Implementing Basel II norms is an investment

It is worthwhile on the part of commercial banks to implement Basel II norms even though the banks have to incur considerable expenditure to implement them.

Under Basel II norms, the risk rate covers 99 per cent of the losses of credit risk and operational risk and in today's competitive market only those banks which have a sound risk management system will survive in the long-term, according to Amarendra Mohan, chief general manager, Department of Banking Operations and Development, Reserve Bank of India.

Mohan said that according to David Elden, chairman of HSBC Ltd, the aggregate cost for implementation of Basel II norms by banks in Asia is about $10 billion.

Nearly 60 per cent of this expenditure would be on information technology related risk management infrastructure. He, however, emphasised that implementation of Basel II norms should be considered as investment rather than cost to the banks.

Addressing a seminar on "Basel II Norms - Are We Ready?" organised by the Confederation of Indian Industry, Mohan said that internal rating based (IRB) approach was the most significant innovation of Basel II and its implementation would be a big challenge to the banks. IRB implementation involved development of risk management infrastructure, systems and human resource skill among other aspects.

Stating that Basel II "is an evolving process and it will continue to evolve," he said that the norms were applicable to all commercial banks, both at solo and consolidated levels.

Chief operating officer of iFlex Solutions N R K Raman said that the Basel Committee recommendations urge banks to adopt more sensitive approaches towards risk management and had proposed a "challenging implementation deadline" of 2006 for internationally active banks.

Chairman of Andhra Pradesh State Finance Corporation M Gopalakrishna said that Basel II recommendations would be able to influence corporate governance and better risk management in the long-run.