The Chartered Accountant
The Chartered Accountant
The Chartered Accountant
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Now if we apply these probability concepts to our systems<br />
and plan to calculate these numbers, we see that<br />
our Indian Banking System did not have the infrastructure<br />
to load such intricate details and numbers in the<br />
past and neither did it have the data storage capacity<br />
and complicated sturdy systems to perform such operations<br />
today. So the entire scenario of calculations and<br />
detailed analysis goes for a toss. Not only this, Basel<br />
II emphasis on computation of probability of default,<br />
loss given default, migration mapping and supervisory<br />
validation require creation of historical database, which<br />
is a time consuming process and may require initial<br />
support from the RBI or large banks which is presently<br />
not there.<br />
Willingness for information Overload<br />
Pillar 3 of Basel II purports to enforce market discipline<br />
through stricter disclosure requirement. While admitting<br />
that such disclosure may be useful for supervisory<br />
authorities and rating agencies, the expertise and ability<br />
of the general public to comprehend and interpret disclosed<br />
information is open to question. Moreover, too<br />
much disclosure may cause information overload and<br />
may even damage financial position of bank.<br />
Consequences<br />
From the above analysis, three probable consequences<br />
emerge, the ripples of which are already being felt:<br />
• New standards are an amalgam of international<br />
best practices and call for introduction of<br />
advanced risk management system with enterprise<br />
level applications. Hence it has become a daunting<br />
task to craft the required level of technological<br />
architecture, and assemble human skill across an<br />
institution undertaking such appraisal and across<br />
the industry which is dragging to overhaul itself.<br />
Also the managerial cadre has to be properly<br />
trained for understanding of critical issues for risk<br />
profiling of supervised entities and validating and<br />
guiding development of complex IRB models.<br />
• <strong>The</strong> additional capital requirement posed by<br />
capital adequacy norms leads to large number of<br />
banks being forced to turn to capital market with<br />
IPOs7 and FPOs8 which is a noticeable market<br />
DECEMBER 2008 982 THE CHARTERED ACCOUNTANT<br />
AUDITING<br />
<strong>The</strong> working Group set up by the Basel Committee to look into implementation<br />
issues observed that supervisors may wish to involve third parties, such as<br />
external auditors, internal auditors and consultants to assist them in carrying<br />
out some or all of the duties under Basel II. <strong>The</strong> prerequisite is that there<br />
should be a rightfully developed national accounting and auditing principles<br />
and scaffold, which are in line with the best international practices.<br />
7 Initial Public Offer<br />
8 Follow on Public Offer<br />
trend today. This further has its own impact on<br />
the banking structure as it demands for dilution<br />
of Government ownership on these banks.<br />
Government has already been forced to increase<br />
the FDI limit by 74 per cent in banking sector to<br />
help these banks raise the required capital.<br />
• <strong>The</strong>se moves in the sector have grown pressure to<br />
consolidate domestic banks to make them capable<br />
of facing international competition. Given the<br />
significant dominance of foreign banks over the<br />
domestic counterparts, even after the consolidation<br />
of domestic banks the threat of takeover remains<br />
if the FDI limit is further relaxed.<br />
Status as on today<br />
An ASSOCHAM Eco Pulse study has brought out<br />
that most Indian banks have improved their capital<br />
adequacy ratio in line with the requirements of global<br />
Basel II norms, but suggests that they need to do more<br />
on international risk management practices in the wake<br />
of increasing pressure to bring down Non-Performing<br />
Assets (NPAs).<br />
Entitled 'Indian Banks and Basel Accord II', the study<br />
shows that the financial health of the Indian banking<br />
system has improved significantly. For instance, this improvement<br />
is vivid in terms of Capital Adequacy Ratio<br />
(CAR) during the third quarter of the fiscal 2007-08.<br />
In comparison to the mandated limit of CAR of 9%,<br />
the average capital adequacy ratio of commercial banks<br />
went up to 13 % in financial year 2008 from 12% in<br />
the previous year. Axis bank recorded the maximum<br />
increase of up to 16.88% in quarter 3, financial year<br />
2007-08 from 11.83% a year earlier in its CAR. ICICI<br />
Bank took the second position with an increase from<br />
13.37% to 15.82% in the current financial year. Other<br />
banks which registered a significant rise in CAR include<br />
ING Vysya Bank, whose ratio rose to 12.23%<br />
over and above 10.70% in the previous year, HDFC<br />
Bank from 12.80% to 13.80% and Centurion Bank of<br />
Punjab from 10.50% in the previous fiscal to 11.50%<br />
in the current fiscal. Punjab National Bank turned the<br />
corner by recording an increase in its CAR against a<br />
decline in the previous financial year. Its capital adequacy<br />
ratio dropped to 12.9% from 13.99% in quarter