The global IT budget related to risk management applications for the global financial services sector to become Basel II-compliant is expected to grow to $22 billion. Indian IT firms are pitching for a chunk of it. Venkatchari Jagannathan reports.

The Basel II accord and other regulatory compliance measures have thrown up a huge business opportunity for banking software companies around the globe.

Says Aruna Rao, business head, corporate banking, products and services, Polaris Software Lab Limited, "The worldwide credit risk management systems market alone is expected to grow at a compound annual growth rate of 7 per cent to $7.96 billion by 2010."

Citing a Tower group-a research group- report Debashis Chatterjee, vice president, Cognizant Technology Solutions says, "The global IT budget related to Basel II is expected to be $22 billion, which would be spent on software and services in the run up to compliance with the norms." According to him the Basel II risk management application software market is still evolving and many technology providers claim to have partial or all necessary product components.

Given this could it be said that the Basel II norms is for banking software companies what Y2K was for software services companies?

Responds B Suresh Kamath, chairman and managing director, Laser Soft Infosystems Limited, "The Y2K boom was very large and Basel II definitely will not be such a large boom. This is primarily because, Y2K problem was affecting all software users, unlike the Basel II norms, which will only affect banking companies."

Adds Rajesh Hukku, chairman and managing director, i-Flex Solutions Limited, "Both cannot be equated. Y2K involved reading every line of software code and correcting the same."

According to Cognizant Technology''s Chatterjee, the implementation of Basel II is considered to be one of the biggest IT challenges since Y2K. "WhileY2K corrected a structural flaw in IT systems, Basel II will have significant implications on business operations of banks. Compliant banks will, in the long run, reap benefits in terms of money, time and people."

Meanwhile the solutions that are in demand to comply with the Basel II norms are integrated risk management products with credit / market / operational risk modules, risk weighted assets software and data warehousing software are in great demand in the North American and European markets.

Interestingly, the Indian software vendors in the banking, financial services and insurance (BFSI) segment are strongly pitching for a big slice of this emerging market. The Bangalore-based Rs1,511 crore i-Flex Solutions has already made its mark in the global market. Out of the handful of enterprise wide risk management solutions available worldwide, i-Flex Solutions'' Reveleus ranks alongside the other top brands. The Tower group has ranked Reveleus amongst the best in the domain.

The other popular products are Algorithmics, Fermat, Misys Almonde, SAP, SAS and Sunguard. According to Rao, Polaris Software is the global implementation partner for Algorithmics.

But complying with the Basel II norms is not simple as the challenges are operational as well as technological. The norms require banks to assess and manage risks at an enterprise level across all lines of businesses and geographies. "This has driven risk management across the global banking system to a new level of sophistication and maturity," says Chatterjee.

According to him one of the challenges that banks face is ensuring the implementation of systems fully compliant with the Basel II norms. Credit risk management begins at the point of origination. Nevertheless, when it comes to locating loan origination history and credit history, Basel II presents a major hurdle to the banking industry.

"Banks don''t have the core systems or architectures in place to consolidate, mine and cleanse the essential data and provide accurate, timely and relevant reporting. Real-time aggregation of data often necessitates significant reengineering of data flows and business processes." Similarly in the case of operational risk, there exist differences in the quantitative and qualitative or process-based approaches. "The biggest challenge is in creating not only a cost-effective, but also an adaptive solution that can evolve along with the regulations and the implementation norms," he says.

As per the Basel II norms banks have to re-classify their assets based on the various claim categories specified in the norms. The main challenge here is to do this without changing the bank''s chart of accounts. The way out is to build a software framework, which can wrap around existing software systems, remarks Kamath.

According to him the main challenge for the banks is to capture required information about customers (retail and corporate), securities (collaterals) and accounts. Without proper data, claim category assignments as per Basel II norms may be faulty. "Non performing asset (NPA) classification of accounts will also affect assignment of claim categories for assets."

The other challenges that could be listed out are, lack of historical data, data integrity, absence of data in digital form, multiplicity of data forms.

Kamath says that banks have a lot of historical data and this would have to be culled from different software systems. His company has developed a tool called Back Volume Server that unifies data into one homogeneous database with mapping between different systems and also seamlessly handle historical data design enhancements.

For the domestic banking industry, the Basel II norms will be applicable from 2007 onwards. According to Kamath, amongst the nationalised banks, Andhra Bank has already completed implementation of Basel II norms software in over 1,000 of its branches.