ii. Lack of precise knowledge: as to how operational risk costs will be charged. The banks are expected to benefit from sharpening up some aspects of their risk management practices preparation and for the introduction of the operational risk charge. iii. Lack of consistency: at least at this stage, as to how insurance activities will be accounted for. One treatment outlined in the Capital Accord is that banks deduct equity and other regulatory capital investments in insurance subsidiaries and significant minority investments in insurance entities. An alternative to this treatment is to apply a risk weight age to insurance investments.
i. Expensive 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. ii. Additional Capital Requirement: Here 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. iii. 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. iv. Increased Pro-Cyclicality: The increased importance to credit ratings under Basel II could actually imply that the minimum requirements could become pro-cyclical as banks are required to raise capital levels for loans in times of economic crises. v. 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. vi. 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. Such as a. Validation of the internal models approved by their head offices and home country supervisor adopted by the Indian branches of foreign banks. b. 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 c. Capital for operational risk should be maintained separately for the Indian branches in India 5.3 Challenges of Indian Bank ’ s under BASEL II