Basel-II expected to spark off M&As in Indian banking

Indian banks will need to invest well over $50-70 million each if they wish to comply with Basel-II norms.

"Indian banks, especially those with a sizeable branch network, will need to spend well over $50-70 million to undertake the exercise, which involves data capturing," said Chris Matten, executive director (Singapore), PricewaterhouseCoopers.

This is as banks in developed nations are busy dotting the 'i's and crossing the 't's with investments of $10-20 million, as they work on meeting the December 2006 deadline for Basel-II.

Matten said with liberalisation and globalisation becoming a way of life for the banking industry, it is no longer a question of whether banks wish to comply, but rather they would be pressurised to comply with the norms by December 2006.

"Banks having operations in any of the European Union countries would need to meet the norms by December 2006," he said.

Cross border pressure in terms of institutional investors will also pressurise Indian banks raising capital overseas to meet Basel II norms.

Adherence to these norms provides a strong signal to investors about the bank's transparency in operations and its ability to meet best global practices, Matten added.

The Reserve Bank of India (RBI) has already piloted a project starting with six to eight Indian banks to come out with a dummy balance sheet this year, said Indian Banks' Association (IBA) chief executive officer H N Sinor. The idea is to see how much is the variance in profitability based on the Basel II formula.

Both Sinor and Matten feel that with Basel II coming into play, it will faster trigger the need for consolidation in the Indian banking industry.

"Many banks do not have the resources as the cost of complying to Basel II will be directly proportional to size of the undertaking. Banks will need to factor in the most important capital cost "" capital itself, which will see greater degree of M&A activity in the country," said Matten.

Banks are likely to change their business model and choose to hold assets to maturity unlike the current practice where they sell down good-rated assets.

ICICI Bank general manager Ashok Alladi added that Basel II will help rearrange banks' balance sheet as capital required for different asset classes will differ as per their rating.

Banks today sell down AAA-rated assets as they are forced to provide nine per cent capital on these assets even though their return is less.

Under Basel II, the capital requirement would stand reduced, making it viable to hold these top-rated assets to maturity, he said.

Further, with Basel II, the old business model of banks will undergo a change as banks will grant credit based on borrowers' ability to repay as opposed to the current practice of granting loans based on collateral, he added.