B.M.

Mittal Chief General Manager Punjab National Bank Head Office, New Delhi

Overview of the Presentation
Assessment of Industry¶s readiness ± Survey by KPMG Opportunities, Concerns and Challenges What needs to be done to ensure effective implementation and within the RBI time frame ± Action Points for effective Implementation

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India: Ready for Basel II ± A Survey Coverage of the Survey Total 32 banks ‡ 9 public sector banks ‡ 6 new private sector banks ‡ 12 old private sector banks ‡ 5 foreign banks Total Banking Assets: 61% Total Profit (after tax): 68% Key Aspects in the questionnaire The Drivers Techonological readiness The Project plan esource Planning Perceivedbenefits andchallenges .

India: Ready for Basel II -.Survey Findings Key Drivers Cricital Drivers for Basel II %age of Implementation respondents Compliance with regulation 46% Enterprise risk management 32% Internal commitment 17% Perceived change in operational risk 5% Reaction to external events 0% .

India: Ready for Basel II -. very few banks have established the position of Chief Risk Officer with a reporting line to the CEO/Board and whose role has been defined with sufficient clarity. However.Survey Findings Other Findings: 16% of the banks surveyed have commenced the process of planning for the more advanced approaches of Basel II. . including collection of loss data. risk mitigation techniques and capital modelling. 89% of the banks surveyed indicated that they have a µdedicated team¶ responsible for Basel II implementation. Compliance with regulation is driving the Basel II implementation programme in 46% of the banks surveyed. New private sector banks ranked enterprise risk management over compliance as their key driver.

India: Ready for Basel II -. pro ect planning and assessing detailed requirements) of implementing a credit risk programme.Survey Findings Credit Risk Preparedness 71% of the banks responded that they had made reasonable progress with the initial stages (in the form of establishing the team. conducting gap analysis. . The more advanced stages of credit risk preparedness have shown minimal progress as well as varied understanding of the implementation approach.

A large number of banks seem to have not yet fully understood the complexities for Basel II compliance in respect of operational risk. Appropriate guidance from the regulator could be one of the reasons.India: Ready for Basel II -.Survey Findings Operational Risk Preparedness Most banks have started work on the Basic Indicator Approach (BIA) for operational risk management. However banks appear to be unclear on their time frames for adopting more advanced approaches. Technological adaptability could be one of the drivers that would enable banks to implement the Standardised and Advanced Measurement Approach for operational risk management. .

90% of the banks intended to use a combination of in-house development as well as external consultants to build appropriate IT solutions. On a scale of 5.Survey Findings Technological Preparedness There appears to be less clarity with regard to use of technology in operational risk. Credit risk technological preparedness range between 3.India: Ready for Basel II -.0 to 3.5.2 to 3.5 and Operational risk technological preparedness range between 2.0 to 2. .5 among various public and private sector banks. Market risk technological preparedness range between 3.

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Managing and Monitoring Risk in a scientific manner Align risk appetite and business strategy Risk Based Pricing Effective Portfolio Management Optimum utilization of Capital Enhance shareholders¶ value by generating risk ad usted return on capital .Opportunities for Banks Measuring.

Embedding good risk management practices into the day to day business processes will be a daunting task. With average age of 45 and above of Public Sector Bank officers. Without their support and motivation.Concerns and Challenges for Banks ± General Issues Guidance and support from senior management is essential to help ensure success of Basel II pro ect. require human resources with appropriate skill sets and proper training. particularly under the advanced approaches. implementation can become difficult and time consuming. Good risk management involves a high degree of cultural changes. Sophisticated risk management techniques. . the task becomes much more challenging.

03. The models under advanced approaches require lot of historical data. collection of data is a formidable task. Banks have to customize and tailor make the risk products to suit their processes. . The scarcity of resources (of raising capital) will add to the existing competition of business growth.2006).Concerns and Challenges for Banks ± General Issues Capital requirement under Basel II will increase due to additional capital charge for operational risk and increased capital requirement for market risk (already implemented wef 31. Highly rated corporates (needing lower amount of capital) may exert pressure on already declining interest spread. However. Methodologies that work in a bank may not work in another bank. with no data warehouses in the banks (especially Public Sector Banks).

consistent. preconditions such as operational autonomy. In view of predominant Government control over public sector banks. realistic and prudent rules for asset valuation and loan loss provisions reflecting realistic repayment expectations. corporate governance etc need to be addressed. Legal systems will require changes for speedier and effective liquidation of collaterals The laws governing supervisory confidentiality and bank secrecy would require modifications to permit disclosure envisaged under pillar III. .Challenges for Banks ± Legal and Regulatory Infrastructure Steps are required for adoption of internationally accepted accounting standards.

Other rating agencies will have to disclose the default rates if they want to be accredited by RBI. commercial papers and other marketable instruments. .Challenges for Banks ± External Credit Rating Agencies Limited number of rating agencies and insignificant level of penetration of ratings. but not in rating issuers/bank borrowers.which may create difficulties in mapping process and compliance with disclosure criterion. At present default rates are disclosed by CRISIL only and other rating agencies are yet to declare the default rates. The rating agencies in India have a good background in rating ³issues´ such as corporate bonds.

. may result in higher risk loans going to banks on standardised approach. The capital requirements of banks under Standardised approach will be less sensitive to credit risk compared to banks on advanced approaches. Such guidelines are required to enable the banks to start collecting the data properly and to design IRB compliant risk management systems. This may lead to concentration of high risk assets with banks adopting standardised approach and low risk assets with banks adopting IRB approach.Challenges for Banks ± External Credit Rating Agencies In India banks/ FI¶s are having stake in rating agencies that may impact the independence of rating agencies. Banks are also awaiting detailed guidelines from the regulator on matter involving regulatory discretion under Internal rating based approach.

Rigorous legal and regulatory framework and less developed secondary market for bonds/ loans etc is a ma or impediment in development of credit derivative markets. . Evolution of developed market for credit derivative is required to mange credit risk effectively and to get full benefit of risk mitigation.Challenges for Banks ± evelopment of market for Credit derivatives and other credit mitigation products Credit derivative products yet to be introduced in India.

System integration. . no single IT supplier can provide all-round risk management solutions. Ensuring correct feeding of data from various sources and the validation of information stored is a ma or challenge to be overcome before the banks start making use of the information in the data warehouse. dedicated software for risk assessment and management and setting up of enterprise wide integrated data warehouse shall pose a formidable challenge for Indian banks. Flexible customization of external systems is important . Integrating various external systems into one platform is the ma or challenge.Challenges for Banks ± MIS and IT Presently. 100% internal development may be too costly because risk management methodologies tend to involve complex computation. However.

‡Structured. Co-ordinating with multiple vendors each handling different parts of the overall solution in the present system is a daunting task. Most of banks are having various banking solutions across branches. Inadequacy of relevant and reliable data to estimate risk inputs for advanced techniques ± shall make the implementation difficult in Indian conditions. . data-backed decision-making has not been very prevalent.Challenges for Banks ± MIS and IT Lack of data driven culture ‡Historical issues in getting reliable data. ‡Only data that was necessary to ease operational processes was captured.

and lesser number of data points in LG . The technologies adopted must be flexible for future changes. Risk methodologies and business processes are evolving. Effort for creation of pooled data are required to be made requiring collaborative efforts between banks and supervisor. EA and high impact low frequency events in operational risk may give distorted results. .Challenges for Banks ± MIS and IT Short data history.

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ata Warehouse to provide risk management Integrating risk management with operational decision making process by conducting periodic use tests.Action Points for Effective Implementation Grooming and Retaining Talent Percolating risk culture across the organisation through frequent communications. organizing seminars and training. if required. . Setting up of solutions. Periodic backtesting and stress testing of the existing models to test their robustness in the changing environment and make suitable amendments.

through ICAAP framework. For Pillar III requirements. Credit risk. Adopting RAROC framework and moving from regulatory capital to economic capital. Handling interrelationship between businesses. Market risk and Operational risk so that cost allocation can be done in a scientific manner. banks should disclose information.Action Points for Effective Implementation Putting in place a comprehensive plan of action to capture risks not captured under Pillar I. . Linkage needs to be established between Funds Transfer Pricing. that are easily understood by the market players and gradually move to disclosure of informations requiring advanced concepts and complex analysis. Asset and Liability Management.