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
Indian Banking System
Secure Electronic Transaction (SET)
Secure Electronic Transaction (SET) is a standard protocol for securing credit card transactions over insecure networks, specifically, the Internet. SET is not itself a payment system, but rather a set of security protocols and formats that enables users to employ the existing credit card payment infrastructure on an open network in a secure fashion. Secure Electronic Transaction (SET) was developed by VISA and MasterCard (involving other companies such as GTE, IBM, Microsoft, Netscape, RSA and VeriSign) starting in 1996. SET is based on X.509 certificates with several extensions. SET uses a blinding algorithm that, in effect, lets merchants substitute a certificate for a user’s credit-card number. This allows traders to credit funds from clients’ credit cards without the need of the credit card numbers. SET makes use of cryptographic techniques such as digital certificates and public key cryptography to allow parties to identify themselves to each other and exchange information Continue reading
Important Banking and Economic Indicators
1. CASH RESERVE RATIO Cash Reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. The amount of which shall not be less than three per cent of the total of the Net Demand and Time Liabilities (NDTL) in India, on a fortnightly basis and RBI is empowered to increase the said rate of CRR to such higher rate not exceeding twenty percent of the Net Demand and Time Liabilities (NDTL) under the RBI Act, 1934. 2. STATUTORY LIQUIDITY RATIO In terms of Section 24 (2-A) of the B.R. Act, 1949 all Scheduled Commercial Banks, in addition to the average daily balance which they are required to maintain in Continue reading
8 Risks Faced by Modern Banks at the Present Competitive Business World
The unanticipated part of the return, that portion resulting from surprises is the true risk of any investment. If we always receive what we expect, than the investment is perfectly predictable and, by definition, risk-free. In other words, the risk of owning an asset comes from surprises-unanticipated events. RISK is a concept that denotes the precise probability of specific eventualities. It is simply the future uncertainty and not only the incidents of predictable outcomes but also the unpredictable favorable outcomes. All the firms or companies whether it is in real or providing service are facing some sort of risk at present competitive business world to run its business. Banks are one of them in these regard and it is facing possibility of risk in terms of money and their achieved reputation. Bank is a financial institution that primarily deals with borrowing and lending money from the people by the people Continue reading
Main Causes of Default of Loans from Industrial Sector
One major problem which the banks in India are facing is the problem of recovery and overdue of loans. The reasons behind this may vary for different financial institutions as it depends upon the respective nature of loans. Here an attempt is made to find out the some causes of default of loans due to which financial Institutions are facing the problems of overdue of loans. The recovery officers of different banks are interviewed for finding out the causes of defaults. These reasons may be useful for the and Banks for the better recovery of loans in future. After surveying different banks, the following can be said to be some of the main causes of default of loans from industrial sector:- Improper selection of an entrepreneur: Selection of the right Entrepreneur is one of the major factors in the profitability of Banks. Two major criterion namely the intention to repay Continue reading
Future of Indian Banking System
The interplay between policy and regulatory interventions and management strategies will determine the performance of Indian banking over the next few years. Legislative actions will shape the regulatory stance through six key elements: industry structure and sector consolidation; freedom to deploy capital; regulatory coverage; corporate governance; labor reforms and human capital development; and support for creating industry utilities and service bureaus. Management success will be determined on three fronts: fundamentally upgrading organizational capability to stay in tune with the changing market; adopting value-creating M&A as an avenue for growth; and continually innovating to develop new business models to access untapped opportunities. Through these scenarios, we can paint a picture of the events and outcomes that will be the consequence of the actions of policy makers and bank managements. These actions will have dramatically different outcomes; the costs of inaction or insufficient action will be high. Specifically, at one extreme, the Continue reading