The management of interest rate risk should be one of the critical components of market risk management in banks. The regulatory restrictions in the past had greatly reduced many of the risks in the banking system. Deregulation of interest rates has, however, exposed them to the adverse impacts of interest rate risk. Interest rate risk in banking is the potential negative impact on the Net interest income and it refers to the vulnerability of an institutions financial condition to the movement in interest rates. Changes in interest rate affect earnings, value of assets, liability, off-balance sheet items and cash flow. Hence, the objective of interest rate risk management is to maintain earnings, improve the capability, ability to absorb potential loss and to ensure the adequacy of the compensation received for the risk taken and effect risk return trade-off. Management of interest rate risk aims at capturing the risks arising from Continue reading
Bank Management
The Electronic Clearing Service (ECS) in India
We have discussed about Indian Financial Network (INFINET), a high-tech communication facility established by RBI for the Indian Banking Sector. There can be no better measure of success of the INFINET than the facility for quick funds transfer. The Reserve Bank of India has, over the last few years, developed many new products for the benefit of banks which are all aimed at ultimately improving customer service and systemic efficiency. One of this – the Electronic Clearing Service (ECS) – is aimed at effecting electronically, repetitive credits or debits for a large population of customers spread across a large number of branches of many banks. ECS (Credit Clearing) This is a new method of payment whereby the institutions having to make a large number of payments (such as interest / dividend) can directly deposit the amount into the bank accounts of the share-holders/ depositors/ investors without having to issue paper Continue reading
Risk Management Principles for Electronic Banking- Basel Committee Recommendations
Continuing technological innovation and competition among existing banking organisations and new entrants have allowed for a much wider array of banking products and services to become accessible and delivered to retail and wholesale customers through an electronic distribution channel collectively referred to as e-banking. However, the rapid development of e-banking capabilities carries risks as well as benefits. The Basel Committee on Banking Supervision expects such risks to be recognised, addressed and managed by banking institutions in a prudent manner according to the fundamental characteristics and challenges of e-banking services. These characteristics include the unprecedented speed of change related to technological and customer service innovation, the ubiquitous and global nature of open electronic networks, the integration of e-banking applications with legacy computer systems and the increasing dependence of banks on third parties that provide the necessary information technology. While not creating inherently new risks, the Committee noted that these characteristics increased Continue reading
Categories of Non Performing Assets (NPA’s)
Non Performing Assets (NPA’s) Non performing asset means an asset or account of borrower ,which has been classified by bank or financial institution as sub —standard , doubtful or loss asset, in accordance with the direction or guidelines relating to assets classification issued by RBI. An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained ‘past due’ for a specified period of time. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the ‘90 days’ overdue’ norm for identification of NPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall Continue reading
Non Performing Assets (NPA)
What is Non Performing Asset (NPA)? For a bank, an Non Performing Asset (NPA) or bad debt is usually a loan that is not producing income. Earlier it was largely applicable to businesses. But things have changed with banks widely extending consumer loans (home, car, personal and education, among others) and strict asset classification norms. If a borrower misses paying his equated monthly installment (EMI) for 90 days, the loan is considered bad, or an NPA. High NPAs are a sign of bad financial health. This has wide-ranging ramifications for a bank, especially in the stock market and money market. So, as soon as a debt goes bad, the banks want it either made better or taken out of their books. The Genesis (origin) of an NPA There are many reasons as to why a loan goes bad. For a business, it could be because it fails to take off. Continue reading
Article on Indian Banking Sector- “Innovation in Banking”
Innovation derives organization to grow, prosper & transform in sync with the changes in the environment, both internal & external. Banking is no exception to this. In fact, this sector has witnessed radical transformation of late, based on many innovations in products, processes, services, systems, business models, technology, governance & regulation. A liberalized & globalized financial infrastructure has provided had provided an additional impetus to this gigantic effort. The pervasive influence of information technology has revolutionaries banking. Transaction costs have crumbled & handling of astronomical brick & mortar structure has been rapidly yielding ground to click & order electronic banking with a plethora of new products. Banking has become boundary less & virtual with a 24*7 model. Banks who strongly rely on the merits of ‘relationship was banking’ as a time tested way of targeting & servicing clients have readily embraced Customer Relationship Management (CRM), with sharp focus on customer Continue reading