Asset Liability Management - (30/12/2010)

Dear All,

Asset liability management is the practice of managing risks that arise due to mismatches between the assets and liabilities (debts and assets) of a financial institution. This can also be seen in insurance. Institutions dealing in public money ordinarily lend out the money borrowed from the public to another section of the public thereby creating both monetary assets and liabilities.

 

Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational risk. Asset Liability management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks or other financial services companies.

 

Typically all the assets and liabilities of a Bank have several maturity periods. Banks manage the risks of Asset liability mismatch by matching the assets and liabilities according to the maturity pattern or the matching the duration, by hedging and by securitization.

 

In India the Reserve Bank of India regulates the Asset Liability management norms for Banks and other financial institutions. It comes out with detailed guidelines to adapt to the changing economic environment. Over the last few years the Indian financial markets have witnessed wide ranging changes at fast pace. Intense competition for business involving both the assets and liabilities, together with increasing volatility in the domestic interest rates as well as foreign exchange rates, has brought pressure on the management of banks to maintain a good balance among spreads, profitability and long-term viability. These pressures call for structured and comprehensive measures and not just ad hoc action. The Management of banks has to base their business decisions on a dynamic and integrated risk management system and process, driven by corporate strategy. Banks are exposed to several major risks in the course of their business - credit risk, interest rate risk, foreign exchange risk, equity / commodity price risk, liquidity risk and operational risks and that is where effective asset liability management places the Banks on a stable platform in the competitive environment.

For further information refer

http://en.wikipedia.org/wiki/Asset_liability_management

http://rbidocs.rbi.org.in/rdocs/pressrelease/pdfs/3204.pdf

 

 

CA Rahul Joglekar

Partner

Gokhale & Sathe

Chartered Accountants

Capital Adequacy Ratio - (29/12/2010)

Dear All,

Capital adequacy ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio (CRAR) is a ratio of a bank's capital to its risk. Regulatory authorities track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements. CRAR determines the capacity of the bank in terms of meeting the time liabilities and other risks such as credit risk, operational risk, etc. In simple terms, a bank's capital is the "cushion" for potential losses, which protects the bank's depositors or other lenders.

 

Capital consists of Tier I capital (share capital + reserves) and Tier-II capital (subordinated debt, revaluation reserves etc). Risk weighted assets are calculated by applying risk weights to the assets of the Bank as per their risk profile or regulatory requirements.

 

In India the Reserve Bank of India has prescribed a minimum CRAR of 9% for all Banks operating in India. Out of the total CRAR of 9%, a minimum of 6% should be Tier I CRAR i.e. made up of only the share capital and free reserves. RBI stipulates strict penalties for Banks not adhering to 9% CRAR norm. In the extreme, the RBI can even order cancellation of the banking licence of the Bank which has continuously failed to maintain the minimum CRAR of 9%

 

Till 2009, the Banks in India used to calculate CRAR under the BASEL-I regime which involved simple calculations and related mostly to financial parameters. With effect from March 2010, all banks are required to calculate CRAR under the advanced BASEL-II approach which takes into consideration various risk factors viz- credit risk, operational risk etc. the BASEL-II approach is considered more stringent as it concentrates heavily on risk weighted assets. The highest risk weight that BASEL-II prescribes is 600%. Risk weights are even attached to off balance sheet items which do not have any financial implication but lead to maintenance of higher capital to absorb the risks of off balance sheet exposures.

 

For further information refer

 

http://en.wikipedia.org/wiki/Capital_adequacy_ratio

http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5777

 

 

CA Rahul Joglekar

Partner

Gokhale & Sathe

Chartered Accountants

Capital Adequacy Ratio - (29/12/2010)

Dear All,

Capital adequacy ratio (CAR), also called Capital to Risk (Weighted) Assets Ratio (CRAR) is a ratio of a bank's capital to its risk. Regulatory authorities track a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements. CRAR determines the capacity of the bank in terms of meeting the time liabilities and other risks such as credit risk, operational risk, etc. In simple terms, a bank's capital is the "cushion" for potential losses, which protects the bank's depositors or other lenders.

 

Capital consists of Tier I capital (share capital + reserves) and Tier-II capital (subordinated debt, revaluation reserves etc). Risk weighted assets are calculated by applying risk weights to the assets of the Bank as per their risk profile or regulatory requirements.

 

In India the Reserve Bank of India has prescribed a minimum CRAR of 9% for all Banks operating in India. Out of the total CRAR of 9%, a minimum of 6% should be Tier I CRAR i.e. made up of only the share capital and free reserves. RBI stipulates strict penalties for Banks not adhering to 9% CRAR norm. In the extreme, the RBI can even order cancellation of the banking licence of the Bank which has continuously failed to maintain the minimum CRAR of 9%

 

Till 2009, the Banks in India used to calculate CRAR under the BASEL-I regime which involved simple calculations and related mostly to financial parameters. With effect from March 2010, all banks are required to calculate CRAR under the advanced BASEL-II approach which takes into consideration various risk factors viz- credit risk, operational risk etc. the BASEL-II approach is considered more stringent as it concentrates heavily on risk weighted assets. The highest risk weight that BASEL-II prescribes is 600%. Risk weights are even attached to off balance sheet items which do not have any financial implication but lead to maintenance of higher capital to absorb the risks of off balance sheet exposures.

 

For further information refer

 

http://en.wikipedia.org/wiki/Capital_adequacy_ratio

http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=5777

 

 

CA Rahul Joglekar

Partner

Gokhale & Sathe

Chartered Accountants

Benchmarking - (28/12/2010)

Dear All,

A term which is widely heard and used, but seldom understood clearly – Benchmarking. Let us throw some light about the concept of benckmarking

 

Benchmarking is the process of comparing one's business processes and performance parameters to industry best and/or best practices from other industries. Parameters typically measured are quality, time and cost. Improvements resulting from the results of benchmarking mean doing things better, faster, and cheaper.

 

Benchmarking involves management identifying the best firms in their industry, or any other industry where similar processes exist, and comparing the results and processes of those studied (the "targets") to one's own results and processes to learn how well the targets perform and, more importantly, how they do it.

 

The term benchmarking was first used by cobblers to measure people's feet for shoes. They would place someone's foot on a "bench" and mark it out to make the pattern for the shoes. Benchmarking is most used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others.

 

Also referred to as "best practice benchmarking" or "process benchmarking", it is a process used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice companies' processes, usually within a peer group defined for the purposes of comparison. This then allows organizations to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance.

 

Various types of benchmarking practices are in existence – process benchmarking, financial benchmarking, performance benchmarking, product benchmarking, strategic benchmarking etc.

 

For more information and reference visit:

http://en.wikipedia.org/wiki/Benchmarking

 

CA Rahul Joglekar

Partner

Gokhale & Sathe

Chartered Accountants

Payment of Gratuity Act - 27/12/2010

Dear all,

A ready guide to the Payment of Gratuity Act, 1972

Payment of Gratuity Act, 1972

 

Application	It applies to the whole of India and so far as it relates to ports and plantations it does not apply to the State of Jammu and Kashmir. It applies to: (a) every factory, mine, oilfield, plantation, port and railway company. (b) Every shop or establishment in which 10 or more persons are or were employed on any day in the preceding 12 months. (c) Such other establishments or class of establishmentas the Central Government may notify in this behalf. Any shop or establishment shall continue to be governed by the Act even if the no. of its employees comes below 10 persons at any time in the future.   Public charitable and religious trusts are also covered by this Act, provided that they are shops or establishments within the meaning of the Shops and Establishment Act and that 10 or persons have been employed by them on any day in the preceding 12 months.
Payment of gratuity	Gratuity shall be paid to an employee on the termination of his employment after s/he has rendered continuous service of not less than 5 years i.e. on superannuation, retirement, resignation, death or disablement due to accident or disease (Sec 4).   The period of 5 years is not necessary if the termination of the employee is because of death or disablement. In the case of death the amount is paid to the legal heirs
Calculation of Gratuity	Gratuity is calculated at 15 days wages last drawn by the employee for each completed year of service. The monthly wage is divided by 26 and multiplied by 15. In computing a completed year of service the period in excess of six months shall be taken as a full year.   Gratuity = Monthly salary x 15 days x No. of years of service 26
Max amount of Gratuity payable	The maximum amount of gratuity payable under the Act is Rs. 10 lakhs. (Revised)
Forfeiture of Gratuity	Gratuity can be forfeited {Sec 4(6)} where an employee has been terminated (i) for any act, willful omission or negligence causing any damage or loss to or destruction of any property belonging to the employer, to the extent of such loss or damage. (ii) for riotous or disorderly conduct or any act of violence on his part. (iii) For any act which constitutes an offence involving moral turpitude, provided the offence has been committed by him in the course of his employment.
Nomination (Sec 6)	Each employee who has completed one year of service is required to make a nomination for the purposes of gratuity in case of his death. There can be more than one nominee. (Form F). Nominees may be changed at any time by the employee, by giving a written notice to the employer. (Form H). If no nomination has been made, it shall be paid to the legal heirs of the deceased employee or if  the  heirs are minor, the share of such minor shall be deposited by the controlling authority with a bank till he attains majority.
Penalty	Failure to comply with the Payment of Gratuity Act 1972 entails certain penalties (Sec.9), which are the following: For avoiding any payment knowingly makes any false statement or representation Shall be punishable with imprisonment upto 6 months or fine upto Rs. 10,000 or both. Failure to comply with any provision of the Act or Rules Shall be punishable with imprisonment upto 1 year but will not be less than 3 months or with fine, which will not be less than Rs. 10,000 but may extend upto Rs.20,000 or with both. Any offence relating to non payment of gratuity under the Act Employer shall be punishable with imprisonment for a term which shall not be less than 6 months but may extend to 2 years.

 

For bare text : http://www.vakilno1.com/bareacts/paymentofgratuity/paymentofgratuity.htm

Thanks and Regards,

Pranav Vaidya

Article Assistant

Gokhale & Sathe

Chartered Accountants