AT Kearney vice-president, William C Haworth, is now in India to advise some of the banks about the stringent capital provisioning required in the coming years.
"It will be a huge challenge for banks in India as well as those worldwide to segment their businesses, assess risks, analyse the reports for at least five years and then allocate capital," Haworth told PTI on Friday.
The Basle Committee under the Bank for International Settlement, which prescribes the banking norms globally, is set to lay down the new capital adequacy norms after including operational risks along with credit and market risks.
The apex committee on banking, in which the Reserve Bank of India is a member, for the first time was considering capital allocation for a operational risks like computer failures, mistakes, thefts and litigations, which increase costs and require capital allocations.
In India, Haworth said, "We do not know what kind of capital is required for priority sector lending. Large capital provisioning might be required in this area." If capital is not provided for, there might be hike in lending rates on these sectors.
The AT Kearney official favoured gradual hike in foreign direct investment limits in banks to enable them to bring in more capital and adhere to new norms.
"A gentler approach to hike FDI is preferred, " Haworth said, adding it was the government's job to manage the transition without affecting the economic activity and labour situation.
The need for hiking the FDI limits assumes importance in the light of proposed Basle-II report as Indian banks would have to hike their capital base substantially to adhere to the norms.
The government had to recapitalise most of the public sector banks in 1990s when the RBI tightened the capital adequacy and provisioning norms for non-performing assets.
Asked whether the proposed Basle committee recommendations could be implemented by Indian banks, he said, "It is not about feasibility. It is essential. Banks have to protect the depositors' money."
He defended the tightening of norms as proposed in the Basle-II report, saying, "No bank has failed during the financial fiasco in the United States last year because they adhered to Basle committee's prescribed norms whereas $6 trillion worth of market capitalisation was eroded from the capital market during the scams."
"Even insurance companies, which had guaranteed assured returns and had invested in capital market are now beaten to death," Haworth said.
Going a step forward, he said the Basle-III report would press for greater disclosure by insurance companies. He said banks would have to take the help of actuaries to determine their risks profiles in the coming years, as they had been doing for insurers.
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