The Basel I and II recommendations of the Bank of International Settlements (BIS) have been framed with the purpose of ensuring sufficient capitalization of banks' assets and lessen the credit and operational risks faced by the banks.While the Basel I norms dealt only with credit risk, Basel II norms cover all types of risks faced by a bank such as interest rate risk, foreign exchange risk, operational risk, etc. The issues of Basel II are multiple and vary from country to country depending on the banking environment of each country.

The Implementation of Basel II will affect the Indian banks in various ways. It will involve high costs, have an effect on loan pricing and will give rise to consolidations, as recently seen by the decision of the State Bank of India (SBI) to merge its subsidiary banking units. In effect, it will involve a lot of trade-offs for the banks and the Indian banking sector as a whole.

Basel II norms are likely to have important consequences on the health of financial sectors worldwide because of the increased importance on banks' risk-management systems, supervisory review process and market discipline and the Indian banking sector is no exception. Implementation of the norms will give the Reserve Bank of India (RBI) a greater say in the World Banking Forum as it follows the global best practices. The Indian banking sector will offer a great opportunity to all commercial banks that possess the technology to serve the population in the world's economy. It will certainly be a huge landmark in the Indian banking sector. The new rules bring out the issues of the bank like bankwide risk management and active risk management.

This will help in better pricing of the loans in alignment with their actual risks. The customer with a high credit-worthiness will be benefited and will get loans at cheaper interest rates. Basel II norms need vast amount of historical data, superior techniques and software for computation of risk measures. This will translate into huge demand for IT and Business Process Outsourcing (BPO) services. A flip side is that the knowledge gained by the big banks due to the implementation of complex norms will act as an entry barrier to the market, as international markets provide incentive to sovereigns and banks that have implemented Basel II.

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