Banking sector may see M&As as Basel-II deadline nears

The Indian banking industry will see a spate of mergers and acquisitions, as many of them might face problems in raising additional capital to comply with the stringent Basel-II norms, a Ficci survey said today.

Majority of banks feel, increased capital requirements under the Basel accord will not make them more risk averse towards credit-dispensation, but small and medium enterprises and the farm and rural sectors may be left out of the loop.

"As the deadline of implementing Basel-II nears, banks are still preparing to solve the risk puzzle, for a more transparent and risk-free financial base," according to the survey of Ficci.

The survey found that capital requirement in smaller banks would trigger a consolidation in the Indian banking system, with increased mergers and acquisitions in the offing.

Most banks have estimated an increase in capital requirement, with 27 per cent of the respondents saying, it may increase by 1-2 per cent while 20 per cent expected it to rise by more than three per cent during the implementation stage of Basel-II.

Raising capital is not an issue with most of the banks and, as many as 62 per cent would prefer to raise it by a combination of Tier-I and Tier-II.

Half of the banks, want such regulatory relaxations that treat investment fluctuation reserve surplus, hybrid capital and investment allowance reserve as Tier-I.

while they want foreign currency translation reserve to be treated as Tier-II.

Operational-risk measurement is one of the new planks of the Basel-II accord and most banks feel, capital allocation on this count will not be counter-productive.

Most banks believe that explicit charge on operational-risk will direct more focus on it, which will further enhance operational risk-management and operational efficiency for the banks.

Also, such an allocation would create a cushion for the claims or losses on this count.

However, some banks feel that in India, capital requirements are too high as the Indian banks, unlike their foreign counterparts are not much involved in speculative activities like derivatives.

Hence, the capital requirement for operational-risk should be lower for the Indian banks than what is specified in Basel-II accord.

On comfort-level with stricter disclosure requirements, half of the banks said they were completely comfortable, whereas the rest were comfortable to some extent.

Majority of the banks were also happy with the support extended by the Reserve bank of India (RBI), for implementation of Basel-II and sought greater consultation with internationally active banks that face significant cross-border implementation challenges.

More than half of the respondents are technologically-equipped to face the future challenges being posed by Basel and have already put in place the core banking solutions.

Most of the banks are confident and have started preparing implementation roadmap, as instructed by the RBI to meet the deadline for executing Basel-II norms by March 31, 2007.

Data-collection has emerged as the biggest challenge in preparing the roadmap and the banks have sought continuous support from regulatory authorities.

Banks are also still in the process of putting in place, a robust management information system to comply with market discipline of the new norms.