Dynamic Provisioning: The Basel II Framework is approaching dynamic provisioning by clearly requiring banks to separately measure EL(Expected Loss) and UL(Unexpected Loss). EL-based provisioning has forward-looking element as it is capable of incorporating through the cycle view of probability of default. The recent financial crisis has provided a still further fillip to the search for a forward-looking provisioning approach due to pro-cyclical considerations. Inadequacy of the Current Provisioning Policy in India: In normal provisioning policies, specific provisions are made ex-post based on some estimation of the level of impairment. The general provisions are normally made ex-ante as determined by regulatory authorities or bank management based on their subjective judgment. While such a policy for making specific provisions is pro-cyclical, that for general provisions does not lay down objective rules for utilization thereof. Indian banks make the following types of loan loss provisions at present: General provisions for standard assets, Specific Continue reading
Financial Management
Financial management entails planning for the future of a person or a business enterprise to ensure a positive cash flow, including the administration and maintenance of financial assets. The primary concern of financial management is the assessment rather than the techniques of financial quantification. Some experts refer to financial management as the science of money management. The five basic components of the Financial Management Framework are: Planning and Analysis, Asset and Liability Management, Reporting, Transaction Processing and Control.
Types of Dividend Policies
The size and frequency of dividend payments are critical issues in company policy. Dividend policy affects the financial structure, the flow of funds, corporate liquidity, stock prices, and the morale of stockholders. The finance manager plays an important role in the dividend policy. The objective of dividend policy is to maximize shareholder’s return so that the value of his investment is maximized. Shareholders’ return consists of two components: dividends and capital gains. Dividend policies has a direct impact on these components; A Low payout ratio may produce higher share price because it accelerates earnings growth. Investors of growth companies will realize their return mostly in the form of capital gains. Dividend yield – dividend per share divided by the market price per share will be low for such companies. The impact of dividend policy on future capital gains is, however, complex. Capital gains occur in distant future, and therefore, are Continue reading
Budgetary Slack – Definition, Causes and Prevention Methods
Meaning and Definition of Budgetary Slack In an organization when a manager is responsible for planning incomes and expenses for the a future period, they can plan income very low and expenses very high so that this amounts gets approved by senior management. The manager basically does this thing to be sure of meeting the budget with a very low income goal, the manager should be able to achieve it and go over it. With a very high expense budget the manager should be able to easily keep actual expenses within the Budget. If this happens the managers performance in the coming year will look very good, as it doesn’t really give management any idea of what the coming year will actually look like because it’s not realistic. And it doesn’t show the actual evaluation of the manager’s performance. So this is known as the Budgetary Slack. In other words, Continue reading
Fama and French Three Factor Model
Capital Asset Pricing Model (CAPM) is the backbone of modern portfolio theory. According to CAPM, the expected return on stock is a function of its relationship with the market portfolio defined by its beta. However, Eugene Fama and Kenneth French (1992) brought together two more factors and found that stock return is based on a combination of not just market beta but also firm size and value. They came up with a new model known as Three Factor Model as an alternative to CAPM. What is Fama and French Three Factor Model? Fama and French three factor model expands on the Capital Asset Pricing Model (CAPM) by adding size and value factors in addition to the market risk factor in CAPM. This model considers the fact that value and small cap stocks out-perform markets on a regular basis. Fama and French attempted to approach and measure equity returns in a Continue reading
Benefits of Securitization
Securitization, also known as asset-backed securitization or structured financing, has been defined as a financing instrument whereby a company transfers rights in current or future receivables or other financial assets to an entity that serves as a “special purpose vehicle” (SPV), which in turn issues securities to capital market investors and uses the proceeds from the issue to pay for the financial assets. The source of the receivables could be any right of payment or asset that generates an income with a stable cash flow. The existing or future receivables could be the income generated, among others things by residential or commercial loans, credit card receivables, automobile loans, student loans, royalties on intellectual property, tax receivables or any other income source that is regular and predictable. Read More: The Concept of Securitization Securitization can also be considered a form of arbitrage between a less-efficient traditional debt market and a more-efficient Continue reading
Importance of Profit and Loss Account
The Profit and Loss Account is a Financial Statement which summarizes a company’s revenue and expenditure for a specific period of time, usually prepared annually or quarterly. These statements provide information that shows the ability of a company to generate profits by increasing its revenues and reducing costs. The Profit and Loss Account is also known as a “Statement of Profit and Loss”, an “Income Statement” or an “Income and Expense Statement”. Importance of Profit and Loss Account Profit and Loss Account represents a company’s ability to generate income through their business operations. Many times businesses will need financing to help create the facilities for their operations. Smaller companies usually obtain bank loans that are based on the amount of income a company has earned from past operations. Solid Profit and Loss history is essential for getting the best loan terms. Profit and loss statements are important also because many Continue reading