A THESIS

ON
THE PROBLEMS IN IMPLEMENTATION OF
“PILLAR–I” OF “BASEL-II NORMS” WITH
SPECIAL REFERENCE TO ‘BANK OF INDIA’
& ‘PUNJAB NATIONAL BANK’ IN PATNA

THE FINAL REPORT

SUBMITTED TO:-

PROF. MANOJ MISHRA

FACULTY SUPERVISOR & ACADEMIC COORDINATOR

INC, PATNA
 SUBMITTED BY:-

AMULYA DARSHAN

A THESIS
ON
THE PROBLEMS IN IMPLEMENTATION OF
“PILLAR–I” OF “BASEL-II NORMS” WITH
SPECIAL REFERENCE TO ‘BANK OF INDIA’
& ‘PUNJAB NATIONAL BANK’ IN PATNA

SUBMITTED BY:-

AMULYA DARSHAN
8NBPA062, MBA (2008-10)

A REPORT SUBMITTED IN PARTIAL FULFILLMENT OF

THE REQUIREMENTS OF
 THE MBA PROGRAM
(The Class of 2010)
INC, PATNA

Certificate from Faculty Supervisor

CERTIFICATE

This is to certify that the Management Thesis titled _______________________________

___________________________________________________________________________

submitted by________________________________________________________________

Enroll No: -_____________________________ during Semester _________ of the MBA

Program (The Class of 2010) embodies original work done by him/her.

Signature of the Faculty Supervisor

Name (in Capitals) : ____________________________________________

Designation : ____________________________________________
Campus : ____________________________________________
 ACKNOWLEDGEMENT
Acknowledgement is a way to show my gratitude and convey my thanks to
those who supported in the successful completion of the executive training and in the
completion of the final report on executive training.

At first, I would like to thank our Centre Head, Mr. Sandeeep Dubey for giving me
the valuable opportunity to do the research work in the sector of my choice banking industry.

I would also like to thank my faculty supervisor Prof. Manoj Mishra, Academic
Coordinator, INC, Patna, for his valuable support in preparation of this thesis report.
Without his ultimate support and guidance I wouldn’t be able to complete this report.

I am also very much thankful to Mr. A.K.Choudhary, Sr.Mgr.,

Balance Sheet Dept. & Mr. S.N.Sahay, Sr.Mgr., Balance Sheet Dept., Patna Circle
Office, Punjab National Bank. Mr. P.K.Sen, Sr. Mgr., Credit Monitoring Dept., Patna
Zonal Office, Bank of India. Mr. U.K.Singh, Sr.Mgr., Credit Dept., Bailey Road Branch,
Bank of India, for their guidance and support.

Last but not least, I would like to thanks my parents, my friends and my
classmates who have encouraged me to achieve my future ambitions.

AMULYA DARSHAN

8NBPA062, MBA (2008-10),

INC, PATNA
TABLE OF CONTENTS
Chapter –1: Executive Summary ….............................6-10
1.1 Introduction…………………………………………..6

1.2 Objectives of Project………………………………….7

1.3 Scope of the Project ………………………….……….8

1.3 Research Methodology …………….…………………9

1.5 Conclusion…………………….………………….......10

Chapter –2: Introduction……………………………..11-20

2.1 Industry Profile……………………………………11-13

2.2 Bank Profile……………………………………….14-20

2.2.1 Bank of India………………………………....14-17

2.2.2 Punjab National Bank ………………………18-20

Chapter-3: Thesis Overview………………….………21-31

3.1 Introduction to Basel Reforms………………………..21

3.2 Basel – II Norms……………………………………....22

3.3 Risk Measurement…………………………. ..........23-24

3.4 Computation & Terminology...……………............25-26

3.5 Advantages of Basel – II.……………………...............27

3.6 Challenges Ahead………………………………...........28

3.7 Implementation in India………………………………29

3.8 Concluding Basel – II……………………………...30-31

Chapter-4: Findings & Conclusion……..………………32-44
4.1 Findings…………………………………………….32-36

4.2 Suggestions………………………………………... 37-38

4.3 Name of the respondents…………………………….39-40

4.4 To Sum up…………………………………………...41-42

EXECUTIVE SUMMARY
INTRODUCTION
Management Thesis is a part of the MBA Program. The objective of a Management
Thesis is to train the student in designing and implementing a research project in
respect of a business problem. A Management Thesis is the culmination of training
provided to the student on practical applicability of the theoretical concepts learned by them.
The prospective employers emphasize on the objectives, research methodology, findings and
recommendations of Management Thesis during the recruitment process. A Management
Thesis Report is a written presentation of the work done by a student on a given
project/research. It is important to bear in mind that even though the Management Thesis
report is submitted only at the end of any given period, in reality it is a culmination of my
continuous efforts.

With special reference to my management thesis title, I would like to mention that the
financial services have grown up at a rapid speed across the globe. In last few decades, the
banking industry has undergone through a massive expansion phase, right from its areas of
operations geographically, to its product and services. Now a day, the banking industry has an
attractive, flexible and customized portfolio of product & services like never before, which in
turn, has increased the complexity in day to day operations of banks across the world. This
situation has created an intensive need for the establishment of a regulatory framework in
order to safeguard the interests of banks from different types of risk prevailing in the financial
horizon through out the globe.

Therefore, a number of reforms and directives have been introduced at

regular intervals of time from different international platforms, Basel –II is the most recent
among all of them. Basel –II norms incorporates the different types of risks related with the
modern banking system, the sensitiveness of risk, supervisory framework and fair disclosure
practices. This report establishes its association with the ‘Basel –II Accord’, its different
aspects, specially ‘The Pillar –I’, its implementation status and particularly, the
problems associated with its implementation process.

EXECUTIVE SUMMARY
OBJECTIVES OF THE THESIS
The major objectives associated with this research thesis are as follows:-

• To get the relevant knowledge of banking industry, in particular the banking reforms.

• A comprehensive study of Basel – II Norms.

• To get the knowledge about the different sorts of risk associated with the banking
operations.

• Checking the current status of implementation of Basel – II Accord in two specific

banks in Patna.

• Finding out the problems faced by the banks while going through the implementation
process.

• Suggesting the measures for successful implementation of Basel – II Norms

• This report will be helpful in creating awareness among the bankers about the
importance of regulatory framework as banks have faced the deadly challenges in
times of global recessionary phase in recent times.
EXECUTIVE SUMMARY
SCOPE OF THE THESIS
The scope of this research is associated with the banking industry. The banks, in recent times,
have increased their areas of operations manifold and became global. This has also made the
banks more concern about the customers and their convenience regarding the products and
services offered by them. The increased level of customer base has intensified the threat of
risk from the different players of the market.

The scope of this thesis involves the measures to safeguard the interests of the banks in the
form of regulatory standards laid down by the Bank for International Settlements (BIS),
Switzerland. The scope of this study is primarily associated with the Minimum Capital
Adequacy Ratio of the Basel – II norms, and the problems faced by the two banks i.e., Bank
of India & Punjab National Bank. This study will help me in finding out the level of
difficulties faced by an organization, the management, and the key person from the
implementation team, while implementing the guidelines of such kinds of reforms and how
they get rid of the problems. The report incorporates the various tools and techniques used for
implementing the Pillar-I of the Basel – II accords likewise the categorization of the
customers, the role of the internal and external rating agencies for evaluating the credit
worthiness of the customers, etc.

GEOGRAPHIC SCOPE
The research work is performed within the territory of Patna city only.
EXECUTIVE SUMMARY
RESEARCH METHODOLOGY
Methodology describes the method which the individual use while doing the research.
Regarding the requirements of my thesis, I have chosen the methods of Secondary Data
Studies and Surveys with help of open-ended structured questionnaire. The methods are
selected on the basis of the problem statement, as the study of secondary data will provide me
an insight about the Basel – II norms and survey will support me in finding the answers to the
problem statement from the persons who were actively involved in the implementation
process.

SAMPLING PROCEDURE
Sampling has been done on the basis of the non-probability convenience sampling as the
information required for the research process demands the certain level of expertise of this
field.

SAMPLE SIZE
Sample size was of only two banks as I have selected the two banks only, Bank of India and
Punjab National Bank.

DATA COLLECTION
Data was collected through secondary data sources and an open-ended structured
questionnaire and through expert interviews also.

FINDINGS
The major findings which I got regarding the problems that are associated with the
implementation of Pillar-I of the Basel-II norms are lack of technical framework,
complications in calculation of CRAR, up gradation of the bank-wide information system
through better branch-connectivity, which entailed cost and may also raise some IT-security
issues. The implementation of Basel II also raises several issues relating to development of
human resource skills and database management. Along with this problems were also
associated with the adjustment of Hair Cut applicable to the collaterals, increased provisions
for NPA’s, calculation of RWA, treatment of term deposit receipts, NSC, KVP, calculation
and supply of appropriate data for the sheets which were 20 in number.

EXECUTIVE SUMMARY
SUGGESTIONS
In my opinion, before going for any such kind of internationally accepted reforms, there
should be a required level of preparation and availability of resources in this regard. The
reforms should be modified in Indian context and limitations of the Indian markets and then
only it should be introduced and implemented. The successful implementation of the Basel-II
accord demands that more and more focus should be given on the development and
improvement of a sound risk management and measurement expertise at different level of
hierarchy within the banks. Proper database management system should be developed and
creating awareness among the bankers and the operational staffs should be the prime concern
for the banks

CONCLUSION
After completion of the MT-I, I can firmly say that it was a nice journey started with the
selection of the topic and problem definition and ended with the final report of the thesis
undertaken. Banking Industry has been growing leaps and bounds and it has become global
and this global presence has converted into global complications also. Basel-II is one of the
latest reforms in this regard to cope up with the challenges banks are facing now a days and to
safeguard the interests of the banks exposed to the volatile credit market.

While going through the implementation process, banks have faced certain problems likewise
inadequate technical expertise, rigorous calculations, lack of aware and expert manpower,
new concepts of CRM and Hair cut, filling up the information sheets, etc. But, banks have
successfully managed to overcome this problem and now in a position where they have
started implementing it to their banks.
INDUSTRY PROFILE
History of Banking Industry
Introduction

Without a sound and effective banking system in India it cannot have a healthy economy.
The banking system of India should not only be hassle free but it should be able to meet
new challenges posed by the technology and any other external and internal factors.

For the past three decades India's banking system has several outstanding achievements
to its credit. The most striking is its extensive reach. It is no longer confined to only
metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even
to the remote corners of the country. This is one of the main reason of India's growth
process.

The government's regular policy for Indian bank since 1969 has paid rich with the
nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a
draft or for withdrawing his own money. Today, he has a choice. Gone are days when the
most efficient bank transferred money from one branch to other in two days. Now it is
simple as instant messaging or dial a pizza. Money has become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct phases.
They are as mentioned below:

• Early phase from 1786 to 1969 of Indian Banks

• Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector
Reforms.
• New phase of Indian Banking System with the advent of Indian & Banking Sector
Reforms after 1991.

INDUSTRY PROFILE
To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase
III.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.
These three banks were amalgamated in 1920 and Imperial Bank of India was established
which started as private banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913,
Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank
of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures
between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline
the functioning and activities of commercial banks, the Government of India came up with
The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949
as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with
extensive powers for the supervision of banking in India as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermath deposit
mobilization was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to them.
Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In
1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale
specially, in rural and semi-urban areas. It formed State Bank of India to act as the principal
agent of RBI and to handle banking transactions of the Union and State Governments all over
the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July,
1969, major process of nationalisation was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were
nationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with
seven more banks. This step brought 80% of the banking segment in India under Government
ownership.

INDUSTRY PROFILE
The following are the steps taken by the Government of India to Regulate Banking
Institutions in the Country:

• 1949 : Enactment of Banking Regulation Act.

• 1955 : Nationalisation of State Bank of India.
• 1959 : Nationalisation of SBI subsidiaries.
• 1961 : extended to deposits.
• 1969 : Nationalisation of 14 major banks.
• 1971 : Creation of credit guarantee corporation.
• 1975 : Creation of regional rural banks.
• 1980 : Nationalization of seven banks with deposits over 200 crores.

After the nationalization of banks, the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up
by his name which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to
give a satisfactory service to customers. Phone banking and net banking is introduced. The
entire system became more convenient and swift. Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered from any
crisis triggered by any external macroeconomics shock as other East Asian Countries
suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the
capital account is not yet fully convertible, and banks and their customers have limited
exposure.

BANK PROFILE
BANK OF INDIA
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen
from Mumbai. The Bank was under private ownership and control till July 1969 when it
was nationalised along with 13 other banks.

Beginning with one office in Mumbai, with a paid-up capital of Rs.50 lac and 50
employees, the Bank has made a rapid growth over the years and blossomed into a
mighty institution with a strong national presence and sizable international operations. In
business volume, the Bank occupies a premier position among the nationalised banks.

The Bank has 3021 branches in India spread over all states/ union territories including
136 specialised branches. These branches are controlled through 48 Zonal Offices. There
are 28 branches/ offices (including three representative offices) abroad.

The Bank came out with its maiden public issue in 1997 and follow on Qualified
Institutions Placement in February 2008. . Total number of shareholders as on 31/03/2009
is 2,35589.

While firmly adhering to a policy of prudence and caution, the Bank has been in the
forefront of introducing various innovative services and systems. Business has been
conducted with the successful blend of traditional values and ethics and the most modern
infrastructure. The Bank has been the first among the nationalised banks to establish a
fully computerised branch and ATM facility at the Mahalaxmi Branch at Mumbai way
back in 1989. The Bank is also a Founder Member of SWIFT in India. It pioneered the
introduction of the Health Code System in 1982, for evaluating/ rating its credit portfolio.

The Bank's association with the capital market goes back to 1921 when it entered into an
agreement with the Bombay Stock Exchange (BSE) to manage the BSE Clearing House.
It is an association that has blossomed into a joint venture with BSE, called the BOI
Shareholding Ltd. to extend depository services to the stock broking community. Bank of
India was the first Indian Bank to open a branch outside the country, at London, in 1946,
and also the first to open a branch in Europe, Paris in 1974. The Bank has sizable
presence abroad, with a network of 28 branches (including five representative offices) at
key banking and financial centers viz. London, Newyork, Paris, Tokyo, Hong-Kong and
Singapore. The international business accounts for around 17.82% of Bank's total
business.
Today Bank of India has been spread with 2594 branches including 93 specialized
branches controlled by 48 Zonal Offices.

Bank of India came up with its maiden public issue in the year 1997 and the total number
of stands to 3, 17,890 as on 30/06/2004.

Bank of India was the first fully computerised branch among the nationalised banks with
the ATM facility at the Mahalaxmi Branch, Mumbai is the year 1989.

BANK PROFILE
Bank of India Abroad

Bank of India was the first Bank in India to open branch office outside the country, at
London, in 1946, and even it is the first to open a branch office in Europe, Paris in 1974.

The Bank has sizable presence abroad, with a network of 21 branches (including three
representative offices) at key and financial centers viz.

• London
• New York
• Paris
• Tokyo
• Hong-Kong
• Singapore

The international business accounts for around 20.10% of Bank's total business.

Bank of India Core Banking

Internet Banking Viewing of all own accounts

Quick view of transactions

Query on Transactions / pending instruments

Account statement download

Details of Lien on Operative or Term Deposit Accounts

 Details of Account

Nominee Details

Submit various like ATM/Debit Card request

Cheque Book Request

Issuance of Demand Draft Request

Funds Transfer between own accounts

Create and Send Mail to Relationship Manager

Stop Payment Instructions

Details of TODs

Phone/ TeleBanking Bank Product related information

Linking multiple account

Last 10 transactions played

Fax on Demand for last 15 transactions

Stop Payment Instructions

Cheque Status

ATM location details

Request for Cheque Book

Request for Statement of account

Forex Rates played and request to send the rates by Fax

SMS Banking Balance Enquiry

Cheque Book Request

Mini Statement of last 5 transactions

Utility Payment Register for select Utility Service Providers for periodic automatic On-line Payments

INFORMATION TECHNOLOGY
Bank of India has been pioneer in launching key initiatives in areas of Products,
Distribution, Technology, International Operations and Risk Management. Our Bank
aims at strengthening customer relations, diversifying delivery channels, increasing
international capabilities and services, and strengthening revenue streams from
diversified sources. Our Bank has redefined banking services with hi-tech services.
The theme of "Relationships beyond Banking" has helped in creating & cementing a
niche in the minds of our clientele.

Branch Automation

Bank completes implementation of 100% Core Banking Solution in all its 3023
branches.

Automated Teller Machines (ATMs)

Bank is having its own 487 ATMs (both on-site & off-site). The Bank is member of
Cashtree and BANCS network. The Bank is the Settlement and Nodal Bank for
Cashtree ATM network having 13 member Banks and BANCS network having 14
member banks. The Bank has also entered into bilateral agreement with State bank of
India and its associates. Our Bank has joined National Financial Switch (NFS) which
enables our Customers to access more than 35,000 ATMs across the country.

BANK PROFILE
Solar Power Systems

Solar Power Systems implemented in 147 Rural / Semi urban branches where there is
acute shortage of Power or high load-shedding periods. We plan to extend in another
100 branches / administrative offices during the year 2009.

Financial Inclusion

IT enabled FINANCIAL INCLUSION SOLUTION has been successfully

implemented in different states of India, viz. Gadab (rural) branch of Raigad Thane
Zone, Puttur in Hyderabad Zone, districts of Lucknow in U.P and Budhni in Sehore
District, Bhopal in M.P.. Expansion of the solution in these centers is in full-swing.

Teller Cash Dispensers

Installation of Teller Cash Dispensers is in progress at identified branches. It will

reduce wait-time, enhance the productivity of Tellers and also help in accurate
dispensing of Cash.

Star Connect Internet Banking Services

Bank’ customers enjoy the convenience of “secured” Anytime, Anywhere, Anyhow

hassle free Banking from the comfort of their Homes & Offices with a mouse click.
Features like Statement of Account – View, Enquiring status of cheques, Request for a
cheque Book, Transfer of funds including third party transfer within the networked
branches etc.
 Interbank Fund Transfer

Online Interbank Fund Transfer made easy and convenient. Now, you can transfer
funds ONLINE across banks, through our StarConnect Internet Banking Services,
using RTGS/ NEFT facility, WITHOUT ANY CHARGES.

Head Office
BANK OF INDIA, STAR HOUSE C - 5, "G" Block,
Bandra Kurla Complex, Bandra (East), Mumbai 400 051
Ph: . 022-66684444
Email: god@bankofindia.co.in
Website: http://www.bankofindia.com

BANK PROFILE
PUNJAB NATIONAL BANK

Established in 1895 at Lahore, undivided India, Punjab National Bank (PNB) has the
distinction of being the first Indian bank to have been started solely with Indian capital.The
bank was nationalised in July 1969 along with 13 other banks. From its modest beginning, the
bank has grown in size and stature to become a front-line banking institution in India at
present.

 A professionally managed bank with a successful track record of over 110 years.

 Largest branch network in India - 4525 Offices including 432 Extension Counters spread
throughout the country.
 Strategic business area covers the large Indo-Gangetic belt and the metropolitan centres.

 Ranked as 248th biggest bank in the world by Bankers Almanac , London.

 Strong correspondent banking relationships with more than 217 international banks of the
world.

 More than 50 renowned international banks maintain their Rupee Accounts with PNB.

 Well equipped dealing rooms; 20 different foreign currency accounts are maintained at major
centres all over the globe.
  Rupee drawing arrangements with M/s UAE Exchange Centre, UAE, M/s Al Fardan
Exchange Co. Doha, Qatar,M/s Bahrain Exchange Co, Kuwait, M/s Bahrain Finance Co,
Bahrain,M/s Thomas Cook Al Rostamani Exchange Co. Dubai,UAE, and M/s Musandam
Exchange, Ruwi, Sultanate of Oman.

PNB Head Office

Punjab National Bank
Street 7, Bhikaji Cama Place
New Delhi 110066, India
Tel : 91-11-26196486, 26102303
e-mail : website@pnb.co.in
www.pnbindia.com

24 hours toll free PNB Call Centre number

1600 12 2222

BANK PROFILE
PROFILE OF PUNJAB NATIONAL BANK
With over 38 million satisfied customers and 4668 offices, PNB has continued to retain its
leadership position among the nationalized banks. The bank enjoys strong fundamentals, large
franchise value and good brand image. Besides being ranked as one of India's top service brands,
PNB has remained fully committed to its guiding principles of sound and prudent banking. Apart
from offering banking products, the bank has also entered the credit card & debit card business;
bullion business; life and non-life insurance business; Gold coins & asset management business,
etc.
Since its humble beginning in 1895 with the distinction of being the first Indian bank to have
been started with Indian capital, PNB has achieved significant growth in business which at the
end of March 2009 amounted to Rs 3,64,463 crore. Today, with assets of more than Rs 2,46,900
crore, PNB is ranked as the 3rd largest bank in the country (after SBI and ICICI Bank) and has
the 2nd largest network of branches (4668 including 238 extension counters and 3 overseas
offices).During the FY 2008-09, with 39% share of low cost deposits, the bank achieved a net
profit of Rs 3,091 crore, maintaining its number ONE position amongst nationalized banks. Bank
has a strong capital base with capital adequacy ratio as per Basel II at 14.03% with Tier I and Tier
II capital ratio at 8.98% and 5.05% respectively as on March’09. As on March’09, the Bank has
the Gross and Net NPA ratio of only 1.77% and 0.17% respectively. During the FY 2008-09, its’
ratio of priority sector credit to adjusted net bank credit at 41.53% & agriculture credit to adjusted
net bank credit at 19.72% was also higher than the respective national goals of 40% & 18%.
PNB has always looked at technology as a key facilitator to provide better customer service and
ensured that its ‘IT strategy’ follows the ‘Business strategy’ so as to arrive at “Best Fit”. The
bank has made rapid strides in this direction.

Along with the achievement of 100% branch computerization, one of the major achievements of
the Bank is covering all the branches of the Bank under Core Banking Solution (CBS), thus
covering 100% of it’s business and providing ‘Anytime Anywhere’ banking facility to all
customers including customers of more than 2000 rural branches. The bank has also been offering
 Internet banking services to the customers of CBS branches like booking of tickets, payment of
bills of utilities, purchase of airline tickets etc. Towards developing a cost effective alternative
channels of delivery, the bank with more than 2150 ATMs has the largest ATM network amongst
Nationalised Banks.

With the help of advanced technology, the Bank has been a frontrunner in the industry so far as
the initiatives for Financial Inclusion is concerned. With it’s policy of inclusive growth in the
Indo-Gangetic belt, the Bank’s mission is “Banking for Unbanked”. The Bank has launched a
drive for biometric smart card based technology enabled Financial Inclusion with the help of
Business Correspondents/Business Facilitators (BC/BF) so as to reach out to the last mile
customer.

BANK PROFILE
The BC/BF will address the outreach issue while technology will provide cost effective and
transparent services. The Bank has started several innovative initiatives for marginal groups like
rickshaw pullers, vegetable vendors, diary farmers, construction workers, etc. The Bank has already
achieved 100% financial inclusion in 21,408 villages.
Backed by strong domestic performance, the bank is planning to realize its global aspirations. In
order to increase its international presence, the Bank continues its selective foray in international
markets with presence in Hongkong, Dubai, Kazakhstan, UK, Shanghai, Singapore, Kabul and
Norway. A second branch in Hongkong at Kowloon was opened in the first week of April’09. Bank
is also in the process of establishing its presence in China, Bhutan, DIFC Dubai, Canada and
Singapore. The bank also has a joint venture with Everest Bank Ltd. (EBL), Nepal. Under the long
term vision, Bank proposes to start its operation in Fiji Island, Australia and Indonesia. Bank
continues with its goal to become a household brand with global expertise.
Amongst Top 1000 Banks in the World, ‘The Banker’ listed PNB at 250th place. Further, PNB is at
the 1166th position among 48 Indian firms making it to a list of the world’s biggest companies
compiled by the US magazine ‘Forbes’.

Financial Performance:
Punjab National Bank continues to maintain its frontline position in the Indian banking industry. In
particular, the bank has retained its NUMBER ONE position among the nationalized banks in terms
of number of branches, Deposit, Advances, total Business, operating and net profit in the year 2008-
09. The impressive operational and financial performance has been brought about by Bank’s focus
on customer based business with thrust on SME, Agriculture, more inclusive approach to banking;
better asset liability management; improved margin management, thrust on recovery and increased
efficiency in core operations of the Bank. The performance highlights of the bank in terms of
business and profit are shown below:

Parameters Mar'07 Mar'08 Mar'09 CRAR

Operating Profit* 3617 4006 5744 26.02

Net Profit* 1540 2049 3091 41.67

Deposit 139860 166457 209760 22.47

Advance 96597 119502 154703 26.55

Total Business 236456 285959 364463 24.15

((Rs.Crores)

* Respective figure for the corresponding financial year.

THE BASEL ACCORD

Basel Committee
- The Basel Committee on Banking Supervision was established in 1974, by the Bank ot
International Settlements (BIS), an international organization founded in Basel, Switzerland in 1930
to serve as a bank for central banks.

- Basel Committee on Banking Supervision is a committee of bank supervisors consisting of

members from each of the G10 countries. It is represented by central bank governors of each of the
G10 countries. The Committee's members are from Belgium, Canada, France, Germany, Italy,
Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, UK and US. The present Chairman
of the Committee is Mr. NoutWellink, President of the Netherlands Bank.

- The Committee is a forum for discussion on handling of specific supervisory problems. It

coordinates the sharing of supervisory responsibilities among national authorities in respect of banks'
foreign establishments with the aim of ensuring effective supervision of banks' activities worldwide.
It meets regularly 4 times a year.

With a view to adopt Basel Committee on Banking Supervision (BCBS) framework on capital
adequacy which takes into account the elements of credit risk in various types of assets in the
balance sheet as well as off-balance sheet business and to strengthen the capital base of banks, RBI
decided in April 1992 to introduce a risk asset ratio system for banks in India as a capital adequacy
measure. Essentially, under the above system the balance sheet assets and other off-balance sheet
exposures are assigned prescribed risk weights and banks have to maintain minimum capital funds
equivalent to the prescribed ratio on the aggregate of the risk weighted assets and other exposures on
an ongoing basis.

Basel I
The first accord was the Basel I. It was issued in 1988 and focused mainly on credit risk by creating
a bank asset classification system.
The Basel Capital Accord is an Agreement concluded among country representatives in 1988 to
develop standardized risk-based capital requirements for banks across countries. The Accord was
replaced with a New capital adequacy framework (Basel II), published in June 2004.

BASEL – II NORMS

It is the second accord which focuses on operational risk along with market risk and credit risk.
Basel II tries to ensure that the anomalies existed in Basel I are corrected.
Basel II is the international capital adequacy framework tor banks that prescribes capital
requirements for credit risk, market risk and operational risk. Basel II is the second of the Basel
Accords recommended on banking laws and regulations issued by Basel Committee on Banking
Supervision.

- The purpose behind applying Basel II norms to Indian banks is to help them comply with
international standards. These international standards can help protect the international financial
system from problems that may arise from the collapse of a major bank.

- Basel II is stated to set up rigorous risk and capital management requirements to ensure that banks
have capital reserves appropriate to their risk profile.

- The outcome is that the greater the risk to which a bank is exposed, greater is the amount of capital
it will require to hold to protect its solvency and overall stability. It will also force banks to enhance
disclosures, which will help create more transparency and trust in the banking system itself. We
believe transparency in financial reporting will improve.

- Total CRAR and Tier I capital is expected to expand with implementation of Basel II norms.

3 Pillars of Basel II

Pillar 1 includes 3 risks now, operational risk + credit risk + market risk.
Basel II and the Capital Requirements Directive

Basel II applies to internationally active banks. As noted above, in the European Union, the
framework has been implemented through the Capital Requirements Directive (CRD). The CRD
affects certain types of investment firms and all deposit takers (including banks and building
societies), except credit unions.

The framework under the CRD reflects the flexible structure and the major components of Basel II.
It has been based on the three "pillars", but has been tailored to the specific features of the EU
market.

BASEL – II NORMS
Minimum capital requirements

Basel II requires that an institution's total regulatory capital must be at least 8% of its risk weighted
assets, based on measures of its credit risk, market risk and operational risk. This ratio is unchanged
from Basel I.

Measuring credit risk

In relation to credit risk, Basel II permits banks to use one of two methodologies. They can assess
risk using the "Standardised" Approach, which involves external credit assessments, or they can use
their own internal systems for rating credit risk. The standardised approach is similar to Basel I but
risk weights are based on credit ratings provided by external credit assessment institutions such as
rating agencies. In contrast, the foundation and advanced internal ratings based approaches reflect
the fact that many internationally active banks already have in place extremely sophisticated internal
methods for modeling, assessing and managing risk. These latter methods can be used only with the
explicit approval of the institution's supervisor.

Measuring operational risk

One of the key changes in Basel II is the addition of an operational risk measurement to the
calculation of minimum capital requirements. This has also been included in the CRD. Operational
risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and
systems or from external events. This definition includes legal risk, such as exposure to fines,
penalties and private settlements. It does not, however, include strategic or reputational risk.

In calculating operational risk capital charges, Basel II sets out three different methods which may
be adopted.

The Basic Indicator Approach is the simplest of the three approaches, and will be the default
option for most firms. It applies a calculation based on the firm's income to determine its capital
requirements.

The Standardised Approach (not to be confused with the approach for credit risk of the same
name) again relies on calculations based on income, but with different percentages applying across
different business lines. To be able to take advantage of the Standardised Approach, firms will have
to meet certain qualifying criteria.

The Advanced Measurement Approach is the most advanced of the three options. Under this
approach, each firm calculates it own capital requirements, by developing and applying its own
internal risk measurement system. As with the Standardised Approach, the firm must meet certain
qualifying criteria, and the risk measurement system must be validated by the FSA before it will be
allowed to take advantage of the AMA.

BASEL – II NORMS
Calculating market risk

As with credit and operational risk, Basel II is designed to reflect the increasingly sophisticated risk
management practices that exist in many financial institutions by offering them the opportunity to
use advanced internal models for calculating market risk. The aim is to encourage institutions to
monitor and control risk effectively, by obliging them to make a series of disclosures about their risk
profiles and regulatory capital procedures which are available to market participants. The intention
is that they strike a balance between meaningful disclosures and the need to protect confidential and
proprietary information.

Keeping in view RBI's goal to have consistency and harmony with

international standards, it has been decided that all commercial banks in India shall adopt
Standardized Approach (SA) for credit risk and Basic Indicator Approach (BIA) for operational risk.
Banks shall continue to apply the Standardized Duration Approach (SDA) for computing capital
requirement for market risks.

Under the Standardized Approach, the rating assigned by the eligible external credit rating agencies
will largely support the measure of credit risk. RBI has identified external credit rating agencies that
meet the eligibility criteria specified under the revised Framework. Banks may rely upon the ratings
assigned by the external credit rating agencies chosen by the RBI for assigning risk weights for
capital adequacy purposes.

The RBI decided that banks may use the ratings of the following domestic credit rating
agencies for the purposes of risk weighting their claims for capital adequacy purposes: a) Credit
Analysis and Research Ltd. b) CRISIL Ltd. c) FITCH Ltd. and d) ICRA Ltd. Banks may use the
ratings of the following international credit rating agencies for the purposes of risk weighting their
claims for capital adequacy purposes a) Fitch; b) Moody's; and c) Standard & Poor's.

Banks should use the chosen credit rating agencies and their ratings consistently for each type of
claim, for both risk weighting and risk management purposes. Banks will not be allowed to "cherry
pick" the assessments provided by different credit rating agencies.
Banks must disclose the names of the credit rating agencies that they use for the risk weighting of
their assets, the risk weights associated with the particular rating grades as determined by RBI for
each eligible credit rating agency as well as the aggregated risk weighted assets.

For instance recently, Induslnd bank entered into MOU with CRISIL and Allahabad bank entered
into MOU with CARE for rating facility as required under Basel II.

BASEL – II NORMS

Computation of Total CRAR and Tier I capital under Basel II

Basel II Tier I CRAR = Tier I capital / (Credit Risk RWA + Operational Risk RWA + Market Risk
RWA)
Basel II Total CRAR = Total capital / (Credit Risk RWA + Operational Risk RWA + Market Risk
RWA)
RWA - risk weighted assets

Pillar 2 requirements give supervisors, i.e., the RBI, the discretion to increase regulatory capital
requirements. The RBI can administer and enforce minimum capital requirements from bank even
higher than the level specified in Basel II, based on risk management skills of the bank. RBI will
consider prescribing a higher level of minimum capital ratio for each bank under the Pillar 2
framework on the basis of their respective risk profiles and their risk management systems. Further,
in terms of the Pillar 2 requirements of the New Capital Adequacy Framework, banks are expected
to operate at a level well above the minimum requirement.

Pillar 3 demands comprehensive disclosure requirements from banks. For such comprehensive
disclosure, IT structure must be in place for supporting data collection and generating MIS which is
compatible with Pillar 3 requirements.

While Basel I was useful, as it brought into focus the need to bridge gap between capital
requirements and risk profiles of commercial banks, Basel II is a step forward by forcing banks to
recognize the need to distinguish between credit quality of individual borrowers. Basel II will help
promote increased transparency and better reporting systems. In short, compliance is a win-win
situation for all concerned. Banks will have to continuously improve the quality of their internal loss
data, with Basel II requiring them to have at least five years of data, including a downturn.

The Terminology

Capital to Risk Weighted Assets Ratio (CRAR) is also known as Capital Adequacy Ratio which
indicates a bank's risk-taking ability. The RBI uses CRAR to track whether a bank is meeting its
statutory capital requirements and is capable of absorbing a reasonable amount of loss.
CRAR = (Tier I capital + Tier II capital) / Risk-Weighted Assets

Capital funds are broadly classified as Tier 1 and Tier 2 capital. Two types of capital are measured:
Tier one capital, which absorbs losses without a bank being required to cease trading, and Tier two
capital, which absorbs losses in the event of winding-up and so provides a lesser degree of protection
to depositors.

Tier I capital (core capital) is the most reliable form of capital. The major components of Tier I
capital are paid up equity share capital and disclosed reserves viz. statutory reserves, general
reserves, capital reserves (other than revaluation reserves) and any other type of instrument notified
by the RBI as and when for inclusion in Tier I capital. Examples of Tier 1 capital are common stock,
preferred stock that is irredeemable and non-cumulative, and retained earnings.
BASEL – II NORMS

Tier II capital (supplementary capital) is a measure of a bank's financial strength with regard to the
second most reliable forms of financial capital. It consists mainly of undisclosed reserves,
revaluation reserves, general provisions, subordinated debt, and hybrid instruments. This capital is
less permanent in nature.

The reason for holding capital is that it should provide protection against unexpected losses. This is
different from expected losses for which provisions are made.

Basel I Vs. Basel II

Basel I is very simplistic in its approach towards credit risks. It does not distinguish between
collateralized and non-collateralized loans, while Basel II tries to ensure that the anomalies existed in
Basel I are corrected.
BASEL – II NORMS
Advantages of Basel-II
It is believed that such an international standard 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. In simple terms, 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.
The basic purpose of this recommendation is to ensure that capital allocation is more risk sensitive,
separating operational risk from credit risk and quantifying both, and attempting to align economic
and regulatory capital more closely to reduce the scope for regulatory arbitrage.
In a nut-shell, Basel II -
• Provides effective assessment methods.
• Incorporates sensitivity to banks.
• Makes better business standards.
• Reduces losses to the banks.
The above-mentioned advantages of Basel II recommendation are helpful in various ways to the
Indian banking industry: -
• Improving overall efficiency of banking and finance systems.
• Takes global aspect into consideration for more rational decision making, improving the decision
matrix for banks.
• Allowing capital discrimination of the banking system by allocating proper risk weighs to each
asset class.
• Providing range of alternatives to choose from.
• Allowing capital allocation based on ratings of the borrower making capital more risk-sensitive.
• Providing an incentive for better and more objective risk measurement.
• Encouraging mergers and acquisitions and more collaboration on the part of the banks, this
ultimately leads to proper control over their capital and assets.

Global Scenario on Basel II

Banking regulators in around the world are planning to implement Basel II, but with varying
timelines and use of the varying methodologies being restricted.
European banks already report their capital adequacy ratios according to the new system. European
banks implemented Basel II at the start of 2008 whereas Japanese banks implemented in 2007.
Australia implemented the Basel II Framework in 2008. US banks are scheduled to switch over in
2009.

Challenges with Indian Banking Industry

- MAJOR CHALLENGES

- With the feature of additional capital requirements, the overall capital level of the banks will
see an increase. But, the banks that will not be able to make it as per the norms may be left
out of the global system.
• Another biggest challenge is re-structuring the assets of some of the banks would be a
tedious process, since most of the banks have poor asset quality leading to significant
proportion of NPA. This also may lead to Mergers & Acquisitions, which itself would be loss
of capital to entire system.
• The new norms seem to favor the large banks that have better risk management and
measurement expertise, who also have better capital adequacy ratios and geographically
diversified portfolios. The smaller banks are also likely to be hurt by the rise in weightage of
inter-bank loans that will effectively price them out of the market. Thus, banks will have to
re-structure and adopt if they are to survive in the new environment.
• Since improved risk management and measurement is needed, 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 historical bank data that is a tedious and high cost process, as most Indian
banks do not have such a database.
• The technology infrastructure in terms of computerization is still in a nascent stage in most
Indian banks. Computerization of branches, especially for those banks, which have their
network spread out in far-flung areas, will be a daunting task. Penetration of information
technology in banking has been successful in the urban areas, unlike in the rural areas where
it is insignificant.
• Experts say that dearth of risk management expertise in the Asia Pacific region will serve as
a hindrance in laying down guidelines for a basic framework for the new capital accord.
• An integrated risk management concept, which is the need of the hour to align market, credit
and operational risk, will be difficult due to significant disconnect between business, risk
managers and IT across the organizations in their existing set-up.
• Implementation of the Basel II will require huge investments in technology. According to
estimates, Indian banks, especially those with a sizeable branch network, will need to spend
well over $ 50-70 Million on this.
BASEL – II NORMS
Present Scenario in Implementing Basel II in India

The deadline for implementing Basel II, originally set for March 31, 2007, has now been
extended. Foreign banks in India and Indian banks operating abroad had to meet those norms
by March 31, 2008, while all other scheduled commercial banks will have to adhere to the
guidelines by March 31, 2009. But the decision to implement the guidelines remains
unchanged. This is true even though the international exposure of even the major Indian
banks is still limited. Whereas some of the large banks say that they are Basel II compliant
with the presence of all the requirements, which Basel II recommends.

Basel II allows national regulators to specify risk weights different from the internationally
recommended ones for retail exposures. The RBI had, therefore, announced an indicative set
of weights for domestic corporate long-term loans and bonds subject to different ratings by
international rating agencies such as Moody's Investor Services, which are slightly different
from that specified by the Basel Committee.

Most of the Indian banks that have migrated to Basel II have reported a reduction in their total
Capital Adequacy Ratios (CARs) due to the new operational risk-based capital charges.
However, a few banks, those with high exposures to higher rated corporate or to the
regulatory retail portfolio, have reported increased CARs. Given recent changes in regulatory
charges, it is doubted whether this will be sustainable. Banks would find it increasingly
attractive to give out loans to the small business segment that qualify as regulatory retail,
given their higher lending margins and lower risk weights. In contrast, the increase in risk
weight for residential mortgage loans will make this area less attractive.
Concluding Basel -II
The Basel Committee on Banking Supervision is a Guideline for Computing Capital for
Incremental Risk. It is a new way of managing risk and asset-liability mis-matches, like asset
securitization, which unlocks resources and spreads risk, are likely to be increasingly used.
This was designed for the big banks in the BCBS member countries, not for smaller or less
developed economies.

The major challenge the country's financial system faces today is to bring informal loans into
the formal financial system. By implementing Basel II norms, our formal banking system can
learn many lessons from money-lenders. Its implementation may involve significant changes
in business model in which potential economic impacts must be carefully monitored.
In a nut-shell, we would like to conclude that keeping in view the cost of compliance for both
banks and supervisors, the regulatory challenge would be to migrate to Basel II in a non-
disruptive manner. We would like to continue the process of interaction with other countries
to learn from their experiences through various international fora. India is one of the early
countries which subjected itself voluntarily to the FSAP of the IMF, and our system was
assessed to be in high compliance with the relevant principles. With the gradual and
purposeful implementation of the banking sector reforms over the past decade, the Indian
banking system has shown significant improvement on various parameters, has become robust
and displayed ample resilience to shocks in the economy. There is, therefore, ample evidence
of the capacity of the Indian banking system to migrate smoothly to Basel II.
Indian banking companies are required to ensure full implementation of Basel II guidelines by
March 31, 2009. With Basel II norms coming into force in 2009, maintaining adequate capital
reserves will become a priority for banks.

- Basel II mandates Capital to Risk Weighted Assets Ratio (CRAR) of 8% and Tier I capital
of 6%. The RBI has stated that Indian banks must have a CRAR of minimum 9%, effective
March 31, 2009. All private sector banks are already in compliance with the Basel II
guidelines as regards their CRAR as well as Tier I capital. Further, the Government of India
has stated that public sector banks must have a capital cushion with a CRAR of at least 12%,
higher than the threshold of 9% prescribed by the RBI.

- There are 4 banks viz. Bank of Maharashtra, Central Bank, UCO Bank and Vijaya Bank,
whose tier I capital as on March 31, 2008 was below the stipulated norm of 6%.

- Failure to adhere to Basel II can attract RBI action including restricting lending and
investment activities. However, private sector banks as well as public sector banks are likely
to comply with Basel II norms by March 31, 2009. The Government announced 1st round of
recapitalization for 3 banks, viz., Central Bank, UCO Bank and Vijaya Bank (whose tier I
capital was less than 6%) for an aggregate sum of Rs38bn.
- Further for public sector banks, the Government has prescribed CRAR of at least 12%.
There are 5 banks which have CRAR less than 12% as of December 31, 2008, viz., Bank of
Maharashtra, Central Bank, Dena Bank, IDBI Bank and Vijaya Bank. Since the Government's
stake in public sector bank cannot be allowed to go below 51 %, these banks cannot take
recourse to equity funding for Tier I capital. Of these banks, government holding in Dena
Bank is very close to 51%; it is therefore not possible for it to raise further equity capital
(without diluting the Government's stake to below 51 %).
Concluding Basel -II
- The Government, in the Interim Budget, embarked approx. Rs200bn for re-capitalizing
public sector banks whose CRAR is less than 12%, as well as for other public sector banks for
future business growth.

- The Government has announced that there will be 2nd round of recapitalization. We believe
Bank of Maharashtra will have to be recapitalized soon with detailed plan, since its Tier I
capital is below 6%. Its government stake is 76%, which is much above the needed 51 %,
indicating scope for an equity dilution. However, the current market conditions may render an
equity issue difficult.

- The recapitalization move by the Government seems to be a precautionary measure to avoid

any kind of risk during the times of a global financial turmoil and would improve market
confidence in the banking system. We believe the recapitalization will increase the
Government's stakes in public sector banks, so that they will be able to opt for fund raising in
the future, when credit off-take picks up momentum.
FINDINGS
The objective of this thesis report can be achieved only through the expert
interviews as the topic itself is not familiar with most of the population.
While following the questionnaire and collecting the information as per the
questionnaire, followings are the major findings which I would like to
mention:-

1. How do you perceive the Basel-II Accord?

• The officials at Punjab National Bank (PNB) consider the Basel-II Accord as
prominent tool for the minimization and limited exposure towards the risk on their
credit functioning. They admit the superiority of Basel-II accord over the Basel-I.
According to them, the method of calculation of risk through Capital to Risk Weighted
Assets Ratio(CRAR) is more authentic in revised Capital Adequacy framework as
compared to the Basel-I. This is more effective for the banks. It is said that the Basel-
II requires allocation of larger fund base as provisions for NPA’s, but in practical, now
banks have to maintain lesser provisions as segmenting the risk category has made it
possible for banks that they can allot fund according to the degree of risk. This, in
turn, also makes more funds available with the banks for their requirements.

• According to the officials at Bank of India (BOI), Mitigation of the credit risk is the
most valuable and promising feature of the new capital adequacy framework Basel-II.
It has equipped the banks with the safeguard measures in order to deal with the risky
exposure of their credit portfolio. Segmentation of different heads on the basis of Risk
weighted Assets in a single portfolio of credit has supported the banks in their risk
measurement exercise.

2. What is your standpoint regarding the Pillar-I norms which is associated with the
Minimum Capital Requirement?

• PNB: - Pillar-I has given a new concept of Credit Risk Mitigation (CRM) and Hair
Cut along with its other provisions. CRM deals with the recognition of certain
collaterals based upon their worthiness to cover the risk exposure and the degree of
risk is assigned upon the fixed criteria. CRM allows a wider range of credit exposure
as it is regulated for regulatory capital requirement. In Pillar-I, the primary and
collateral security are not treated in a distinguished manner or approach but they are
considered in a same manner. This means if a loan is granted of Rs.100 and collateral
 is provided worth Rs.40, then risk weight would be assigned to Rs.60 only and
accordingly provisions would be made for Rs.60 only. Hair Cuts are discounting
factors to be applied on CRM value. In India, banks are allowed to go for standard
supervisory Hair Cut.

FINDINGS
• BOI: - One of the distinguishing feature of Pillar-I of new capital adequacy
requirement framework relates to the fine tuning of the methodology for assessment of
exposure and collaterals for the purpose of calculation of Capital Risk Weighted
Assets Ratio (CRAR).

3. What is the implementation scenario at this stage?

• PNB: - We have thoroughly implemented the Basel-II norms right from our corporate
office to the branches working at the grass root level in a phase wise manner.

• BOI:- We have initiated the implementation process of Basel-II on a parallel run with
the already existing Basel-I, on a quarterly basis since 01/04/06 and finally we have
implemented Basel-II accord on 31/03/09.

4. What were the resources which you employed to ensure the success of the
implementation?

• PNB: - This was implemented through LADDER (Loan & Advances Data Desk
Evaluation Report) System and the calculation of Capital Adequacy and Risk
Weighted Asset(RWA) are being generated through LADDER System. D2K
Technology, a kind of Software is introduced for calculation of risk sensitiveness’ of
loans and advances. Input in form of different sort of data is being provided to the
system and the system itself provides the output.

• BOI:- With the help of several phases of parallel runs and providing appropriate
training to the team member involved in the implementation process and to the
Branch Managers, who were made liable for implementing the Basel-II at the grass
root level i.e. at the branch level, we have ensured the success of the accord. We have
done a lot for data mining and sorting the data in a prescribed format, for successful
implementation of the Base-II reforms

5. What was your experience in this process?

• PNB: - To provide a better framework for implementing the Basel-II Accord, we have
upgraded our LADDER System to suit the desired requirement of Basel-II. We
collected data from the credit department of our branches and the collected data was
consolidated at the circle level and the data collected from different circle offices was
consolidated at the Zonal Offices and ultimately at the Head Office level.
 • BOI:- The whole exercise involved in the implementation of Basel-II has fine tuned
the credit operations of all the banks including ours also. By going through the Basel-
II Capital Adequacy Framework, we have been able to achieve the desired goal i.e., to
maintain the CRAR at 11.75% on 31/03/07, 12.04% on 31/03/08 and now we

FINDINGS
are operating at 13.26% as on 30/06/09 as compared with the minimum level of 9% as
prescribed by the RBI.

6. What were the problems you witnessed while going through the implementation
process?

• PNB:- The biggest difficulty, which we have to face while going through the
implementation process, is related to the operations which we have to perform with the
accumulation and validation of the existing database of the loan account. We had to also
cope up with the up gradation of the LADDER System, trained manpower, awareness
level of the employees, limit exposure, collateral security, non-fund base business, inter
alia, up gradation of the bank-wide information system through better branch-
connectivity, which entailed cost and may also raise some IT-security issues. The
implementation of Basel II also raises several issues relating to development of human
resource skills and database management. Banks required a higher amount of capital
under the Basel II framework.

• BOI: - Since this a very new concept in banking industry implemented by RBI, initially
we faced the problem of methodology to be opted for the proper implementation of the
Basel-II framework. The major problems which we to face while implementing the
Basel-II Accord were such as adjustment of Hair Cut applicable to the collaterals,
increased provisions for NPA’s, calculation of RWA, treatment of term deposit receipts,
NSC, KVP, calculation and supply of appropriate data for the sheets which were 20 in
number, Life Insurance Policies with declared surrender values, treatment of financial
collaterals in case of year mark limit, etc.

7. Which was the most crucial one and why?

• PNB:- Proper data up gradation and restructuring of the LADDER System were the most
crucial problems which our bank had to face while going for the implementation process.
This was so because the consolidation of the data from the wide spread network of
branches, had been performed after the rigorous task of data mining and data validation.
The data was organized in a prescribed format sent from the Head Office, which demands
the detailed information regarding the credit portfolio of individual customers,
segmentation of the different securities based upon their amount and risk exposure,
information regarding bank’s own exposure towards its credit portfolio and associated risk
to that along with the operational arising out from the day to day activities of the banks.
• BOI:- We have 20 spreadsheets to be filed up for the calculation of CRAR in Basel-II
framework. This required a very minute and accurate observation skills and a certainly a
higher level of expertise. If the data is supplied or filled according to the requirements of

FINDINGS
the sheet, then only the calculation at the higher level can be performed and the desired
outcome can be generated. If the person responsible for filling up the sheets fails to do so,
then it will be a mere kiosk, which generally happens also.

8. How did you overcome with the problems associated?

• PNB:- At the Circle Office level, we don’t have to do a lot more as the Head Office
requires only the input from our side, still we had to do data up gradation and LADDER
System up gradation exercise in order to appropriate calculation and report generation for
the CRAR. We spent a huge amount on the creating the technical infrastructure, bank-
wide information system, data base management, adequate and phase wise training
sessions for the human resource involved in the implementation process, etc.

• BOI: - We had collected the required data from the wide spread network of our branches
and the collected data was feed into our system and then we tally the figures with the
bank’s exposure to the risk, in order to derive the correct results. The required software
meeting with the requirements of the new capital adequacy framework of Basel-II, was
developed at the Head Office level, the data was provided by the branches. Training
modules, circulars and various other types of awareness programs was introduced in order
to develop the human resource skill set.

9. Does Basel-II still relevant or we need Basel-III?

• PNB: - Basel-II has been implemented in recent times and there are a lot of other banks
where it is yet to be implemented. We are still waiting for the impact of Basel-II on the
overall functioning of the banking industry in India, so I think Basel-II is still relevant.

• BOI: - Basel-II has just begun its journey in India and it has a long way to go. Thus,
Basel-II is relevant.

10. What would you like to add more to improve the quality of my thesis report?

• PNB:- Additionally, I would like to say that, we are using Standardized Approach for the
calculation of credit risk, Basic Indicator Approach for operating risk and Standardized
Approach for market risk. I would also like to mention that the Internationally accepted
norms like Basel-II is more adaptive in developed countries where the required
infrastructural and technological support and skilled personnel are already available, but
in Indian context, such kind of any accord should be introduced and implemented after
making the prerequisites available for the banks.
FINDINGS
• BOI:- Banks are required to expose a certain amount of equity so that their shareholders
take the first loss and shield depositors from the impact of inappropriate and wrong
business decisions. Basel-II, the risk based capital is going to be one of the primary
drivers of the train towards global banking and aimed to promoting banking industry. The
approach adopted for the calculation of the credit risk is the Standardized Approach, for
operational risk it is Basic Indicator Approach and for the market risk it is Standardized
Approach.
SUGGESTIONS
After the completion of the entire exercise which I have performed during my
Management Thesis-I and the findings at which I arrived, these can be possible
suggestions from my side. I am not authorized to dictate the terms for the successful
implementation of Basel-II, still the followings are my suggestions:-

• The first and the foremost criteria for the implementation and adoption of any type of
internationally accepted accords such as Basel-II, should be the availability of the
required infrastructure in advance.

• With the feature of additional capital requirements, the overall capital level of the
banks will see an increase. For this very purpose banks should be some more
relaxations to enjoy their rights for raising required fund base from the market.

• One of the biggest challenges is re-structuring the assets of the banks which would be
a tedious process, since most of the banks have poor asset quality leading to
significant proportion of NPA. This also may lead to Mergers & Acquisitions, which
itself would be loss of capital to entire system. So, this aspect should also be taken into
care while implementing the Basel-II norms with the banks.

• The new norms seem to require a better level of risk management and measurement
expertise, and also better capital adequacy ratios and geographically diversified
portfolios. Thus more and more focus should be given on the development and
improvement of a sound risk management and measurement expertise at different
level of hierarchy within the banks.

• Since improved risk management and measurement is needed, 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 historical bank data that is a tedious and high cost
process, as most Indian banks do not have such a database as this was also reflected in
my findings. In this regard, banks should have an ultimate database management
system.

• There is a lot more that should be done in the field of building the necessary
technological enhancements in terms of computerization of branches in order to
support the respective head offices with the required input of information. Because,
the technology infrastructure in terms of computerization is still in a nascent stage in
most Indian banks. Computerization of branches, especially for those banks, which
have their network spread out in far-flung areas, will be a daunting task. Penetration of
information technology in banking has been successful in the urban areas, unlike in
the rural areas where it is insignificant.
SUGGESTIONS
• While going through the interview with the experts of this field, i.e. the experts
involved in Basel-II implementation process say that dearth of risk management
expertise in the Indian banking sector is serving as a hindrance in laying down
guidelines for a basic framework for the new capital accord. There is an urgent need
for the experts who can deal with the field of risk management in the implementation
scenario of the Basel-II.

• An integrated risk management concept, which is the need of the hour to align market,
credit and operational risk, will be difficult due to significant disconnect between
business, risk managers and IT across the organizations in their existing set-up. Thus,
there should be a proper coordination and alignment between the experts of the risk
management and the masters of IT to ensure the success of the Basel-II framework.

• Another practical problem which I came to know is that the number of sheets related
to the classification of different heads, to be filled by the operational staff, is really a
tedious task to do. This involves a lot of minute observations while filling up those
sheets and has an ample scope for confusion which will turn into mistakes. So, there
should be simplifications in filling up those sheets to reduce the complications and
improving the assurance of getting the success.

• Implementation of the Basel II will require huge investments in technology.

According to estimates, Indian banks, especially those with a sizeable branch network,
will need to spend well over $ 50-70 Million on this.
NAME OF RESPONDENTS…
In order to assure the success of my thesis, I have done a lot of things which includes
discussions with my faculty supervisor Prof. Manoj Mishra, rigorous search on the internet
sites, long hours of study of these materials, walk-in to the different branches, etc. The banks
where I moved for gathering information & seeking help from their part and their respective
level of response is listed below:-

1. Mr. A.K.Choudhary

Senior manager, Balance Sheet Dept.,

Circle Office, Patna,

Punjab National bank

2. Mr. S.N.Sahay

Senior manager, Balance Sheet Dept.,

Circle Office, Patna,

Punjab National bank

3. Mr. P.K.Sen

Senior Manager, Credit Monitoring Dept.,

Zonal office, Patna,

Bank of India

4. Mr.Satyendra Kumar

Senior Manager, Credit Monitoring Dept.,

Zonal office, Patna,

Bank of India
 5. Mr. U.K.Singh

Manager, Credit Dept.

Bank of India, Bailey Road Branch, Patna.

NAME OF RESPONDENTS…
Prior to this phase of expert interview, I moved to various other banks working in Patna and
met a lot of persons, in order get an insight about the thesis topic and selection of sample,
following is the list of the persons and their response:-

1. Punjab National Bank,

SME Branch, Boring Canal Road, Patna.

Mr. Anand Diwedi

Branch Manager

Response: - He suggested me to consult to the Circle Office of PNB.

2. ICICI Bank

Boring Road Branch, Patna.

Branch Manager

Response: - Confidential matter so can’t discuss with you. They implement as

instructed.

3. Bank of Baroda

S. K. Puri Branch, Boring Road, Patna

Sr. Branch Manager was on leave.

 4. Bank of India

Boring Road Branch, Patna

Mr. Umesh Tiwari

Branch Manager,

Response: - Very supportive, aware, suggested me to meet Mr. Pandey, Manager

Bailey Road Branch, as he was involved in the implementation process

5. HDFC Bank

Boring Road Branch, Patna

Sunil Kumar

Response: - Not aware of the term even

6. Punjab National Bank

Circle Office, R. Block, Patna.

Mr. Manish

IT Dept. Head,

Response:-Supportive, but not authorized to give information in written. Still ready

to cooperate with me in an informal manner.

TO SUM UP
The management thesis is meant to provide an interface between the industry and the
student pursuing his/her MBA program. This is being done through the way of
research process undertaken in order to get an insight of the preferred sector or
industry. The research objective may deals with the problem faced by the industry or
testing of a new idea. This may concerned with the new product development, market
mapping, scope for the product in the market, an attempt against the competitors
move, impact of advertisement over the sales figures, etc. At our college INC, it is
done in the Sem-III of the MBA program under the guidance of the assigned faculty
supervisor, who takes care of the each and every achievement and failure made by
the student and ensures the successful completion of the research undertaken.
 As far as my preferred sector is concerned, it is the banking sector where I
would like to make my career. That’s why I have selected the topic for Management
Thesis-I, related to the banking industry i.e, “Problems in Implementation of Pillar-I
norms of Basel-II with special reference to Punjab National Bank and Bank of
India.”

The information from secondary data sources has been collected and studied.
This gave me an insight about the Basel – II reforms, its major aspects, the Three
Pillars, implementation status, major challenges, and the problems involved in its
implementation. This phase also witnessed the awareness level among the bankers
themselves based on the response they gave. The target bank has also been selected
after a rigorous movement from bank to bank. The research design has also been
selected along with the data collection methods, sampling process and selection of
the sample. After completing the process, I have prepared the questionnaire and
collected information from the personnel dealing with the credit department of both
the banks.

The banks, in recent times, have increased their areas of operations

manifold and became global. This has also made the banks more concern about the
customers and their convenience regarding the products and services offered by
them. The increased level of customer base has intensified the threat of risk from the
different players of the market.

The scope of this thesis involves the measures to safeguard the interests of the
banks in the form of regulatory standards laid down by the Bank for International
Settlements (BIS), Switzerland. The scope of this study is primarily associated with
the Minimum Capital Adequacy Ratio of the Basel – II norms, and the problems
faced by the two banks i.e., Bank of India & Punjab National Bank. This study will
help me in finding out the level of difficulties faced by an organization, the
management, and the key person from the implementation team, while implementing
the guidelines of such kinds of reforms and how they get rid of the problems. The

TO SUM UP
report incorporates the various tools and techniques used for implementing the Pillar-
I of the Basel – II

Broadly speaking, in developing Basel II we are striving to establish higher

standards for internal risk management at banking organizations, including capital
adequacy, and to improve both the supervisors' and the public's understanding of
banks' risk taking and risk management. Over the past two decades, major banking
organizations have become ever larger and more complex, while some national
 financial systems have become more concentrated. Against this backdrop, assessing
the overall risk and capital adequacy of the largest banks has become not only
increasingly difficult for supervisors, the public, and bank management, but also
critical for national authorities. If you believe, as I do, that Basel I was one of the
most important advances in international bank supervision, then I hope you also
accept that market changes and increased sophistication in risk-management
techniques require that we now update that initial framework. A fundamental
premise of Basel II is that, for these major banks, neither supervisory nor market
discipline can be effective unless banks' own systems can be depended on to
measure and manage risk taking and capital adequacy. Basel II is intended to
provide both a framework and incentives for achieving these ends.

The major findings which I gathered from the expert interview are such as the
basic problems are associated with the operations which we have to perform with the
accumulation and validation of the existing database of the loan account. Banks had
to also cope up with the up gradation of the LADDER System, trained manpower,
and awareness level of the employees, up gradation of the bank-wide information
system through better branch-connectivity, which entailed cost and may also raise
some IT-security issues. The implementation of Basel II also raises several issues
relating to development of human resource skills and database management. Further,
the issues were also related with the adjustment of Hair Cut applicable to the
collaterals, increased provisions for NPA’s, calculation of RWA, treatment of term
deposit receipts, NSC, KVP, calculation and supply of appropriate data for the sheets
which were 20 in number, Life Insurance Policies with declared surrender values,
treatment of financial collaterals in case of year mark limit.

In this regard, banks and the RBI should apply their more concern about
creating the supporting environment, technical infrastructure, computerization,
human skill development, reducing the complications in filling up the required
information set at branch level, creating an awareness level, etc.

After successful completion of the entire project, one thing I must mention that
the banks have put their sincere efforts to follow the norms and the guidelines
underlined by the RBI in India, in accordance with the Basel-II framework. Yes, it is
evident that they have to face a lot of problems while going through the
implementation process, but the banks have successfully managed and got the status
of successfully implementing the Basel-II Accord within the specified timeframe.

REFERENCES
BOOKS
• Banking Reforms

Icfai University Press

 • Treasury Management – Icfai Journal

May, 2009

INTERNET
• www.finance.indiamart.com

• www.finanacialexpress.com

• www.globalriskregulater.com

• www.wikipedia.org.com

• www.federalreserve.com

• www.bankofindia.org

• www.punjabnationalbank.com
QUESTIONNAIRE FOR MT-I
This is a questionnaire regarding the thesis topic “Problems in implementation of Pillar-I
norms of Basel-II Accord with special reference to Punjab National Bank and Bank of
India in Patna.”

Q.1. How do you perceive the Basel-II Accord?

Q.2. What is your standpoint regarding the Pillar-I norms which is associated with the
Minimum Capital Requirement?

Q.3. What is the implementation scenario at this stage?

Q.4. What were the resources which you employed to ensure the success of the
implementation?

Q.5. What was your experience in this process?

Q.6. What were the problems you witnessed while going through the implementation
process?

Q.7. Which was the most crucial one and Why?

Q.8. How did you overcome with the problem associated?

Q.9. Do you think Basel-II is still relevant or we need Basel-III?

Q.10. What would you like to add more to improve the quality of thesis report?