SSIs - taken for granted on Basel-II?
R. Gopalakrishnan
One of the things that have been happening in the past few years in the rarefied world of financial regulation, far away from the scrutiny of the entrepreneurial community, is the finalisation of revised prudential norms for banks under the auspices of the Bank for International Settlements, Basel (Switzerland).
The revised Basel norms, known as Basel-II, to be enforced within the next two years, are bound to impact borrowers from banks, besides banks themselves, one way or another. But it is doubtful whether the small scale industry (SSI) sector in India, which accounts for bank advances worth Rs 60,000 crores annually, has been made aware of the importance and implications of the Basel-II regulations, not to say of being taken into confidence by the policy-makers while finalising the nation's own stance in the Basel Committee.
That is not a happy situation. In many developed countries, organisations of small and medium enterprises (SMEs) have been taking an active interest in the Basel process and proactively representing their own point of view regarding the direction that discussions --highly complex and technical, but nonetheless important for day-to-day financial deals -- at Basel have been taking and various formulae that were getting finalised, regarding how banks should improve their assessment of risks in various categories of advances and provide for capital as a cover against the risks.
In the United States of America (US), the Office of Advocacy in the Small Business Administration (SBA), mandated by Congress to examine all public policies from the point of view of the impact these may have on small businesses, has been interacting with the entrepreneurial community on Basel-II. The European Chamber of Small Business has been interactive with the European Union's (EU's) executive bodies on Basel issues. However, in India, the matter seems to have been left entirely to pundits in the RBI and higher echelons of the Union Finance Ministry and the banking community. This, despite views held widely that the application of the first set of Basel regulations in respect of capital adequacy, income recognition and risk assessment (Basel-I, 1988) in India has happened without regard to the banking practices and economic and legal environment in this country as distinct from developed countries and hence had not proved an unmixed blessing.
It is true that the Basel decisions are quite complex and highly technical - and in fact, according to the Independent Community Bankers of America (ICBA) -- needlessly so. In any case, there is no justification to keep the small entrepreneur, however limited his theoretical understanding, away while evolving the nation's own contribution or response to the proposals of the Basel Committee and while implementing the Basel Accord.
Despite the complexity of issues involved, the SSIs and medium enterprises should be able to pose relevant questions that relate to their legitimate interests and influence the policy of the country's own regulator, the RBI, while adopting Basel-II.
What will be the role of rating - internal and external - of borrowers by banks in allocation of credit to them? Will Basel-II force small entrepreneurs away from the traditional short-term and long-term funding and towards equity capital? Is it true, as claimed by BIS documents, that Basel-II will lead to a lowering of risk weight and capital charge on lending by banks to small businesses and retail borrowers? What difference will Basel-II make to the issue of collateral, especially collateral of personal housing as distinct from collateral of assets of the businesses themselves? What is the reliability of claims that the new regulations will lead to less reliance on intuitive decision-making by bankers and greater reliance on quality and reliable data? What will be the relative cost of compilation and presentation of such data by small borrowers compared to the benefits that are supposed to arise?
Perhaps it is not late even now for an enlightened debate within India's entrepreneurial community and its interaction on Basel-II with financial regulators and economic policy-makers.
SSIs : A review
