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Banking and legal framework


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Banking and legal framework

  1. 1. Banking andBanking andLegalLegalFrameworksFrameworks06/05/131
  2. 2. ContentContentBanking Regulation Act-1949.Reserve Bank of India Act- 1934.Basel I, II, III.Risk faced by Bank.Capital Adequacy Ratio.06/05/13 2
  3. 3.  It empowered the Reserve Bank of India(RBI) "to regulate, control, and inspect thebanks in India".Framework for regulation and supervisionof commercial banking activity.In 1965 the act was amended to covercooperatives banks. The emphasis of supervision has shiftedfrom CAMELS to more risk based approach.Banking RegulationBanking RegulationAct- 1949Act- 194906/05/13 3
  4. 4. Banking Regulation Act- 1949 defines abanking company as “a company whichtransact the business of banking in India” Sec 7 of Banking Regulation Act prohibits acompany other than banking company fromusing the word “bank”, “banker”, “banking”,or “banking company”.06/05/13 4cont...cont...
  5. 5. Reserve Bank OfReserve Bank OfIndia Act-1934India Act-1934RBI was established on 1stApril 1935.RBI was originally Privately owned.RBI was Nationalised in Year 1949.Central Office was initially established inCalcutta and moved to Mumbai in 1937.06/05/13 5
  6. 6. Structure of RBIStructure of RBI RBI Have 20 Directors :• The Governor• Four Deputy Governors• One Govt. Official from Ministry of Finance.• Ten Nominated Director, nominated by Govt.• Four Directors to represent Headquarters atMumbai, Kolkata, Chennai & New Delhi. Appointed/ Nominated for period of Four Years. RBI has Head office in Mumbai & other 22 regionaloffices.06/05/136
  7. 7. Function of RBIFunction of RBI06/05/1371. Bank of Issue2. Banker to Government3. Bankers Bank and Lender of the Last Resort4. Controller of Credit5. Custodian of Foreign Reserves6. Promotional functions
  8. 8. Basel NormsBasel Norms Basel guidelines refer to broad supervisorystandards. Currently there are 27 member nations in thecommittee. The set of agreement by the BCBS are calledBasel accord. It mainly focuses on risks to banks and thefinancial system.06/05/13 8
  9. 9. Basel Norms cont...Basel Norms cont...The purpose of the accord is to ensure thatfinancial institutions have enough capital. India has accepted Basel accords for thebanking system.06/05/13 9
  10. 10. Establishment ofEstablishment ofBasel CommitteeBasel CommitteeIt was formed in response to the messyliquidation of a Cologne-based bank in 1974. On 26 June 1974, a number of banks hadreleased Deutsche Mark to the Bank Herstattin exchange for dollar. Due differences in the time zones, there wasa lag in the dollar payment.06/05/13 10
  11. 11. Cont...Cont...06/05/13 11This incident prompted G-10 nation to formBasel committee on banking supervision.
  12. 12. Basel I, II, IIIBasel I, II, III06/05/13 12
  13. 13. Basel IBasel IIn 1988, BCBS introduced capitalmeasurement system called as Basel 1.It focused almost entirely on credit risk.It defined capital and structure of risk weightsAssets (RWA)for banks. India adopted Basel 1 guidelines in 1999.06/05/13 13
  14. 14. Cont...Cont...This classification system grouped a banksassets into five risk categories:06/05/13 14Risk WeightsRisk Weights Asset ClassificationAsset Classification0% Cash, government and debt and any OECD government debt0%, 10%, 20% or 50% Public sector debt20% Development bank debt, OECD bank debt, OECD securitiesfirm debt, non-OECD bank debt (under one year maturity)and non-OECD public sector debt, cash in collection50% Residential mortgages100% private sector debt, non-OECD bank debt (maturity over ayear), real estate, plant and equipment, capital instrumentsissued at other banks
  15. 15. Cont...Cont...Calculation of RWA06/05/13 15AssetsCategoryRiskWeightCapitalratioAmount RWA MinimumCapitalRequirementTreasuryBond0% 8% $1000 $0 $0MunicipalBond20% 8% $1000 $200 $16ResidentialMortgage50% 8% $1000 $500 $40UnsecuredLoan100% 8% $1000 $1000 $80
  16. 16. Pitfalls of Basel IPitfalls of Basel ILimited differentiation of credit risk.Static measure of default risk. No recognition of term-structure of creditrisk .Simplified calculation of potential futurecounterparty risk06/05/13 16
  17. 17. Basel IIBasel IIIn June ’04, Basel II guidelines were publishedby BCBS.Guidelines were based on three parameters,which the committee calls it as pillars.– Capital Adequacy Requirements– Supervisory Review– Market Discipline06/05/13 17
  18. 18. ChangesChangesBanks are required to maintain a minimumcapital to Risk-weighted assets ratio (CRAR) of9% on an ongoing basis.Two approaches for computing RWAs for CreditRisk:– Standardized Approach:– Foundational Internal Rating Approach:06/05/13 18
  19. 19. Cont...Cont...Operational & Market RiskThree approaches– Basic Indicator Approach– Standardized Approach– Advanced Measurement Approach06/05/13 19
  20. 20. Basel II-3PillarsBasel II-3Pillars06/05/13 20
  21. 21. Basel IIIBasel IIIIn 2010, Basel III guidelines were released.These guidelines were introduced in responseto the financial crisis of 2008.Basel III norms aim at making most bankingactivities such as their trading book activitiesmore capital-intensive.The guidelines aim to promote resilientbanking system by focusing on four vitalbanking parameters.06/05/13 21
  22. 22. Cont...Cont... The minimum amount of equity, as apercentage of assets, will increase from 2% to4.5% There is also an additional 2.5% "buffer"requirement.06/05/13 22
  23. 23. Risks faced by BanksRisks faced by BanksCredit risk.Country and transfer risk.Interest rate risk.Liquidity risk.Operational risk.Settlement Risk.06/05/13 23
  24. 24. Capital AdequacyCapital AdequacyRatioRatioDefinition:Capital Adequacy Ratio (CAR) is defined as theratio of banks capital to its risk assets. CapitalAdequacy Ratio (CAR) is also known asCapital to Risk (Weighted) Assets Ratio(CRAR).06/05/13 24
  25. 25. Cont...Cont... In1992-93 banks are required to have aminimum capital of 8%.In 1998-99. the CRAR to be raised to 10%.Minimum requirements of capital fund in India:Existing Banks 09 %New Private Sector Banks 10 %Banks undertaking Insurance business 10 %Local Area Banks 15%06/05/13 25
  26. 26. Cont...Cont...Concepts of Capital Adequacy Norms:06/05/13 26
  27. 27. Thank YouThank YouPresented By:Presented By:Bhavini Patel - 27Bhavini Patel - 27&&Shradha Pereira - 32Shradha Pereira - 3206/05/13 27