No extension of Basel II deadline

MUMBAI: After extending the deadline for Basel II implementation from March 2007 to March 2008, the Reserve Bank of India (RBI) has made it clear that there will be no further extensions.

“There will be no further changes in the deadline for Basel II implementation. The deadline for banks having international presence will be March 2008 while banks having no international presence will have to comply with Basel II norms by March 2009,” said V Leeladhar, deputy governor with Reserve Bank of India.

The RBI is confident that banks are on the right track with regard to Basel II. “We have been scrutinising each bank over the last two years. We are now getting a confidence that all major banks are in a position to meet all the requirements,” Leeladhar said.

However, the regulator admits that it won’t be a cakewalk to the finish. “If there are problems, we have to meet the banks and find ways to resolve them,” Leeladhar added.

Leeladhar stressed upon few challenges that banks will face during Basel II implementation. First, there are few rating agencies in India and credit risk assessment needed for Basel II relies heavily on the external rating agencies.

“While the RBI has appointed four rating agencies in India, the rating penetration is low as the ratings are confined to rating of capital issues and not of issuing entities as a whole,” Leeladhar said.

There could also be some pressures on the margins of banks as the new framework could intensify competition. “Banks would need to streamline and their client acquisition and retention strategy,” said Leeladhar.

He expressed concern over the skill levels in public sector banks. “Complexities in advanced approaches (under Basel II) require highly skilled staff and human resource management. This will be a hurdle for public sector banks,” Leeladhar said.

The RBI deputy governor said the central bank was gathering responses to a discussion paper it issued last month that expressed concern about aspects of bank and financial holding company structures that some banks have proposed using in India.

“We have started getting feedback, we will look closely at them and formulate our response,” he said, but did not set a timeframe for a decision.

“This is for the first time we are going to have a holding company in the Indian financial sector. So when we are starting this, we want to do it in a proper way, taking into account all the plus points and the negative factors. It is not something we are going to superimpose on banks,” he added.

Leeladhar said Indian banks are not affected by the US subprime crisis.

“By and large, Indian banks are not affected by the subprime crisis….Indian banks’ exposure to instruments such as CDOs (collateralised debt obligations) are very limited,” he pointed out. (With Agencies)