The Chartered Accountant

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