Basel frame work impact on the banks

In addition to the work on capital standards, particular supervisory questions which the Committee has addressed include the supervision of bank’s foreign exchange positions, the management of banks international lending (i.e. country risk ), the management of bank’s off –balance –sheet exposures, the prevention of criminal use of the banking system, the supervision of large exposures, risk management  guidelines for derivatives and the management of interest rate risk . Supervisors may decide to apply a 150% or higher risk weight reflecting the higher risks associated with other assets.  In the case of credit risk, it prescribes differential risk weights within each category of exposure. Credit risk could be reduced by adoption of credit risk mitigation techniques. However introduction of operational risk factor is likely to increase the capital requirement. Improved risk assessment ensures greater discipline and better information for investors in order to comprehend the bank’s risk pastures and act rationally. From 1997 onwards, Basel Committee has  taken initiative to address the rigidities in 1988 Capital Accord by evolving a comprehensive and risk- sensitive  New Basel Capital Accord. The Minimum Capital Requirements are composed of three fundamental elements: a definition of regulatory capital, risk weighted assets and the minimum ratio of capital to risk weighted assets.

 

IMPACT ON THE BANK

At the outset it is clarified that the proposed New Accord is yet in its formative/ evolutionary stage – it has been floated as a Consultative Document and the accord is not yet finalised or even fully crystallised. Many sections/ parts of the proposed Accord have scope for additional inputs/ further refinement. Further, there are also a number of areas where options are to be exercised at the supervisory level. There are also other areas where options could be exercised at individual bank level. This three-fold fluidity at the level of the Committee, the Supervisor and the Bank will render premature, any attempt at this stage to quantify the impact. It may be added that until the Committee views are firmed up, the supervisory (RBI) options can not be delineated; similarly until the supervisory options are exercised, the options available to the Bank can not be examined properly.

AREAS NOT FINALISED BY THE COMMITTEE:-    

    It is still exploring the possibility of using the country risk rating assigned to sovereigns by Export Credit Agencies(ECAs) as against using the ratings of  External Credit Assessment Institutions(ECAIs)
    The risk weights for retail portfolio have not yet been finalised.

    The proposals on the IRB approach for retail, project finance and equity exposures are yet be finalised.

    The proposals related to operational risk are still in a formative stage.

AREAS REQUIRING THE EXERCISE OF OPTIONS AT THE SUPERVISORY LEVEL :-

    Recognition of eligible ECAIs (External Credit Assessment Institutions) / ECAs (Export Credit Agencies) and discretion for assigning lower risk weights for specific exposures.

    Normally banks may use only solicited ratings, Supervisors may allow them to use unsolicited ratings.

    Claims on PSEs may be treated as claims on the Sovereigns.

    Risk weight may be increased depending upon the overall default experience of the Supervisor.

    Supervisors may decide to apply a 150% or higher risk weight reflecting the higher risks associated with other assets.

IMPACT ON CAPITAL REQUIREMENT :-

Within the above constraints, we give below our opinion which is limited to the likely direction(increase/ decrease) of change and does not extend to the magnitude thereof.

    The new accord will be extended on a consolidated basis to holding companies of banking groups. Further, individual banks within the group should also be capitalised on a stand-alone basis. Thus we will need to provide for adequate capital at all of our subsidiary companies. This could lead to additional demands on capital requirements, to compensate for deficit capital, if any, in the group.

    In the case of credit risk, it prescribes differential risk weights within each category of exposure. It is difficult to crystallise  the impact as it could move both ways. For instance, under the existing accord, all corporates get risk weighted at 100% whereas under the new accord, some may get a weightage of 20% or 50% while others may get a weightage of 150%.

    Credit risk could be reduced by adoption of credit risk mitigation techniques. It may have an effect of reduced capital requirement.

    In the case of market risks, there is no change from the existing accord. However, as it has not been implemented in India so far, there could be an additional capital requirement when RBI introduces it.

    In the case of operational risks, the consultative document states that the work is still in a developmental stage. While it is expected that the operational risk would constitute approx. 20% of the overall capital requirements under the new framework, the impact can not be assessed till further crystallisation of the committee’s views. However introduction of operational risk factor is likely to increase the capital requirement.
5.    CONCLUSION

In the light of the above, our Bank needs to have a definite agenda encompassing the following: -

    There is an urgent need to realise that adoption of advanced risk management practice is absolutely essential in its own right. New risk management models do have the potential to support rational, efficient, reliable internal control system and choices about risks. Pre-requisite for such applications require advanced IT infrastructure, robust MIS and necessary human expertise.

    Effectiveness of IRB approach and compliance with its spirit will be contingent on efficient internal audit and loan review system.

    While the efficacy of proper risk management will optimise yield on their funds, higher return on funds will facilitate ploughing back of profits into capital. Due to high cost of capital and subdued market sentiments, this is the only way left for banks to raise their capital adequacy.

    Improved risk assessment ensures greater discipline and better information for investors in order to comprehend the bank’s risk pastures and act rationally. It has to be borne in mind that improved market discipline does not necessarily amount to uniformly harsher treatment of banks by the market. On the contrary, it recognises the strengths of banks and weeds out weak links in a transparent manner.    

Is depreciation a source of funds

Depreciation means decrease in the value of an asset due to wear and tear, lapse of time, obsolescence, exhaustion and accident. Depreciation is taken as an operating expenses while calculating funds from operation. The accounting entries are as follows-

i) Depreciation A/C Dr

To Fixed Assets A/C

ii) Profit & Loss A/C Dr

To Depreciation A/C

Both the profit & loss A/C and depreciation are non-current asset and depreciation is an non fund item. It is neither a source nor an application of funds. It is added back to the operating profits to find out funds from operation since it has all been charged to profit & loss a/c bur it does not decrease fund from operations. Depreciation should not therefore be taken as source of funds. If depreciation were really a source of fund by itself then any enterprise would have improved its position at will by merely increase the periodical depreciation charge.

Fund flow statement Vs Income statement

1) It deals with financial resources required for running the business activities. It explains how were they used.	1) It discloses the results of the business activities i.e. how much has been earned and how it has been spent.
2) It matches the fund raised and fund applied during a particular period. The sources and applications of fund may be of capital as well as revenue nature.	2) It matches the income of a period with the expenditure of that period which are both of a revenue nature. For examples when shares are issued for cash, it becomes a sources of fund while preparing a fund flow statement but it is not an item of income for an income statement.
3) Sources of fund are many besides opearations such as shares capital , debentures, sale of fixed assets.	3) It discloses the results of operations can not even accurately tell about the funds from operations alone because of non-funds items (such as depreciation, writing off fictitious assets etc being included there in.

Fund flow statement Vs Balance Sheet

1).It depicts the overall increase or decrease in working capital during a particular period.	1) shows the financial position of a business on a particular date
2) It incorporates the different sources and applications of funds during a period.	2) It incorporates all assets and liabilities on a particular date .
3) It depicts the changes that have taken place in the fixed assets and fixed liabilities, which have a bearing on the funds during a particular period.	It shows all assets and liabilities of a business on a particular date.
4) It is a dynamic statement since it focuses on those major transactions, which have been behind the balance sheet changes.	4) It is merely a statement of assets and liabilities on a particular date.

Uses of Fund Flow statement

Uses of Fund Flow statement-

i) It explains the financial consequences of business operation. Funds flow statement provide a ready answer to so many conflicting situation such as ;

a) Why the liquid position of the business is becoming more and more unbalanced in spite of business making more and more profit ?

b) How was it possible to distribute dividends in excess of current earning or in the presence of a net loss for the period ?

c) How the business could have good liquid position in spite of business making losses or acquisition of fixed assets ?

d) Where have the profits gone ?

 

Defined answers to these questions will help the financial analyst in advising the employer/ client to direct the fund to the channels which will be most profitable for thee business.

ii) It answers intricate queries: - The financial analyst can find out answer to a number of intricate questions-

a) What is the overall credit worthiness of the enterprise?

b) What are the sources of repayment of loan taken?

c) How much funds are generated through normal business operation?

d) In what ways the management has utilized the fund in the past and what are going to be likely use of funds?

iii) It acts as instruments for allocation of resources. - A projected fund flow statement will help the analyst in finding out how the management is going to allocate scarce resources for meeting the productive requirement of business. The funds should be managed in such a way that the business is in a position to make payment of interest and loan installments as per the agreed schedule.

iv) It is a test as to effective or otherwise use of working capital- The adequacy or inadequacy of working capital will tell the financial analyst about the possible steps that the management should take for effective use of surplus working capital or more arrangement in case of inadequacy of working capital.

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FUND FLOW ANALYSIS

Meaning –The most commonly accepted meaning of the term fund is the working capital of the business which denotes excess of current assets over current liability.

There will be a flow of fund in case the working capital position of the company changes on account of any transaction.

Example -I- The company realizes Rs20000/- from its debtors. The transaction will reduce the debtors from Rs80000 to 60000 but increase the cash balance from the present balance of Rs 20000 to Rs40000. Thus the total current assets continue at the old figure of Rs 30000 . This means this transaction will not bring any change in the working capital of the company. It is simply a conversion of current assets in to another current asset.

Thus there is no flow of fund.

Example-II- The company sells its building having a book value of Rs50000 at sum of Rs 60000. This transaction will cash balance with the company from Rs20000 to Rs80000.The total current assets will be increased by Rs60000. Thus the transaction has brought a change in working capital position .

From the above, the following general rules can be formed –

1) There will be flow of fund if a transaction involves-

i) Current assets & fixed assets .eg. purchase of building for cash.

ii) Current assets and capital eg. Issue of share for cash

iii) Current assets and fixed liability.,eg. Redemption of debenture for cash.

iv) Current liability & fixed liability eg. Creditors paid up in debentures.

v) Current liability & capital eg. Creditors paid of in shares.

vi) Current liability and fixed assets. eg: Building transferred to creditors in satisfaction of their claims.

There will be no flow of funds if a transaction involves –

i) Current asset and current liability eg. Payment made to creditors.

ii) Fixed asset and fixed liability eg. Building purchased and payment made in creditors

iii) Fixed asset and capital eg. Building purchased and payment made in shares.

Cash Flow Analysis Vs Fund Flow Analysis

1) It is concerned only with the change in cash position.	1) It is concerned with the change in working capital position between two balance sheet dates.
2) A cash flow statement is mere a record of cash receipt and disbursement. Of course it is valuable in its own ways but it fails to bring to light many important changes involving the disposition of sources.	2) While studying the short term solvency of a business one is interested not only in cash balance but also in the assets which can be converted in to cash. This information is available in the fund flow statement.
3) It is more useful to the management as a tool of financial analysis in short period as compared to funds flow anlysis. It has rightly been said that shorter the period covered by the analysis, greater is the importance of cash flow analysis.	3) If it is to be found out whether the business can meet its obligations maturing after 10years from now, a good estimate can be made about firm’s capacity to meet its long term obligations if change in working capital on account of operation are observed.
4) Cash is apart of working capital and therefore an improvement of cash position results in improvement in the fund position, but the reverse is not true.	Inflow of cash result in inflow of funds but inflow of funds may not necessarily result in inflow of cash. Thus a sound fund position does not necessarily mean a sound cash position but a sound cash position generally mean a sound fund position.

Some people use the term fund in a very narrow sense of cash only . In such a event the two terms fund and cash will have synonymous meaning. For All You Blogs

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Gross domestic product:3

In economies, near entity create square measure create for sales event, and sold-out. ,  the enumerate spending of currency used to buy thing is a spatial relation of mensuration creation. This is renowned as the using up know-how of scheming GDP. Note that if you knitting yourself a human, it is human action but placental mammals not get counted as GDP because it is never . human- is a immature line of the efficiency, but if one trusts some John Roy Major activities much  as mortal- (broadly speaking undischarged) as presentation, GDP give ups to be an exact indicant of creation. likewise,
if there is a lengthy name change from non-market precondition of overhaul (for lesson preparation, improvement, person , do-it yourself statuss) to alter  of work, then this movement toward redoubled shop thinking of service Crataegus oxycantha protective covering a impressive  diminish in real domesticated display, resultant in to a fault cheerful and increased  rumored GDP.

The perfect interior goods (GDP) is one the coil signalings used to bore the upbeat of a rural area' frugalness. It embodys the sum dollar esteem of all  and coupling  over a particular indication ending - you can alter of it as the change magnitude of the system. commonly, GDP is univocal as a comparability to the late after part or time period. For occurrence, if the period of time- GDP is up 3%, this is persuasion to signify that the system has full-grown by 3% over the last time period. GDP is complex  (which is reason we allow it to the social scientists,) but at its nearly staple, the figuring can be done in one of deuce path: either by adding up what everyone attained in a class (financial gain way,) or by adding up what everyone worn-out (disbursement know-how.) Logically, some  measures should win at just about the like count.

The financial gain proffer, which is quondams referred to as GDP(I), is premeditated  by adding up numerate defense to workers, double-dyed lucre for corporate and non unified healthy s, and taxes less whatsoever subsidies. The spending know-how is the more vernacular act and is measured by adding whole T.B., investment funds, system of rules defrayment and textile spreads. one can ideate, system product and sickness, what GDP verbalises, has a titanic combat on all but everyone inside that frugalness. For representative, when the system is sound, you will typically construe let loose state and regular payment s as businesses obligation labour to sports meeting the biological process frugality. A evidential occurrence in GDP, whether up or falling ,  has a profound phenomenon on the tired alter. It's not rugged to believe how come: a nonstandard   ordinarily norm soft  financial gain for companies, which in move mean nether origin Mary Leontyne Prices. capitalists in truth care about negative  GDP object, which is one of the ciphers s use to determine whether an scheme is in a ceding.

Gross domestic product:2

The result of pomposity can be eject by activity GDP vegetation in constant quantity literal tolls. withal, some s lay out that touching a formal  gdp take aim should be the primary cognitive content of  plan of action. This is because it would cue policymakers to take into declare the meaning of their resultants on pretentiousness, as good as on vegetation. GDP can be calculable  in threesome way. The financial gain know-how ciphers the financial gain of occupants traced from the display of trade goods and service. The sign know-how add ups the measure of indefinite quantity from the distinguishable computer memory units of the .
The financial loss know-how summates defrayal on trade goods and personnel create by nonmigratory s, ahead allowing for derogation and cap bodily process. As one soul' product is some other causal agency' financial gain, which in twist change states using up, these triad measures ought to be selfsame. They seldom  because of  s. what is more, the indefinite quantity and financial gain measures get rid of unreported  scheme human activity that takes post in the sarcastic  saving but that Crataegus laevigata be assume by the depletion measure.

GDP is unlikable as an lense of social science plan of action by some because it is not a double-dyed measure of . It placental mammals not consider faces of the respectable being specified  as some ease activities. Nor executive departments it permit economically worth activities that square measure not prepaid for, specified  as raises commandment their children to have. But it eutherians reckon some aim that petty the upper-class  of being, specified  as activities that wrongdoing the geographical area.

GDP can be compulsive in terzetto selection, all of which should, in law, devote the indistinguishable turn up. They area unit the result (Beaver State production) address, the financial gain airway, and the  timing. to the highest degree direct  of the terzetto is the creation access, which nitty-grittys the produces of  collection of enterprisingness to make it at the add up. The disbursal movement work on the  that all of the result essential be tree branch by soul, thus the valuate of the tot up issue moldiness be coordinate to domicile' tot disbursements in purchase thing. The financial gain come up work on the  that the financial gains of the creative cistrons .