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One of the most significant objectives of any bank is to grow their business and profits by increasing lending and investments vis-à-vis need to install an adequate risk mitigation process and measures. Risk has always been associated with banking, and banks have been able to manage their operations due to strict lending norms. Banks focus on the various stages of disbursal of loans, such as credit appraisals, viability of proposed projects, a promoter’s experience, past financials statements, and credit monitoring and supervision. In the past decade, the Indian banking system has witnessed an increase in non-performing assets and bank frauds owing to the lack of adequate skills of lending officers, wilful defaults by borrowers, and poor credit monitoring by the banks post-disbursement of loans (Singh, 2016). Recent cases of non-performing assets (NPA) bank frauds, money laundering, conflict of interest, poor corporate governance, and ethical failure were observed in the Indian banking system. As a result, banks became more cautious and risk averse, which led to a decline in credit growth up to the 5%-6% level. Speaking at a September 2020 webinar organised by the Indian Merchant’s Chamber of Commerce and Industry, Mr Arijit Basu, Managing Director of the State Bank of India, stated that lenders need to balance growth with prudence, and while banks need to support businesses, they also need to have adequate risk-mitigation measures in place. He went on to say that all Indian banks must follow prudential lending procedures based on a good business model with a viable cash flow and due diligence in high-risk projects.
Bankers cannot avoid risk just by reducing lending; they must manage risk by meeting credit requirements for the banking industry. Banks are always focussed on building a smooth process of financial intermediation, but in the present day scenario, banks are confronted and concerned with various types of risks. Hence, the efficient management of financial and non-financial risks through the use of IT advancements has become inevitable in the banking industry. Further, at the international level, consolidation, globalization, and real-time information are three important factors that have transformed risk management in the modern world (Härle et al., 2016). In 1930, the Bank of International Settlement (BIS) was established to provide global central bank cooperation. It was founded through an intergovernmental agreement between Germany, Belgium, France, the United Kingdom, Italy, Japan, the United States, and Switzerland, and it began business in Basel, Switzerland, May 17, 1930. Today it is owned by 63 central banks worldwide that account for approximately 95% of the world’s GDP. The BIS promotes international cooperation among financial supervisory officials and monetary authorities through a process known as the “Basel Process.”
The Basel Committee on Banking Supervision (BCBS), the primary global standard setter for the prudential regulation of banks, has 45 members that comprise central banks and bank supervisors from 28 jurisdictions. Basel III was created as a set of reforms, developed by the Basel Committee on Banking Supervision in response to the global financial crisis of 2007-2009; the goal was to ensure a stress-tested quality of capital to mitigate liquidity and market risk. The 2007-2009 crisis taught a critical lesson to the banking industry to further strengthen their capital base to protect themselves from the dangers of bank frauds and scams.
The Basel III reforms were finalised December 2019 and targeted implementation, with lenders in India being required to comply with these reforms beginning January 1, 2022. However, due to the coronavirus pandemic, the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of the BCBS, deferred implementation of Basel III until January 2023.