India has implemented the Risk Based Supervision (RBS) framework which evaluates the risk profiles of banks through the analysis of twelve specific risks. National regulators like the RBI can specify risks different from those internationally recommended for retail exposures. As per the present RBI guidelines, the new Basel norms are applicable only to scheduled commercial banks. The Governor of RBI himself had admitted as much when he talked about the asymmetry in regulatory regime among the broad segments of the financial sector, viz banking, securities and insurance sectors. There was also the likelihood of regulatory arbitrage among these broad segments.

We as a country have decided that we need to be Basel II-compliant by adopting, what is known as a `Standardized Approach' for credit risk and a `Basic Indicator Approach' for operational risk under the Pillar I expectations of Basel II. The time limit we have given ourselves is March 31, 2009 and for foreign banks or Indian banks with overseas presence it is March 31, 2008. The Reserve Bank of India (RBI) which monitors and oversees the whole process of Basel II compliance has decided that Indian banks need to get into the more advanced Internal Ratings-Based Approach only after suitable skills are developed at both the banks' and supervisory levels.

Whether we are looking at Basel I or Basel II it will be instructive to remind ourselves that Basel II exercise is a voluntary one and not one mandated by or thrust upon by the World Bank or International Monetary Fund (IMF) on recipient countries. So we are getting into this with our eyes wide open, knowing fully well that Basel II can have birth pangs just as Basel I had its own initial difficulties, when prudential norms for income recognition, asset classification and provisioning were first conceived and implemented in the 1990s.

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