attained vital importance. Day by day there has been expanding banking complexities in banking transactions, capital requirements, liquidity, prestige and risks associated with them.
Basel Norms & Indian Banking law
The World Trade Organisation (Wto), of which India is a member nation, requires the countries like India to get their banking systems at par with the global standards in terms of financial health, safety and transparency, by implementing the Basel Ii Norms by 2009.
Basel Committee:
The Basel Committee on Banking administration provides a forum for regular cooperation on banking supervisory matters. Its objective is to improve understanding of key supervisory issues and improve the ability of banking administration worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting base understanding. The Committee's Secretariat is placed at the Bank for International Settlements (Bis) in Basel, Switzerland.
Need For Such Norms:
The first accord by the name .Basel Accord I. Was established in 1988 and was implemented by 1992. It was the very first exertion to introduce the plan of minimum standards of capital adequacy. Then the second accord by the name Basel Accord Ii was established in 1999 with a final directive in 2003 for implementation by 2006 as Basel Ii Norms. Unfortunately, India could not fully implement this but, is now gearing up under the guidance from the support Bank of India to implement it from 1 April, 2009.
Basel Ii Norms have been introduced to overcome the drawbacks of Basel I Accord. For Indian Banks, its the need of the hour to buckle-up and custom banking company at par with global standards and make the banking system in India more reliable, transparent and safe. These Norms are significant since India is and will explore increased capital flows from foreign countries and there is expanding cross-border economic & financial transactions.
Features Of Basel Ii Norms:
Basel Ii Norms are considered as the reformed & refined form of Basel I Accord. The Basel Ii Norms primarily stress on 3 factors, viz. Capital Adequacy, Supervisory chronicle and market discipline. The Basel Committee calls these factors as the Three Pillars to manage risks.
Pillar I: Capital Adequacy Requirements:
Under the Basel Ii Norms, banks should pronounce a minimum capital adequacy requirement of 8% of risk assets. For India, the support Bank of India has mandated maintaining of 9% minimum capital adequacy requirement. This requirement is popularly called as Capital Adequacy Ratio (Car) or Capital to Risk Weighted Assets Ratio (Crar).
Pillar Ii: Supervisory Review:
Banks majorly encounter with 3 Risks, viz. Credit, Operational & market Risks.
Basel Ii Norms under this Pillar wants to ensure that not only banks have enough capital to support all the risks, but also to encourage them to fabricate and use better risk administration techniques in monitoring and managing their risks. The process has four key principles:
a) Banks should have a process for assessing their allembracing capital adequacy in relation to their risk profile and a strategy for monitoring their capital levels.
b) Supervisors should chronicle and evaluate bank's internal capital adequacy estimation and strategies, as well as their ability to monitor and ensure their compliancy with regulatory capital ratios.
c) Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to want banks to hold capital in excess of the minimum.
d) Supervisors should seek to intervene at an early stage to forestall capital from falling below minimum level and should want rapid corrective action if capital is not mentioned or restored.
Pillar Iii: market Discipline:
Market discipline imposes banks to guide their banking company in a safe, sound and productive manner. Mandatory disclosure requirements on capital, risk exposure (semiannually or more frequently, if appropriate) are required to be made so that market participants can correlate a bank's capital adequacy. Qualitative disclosures such as risk administration objectives and policies, definitions etc. May be also published.
Conclusion:
Basel Ii Norms offers a variety of options in expanding to the proper advent to measuring risk. Paves the way for financial institutions to proactively operate risk in their own interest and keep capital requirement low.
But . . .
Requires strategizing risk administration for the whole enterprise, construction huge data warehouses, crunching numbers and performing complex calculations and poses great challenges of compliancy for banks and financial institutions.
Increasingly, banks and securities firms world over are getting their act together.
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