Under globalization banking system in India has become crucial. From day to day, it became increasingly complex banking for banking, capital adequacy, liquidity, credit and associated risks.
The World Trade Organization (WTO), of which India is a member nation, which requires countries like India to get their banking systems at par with global standards in terms of financial health, safety and transparency, through the implementation of Basel II Standardsof 2009.
Basel Committee:
The Basel Committee on Banking Supervision is a forum for regular cooperation on banking supervisory matters. Their goal is to improve understanding of key supervisory issues and improve the quality of banking supervision worldwide. It should do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting a common understanding. The Committee Secretariat is located at the Bank for InternationalSettlements (BIS) in Basel, Switzerland.
NEED FOR such standards:
The first agreement, with the name. I. Basel Capital Accord was founded in 1988 and was to be implemented by 1992. It was the first attempt to introduce the concept of minimum requirements on capital adequacy. Then the second agreement called Basel II Accord has been established in 1999 with a final directive in 2003 for implementation from 2006, such as Basel II norms. Unfortunately, India could not fully implement, but this, is preparing forunder the leadership of the Reserve Bank of India for its implementation from 1 April 2009.
Basel-II norms have been introduced to overcome the disadvantages of Basel I Accord on. For Indian banks, its the need of the hour buckle-up and banking practices at par with global standards and make the banking system in India, more reliable, transparent and secure. These standards are necessary because India is witnessing increasing and capital flows from abroad and there are more and morecross-border economic and financial transactions.
FEATURES OF THE BASEL II norms:
Basel-II norms are seen as the reformed and refined form of Basel I Accord. The Basel II norms in the first place value on 3 factors, viz. Capital adequacy, supervisory review and market discipline. The Basel Committee encourages such factors as the three pillars in order to manage risk.
Pillar I: Capital requirements:
In the framework of the Basel II norms, banks should obtain a minimum capital adequacyRequirement of 8% of risk weighted assets. For India, the Reserve Bank of India has entrusted the maintenance of 9% minimum capital requirement. This requirement is generally considered a Capital Adequacy Ratio (CAR) or Capital Risk Weighted Assets Ratio (crare) is called.
Pillar II: Supervisory Review:
Banks majorly encounter with 3 risk, that is. Credit, operational and market risks.
Basel-II norms in this pillar would ensure that not only the banks have sufficient capital for all the supportRisks, but also encourage them to develop and use better risk management techniques in monitoring and managing their risks. The process has four key principles:
a) The banks should be a procedure for assessing their overall capital adequacy in relation to their risk profile and a strategy for monitoring their capital.
b) Supervisors should review and evaluate the bank internal capital adequacy assessment and strategies, as well as their ability to monitor and ensure their Compliance with regulatory capital ratios.
c) Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to have to keep capital in excess of the minimum.
d) Supervisors should seek to intervene early to capitalize on that below minimum and should prevent a rapid response when the capital will be restored or have not mentioned.
Pillar III: Market Discipline:
Market> Discipline imposed on banks to carry out their banking transactions in a safe, sound and efficient manner. Mandatory disclosure requirements on capital (risk every six months or more frequently if applicable) are required to be so designed that the operator of a bank capital adequacy can be tested. Qualitative data such as risk management and methods, definitions, etc. can also be published.
CONCLUSION:
Basel II standards, offers a variety of options in addition toThe standard approach to measuring risk. Paves the way to the financial institutions to proactively control risk is low in their own interest and keep capital requirement.
But. . .
Requires the development of strategies of risk management for the entire company, building huge data warehouses, crunching numbers and performing complex calculations, and compliance presents major challenges for banks and financial institutions.
More and more banks and investment firms around the world get their acttogether.
