According to HN Sinor, some banks are not prepared to embrace Basel II. He further adds that more capital may be required to sustain the economic growth.
But Sinor does not see any capital crunch to take place because he feels everyone looks at India much more positively. Hence, capital flows will not be an issue.
Excerpts of CNBC-TV18's exclusive interview with HN Sinor:
At the FICCI Conference on Tuesday, we seem to get an indication that there could be a marginal extension, did you have the same feeling as well?
Yes, that's right. In fact, some indications were already made in the annual report of the Reserve Bank of India. Now, I think this has been revalidated by Mr Leeladhar's (Deputy Governor, RBI) statement on Tuesday. I would say it is a good news.
Why do you consider it as good news, are banks not ready as yet or will they just see a better risk implementation, if they have a little more time?
The point is that there is different level of preparedness across the system. Earlier, the indications were that Basel II norms would be implemented across the board from March 2007. Some of the players are not fully prepared for that.
As we are moving away from simple risk management practice to more sophisticated risk management practice in Basel II, it will take time before we really internalise the whole process.
For the Indian conditions, would you think that there is some need to modify Basel II norms? We need to put different risk priorities for different kinds of lending, and Basel II almost requires highest risk weight for priority sector lending, so is that something that needs to be modified?
Once we put in place the whole process of risk management, the Reserve Bank will certainly review and try to be in alignment with what has been recommended under Basel II.
For instance, under Basel II, mortgages carry risk weight of 35 per cent, whereas in India, we are still following a different risk weight practice. But once the system starts operating, perhaps as we go along, we will wait till get an alignment with the global best practices.
Which category of banks do you see struggling the most at this point to make it to the Basel II norms? Are there any concerns at all on a capital crunch situation?
These are the two issues. The first issue is whether some of the banks are fully prepared or not. And secondly, whether there will be a capital crunch or not.
I would say that in terms of preparedness, there are some banks, particularly those, which are internationally active, which are far ahead than many others in the system. So some of them need to catch up, that's true.
The other thing is that more capital requirement will be pretty well established. India is growing so we will need larger capital. But I do not see any capital crunch to take place because I think everyone looks at India much more positively. Today, capital flows may not be an issue.
Finance Minister P Chidambaram said that banks will need about Rs 42,000 crore (Rs 420 billion) of capital by 2010 to sustain economic growth. Is that the number you would agree with? How do you see banks raising this kind of money?
This is the back of the envelope calculation, which we have also made. It works out to around Rs 40,000 crore plus.
Do you see any problem with banks raising this kind of money?
We do not see much of issue on raising this money.
Risk weight allocation is the highest now for priority sector lending, which is being pushed the most by the government, is that tying the hands of banks a bit?
Ultimately, we need to look at risk-adjusted return on our investments. So wherever we deploy funds, if the spreads are protected after adjusting for the rest, I think that would be a good area to lend to. The only issue is that the bankers will have to look at the pricing front much more closely.
As someone who has been watching the banking industry for a long time, what is your sense of how interest rates will shape up from here on?
In the immediate future, I think interest rates will remain stable. But we will have to watch out in the last quarter.
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