“Operational Risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and system or from external events.” Generally, operational risk is defined as any risk, which is not categorized as market or credit risk, or the risk of loss arising from various types of human or technical error. It is also synonymous with settlement or payments risk and business interruption, administrative and legal risks. Operational risk has some form of link between credit and market risks. An operational problem with a business transaction could trigger a credit or market risk. Indeed, so significant has operational risk become that the Bank for International Settlement (BIS) has proposed that, as of 2006, banks should be made to carry a Capital cushion against losses from this risk. Managing operational risk is becoming an important feature of sound risk management practices in modern financial markets 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.
Virtual Banking in India
The practice of banking has undergone a significant transformation in the nineties. While banks are striving to strengthen customer relationship and move towards ‘relationship banking’, customers are increasingly moving away from the confines of traditional branch-banking and are seeking the convenience of remote electronic banking services. And even within the broad spectrum of electronic banking, the aspect of banking that has gained currency is virtual banking. Increase in the functional and geographical spread of banks has necessitated the switchover from hard cash to paper based instruments and now to electronic instruments. Broadly speaking, virtual banking denotes the provision of banking and related services through extensive use of information technology without direct recourse to the bank by the customer. The origin of virtual banking in the developed countries can be traced back to the seventies with the installation of Automated Teller Machines (ATMs). It is possible to delineate the principal types Continue reading
Agency Problem
Why conflict of interest between owners and management? The control of the modern corporation is frequently placed in the hands of professional non-owner managers. We have seen that the goal of the financial manager should be to maximize the wealth of the owners of the firm and given them decision-making authority to manage the firm. Technically, any manager who owns less than 100 percent of the firm is to some degree an agent of the other owners. In theory, most financial managers would agree with the goal of owner wealth maximization. In practice, however, managers are also concerned with their personal wealth, job security, and fringe benefits, such as country club memberships, limousines, and posh offices, all provided at company expense. Such concerns may make managers reluctant or unwilling to take more that, moderate risk if they perceive that too much risk might result in a loss of job and Continue reading
Variable Cash Reserve Ratio and Credit Control
Considering the limitations of the bank rate policy and the open market operations, the need to develop a very effective method of credit control was felt. Especially the need was to directly control the power of the commercial banks to create credit, Variable cash reserve ratio was suggested as one more method of quantitative credit control by Keynes. Further this method is considered necessary for promoting the overall liquidity and solvency of the banking system, apart from improving the public confidence on the banking system. The process of working of this method of credit control can be easily understood with an example. Suppose in an economy there is over expansion of credit which is possible with excessive cash reserves with the commercial banks. To check this, the central bank may raise the cash reserve ratio say from 20% to 25% Then this will bring down the availability of cash reserve Continue reading
Role of Financial Institutions in Economic Development
Financial institutions form the backbone of a modern economy, serving as crucial intermediaries that facilitate the flow of money and capital. By mobilizing savings, providing credit, and offering a spectrum of financial services, these institutions contribute to economic growth and development. Financial institutions provide means and mechanism of transferring resources from those who have an excess of income over expenditure to those who can make productive use of the same. The commercial banks and investment institutions mobilize savings of people and channel them into productive uses. Financial institutions provide all type of assistance required for economic development in the following ways. 1. Providing Funds The underdeveloped countries have low levels of capital formation. Due to low incomes, people are not able to save sufficient funds which are needed for sensing up new units and also for expansion, diversification and modernization of existing units. The persons who have the capability of starting Continue reading
Sales Budget Preparation
Sales Budget is a forecast of total sales expressed and incorporated in quantities and/or money. An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time. A sales budget may be prepared by expressing turnover under any one or combination of the following: Product or product group; Territories, areas and countries; Types of customers, e.g., National, Government, export, home, wholesale or retail; Salesmen, agents or representatives, and Period, such as quarter’s months, weeks, etc. A sales budget may be prepared with the help of any one or more of the following method: Analysis of past sales with-adjustment for current conditions. Analysis of past sales for a number of years, say 5 to 10 years, viz, long-term trend, seasonal trend, cyclical and sundry other factor. The long-term trend Continue reading