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Session 2 HDFC-JOINT CERTIFICATION PROGRAMME HDFC-IBS Mumbai

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  • 8/4/2019 Session 2 HDFC-JOINT CERTIFICATION PROGRAMME HDFC-IBS Mumbai

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    RISK MANAGEMENT, ALLIANCEAND

    MERGER, CONSOLIDATIONParticipatory notes, Fair Practices for debt collection

    1- 2 session

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    Dr.P.R.

    Kulkarni

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    1.7RISK MANAGEMENT

    Bank in the process of financial intermediation are confronted withvarious kinds of financial and non-financial risk.

    They are interest rate risk, foreign exchange risk, liquidity risk, pricerisk, operational risk, regulatory risk

    These risk are highly independent/interdependent events that affectthe banks

    Risk Management Functions: the broad parameters of the riskmanagement function should covers:

    1. Organizational structure

    2. Comprehensive risk approach

    3. Risk management policies4. Strong MIS

    5. Well laid out procedures

    6. Periodical review

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    Risk management structure :

    Each bank should set risk limit after assessing risk

    Risk management committee should set up with the fullresponsibility.

    The functions of the committee are essentially toindentify, monitor and measure the risk.

    Frame policies ,verifies the models used for assessment

    of risk Loan Review :The main objective of LRM could be :

    Identify the loan which develop the credit weakness

    Evaluate the portfolio quality

    Determining adequacy of loan loss provision Provide information to top management on credit

    administration

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    CREDITRISK

    Credit risk is defined as the possibility of losses associated

    with diminution in the credit quality of the borrower.

    Credit risk emanates from a banks dealings with an

    individuals, corporate, bank, FI.

    Credit risk may take following forms

    Direct lending, Guarantees treasury operation, cross borderexposure.

    Market risk: Market risk arises due to price changes in marketsuch as interest, foreign exchange fluctuation, prices of

    commodity. The market risk take the form of : Liquidity risk, foreign

    exchange risk, equity risk, interest rate risk, commodity risk

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    Operational risk ;

    The operation risk arises because of failure of thesystem, procedure and machines. The mostimportant type of operational risk involvesbreakdown in internal control and corporate

    governance.

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    THE BASEL I ACCORD

    Basel I was largely limited to the treatment of credit andmarket risk (with some blending of operational risk) andhad a flat assessment of 8 percent of risk-weightedassets for the calculation of risk capital requirements

    related to credit risk charges

    The Basel II Capital Accord (Basel II) is an extension ofthe original risk and capital management guideline(Basel I) created by the Bank for International

    Settlements in 1988.

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    DIFFERENCE IN APPROACHES OF BASEL I & BASEL II

    Basel I Accord explicitly covers only two types ofrisks in the definition of risk weighted assets: (1)credit risk and (2) market risk. Other risks arepresumed to be covered implicitly through thetreatments of these two major risks.

    The pillar one proposals to modify the definition ofrisk-weighted assets in the New Accord have twoprimary elements: (1) substantive changes to thetreatment of credit risk relative to Basel I Accord; and(2) the introduction of an explicit treatment ofoperational risk that will result in a measure ofoperational risk being included in the denominator ofa banks capital ratio.

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    THE BASEL II FRAMEWORK IS.

    More risk sensitive

    More risk specific

    Includes operational risk as part of the risk capitalcalculation, and

    Deliberately links the efficient and profitable provision of

    capital, across all aspects of the business, to riskmeasurement and management activities

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    KEY ELEMENTS OF THE NEW ACCORD

    The New Accord consists of three pillars:

    (1) Minimum capital requirements(2) Supervisory review of capital adequacy

    (3) Public disclosure.

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    Pillar 1 Pillar 2 Pillar 3

    Minimum CapitalRequirements:

    Three Methods forComputing:

    Credit RisksOperational Risks

    Methods for MarketRisks remainedUnchanged

    Supervisory ReviewProcess

    Five key Principles1. Board and Senior

    Management Oversight

    2. Sound CapitalAssessment

    3. ComprehensiveAssessment of Risks

    4. Monitoring andReporting.

    5. Internal Control Review.

    Market Discipline:

    Disclosure Requirementof:

    Description of riskmanagement

    approachesLevels of capitalAnalysis of riskexposures and capitalby businesses /segments

    Basel II Accord consists of three mutually enforcing Pillars.

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    CAPITAL

    Tier 1 capital:(1)Paid up capital(2)Statutoryreserves (3)Disclose free reserves.

    Tier II capital: undisclosed reserves, preferenceshares, revaluation reserves, provision for lossreserves, subordinate debts

    Tier II capital should be 100% of tier I capital

    Dr.P.R.Kulkarni

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    1.8 ALLIANCES /MERGERS/ CONSOLIDATION

    Alliances : A strategic alliance is formal and mutuallyagreed to commercial collaboration between companies.

    The partners pool, exchange or integrate specificbusiness resources for mutual gains . Yet they remainseparate business

    It is arrangement whereby two organizations agree toco-operate in the operation of business activity.

    The alliance can be either equity or non equity base.

    Why alliance : help to achieve rapid growth in thechanging market condition. (2) it helps construct broader

    business system by linking companys internal corecompetence. (3) It can create tremendous value to theorganization (4) it alternative approach for mergers andacquisition

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    Benefits : it has benefits like (1) increase in capital forresearch for product development (2) ability to bringtogether complementary skills and assets (3) Technologytransfer (4) Access to knowledge and expertise (4)

    Building credibility in the industry.

    Merger : Merger is also known as amalgamation, isdefined as the combination of two or more companies intosingle company.

    One survives with the name and other lose their name.

    All assets and liabilities of merging companies getstranferred to the surviving company.

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    Objectives : Mergers are well recognized for the growth anddiversification. Following characteristic motivate mergers:

    Diversify the areas of activities. Improve the profitability.

    Serve the customer better.

    Achieve economic of scale and size.

    Acquire he assets at lower than the market price.

    Bring separate enterprises under single roof. Types of Mergers :There are four types of mergers (1)

    Horizontal mergers- merger of similar products. (2) Verticalmergersone of them is potential suppliers of gods orservices to others.(3) concentric mergersthe two companiesmay be related through basic technologies , productionprocess or market. (4) conglomerate mergers it involves apredominant element of diversification.

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    ADVANTAGES

    Brings in synergy in the operations and economies ofscale in inputs and production and cost saving.

    Creates an opportunities to penetrate market.

    Enable to achieve world class standards in their line of

    business . Facilitates product innovation

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    CONSOLIDATION

    Consolidation is defined as the combining of two existing

    companies into new company. The existing companies lose their identities and new

    entity is created with different or new name.

    The assets and liabilities of both companies get merged

    into the new company. Acquisition or take over : Acquisition or take over of a

    company refers to acquiring of a controlling stake in theownership of a company by other entity.

    This is done by buying the share capital of othercompany by hostile manner or with the consent of theexisting company.

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    1.10CREDIT INFORMATION BUREAU INDIA LTD (CIBIL)

    Ownership structure :

    CIBIL has been established by SBI,HDFC (40% shareholding) Dun andBradstreet and trans Union International.

    CiBIL is repository of information which contains the credit history ofcommercial and consumer borrowers.

    CIBIL provides this information to its members in the form of credit

    information report. Function of CIBIL: CIBIL is a composite credit bureau which cater to

    both commercial an consume segments.

    The consumer credit bureau covers credit availed by individuals andthe commercial credit bureau covers the credit availed by non-individuals

    The aim of CIBIL is to minimize instances of defaults by providingcredit information pertaining to non individual borrowers

    CIBIL maintains a central data base of information as received form itsmembers.

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    1.11FAIR PRACTICESCODEFOR DEBTCOLLECTION

    Demand for Lenders Liability Law : The securitization and Reconstruction of financial assets and

    enforcement of security interest Act was enacted in India in2002.

    The Act allowed to take the possession of assets of defaulting

    companies without taking any legal action. In many countries banks are mandated by laws to respect the

    right and interest of lenders, depositors, and other customers.

    In India RBI and Basks and Financial Institutions finalized theFair Practices Code for Lenders and advised the banks to

    adopt the guidelines

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    GENERAL GUIDELINES Application of loans and their processing : loan

    application for priority sector advances should becomprehensive .

    Acknowledgement of receipt of application.

    Scrutinize the application within the reasonable timeperiod

    Loan Appraisal and terms and conditions: Lendersshould ensure that the credit proposal is properlyappraised.

    Terms and conditions of credit facilities are arrived after

    negotiation. Convey the borrower sanction limits.

    Inform the terms and condition of the loan

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    Disbursement of loans : lender should ensuretimely disbursement of loans sanctioned.

    Post disbursement of loan monitoring.

    Before calling the loan reasonable time should begiven to borrower and conditions of the loansshould be explained .

    Lender should release all securities after repaymentof loans

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    PARTICIPATORY NOTES

    Foreigners or non residents are not allowed to investdirectly in Indian stock market.

    Their involvement in Indian capital market has to becarried out through foreign institutions.FII have toregistered with SEBI.

    Participatory notes are like contract notes.

    They are issued by FII to entities that want to invest inIndian stock market but not want register with SEBI.

    FII registered with SEBI and their sub account can beissue or hold participatory Notes.

    The underlying security against these Notes would belisted in Indian stock exchanges

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    FII provide information to foreign investors aboutsecurities purchased.

    On the recommendation of by the Lahiri Committeeparticipatory notes can be only issued to regulatedentities.

    FII are not allowed to issue participatory notes to IndianNationals ,person of Indian origin or oversee corporatebodies.

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