Management Thesis On Basel 2 Norms in India

An Analytical report to study the impact of Basel II on Indian banking sector with special reference to 1
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CERTIFICATE
This is to certify that the Management Thesis titled AN ANALYTICAL REPORT TO
STUDY THE IMPACT OF BASEL II ON INDIAN BANKING SECTOR WITH SPECIAL REFERENCE TO
SBI submitted during Semester IV of the MBA Program (The Class of 2010)
embodies original work done by me.
Signature of the Student
Name (in Capitals) : _______Deepankar

Ghosh________________________________________
Enroll Number :
__________8NBAH027_____________________________________________
Campus :____Allahabad__________________________________________________
__
:
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ACKNOWLEDGEMENT
Acknowledging debt is not easy to us as we are indebted to many

people but firstly towards my father and mother those who have
given me opportunity to be in such a professional course.
My acknowledgement debt will be incomplete if I fail to give sincere

thanks to my MT Guide Mr. Prateek Jain as without his suggestion
the final report would not have materialized of.
I express my profound gratitude to her for making me the fortunate

one to get the opportunity to work under her supervision and
guidance. The keen interest, co-operation, inspiration, continuous
encouragement and motivation provided by him enabled me to
complete my research work in time.
I would also take this opportunity to thank the Manager of SBI and
bank personnel for given their valuable time and input regarding
the topic to furnish it in a complete manner.
Last but not the least I would like to thank all the faculty members
and the Principal of INC, Allahabad for their kind cooperation and
guidance.
Dipankar.B.Ghosh
Enroll No-
8NBAH027
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LIST OF TABLES & CHARTS
Table No Content Page No.
1. Pillars of Basel II 15
2. Rating & Risk weights indicated by RBI 16
3.
CAR of banks during Global financial turmoil 22
4. CAR of State Bank Group 39

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ABBREVIATIONS
AMA - Advanced Measurement Approach
BCBS - Basel Committee on Banking Supervision
BIA - Basic Indicator Approach
BIS – Bank for International Settlements
CDO – Collateralized Debt Obligations
CRAR - Capital to Risk Weighted Assets Ratio
EAD - Exposure at Default
ICAAP - Internal Capital Adequacy Assessment Process
IMA - Internal Measurement Approach
IRB – Internal Ratings Based Approach
LDA - Loss Distribution Approach
LGD - Loss Given Default
MCR - Minimum Capital Requirements
NIBM - National Institute of Bank Management
NPA - Non Performing Assets
PD - Probability of Default
SA - Standardized Approach
SRP - Supervisory Review Process
Var – Value at Risk

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SUMMARY
Basel II is basically the second of the Basel Accords, which are recommendations on banking
laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of
Basel II is to create an international standard that banking regulators can use when creating
regulations about how much capital banks need to put aside to guard against the types of
financial and operational risks banks face. Basel II is believed to can help protect the
international financial system from the types of problems that might arise should a major bank or
a series of banks collapse.
In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital
management requirements designed to ensure that a bank holds capital reserves appropriate to
the risk the bank exposes itself to through its lending and investment practices. The Basel
Committee on Banking Supervision has come up with three pillars namely, minimum capital
requirements, supervisory review process and market discipline, the first one which tries to
ensure that capital allocation is more risk sensitive, the second tries to separate the operational
risk from credit risk, and quantifying both of them, the third attempts to align economic and
regulatory capital more closely to reduce the scope for regulatory arbitrage.
In the current thesis I have done an interview based research to get knowledge of the challenges
faced by the banks during the process of implementing Basel II norms. The interview was done
using an interview protocol prepared in consultation with my guide. The major limitation of the
project has been that the research, suggestions and conclusions have been confined to the banks
in Allahabad.
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There are different aspects of the study like change in the quantum and quality of data being
collected for the purpose of rating which had an impact on the manpower requirements of the
banks. The banks which had actually calculated their capital requirements based on internal
capital appraisal methods had their capitals well above the 9% limit set by the central bank. Pro-
cyclicality did not seem to be a major issue with the bankers as they found the counter cyclical
measures of the central bank very effective. With the advent of Basel II the amount available
with the banks for lending has come down and tends to increase again when the advanced credit
measurement approaches are introduced.
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INTRODUCTION
In 1988 the Bank for International Settlements’ Basel Committee on Banking Supervision,
commonly known as the Basel Committee, imposed the Basel Capital Accord. The Basel Capital
Accord introduced a system for implementing a credit risk framework for determining the
minimum amount of capital that a bank must hold as a cushion against risks. The Basel Capital
Accord was adopted over time not only in member countries, but in virtually all countries
operating international banks.
One problem with the original Basel Capital Accord was that it took a "one size fits all"
approach, without regard for the actual operational risk incurred by the bank. In 2004, the Basel
II Accord was established. The new accord aligns the requirement for capital on hand with the
actual risk involved, providing an incentive for banks to improve risk management.
Basel II is the second of the Basel Accords recommended on banking laws and regulations
issued by the Basel Committee on Banking Supervision. The purpose of Basel II is to create an
international standard that banking regulators can use when creating regulations about how much
capital banks need to put aside to guard against the types of financial and operational risk banks
face. These international standards can help protect the international financial system from the
types of problems that might arise should a major bank or a series of banks collapse.
Basel II insists on setting up rigorous risk and capital management requirements designed to
ensure that a bank holds capital reserves appropriate to the risk The underlying assumption
behind these rules is that the greater risk to which the bank is exposed, the greater the amount of
capital the bank needs to hold to safeguard its solvency and overall economic stability. It will
also oblige banks to enhance disclosures. Thus Indian banks require Basel II compliance for the
following reasons:-
1) Basel II norms will facilitate introduction of new complex financial products in Indian
Banking Sector
2) Indian banks require a more risk sensitive framework. There is improvement in risk
management system by Indian banks
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3) New rules will provide a range of options for estimating regulatory capital and will
reduce gap between regulatory capital & economic capital.
Indian banks today, operate in an environment characterized by progressive deregulation, in-

creased global integration and IT usage which have opened up a plethora of domestic and
international opportunities for them. In light of this, RBI has enforced mandatory adoption of
Basel II guidelines for Indian banks which are a set of prudential regulatory norms with an
almost universal acceptance.
This study explores the impact of Basel II on the Indian banking sector and how it would lead to
shifts in lending structure, benefit the larger and sophisticated bank like SBI and enhance the
competitiveness of the bank in general, ahead of the opening up of the sector to foreign banks in
2010. It then elaborates on the key challenges that SBI is facing after the implementation of Ba-
sel II guidelines, mainly in the areas of infrastructure requirements, development of credit
assessment models, and supervisory skills. The study drills deep into the foundations of credit
assessment using Internal Ratings method and data requirements for each determinant of credit
risk before analyzing the progress of Indian banks on the implementation of these advanced
approaches. The concluding section outlines the additional improvements Indian banks would
have to register in order to become globally competitive.
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DISCUSSION OF PROBLEM
Banks are under increasing pressure to comply with Basel II guidelines. But many are finding
that implementation of Basel II is becoming a challenge. Indian banks appear to be uncertain
about the actual intent of Basel II guidelines. The main point that all Indian banks and
particularly those in the public sector are missing is that Basel II is more about the risk
governance structure of a bank and risk calculation is only an intermediate step towards building
that structure.
Some of the key issues that require an attention of all sorts are:-
 Should banks be looking at the potential business benefits accruable from Basel-II
implementation, besides the compliance requirements?
 Quantification of the end benefits from Basel compliance – what does the bank stand to
gain by ramping up and complying with Basel II?
 What is the ideal phase-wise approach to implement Basel-II in the Indian context?
 What are the practical problems that banks are certain to face or are currently facing in
implementing Basel II?
 Is Basel II a technology that can be bought off the shelf or does it involve business
process re- engineering or is it merely a new way of calculating a bank's risk profile?
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OBJECTIVE OF THE STUDY
During this study, the impact of BASEL II on the Indian banking sector will be analyzed
from the view point as follows:-
 Need for Basel II?
 The analysis on what is Basel II?
 The objectives of Basel II
 To analyze impact of Basel II on Indian Banks with special reference to State Bank of
India.
 To analyze the challenges in implementing Basel II in State Bank of India.
During the study the sub-objectives achieved will be as follows:-

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 Purpose of setting Capital Standards in banking Sector.
 Need for implementing Internal Ratings method for credit assessment
INDUSTRY OVERVIEW
The Indian banking sector has acquired a greater degree of resilience due to the financial reforms
implemented in a gradual and sequential manner under the watchful eyes of Reserve Bank of
India and Ministry of Finance. This was implemented by a participative process aimed at
reduction in statutory pre-emption
An assessment of the banking sector performance shows that banks in India have experienced
strong balance sheet growth in the post-reform period in an environment of operational
flexibility. Improvement in the financial health of banks, reflected in significant improvement in
capital adequacy and improved asset quality, is distinctly visible. These significant gains have
been achieved even while renewing the goals of social banking by maintaining the wide reach of
the banking system and directed credit.
Banks in India have always played a pivotal role in providing a thrust to the development of the
country by assisting in the development of the priority sector in India which includes agriculture
as well as in the industrial and infrastructural development. Changes in these sectors are essential
to boost comprehensive growth and revival of the economy. Thus, in the current challenging
times of economic stagnation affecting these sectors, it becomes all the more necessary to
provide the much required fiscal support to the banking industry.
The risk aversion which has crept into the domestic banking sector on account of the
international banking crisis has created a situation of deep concern and threat for the real
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economy and all the players in it. Challenges facing the Indian Banking sector this year include:
compliance with Basel II norms and competition from foreign banks.
There has been a lackluster demand for credit despite sufficient liquidity in the system and
lowering of interest rates by banks, following the phased reductions in cash reserve ratio and
policy rates by the Reserve Bank of India. The reduction in PLR required cut in deposit rates as
well.
Credit targets of public sector banks had been revised upwards to reflect the needs of the
economy, which called for a recapitalization plan for banks to improve their soundness and their
ability to withstand sudden shocks—like the ongoing global crisis that has devastated many of
top-notch US banks. There is a negative impact on the banking sector due to lending at fixed
ceiling rates to focus sectors. Margins have been hurt as the banking sys-tem has raised a large
portion of its liabilities at high rates in the recent past.
With economic slowdown being the major issue at present, the bankers' main concern is to fund
growth without facing any hurdles. The obvious choice, according to bankers, which has to be
acted upon, is infrastructure funding. Though there has been a revival of economic growth and a
pick up in the pace investment cycle, the banking sector expects several positive measures in the
near future, so that they can continue to play a vital role in intermediating between the demand
and supply of funds.
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SBI
COMPANY PROFILE
State Bank of India (SBI) is India’s largest commercial bank. SBI has a vast domestic network of
over 9000 branches (approximately 14% of all bank branches) and commands one-fifth of
deposits and loans of all scheduled commercial banks in India.
The State Bank Group includes a network of eight banking subsidiaries and several non-banking
subsidiaries offering merchant banking services, fund management, factoring services, primary
dealership in government securities, credit cards and insurance. The eight banking subsidiaries
are:
 State Bank of Bikaner and Jaipur (SBBJ)
 State Bank of Hyderabad (SBH)
 State Bank of India (SBI)
 State Bank of Indore (SBIR)
 State Bank of Mysore (SBM)
 State Bank of Patiala (SBP)
 State Bank of Saurashtra (SBS)
 State Bank of Travancore (SBT)
The origins of State Bank of India date back to 1806 when the Bank of Calcutta (later called the
Bank of Bengal) was established. In 1921, the Bank of Bengal and two other Presidency banks
(Bank of Madras and Bank of Bombay) were amalgamated to form the Imperial Bank of India.
In 1955, the controlling interest in the Imperial Bank of India was acquired by the Reserve Bank
of India and the State Bank of India (SBI) came into existence by an act of Parliament as
successor to the Imperial Bank of India.
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Today, State Bank of India (SBI) has spread its arms around the world and has a network of
branches spanning all time zones. SBI’s International Banking Group delivers the full range of
cross-border finance solutions through its four wings – the Domestic division, the Foreign
Offices division, the Foreign Department and the International Services division.
State Bank of India (SBI) (LSE: SBID) is the largest bank in India. If one measures by the
number of branch offices and employees, SBI is the largest bank in the world. Established in
1806 as Bank of Calcutta, it is the oldest commercial bank in the Indian subcontinent. SBI
provides various domestic, international and NRI products and services, through its vast network
in India and overseas.
With an asset base of $126 billion and its reach, it is a regional banking behemoth. The
government nationalized the bank in 1955, with the Reserve Bank of India taking a 60%
ownership stake. In recent years the bank has focused on three priorities, 1), reducing its huge
staff through Golden handshake schemes known as the Voluntary Retirement Scheme, which
saw many of its best and brightest defect to the private sector, 2), computerizing its operations
and 3), changing the attitude of its employees (through an ambitious programme aptly named
'Parivartan' which means change) as a large number of employees are very rude to customers.
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REVIEW OF LITERATURE
 Daniel Tabbush, Head of CLSA Banking Research (2008) in his report stated “Mortgage-
loan risk weightings drop from 50% to 35% under Basel II, making them much more
profitable in terms of regulatory capital required, while small and medium-sized
enterprise (SME) lending can move from 100% to 75%”.
 Anand Wadadekar (2008) in his study “Basel Norms & Indian Banking System” revealed
that Basel II Norms offers a variety of options in addition to the standard approach to
measuring risk. Paves the way for financial institutions to proactively control risk in their
own interest and keep capital requirement low.
 C.P.Chandrasekhar & Jayati Ghosh(2007) in their study “Basel II and India's banking
structure” examined what the guidelines involve, their effects on the banking structure
and behavior and some likely outcomes of implementing them.
 Rana Kapoor, managing director, YES Bank (the latest entrant to new generation private
banks in India), holds “Most (Indian) banks are likely to start with simpler, elementary
approaches, just adequate to ensure compliance to Basel II norms and gradually adopt
more sophisticated approaches. The continued regulatory challenge will be to migrate to
Basel II in a non-disruptive manner”.
 P.S. Shenoy, chairman and managing director, Bank of Baroda, believes “Basel II
compliance will eventually result in banks acquiring a competitive edge, stating `Banks
that move proactively in the broad direction outlined by the Basel Committee will have
acquired a definite edge over their competitors when the new accord enters the
implementation phase”.
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 Niall S.K. Booker, chief executive officer, HSBC India and chairman of the IBA
Committee on Basel II states “There is the possibility that in international markets access
may be easier and costs less for banks adopting a more sophisticated
approach….however in a market like India it seems likely that the large domestic players
will continue to play a very significant role regardless of the model used”.
 Mandira Sharma & Yuko Nikaido (2007) in their study on”Capital Adequacy Regime in
India” examined issues and challenges with regard to the implementation of CRAR
norms under Basel II regime in India. They also tried to identify limitations, gaps and
inadequacies in the Indian banking system which may hamper the realization of the
potential benefits of the new regime.
 Ernst & Young in their survey in 2008 revealed that Basel II has changed the competitive
landscape for banking. Those organizations with better risk systems are expected to
benefit at the expense of those which have been slower to absorb change due to increased
use of risk transfer instruments. It also concluded that portfolio risk management would
become more active, driven by the availability of better and more timely risk information
as well as the differential capital requirements resulting from Basel II. This could
improve the profitability of some banks relative to others, and encourage the trend
towards consolidation in the sector.
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RESEARCH METHODOLOGY
RESEARCH DESIGN
The project is carried out, keeping in mind the main objectives of the research.
The research design is the conceptual framework within which the research is conducted. It
contains the blueprint for the collection, measurement and analysis of the data. So research
designs include an online of everything done, from defining the problem in terms of predefined
objectives till the final analysis of data.
METHODOLOGY
In order to get a first hand knowledge of the impact and challenges faced by State Bank
of India while implementing Basel II norms, I found, in consultation with my MT Guide that
“Expert Interview” would be the best way to get an detailed insight and appropriate results on
my thesis. The project has been limited to SBI Bank in Allahabad City, hence I had chosen
expert interview as my research methodology.
DATA COLLECTION
1. Primary data: Primary data is collected from Expert Interview conducted through
systematic & structured set of questions.
2. Secondary data: Secondary data is obtained from Indian Banking Association Journal,
Bank’s Website, and Internet & Articles.

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WORK UNDERTAKEN BY ME
 The project is basically divided into five phases:-
1. Identify the gaps and research methodology to execute it.
2. Analyze how Indian banks sheltered and resisted themselves from global
economic turmoil.
3. Comparative analysis of Capital Adequacy Ratio of banks of different

countries during global economic crisis.
4. Study the impact of Basel II on Indian banking sector.
5. Analyze the impact of Basel II on SBI.
DISCUSSION OF IMPLICATION
Since the project deals with impact of Basel II on SBI with an overview of Indian banking sector
there are certain issues that require further scope for the research which include:
• Growth in Indian banking sector after the implementation of Basel II
• Impact of Basel II on other public and private sector banks.
• Will the banks able to benefit or suffer their portfolio with Basel II?
• Future of Basel II or need to migrate to Basel III
.
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RESULTS & ANALYSIS
WHAT IS BASEL I:
 Basel I is a framework for calculating ‘Capital to Risk-weighted Asset Ratio’ (CRAR). It

defines a bank’s capital as two types: core (or tier I) capital comprising equity capital and
disclosed reserves; and supplementary (or tier II) capital comprising items such as
undisclosed reserves, evaluation reserves, general provisions/general loan loss
reserves, hybrid debt capital instruments and subordinated term debt.
 Under Basel I, at least 50 per cent of a bank’s capital base should consist of core capital.
In order to calculate CRAR, the bank’s assets should be weighted by five categories of
credit risk – 0, 10, 20, 50 and 100 per cent. In 1996, an amendment was made to Basel I
to incorporate market risk, in addition to credit risk, in the calculation of CRAR. To
measure market risk, banks were given the choice of two options:
a. A standardized approach using a building block methodology
b. An ‘in-house’ approach allowing banks to develop their own proprietary models
to calculate capital charge for market risk by using the notion of Value-at-Risk
(VaR).
 Adopting the general approach of gradualism, India implemented the Basel I framework
with effect from 1992-93 which was, however, spread over 3 years– banks with branches
abroad were required to comply fully by end March 1994 and the other banks were
required to comply by end March 1996. Further, India responded to the 1996 amendment
to the Basel I framework which required banks to maintain capital for market risk
exposures, by initially prescribing various surrogate capital charges for these risks
between 2000 and 2002.
LOOPHOLES OF BASEL I:
• Because of a flat 8% charge for claims on the private sector, banks

have an incentive to move high quality assets off the balance sheet
(capital arbitrage) through securitization thus reducing the average
quality of bank loan portfolio.
• It does not take into consideration the operational risks of banks, which
become increasingly important with the increase in the complexity of
banks.
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• Also, the 1988 Accord does not sufficiently recognize credit risk mitigation
techniques, such as collateral and guarantees.
• The regulatory Capital requirement has been in conflict with increasingly

sophisticated internal measures of economic Capital.
• It was concentrating on only on credit risk
BASEL II
 Basel 2 is the new capital accord signed in June 2004 at Bank for International Settlement
located at Basel, Switzerland. It is an improvement over Basel 1 which had certain
deficiencies which have now been removed. Basel 2 is based on three pillars: capital
adequacy, supervisory review and market discipline. It is basically concerned with
financial health of the banks worldwide. The focus in Basel 2 is the risk determination
and quantification of credit risk, market risk and operational risk faced by banks. Reserve
Bank of India has accepted the accord and issued guidelines to ensure compliance with
the norms from March 31, 2008.
 Basel II is a much more comprehensive framework of banking supervision. It not only

deals with CRAR calculation, but has also got provisions for supervisory review and
market discipline. Thus, Basel II stands on three pillars:
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 Pillar 1 spells out the capital requirement of a bank in relation to the credit risk in its
portfolio, which is a significant change from the “one size fits all” approach of Basel I.
Pillar 1 allows flexibility to banks and supervisors to choose from among the
Standardized Approach, Internal Ratings Based Approach, and Securitization Framework
methods to calculate the capital requirement for credit risk exposures. Besides, Pillar 1
sets out the allocation of capital for operational risk and market risk in the trading books
of banks.
 Pillar 2 provides a tool to supervisors to keep checks on the adequacy of capitalization

levels of banks and also distinguish among banks on the basis of their risk management
systems and profile of capital. Pillar 2 allows discretion to supervisors to (a) link capital
to the risk profile of a bank; (b) take appropriate remedial measures if required; and (c)
ask banks to maintain capital at a level higher than the regulatory minimum.
 Pillar 3 provides a framework for the improvement of banks’ disclosure standards for
financial reporting, risk management, asset quality, regulatory sanctions, and the like.
The pillar also indicates the remedial measures that regulators can take to keep a check
on erring banks and maintain the integrity of the banking system. Further, Pillar 3 allows
banks to maintain confidentiality over certain information, disclosure of which could
impact competitiveness or breach legal contracts.
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 Basel II gave a free hand to the RBI to specify different risk weights for retail exposures,
in case they think that to be more appropriate. To facilitate a move towards Basel II, the
RBI has also come out with an indicative mapping of domestic corporate long term loans
and bond credit ratings against corporate ratings by international agencies like Moody’s
Investor Services.
Moody’s Ratings ICRA Risk Weights

Aaa to Aa LAAA 20%
A LAA 50%
Baa to Ba LA 100%
B LBBB & below 150%
Unrated Unrated 100%
Mapping for Corporate Loans and Bond Ratings and risk weights as indicated by the RBI*
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OBJECTIVES OF BASEL II
Creating a better linkage between the minimum regulatory capital and risk, enhancing market
discipline, supporting a level playing field in an increasingly integrated global financial system,
establishing and maintaining a minimum capital cushion sufficient to foster financial stability in
periods of adversity and uncertainty, and grounding risk measurement and management in actual
data and formal quantitative techniques.
Basel II is the effort to improve risk measurement and management, especially at our largest,
most complex organizations. Thus it would be reasonable to infer that the main focus of the new
framework (Basel II) is on providing the right incentives to the banks to adopt data-based,
quantitative risk management systems to be able to adopt the advanced risk-sensitive approaches
of the revised framework, which, in turn, would contribute to systemic and financial stability
CHALLENGES FOR INDIAN BANKS UNDER BASEL II
1) Costly Database Creation and Maintenance Process:
The most obvious impact of BASEL II is the need for improved risk management and
measurement. It aims to give impetus to the use of internal rating system by the international
banks. More and more banks may have to use internal model developed in house and their
impact is uncertain. Most of these models require minimum 5 years bank data which is a tedious
and high cost process as most Indian banks do not have such a database.
2) Additional Capital Requirement:
In order to comply with the capital adequacy norms we will see that the overall capital level of
the banks will raise a glimpse of which was seen when the RBI raised risk weightages for
mortgages and home loans in October 2004. Here there is a worrying aspect that some of the
banks will not be able to put up the additional capital to comply with the new regulation and they
may be isolated from the global banking system.
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3) Large Proportion of NPA's:
A large number of Indian banks have significant proportion of NPA's in their assets. Along with
that a large proportion of loans of banks are of poor quality. There is a danger that a large
number of banks will not be able to restructure and survive in the new environment. This may
lead to forced mergers of many defunct banks with the existing ones and a loss of capital to the
banking system as a whole.
4) Low Degree of Corporate Rating Penetration:
India has as few as three established rating agencies and the level of rating penetration is not
very significant as, so far, ratings are restricted to issues and not issuers. While Basel II gives
some scope to extend the rating of issues to issuers, this would only be an approximation and it
would be necessary for the system to move to ratings of issuers. Encouraging ratings of issuers
would be a challenge.
5) Cross Border Issues for Foreign Banks:
In India, foreign banks are statutorily required to maintain local capital and the following issues
are required to be resolved; validation of the internal models approved by their head offices and
home country supervisor adopted by the Indian branches of foreign banks. Date history
maintained and used by the bank should be distinct for the Indian branches compared to the
global data used by the head office capital for operational risk should be maintained separately
for the Indian branches in India
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CAPITAL ADEQUACY STANDARD IN INDIA
Capital adequacy is an indicator of the financial health of the banking system. It is measured by
the Capital to Risk-weighted Asset Ratio (CRAR), defined as the ratio of a bank’s capital to its
total risk-weighted assets. Financial regulators generally impose a capital adequacy norm on
their banking and financial systems in order to provide for a buffer to absorb unforeseen losses
due to risky investments. A well adhered to capital adequacy regime does play an important role
in minimizing the cascading effects of banking and financial sector crises.
India adopted Basel I norms for scheduled commercial banks in April 1992, and its
implementation was spread over the next three years. It was stipulated that foreign banks
operating in India should achieve a CRAR of 8 per cent by March 1993 while Indian banks with
branches abroad should achieve the 8 per cent norm by March 1995. All other banks were to
achieve a capital adequacy norm of 4 per cent by March 1993 and the 8 per cent norm by March
1996.
In its mid-term review of Monetary and Credit Policy in October 1998, the Reserve Bank of
India (RBI) raised the minimum regulatory CRAR requirement to 9 per cent, and banks were
advised to achieve this 9 per cent CRAR level by March 31, 2000.9 Thus, the capital adequacy
norm for India’s commercial banks is higher than the internationally accepted level of 8 per cent.
The RBI responded to the market risk amendment of Basel I in 1996 by initially prescribing
various surrogate capital charges such as investment fluctuation reserve of 5 per cent of the
bank’s portfolio and a 2.5 per cent risk weight on the entire portfolio for these risks between
2000 and 2002. These were later replaced with VaR-based capital charges, as required by the
market risk amendments, which became effective from March 2005. India has gone a step ahead
of Basel I in that the banks in India are required to maintain capital charges for market risk on
their ‘available for sale’ portfolios as well as on their ‘held for trading portfolios’ from March
2006 while Basel I requires market risk charges for trading portfolios only.
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FACTS BEHIND INDIAN BANKS RESISTANCE FROM GLOBAL FINANCIAL

TURMOIL
The global financial crisis didn’t directly affected India as Indian financial system has sound
fundamentals and the Indian Government has put in place, systems and practices to promote a
safe, transparent and efficient market to protect market integrity.
This was possible due to classic reports and model given by Mr. Narasimham about the policy
framework for the Government of India and the RBI to formulate the structure of India’s banks
and financial institutions was based on adequate capitalization, good provisioning norms and
well-structured supervision. The Committee also recommended gradual liberalization of the
banking sector by adopting measures such as reduction of statutory preemptions, deregulation of
interest rates and allowing foreign and domestic private banks to enter the system. Along with
these, the Committee also recommended adoption of prudential regulation relating to capital
adequacy, income recognition, asset classifications. While the liberalization was aimed at
bringing about competition and efficiency into India’s banking system, the prudential regulation
was aimed at strengthening the supervisory system, which is important in the process of
liberalization.
Government of India and RBI accepted these recommendations and proceeded to implement
them. The RBI enforced strict capital adequacy requirements and if any financial institution or
bank exceeded the specified limits of exposure to stock markets, it would have to provide more
capital. This effectively insulated the banks and financial institutions from volatility of the
bourses. Enforcement of the above instructions has paid good dividends. Erosion of capital of the
banks and financial institutions has been reduced. These exposure limits, however, deserve to be
reviewed from time to time.
The Narasimham Committee endorsed the internationally accepted norms for capital adequacy
standards, developed by the Basel Committee on Banking Supervision (BCBS). BCBS initiated
Basel I norms in 1988, considered to be the first move towards risk-weighted capital adequacy
norms. In 1996 BCBS amended the Basel I norms and in 1999 it initiated a complete revision of
the Basel I framework, to be known as Basel II. In pursuance of the Narasimham Committee
recommendations, India adopted Basel I norms for commercial banks in 1992, the market risk
amendment of Basel I in 1996.
By and large, India has been spared the panic that followed the collapse of banking institutions
such as Fortis in Europe, and Merrill Lynch, Lehman Brothers and Washington Mutual in the
U.S. Global financial crisis. The turmoil in the international financial markets of advanced
economies that started around mid-2007 has exacerbated substantially since August 2008.
SBI
This shows that there was no impact of the sub prime episode on the Indian banks & none of the
Indian banks or the foreign banks, with whom the discussions had been held, had any direct
exposure to the sub-prime markets in the USA or other markets.
However, a few Indian banks had invested in the collateralized debt obligations (CDOs) / bonds
which had a few underlying entities with sub-prime exposures. Thus, no direct impact on account
of direct exposure to the sub-prime market was in evidence. However a few of these banks did
suffer some losses on account of the mark-to-market losses caused by the widening of the credit
spreads arising from the sub-prime episode on term liquidity in the market, even though the
overnight markets remained stable.
Finally Indian banks’ global exposure was relatively small, with international assets at about 6
per cent of the total assets. Even banks with international operations had less than 11 per cent of
their total assets outside India. Moreover 34 percent of our deposits were in government
securities and cash with the RBI. The consumer loan to GDP ratio was just 10 percent, whereas
this ratio is as high as 100 percent for the US.”
SBI
COMPARATIVE ANALYSIS OF CAR OF BANKS DURING GLOBAL FINANCIAL

CRISIS
Name of the Bank CAR (%) in 2008

Federal Bank of America 22.5
Barclays Bank 21.1
J P Morgan Chase Bank 17.7
Kotak Mahindra Bank 18.7
Brazil Bank 18.1
Indonesian Bank 19.5
Singapore Bank 16.1
Hong Kong Bank 15.2
Citibank 16.6
UBS Bank 16.7
State Bank of India 12.6
HDFC Bank 13.6
ICICI Bank 14.0
Axis Bank 13.5
IDBI Bank 12.0
ING Vyasya Bank 10.2
Punjab National Bank 13.0
Bank of Baroda 12.7
Indian Overseas Bank 12.0
Allahabad Bank 12.0
Union Bank of India 12.0
Bank of India 12.0
From the above table we can clearly demarcate that US, Hong Kong, Brazil, Singapore &
Indonesian banks have high capital adequacy ratio as compared to Indian banks who have
maintained a steady average of 12 and above but less than 14. Capital adequacy ratios ("CAR")
are a measure of the amount of a bank's capital expressed as a percentage of its risk weighted
credit exposures. So the risk weightages of these banks were enormous which lead to their
downfall during economic turmoil.
The banking sector in India is largely (70%) dominated by the public sector. Partly as a result,
India has not witness the kind of crisis of confidence seen in advanced countries because the
Indian banking sector is generally cautious and conservatively regulated as compared to foreign
banking system where it is freely regulated. Additionally, strict regulation and conservative
policies adopted by the Reserve Bank of India have ensured that banks in India are relatively
insulated from the travails of their Western counterparts. However, this cannot be advanced as a
reason either for continuance of public sector dominance or for resistance to further financial
sector reform.
SBI
IMPACT OF BASEL II ON INDIAN BANKS
Indian banks are strongly regulated and supervised entities. In particular, weak banks and those
banks, which show signs of problems, are subjected to rigorous on-site and off-site supervision
and stringent prudential standards. Thus, risks inherent in inter-bank exposures are not
comparable to that of the corporates. There is, therefore, a need for a modified treatment for
claims on banks. The Basel Committee has provided discretion to national supervisors to assign
a lower risk weight to the exposures to the sovereign of incorporation, denominated in domestic
currency and funded in that currency.
Basel II is the new regulatory framework within which all banks will have to work. Its aim is to
safeguard the stability of the financial sector and one of its aspects is a comprehensive approach
to risk. The first phase of the Accord took effect in 2007, and the second phase was implemented
in 2008.
The Accord regulates the amount of capital that banks will have to set aside for their loans. In
addition, it prescribes that this capital must be a better reflection of the actual credit risks
represented by the companies to which the banks lend. Banks can select from three methods of
determining the risks and the associated capital requirements; the banks with the most
sophisticated risk management will be rewarded with a lower capital requirement relative to their
existing capital bases. This is one of the reasons why credit will not necessarily become more
expensive. There is also no question of credit crunch; banks' loan portfolios have in fact grown
as a proportion of their total assets.
As from 1 January 2007, banks were required to have historical credit information on their
lending customers; this information is needed to evaluate their customer’s creditworthiness.
Three quarters of companies are currently reported to have insufficient information about the
banks' new credit risk criteria.
An increase in the transparency of company accounting and of the information exchanged with
banks has intended to result in greater objectivity with regard to the granting of new credit lines.
The more favorable the company's risk profile, the better the credit risk rating and the more
favorable the bank's terms and conditions will be.
SBI
Thus Indian banks have developed:
 Credit and Operational Risk Models
 Business Models and Surrounding Processes
 Skill levels of Operating Personnel
 Valid and Integrated Data Backup
With the advent of Basel II, Indian Banks may be required to raise over Rs.1, 70,000 crs
additional Capital during the coming 3 years. Basel II has tightened up requirements on the
demand side for loans and it is worth giving serious consideration to limit borrowing
requirements and to alternative credit products, which can have a considerable impact on a
company's balance sheet. Moreover new Framework has helped to reduce Capital Base of Indian
Banks by 1% to 2%, except a few Banks. Under Basel II, the banks are little forced to make its
loans more expensive, to restrict outstanding credit lines, or to refuse to grant further loans. Also
the basic lending criteria are certainly continued to be the competence of the
management, the company's ability to repay the loan, and adequate equity.
IMPACT OF BASEL II ON SBI
The impact on SBI can be best studied by analyzing the different types of risk involved with
Basel II which is as follows:-
 CREDIT RISK
The risk that a borrower or counterparty might not honour its contractual obligations – which is
very relevant to operating staff.
There are two approaches for credit risk:
i. Standardized Approach (SA)
ii. Internal Ratings Based (IRB) approach.

SBI
In SA, credit risk is measured in a more risk sensitive manner, i.e. by linking credit ratings of
credit rating agencies to risk of the assets of the bank. The responsibility of providing the risk-
weights corresponding to various assets, under SA, lies with the supervisory authority of a
country.
As far as the IRB approach is concerned, banks are allowed to use their internal estimates of
credit risk, subject to supervisory approval, to determine the capital charge for a given exposure.
This would involve estimation of several parameters such as the probability of default (PD), loss
given default (LGD), exposure at default (EAD) and effective maturity (M) corresponding to a
particular debt portfolio.
Credit Risk – State Bank of India’s Preparedness
• Existing Internal Credit Risk Assessment System refined and extended to cover Advance
Accounts of Rs. 25 lacs and above.
• Existing Internal Credit Information System is being fine-tuned to meet Basel II

requirements, now covering Whole Bank.
• Models for implementation of Integrated Risk Management and Operational Risk

Management are being implemented.
• Consultants are being appointed for Portfolio Credit Risk Modeling Exercise
 MARKET RISK
The risk of adverse price movements such as exchange rates, the value of securities, and interest
rates - Less relevant to operating staff, more or less centralized at corporate centre.
Market Risk State Bank of India’s Preparedness
• Exploring the feasibility of using KVaR+ software for mapping Treasury Operations for
market Risk.
• Developed adequate hedging mechanisms to absorb the impacts of Market Risk.
• Their investment Risk is akin to the Country Risk and thus well protected.
SBI
• Implementation of Oracle Based ALM Software is in progress, to provide comprehensive

ALM data analysis.
Market Risk State Bank of India’s Concerns
• During the FY: 2005-06, additional Capital charge of around Rs. 1200 crore has been
provided on account of Market Risk on AFS category of Investments.
• Securitization Transactions are subjected to stringent treatment thus making them less
attractive.
 OPERATIONAL RISK
The risk of loss resulting from inadequate or failed internal processes, people, and systems or from
external events – Newly introduced & also very relevant to operating staff.
In order to calculate the capital charges for operational risk, three approaches are used: –
1. Basic Indicator Approach (BIA),
2. Standardized Approach (SA) and
3. Advanced Measurement Approaches (AMA)
In the BIA, an estimate of the capital charge for operational risk is provided by averaging over a
fixed percentage of positive annual gross income of the bank over the previous three years.
Under SA, at first the bank’s business activities are divided into eight business lines. For each
business line, a capital charge is calculated by multiplying the gross income of the business line
by a factor. A capital charge for each business line is thus calculated for three consecutive years.
Under AMA, a bank can, subject to supervisory approval, use its own mechanism for
determining capital requirement for operational risk.
SBI
Operational Risk State Bank of India’s Preparedness
• Operational Risk Management Committee, is developing the ORM Policy to assess the
losses to:
1) Physical Assets
2) Business and Systems
3) Process Management and Delivery Mechanism.
• Business Process Re-engineering Team is in place evaluating the processes and

redefining the Systems & Procedures to mitigate incidence of losses on account of
processes and Systems.
Operational Risk – SBI’s Concerns
• At 12% CAR, the Bank may be required to provide additional capital charge of around
Rs. 4500 crore towards Operational Risk.
• The Bank has established systems and procedures and hence, may be required to provide
lesser capital for Operational Risk under Advanced Approaches.
• However, given the current level of MIS and Technical Sophistication, our Bank for the
present, may be in a position to adopt Basic Indicator Approach only.
Challenges in Implementation at SBI
• Complexities in Systems and Processes involved in Basel II make the implementation

process difficult, time consuming and costly.
• Availability and mapping of Validated and Auditable Data and Integration of the same to
Basel II norms.
• Adaptability of Operating Personnel to the New Skills
• Internationally active Bank like ours will face problem due to localization of Basel II
norms in different Geographical Zones due to Home & Host Country Regulations
SBI
• An Integrated Risk Governance Structure is set up to facilitate early migration to Basel II.
• Separate departments are set up to monitor and manage Credit Risk, Market Risk and
Operational Risk.
• Risk based Internal Audit has been implemented across the Bank.
• An In-house Committee is overseeing the Transition to Basel II.
Main implications of Basel II on SBI
• Currently the bank is moderately affected on account of Credit Risk, but adversely
affected on account of Operational Risk.
• Without any additional Capital support, Basel II would tend to reduce CAR of the bank
by around 150 bps.
• The Projected CAR tends to slide immediately by around 1.50%, but the negative impact
is expected to be neutralized over a period of 5 years
Thus in a nutshell Basel II is basically a Risk Management Exercise which:-
• Doesn’t seek to change business models of the Bank.
• Requires to fine-tune/update Risk Management practices.
• Robust enough to capture all possible Risks the Bank is facing or likely to face.
• Initiate adequate and appropriate Risk Mitigation measures through effective Systems
and Procedures
SBI
FINDINGS
1. Changes have been and will be there in the quantum of data collected due to the new
Basel II norms. This has had an impact on the manpower requirements and the time
availability for the job, which was one of the common problems faced by the banks
during this phase, though some bankers feel it’s just the aggregating of the data available
in various databases. This data collection though is critical for the banks for the purpose
of ratings.
2. While bankers say that there have been privacy and security issues faced during the
collection of data for the purpose of rating but they were not clear on how they had
overcome those issues, most others say that they did not have any issues related to
privacy since the customer is obliged to provide data for the processing of the application
with regards to security issue they were not aware of any security issues faced so far. The
bankers say that industry risk data, business risk data are also available with the banks
which help in the rating process, so data privacy is not a major problem they say.
3. The bank is of the view that with the advent of Basel II there will be better capital
adequacy since they are based on the risks involved unlike the ones in Basel I, where a
single brush approach was adopted without taking any specific risks into consideration.
But it has also been affecting their business in a way; like for instance the underarm
limits for NPAs has been increased from 100% to 150% so there is an impact on the
amount available for lending.
4. Basel II has not affected the short term lending of the banks, the way it was predicted to
affect, but the bankers say that there will be an impact on the pricing of these short term
lending of the banks. The banks have a firm belief that short term lending is a major
weapon in the bank’s armory for the better utilization of the bank’s short term resources.
SBI
Further the banks are of the view that the excess liquidity with the banks can be diverted
through into this route.
5. Mostly the bank had their ICAAPs in tune with the regulatory capital requirements set by
the regulatory authorities and IBA. They had used Liquidity risk, Interest risk on banking
book (MVE & Earning Perspective), Credit concentration risk and others to calculate the
ICAAP. Those that had actually calculated ICAAPs had their capitals at well above the
regulatory requirements averaging at around 12%.
6. The interview with manager and officials threw up contradicting views regarding the
number of rating agencies available in the country. Some of them were of the view that in
India there is no much demand for rating of corporate bonds and other instrument, their
argument is that very few organizations which go for ratings, get a good rating, so the
purpose of ratings which is actually to increase the value of the instrument is actually not
working. Some also argue that the situation is opposite where the rating agencies are
behind the banks to rate their instruments.
7. Most of the banker is of the view that it’s difficult to classify the expense incurred as a
capital expenditure or revenue expenditure. There was feeling that there needs to be
proper demarcation of the expenses incurred in order to have better comparability
between the banks. Some of them were already demarcating some expenses as capital
expenditure or revenue expenditure but this has been varying from bank to bank.
8. The question related to pro-cyclicality seemed to be irrelevant as none of the bank felt
that they have been affected or find any reason that they will be affected in the near
future because of this. They were also of the view that their portfolios are well diversified
to handle any such situation.
SBI
9. The banker were of the view that the prevalent economic and market conditions are
pointers for consolidation and that the impact of the Basel II norms needs to be
understood by both the banks and its customers. They feel it’s good to wait for the
stabilization period to end rather than to proceed to advanced measurement approaches in
haste. The one exception which I said earlier was eager to proceed to the advanced
approaches as they were confident of handling it.
10. Earlier there were no separate departments for managing risks, but after implementing
Basel II separate departments have been entrusted with the task of managing Credit Risk,
Market Risk and Operational Risk.
11. Regarding the comparability of the capital standards post Basel II, banks had varying
views some were of the view to wait and watch what happens next, some were of the
view that it definitely achieves the purpose it was set due the basic theme, i.e. the ideas
propounded by Basel II and because it advocates for the international best practices to be
adopted by banks, others were of the view that there needs to be further study regarding
this.
SBI
RECOMMENDATIONS
 Though data privacy and data security issues have not posed a major problem with the
bank in Allahabad, I feel that this could be an issue in the future considering the issues
the developed countries are facing. Especially with the rise of the out sourcing culture in
India too there could be security issues with regards to data security; hence it’s worth the
regulators give a look at this.
 A special forum within the framework of the Indian Bank’s Association to facilitate the
bankers to discuss live issues faced during the implementation of the Basel II. This would
make the transition easy especially for small banks implementing the norms in India.
 With regard to the treatment of Basel II implementation expenses incurred by the banks,
the reserve bank could support the banks with proper demarcation of the expenses other
than those provided by the Indian Companies Act, since it was one of the problems faced
by the commercial banks.
 The major problem facing the regulators is about the current crisis, it’s not the crisis in
itself that’s the problem but the underlying factor that the countries and banks which
implemented Basel II have faced the most of the heat of the current crisis, so it’s time the
Basel Committee on Banking Supervision revisits the Basel II.
 The methods and assumptions used to calculate the ICAAP needs to be made clear,
though ICAAP is totally the banks own calculations there needs to be some regulation
with regards to this since there could be possibility that the banks could use future profits
or other probabilities to set against capital requirements.
SBI
 Though Basel II has reduced the amount available with the banks for lending it’s for the
good of the banking system as a whole so the strict capital standards.
 The number of rating agencies available in India is low compared to the number of
corporate accounts that need to be rated. But first awareness has to be created about the
uses and advantages of external ratings, among the consumers and with provided demand
at the later stage the regulators could authorize more rating agencies.
 I feel that the banks would still face problems in capturing the IT systems losses under
the current framework. There needs to be a proper mechanism set in place to measure
future IT systems loss, and the potential monetary losses it could cause, especially since
the Indian banking sector is in a transformational process, upgrading the data bases in IT
systems.
 Bank has to train all its employees so that everybody can understand about Basel Accord.
 Finally, Basel II is fundamentally about better risk management anchored in sound

corporate governance. The central bank needs to ensure strong corporate governance
practices in the banking industry, the Indian Banking Association needs to conduct
regular workshops on corporate governance for the bank’s board members
SBI
REFERENCES
 ARTICLES:
1. Approach to Basel II (Speech) by Mrs.Shyamala Gopinath.
2. Challenges and implications of Basel II for Asia (Speech) by Dr.Y.V.Reddy
3. Demystifying Basel II (Speech) by Shri V.Leeladhar, Deputy Governor, Reserve Bank of
India
4. Basel II and Credit Risk Management (Speech) Shri V. Leeladhar, Deputy Governor, and
Reserve Bank of India at the program me on Basel II and Credit Risk Management.
5. Regulation and Risk Management: Implementing Basel II (Speech) by Address of Shri V
Leeladhar, Deputy Governor, delivered at the Platinum Jubilee Celebrations of the South
Indian Bank Ltd., Thirussur on 2005
6. India’s Preparedness for Basel II implementation,(Speech) The Special Address delivered
by Shri V. Leeladhar, Deputy Governor, Reserve Bank of India at the Panel Discussion
during “FICCI-IBA Conference on Global Banking : Paradigm Shift.
7. Implementation of Basel II – An Indian perspective(speech) Address by Ms. Kishori J
Udeshi, Deputy Governer, RBI at the Annual International seminar on Policy changes for
financial sector on June 2005

SBI
 BOOKS :
1. Preeti Phuskele “Basel II Norms- Implications on Business” ISBN: 81-3141-166-9

ICFAI University Press.
2. Nagarajan N “Implications of Basel II for Risk Management and Capital

Structure” ISBN: 81-7881-335-1 ICFAI University Press
 WEBSITES:
 www.bis.org
 www.articlesarchive.com
 http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=303
 www.rbi.org.in/rdocs/Publications/Docs/21113.doc
 http://www.iba.org.in/basel_II.asp
 http://www.banknetindia.com/index.htm
 www.banknet.com/banking/81022.html.
 www.epaper.thehindubusinessline.com
 www.ficci.com/surveys/II.pdf
SBI
APPENDICES
Interview Protocol
Basel II implementation and challenges faced by Indian banks.
Name of the Bank:
Address of the Branch:
Name and designation of the person in charge:
1. Did/Will Basel II cause changes in the way (intensity, depth etc) that you collect and process
data?
If YES: How did it affect your business? How have you overcome it?
Does it impact your business in any way?
If NO: Do you think you will face any problem related to collecting and processing data?
2. Have you so far faced any privacy or security issues with regard to collection of additional
data for the purpose of Basel II?
If YES: what was the issue in specific? And how did you tackle it?
SBI
If NO: Do you think you would face any such situation in the future?
3. Does your bank have designated people to work exclusively as suggested by RBI on
implementing the various stages of the Basel II norms?
If YES... how many?
If NO... didn’t you find the need to employ personnel exclusively for that?
Or was the current staff sufficient enough?
4. Do you think the high rise in the risk weights would increase the cost of borrowings for your
consumers?
Comment
5. How much in Percentage terms is your short term lending? Has Basel II discouraged you from
such lending?
If YES do you think it is good for the bank in the long term perspective?
If NO so you would say that STL should be continued what is the major reason behind this
view of yours?
6. Has the lack of knowledge of employees posed any problems in implementing BASEL II
norms in your bank?
If YES: what were the specifics?
If NO: How did you equip the employees?

SBI
Did you get any help for the central bank’s side in this regard?
7. What is the current Internal Capital Adequacy Assessment Process (ICAAP) of your bank,
how different is it from the regulatory capital requirement?
What are the variables you use to calculate this?
8. Do you have any reservations in classifying the expenses incurred in implementing Basel II?
If YES, How do you think the expenses should be treated?
If NO, So you agree that the additional expenses incurred in technology, resources up
gradation need not be treated as Investments right?
----Thank you----
SBI
Appendix Table 1: Capital Adequacy Ratio

(As at end-March)
(Per cent)
Basel- Basel-
Basel- II II
Sr. 2004- 2005- 2006- Basel-I I 2008- 2007- 2008-
No. Name of the Bank 05 06 07 2007-08 09 08 09
1 2 3 4 5 6 7 8 9
State Bank Group 12.4 12.0 12.3
State Bank of India 12.5 11.9 12.3 13.5 13.0 NA 14.3
State Bank of Bikaner & Jaipur 12.6 12.1 12.9 13.5 13.2 12.5 14.5
State Bank of Hyderabad 11.7 12.1 12.5 12.4 10.6 12.0 11.5
State Bank of Indore 11.6 11.4 11.8 11.3 11.8 11.3 13.5
State Bank of Mysore 12.1 11.4 11.5 12.3 12.4 11.7 13.4
State Bank of Patiala 14.2 13.7 12.4 12.5 11.4 13.6 12.6
State Bank of Travancore 11.1 11.2 11.7 12.7 12.1 13.5 14.0

Management Thesis On Basel 2 Norms in India

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An Analytical report to study the impact of Basel II on Indian banking sector with special reference to 1

This is to certify that the Management Thesis titled AN ANALYTICAL REPORT TO

embodies original work done by me.

Signature of the Student

Name (in Capitals) : _______Deepankar

Acknowledging debt is not easy to us as we are indebted to many

My acknowledgement debt will be incomplete if I fail to give sincere

I express my profound gratitude to her for making me the fortunate

LIST OF TABLES & CHARTS

Table No Content Page No.

2. Rating & Risk weights indicated by RBI 16

4. CAR of State Bank Group 39

AMA - Advanced Measurement Approach

BCBS - Basel Committee on Banking Supervision

BIA - Basic Indicator Approach

BIS – Bank for International Settlements

CDO – Collateralized Debt Obligations

CRAR - Capital to Risk Weighted Assets Ratio

EAD - Exposure at Default

ICAAP - Internal Capital Adequacy Assessment Process

IMA - Internal Measurement Approach

IRB – Internal Ratings Based Approach

LDA - Loss Distribution Approach

LGD - Loss Given Default

MCR - Minimum Capital Requirements

NIBM - National Institute of Bank Management

NPA - Non Performing Assets

SRP - Supervisory Review Process

Var – Value at Risk

Indian banks today, operate in an environment characterized by progressive deregulation, in-

OBJECTIVE OF THE STUDY

 Need for Basel II?

 The analysis on what is Basel II?

 The objectives of Basel II

 To analyze the challenges in implementing Basel II in State Bank of India.

During the study the sub-objectives achieved will be as follows:-

 Purpose of setting Capital Standards in banking Sector.

 Need for implementing Internal Ratings method for credit assessment

 State Bank of Bikaner and Jaipur (SBBJ)

 State Bank of Hyderabad (SBH)

 State Bank of India (SBI)

 State Bank of Indore (SBIR)

 State Bank of Mysore (SBM)

 State Bank of Patiala (SBP)

 State Bank of Saurashtra (SBS)

 State Bank of Travancore (SBT)

systematic & structured set of questions.

Bank’s Website, and Internet & Articles.

 The project is basically divided into five phases:-

1. Identify the gaps and research methodology to execute it.

3. Comparative analysis of Capital Adequacy Ratio of banks of different

4. Study the impact of Basel II on Indian banking sector.

5. Analyze the impact of Basel II on SBI.

• Growth in Indian banking sector after the implementation of Basel II

• Impact of Basel II on other public and private sector banks.

• Future of Basel II or need to migrate to Basel III

RESULTS & ANALYSIS

 Basel I is a framework for calculating ‘Capital to Risk-weighted Asset Ratio’ (CRAR). It

• Because of a flat 8% charge for claims on the private sector, banks

• The regulatory Capital requirement has been in conflict with increasingly

• It was concentrating on only on credit risk

 Basel II is a much more comprehensive framework of banking supervision. It not only