Traditionally, credit risk management was the primary challenge for banks. With progressive deregulation, market risk arising adverse changes in market variables, such as interest rate, foreign exchange rate, equity price and commodity price has become relatively more important. Even a small change in market variables causes substantial changes in income and economic value of banks. Market Risk may be defined as the possibility of loss to a bank caused by the changes in the market variables. It is the risk that the value of on/off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices. Market risk is the risk to the bank’s earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange and equities, as well as the volatilities of those prices. Market Risk management provides a comprehensive and dynamic Continue reading
Indian Financial System
Credit Risk Management in Indian Banks
In course of banks lending involves a number of risks. In addition to the risks related to creditworthiness of the counterparty, the banks are also exposed to interest rate, Forex and country risks. Unlike market risks, where the measurement, monitoring, control etc. are to a great extent centralized. Credit risks management is a decentralized function or activity. This is to say that credit risk taking activity is spread across the length and breadth of the network of branches, as lending is a decentralized function. Proper a sufficient care has to be taken for appropriate management of credit risk. Credit risk or default risk involves inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, hedging, settlement and other financial transactions. The objective of credit risk management is to minimize the risk and maximize banks risk adjusted rate of return by assuming and maintaining credit Continue reading
The Concept of Dematerialisation of Securities
Origin of Dematerialisation in India The concept of demat was introduced in Indian capital market in 1996 with the setting up of NSDL. A depository holds securities in dematerialized form. It maintains ownership records of securities in a book entry form and also effects transfer of ownership through book entry. SEBI has introduced some degree of compulsion in trading and settlement of securities in demat form while the investors have a right to hold securities in either physical or demat form, SEBI has mandated compulsory trading and settlement of securities in select securities in dematerialized form. This was initially introduced for institutional investors and was later extended to all investors. Starting with 12 script on15th Jan 1998, all investors are required to mandatory trade in dematerialized form in respect of 2335 securities as at end-June 2001. By Nov, 2001. 3811 companies were under demit mode and the rest of the Continue reading
Changes in the Indian Secondary Market Regulations
The Indian securities market is in transition. Several important changes were brought for the smooth and effective functioning of stock exchanges from the time to time by the SEBI. The revolutionary changes have been taking place over a period of time. In fact, on almost all the operational and systematic risk management parameters, settlement system, disclosures, accounting standards, the Indian securities market is at par with the global standards. Some of those initiatives taken place in the secondary market are discussed below: Overall administration, supervision and control of the stock exchanges: The central government for the first time in April 1988 constituted an administrative body viz. securities and exchange board of India and in January 1992, the central government enacted an Act granting a statutory recognition to the securities and exchange board of India as a regulator of the securities/ markets. The governing board of the council to be consisting Continue reading
Case study- “Merger of HDFC Bank and Times Bank”
In November 1999, when Deepak Parekh and S M Data, Chairman of new private sector banks shook hands, they created a history of sorts. It is the first ever mega merger of Indian banks. It signaled that Indian banking sector has finally joined the MBA bandwagon. There is no denying the fact that there have been mergers in the Indian banking sector before, but they were essentially attempts by the government to bailout the weak public sector banks that made the stronger partners feeble.  Now, the paradigm shifts lies in the fact that while the earlier mergers took place at the behest of the government, the market forces drove the merger of HDFC BANK and Times Bank. Any talk of M&A in the Indian banking sector would have been pointless a few years ago.  And any suggestion of merger of banks would be regarded as nothing short of Continue reading
Case Study- “Entry of LIC into Banking: Is it a Wise Decision?”
Life Insurance Corporation of India (LIC) is a long-term player with long-term resources garnered at a low cost. It has chosen Corporation Bank and Oriental Bank of Commerce, for investments in their equity shares. These two public sector banks have the distinction of turning out superlative performance. The business per employee and intermediation costs for these two banks are the lowest in the industry. So are there Non-Performing Assets. Corporation bank incidentally, is the only public sector bank, where the recent voluntary retirement schemes has not been implemented, as it does not have any excess staff to be sent out. In the Mangalore based Corporation bank are perhaps the biggest gambles over undertaken by the two giants. That, despite the state banks status as one of the best-managed bank in the country. Competition is intense in both domence at last count there were 19 public sectors, 34 private sectors, and Continue reading