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
Business Finance
Business Finance is that business activity which is concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives of business enterprises.
Organizational Structure and Role of Banks in India
Banking Regulation Act of India, 1949 defines Banking as “accepting, for the purpose of lending or of investment of deposits of money from the public, repayable on demand or otherwise or withdrawable by cheque, draft order or otherwise.” The Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949, govern the banking operations in India. Organizational Structure of Banks in India: In India banks are classified in various categories according to differ rent criteria. The following figure indicate the banking structure: 1. The Reserve Bank of India (RBI): The RBI is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all scheduled banks and hence is known as the “Reserve Bank”. 2. Public Sector Banks: State Bank of India and its Associates Nationalized Banks Regional Rural Banks Sponsored by Public Sector Continue reading
Effects of Price Level Changes on ROI and RI
The price level changes are a common phenomenon and will introduce entirely new distortions into ROI and RI measures. The principal distortions occur because revenues and cash costs are measured at current prices, while the investment cost and depreciation charge are measured at historical prices used to acquire the assets. Depreciation based on historical cost underestimates what the depreciation charge would be based on the current cost. This results in overstating the firm’s income. At the same time, the firm’s investment is understated, because most of firm’s assets were acquired in precious years at lower price levels than those currently prevailing. The combination of overstated net income and understated investment causes the ROI or RI measures to be much higher than if inflation had not occurred. The increased ROI or RI is not a signal of higher profitability and it is mainly due to a Continue reading
Types of Finance Lease Agreements
A finance lease, also called a capital lease, is one which usually covers the full useful economic life of the assets or a period that is close to the economic life. The lessor receives lease rentals during the lease period so as to recover fully not only the cost of the assets but also a reasonable return on the funds used to buy the assets. The finance lease is usually a non-cancellable and the lessee provides for the maintenance of the assets. The lease payment under financial lease is a payment for the use of the assets only and the responsibility for the repair and maintenance of the assets generally lies with the lessee. Since the term of a finance lease is normally closely aligned with the economic life of the assets, the lessee’s position is quite similar that of an owner; and the cost of maintaining is in its Continue reading
Relationship Between Agency Theory and the Existing Accountancy Practices
The agency theory is a mixture of the relationships between principals and agents, it occurs when the principal and the agents create a delegation. The agency theory argues that in modern corporations, where share ownership is widely held, managerial actions depart from those required to maximize the shareholder’s return. In Agency theory terms, the owners are principals and the managers are agents and there is an Agency loss which is the extent to which returns to the residual claimants, the owners, fall below what they would be if the principals, and the owners, exercised direct control of the corporation. The long-term strategies for agency theory include the principle of the company, business, franchise, etc. providing incentives such as increasing commission, continuing to provide advertising, training, and motivation to increase outlet operations. Regarding the exogenous factor, outlet managers have an incentive to shirk and misrepresent their abilities because the firm is Continue reading
Classification of Bank Payment Systems
Payment systems can be classified on the basis of the value of transactions being put through them, settlement modality or on the basis of timing of settlement. Value of funds transfer: payment systems can be categorized into (a) Large-value funds transfer — where individual payments are of high value and therefore time sensitive and (b) Retail funds transfer — where the value of transactions are of relatively low individual value but the volume of transactions put through it large. Settlement modality: payments systems can be classified into (a) Net settlement where payments are set off against receipts over a large number of transactions taken up for settlement. This arrangement can be on a bilateral basis between two participants or on a multilateral basis amongst all participants and (b) Gross Settlement — where each transaction is settled independent of other transactions. Timing of settlement: payment systems can be classified as (a) Continue reading