an evaluation and analysis of the risk return profile of seleted inidan bank
TRANSCRIPT
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8/9/2019 An Evaluation and Analysis of the Risk Return Profile of Seleted Inidan Bank
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A
Research Project Report
On
“AN EVALUATION AND ANALYSIS OF THE RISK
RETURN PROFILE OF SELETED INIDAN BANK !
Submitted to the MBA Department in Partial fulllment of the Requirement for the degree of
Master’s of Business Administration
Session – 20!"20#
SUBMITTED TO: SUBMITTED By :
U.P.T.U , Lucknow Va"#ha$ %ha&han'BA IV Se(
Ro)) No *+,-./,*00
'eer&t Inst"t&te o1 En2"neer"n2 3
Techno)o24NH 5. Ba2hpat B4pass6 Roa7 'eer&t UP
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A % K N O 8 L E D 9 E ' E N T
I am highly indebted to Ms. Akansha Dubey, Faculty of
Management, MIET, Meerut, for his inaluable time and adice gien to me
from his busy schedule in com!letion of this !ro"ect successfully.
#e not only told me about arious !olicies of Angel $roking %td. but
of others also, he hel!ed me to get to the market so that I may easily collect
data and hel!ed me !ee! into the &orking style of Angel's em!loyees.
$esides each and eery member of the team, &ere ery su!!ortie and kind
to me during the &hole training !eriod.
I am also highly thankful to my industry guides Mr. #imanshu
(ingh, E)uity Adisor, Angel $roking %td and Mr. Ali Asad, (ales, Angel
$roking %td for their e*orts in guiding me as and &hen I re)uired their
guidance.
In the end, I am thankful to my !arents+ friends teachers &ho directly or
indirectly hel!ed me &hile !re!aring the re!ort.
Executive Summary
The activities of large, internationally active financial institutions have grown increasingly
complex and diverse in recent years. This increasing complexity has necessarily been accompanied
by a process of innovation in how these institutions measure and monitor their exposure to
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different kinds of risk. One set of risk management techniques that has attracted a great deal of
attention over the past several years, both among practitioners and regulators, is "stress testing",
which can be loosely defined as the examination of the potential effects on a firm’s financial
condition of a set of specified changes in risk factors, corresponding to exceptional but plausible
events.
This report represents the findings of a orking !roup on acro #tress Testing established
by the $ommittee on the !lobal %inancial #ystem. The group was asked to investigate the current
use of stress testing at large financial institutions, in line with the $ommittee’s overall mandate to
improve central banks’ understanding of institutional developments relevant to global financial
stability. The term "macro" in the group’s name indicates another element of the group’s mandate,
namely to explore the possibility that aggregating financial firms’ stress test results might produceinformation that is of use to central banks, other financial regulators, and private§or
practitioners.
embers of the group interviewed risk managers at more than twenty large, internationally
active financial institutions, both in their home countries and as a group at a meeting hosted by the
'anque de %rance. %rom these interviews, the group gained a substantial base of knowledge on the
current "state of the art" in the design and implementation of risk management and on the role of
stress testing in risk management decisions at the corporate level.
(rawing on this knowledge, the group then considered some of the issues relating to the
aggregation of the results of risk management conducted at different financial firms. The group
concluded that, under ideal circumstances, aggregate stress tests could potentially provide useful
information in a number of areas. )ggregate risk management might be used by financial firms to
help make ex ante assessments of market liquidity risk under stress when evaluating the riskiness
of a trading strategy. $entral banks and financial regulators might use them to more effectively
monitor broad patterns of risk&taking and risk&intermediation in financial markets. *owever, the
group also noted that it is as yet unclear whether such ideal circumstances prevail. +n particular, it
is unclear whether an appropriate reporting population can be assembled, whether the stress tests
currently conducted by financial firms are compatible with one another, and whether the
information obtained would ustify the reporting burden.
This report represents practices application of risk management techniques in the portfolio
section. -isk management can be integrate by fundamental and technical method which are used
for calculation of annul return and ./.# for the portfolio .
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I N D E :
Part"c&)ar Pa2e
St&7ent cert"1"cate 0
%ert"1"cate o1 1ac&)t4 9&"7e +
Dec)arat"on ;
Acec&t"$e s&((ar4 /
%hapter * *,
THEORETICAL PRESENTATION OF THE TOPIC
%hapter 0 ;0
ORGANIZATIONAL PROFILE OF THE COMPANY
%hapter+ -,
/-#0T)T+O0 O% ()T) )0( )0)12#+#
%hapter; -0
%+0(+0!#, $O0$13#+O0# )0( #3!!#T+O0#
%onc)&s"on ?+
B"#)"o2raph4 ?;
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%HAPTER I
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RISK 'ANA9E'ENT IN INDIAN BANK
O#ject"$e
8HY DO I INTEND TO TAKE UP THIS STUDY @
* )nalyse risk factors affecting different portfolios,
4.)nalyse the different portfolio preference of various income groups,
5.#elect best suited portfolio for different risk appetite clients,
6.inimi7e risk exposure to the present portfolio,
8.inimi7e losses at the time of extreme shock,
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+0T-O(3$T+O0
Over the past fifteen years, several investors have suffered huge losses due to
extreme events.
'arings 'ank failed in 9::8, 1ong Term $apital anagement collapsed +n
9::;, and nron went bankrupt in 4
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INTRODU%TION TO
INDIAN BANKIN9SE%TOR
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INTRODU%TION
'anking is the backbone of a modern economy. *ealth of banking industry is one of the
most important pre&conditions for sustained economic progress of any country. The world of
banking has assumed a new dimension at the dawn of the 49st century with the advent of tech
banking, thereby lending the industry a stamp of universality. +n general, banking may be classified
as retail and corporate banking. -etail banking, which is designed to meet the requirements of
individual customers and encourage their savings, includes payment of utility bills, consumer
loans, credit cards, checking account balances, )Ts, transferring funds between accounts and the
like. $orporate banking, on the other hand, caters to the needs of corporate customers like bills
discounting, opening letters of credit and managing cash.
The +ndian banking scene has changed drastically with the private sector making inroads in
an area hitherto dominated by large public sector banks. !rowing disinvestment is likely to impact
the banking industry as well. There is every possibility of privati7ation of public sector banks,
leading to greater operational autonomy.
The development of the +ndian banking sector has been accompanied by the introduction of
new norms such as +ncome -ecognition and $apital )dequacy, by the government. The latter
implies that banks can lend on the basis of their respective capital base. These norms have caused
banks to construct equity on their own, before going in for debt. (isintermediation is a real threat
for banks. Of late, banks are adopting the A) =conomic Aalue )dded> concept wherein revenues
are viewed in the context of the risk associated with them.
The 0ew orld order has ensured "#urvival of the %ittest". 0ew services are the order of
the day, in order to stay ahead in the rat race. 'anks are now foraying into net banking, securities,
consumer finance, housing finance, treasury market, merchant banking and insurance.
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BANKIN9 STRU%TURE
The +ndian banking industry, which has -eserve 'ank of +ndia as its regulatory authority, is
a mix of the public sector, private sector, and foreign banks. The private sector banks are again
split into old banks and new banks.
S%HEDULED BANKS
#cheduled commercial banks are those that come under the purview of the #econd
#chedule of -eserve 'ank of +ndia =-'+> )ct, 9:56. The banks that are included under this
schedule are those that satisfy the criteria laid down vide section 64 =@< of the )ct>. #ome co&
operative banks come under the category of scheduled commercial banks though not all co&
operative banks.
PUBLI% SE%TOR BANKS
/ublic sector banks are those in which the !overnment of +ndia or the -'+ is a maority
shareholder. These banks include the #tate 'ank of +ndia =#'+> and its subsidiaries, other
nationali7ed banks, and -egional -ural 'anks =--'s>. Over B
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PRIVATE SE%TOR BANKS
/rivate 'anks are essentially comprised of %our typesE the old and the new. The old private
sector banks comprise those, which were operating before 'anking 0ationali7ation )ct was passed
in 9:@:. On account of their small si7e, and regional operations, these banks were not nationali7ed.
These banks face intense rivalry from the new private banks and the foreign banks. The banks that
are included in this segment includeE 'ank of adura 1td. =now a part of )11)*)')( 'ank>,
'harat Overseas 'ank 1td., 'ank of -aasthan, ?arnataka 'ank 1td., 1ord ?rishna 'ank 1td., The
$atholic #yrian 'ank 1td., The (hanalakshmi 'ank 1td., The %ederal 'ank 1td., The Dammu F
?ashmir 'ank 1td., The ?arur Aysya 'ank 1td., The 1akshmi Ailas 'ank 1td., The 0edungadi
'ank 1td. and Aysya 'ank. The new private sector banks were established when the 'anking
-egulation )ct was amended in 9::5. %inancial institutions promoted several of these banks. )fter
the initial licenses, the -'+ has granted no more licenses. These banks are gearing up to face the
foreign banks by focusing on service and technology. $urrently, these banks are on an expansion
spree, spreading into semi&urban areas and satellite towns. The leading banks that are included in
this segment include 'ank of /unab 1td., $enturion 'ank 1td., !lobal Trust 'ank 1td., *(%$
'ank 1td., )11)*)')( 'anking $orporation 1td., +('+ 'ank 1td., +ndus+nd 'ank 1td. and
)xis 'ank 1td.
FOREI9N BANKS
The operations of foreign banks, though similar to that of other commercial +ndian banks,
are mainly confined to metropolitan areas. %oray of foreign banks depends on reciprocity,
economic and political bilateral relations. )n inter&departmental committee has been set up to
endorse applications for entry and expansion. %oreign banks, in the wake of the liberali7ation era,
are looking to expand and diversify. #ome of the leading foreign banks that operate in +ndia are
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$itibank, #tandard $hartered !rindlays 'ank, *ong ?ong #hanghai 'anking $orporation, 'ank
of )merica, (eutsche 'ank, (evelopment 'ank of #ingapore and 'anque 0ational (e /aris.
PUBLIC SECTOR BANKING – AT A DISADVANTAGE
%unctioning of /ublic #ector 'anks =/#'s>, which are yet to achieve computeri7ation
across the board, is at a relative disadvantage when compared to the private sector, which is
offering state&of&the&art facilities such as )Ts, doorstep banking, banking on phone, and net
banking. /#'s also suffer from huge costs of labor and low levels of automation. )t this rate, it
may not be long before new channels devised by private banks effectively surpass the number of
branch 0e%ourrks offered by the /#'s.
This apart, the problems which have assumed enormous proportion today as far as /ublic
#ector banks are concerned are ballooning 0/) levels, declining margins, poor credit off&take,
high overheads, and lack of good quality assets. 'anks are sticking to reliable borrowers for fear of
bad debts. +n fact, banks largely invest in government securities, which have 7ero risk. ith !O+
being the single largest borrower, the yields on these securities determine the interest rates.
The government aims to decrease its shareholding in /#'s to 55C, however, at the same
time it also wants to retain the controlling stake. This, it is feared, is not going to solve the
problems which /#'s are coping with now.
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PRIVATE SE%TOR BLOO'S
$orporate governance and self®ulation are the ground rules for the private sector.
!overnment interference is not preferred. hile some private banks such as )11)*)')( 'ank,
)xis 'ank and +('+ 'ank have financial institutions 'anking them, others are opting for foreign
partnerships for technology and monetary resources.
/rivate 'anks have emerged relatively strong, with about @
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The -eserve 'ank of +ndia =-'+> is launching its new liquidity adustment facility =1)%>,
effective Dune 8. The first phase would see the withdrawal of additional collateralised lending
facilities, and Tier&++ refinance to banks. The 8C fixed rate -epo will also be withdrawn. The
facilities of collateralised lending and Tier&+ refinance facilities will continue.
The $entral government has granted approval to banks during the current financial year to make a
foray into forward trading in gold by including gold on the list of commodities eligible for hedging
under the %orward $ontract =-egulation> )ct, 9:84.
'EASURES ADOPTED BY RBI
easures to increase liquidity and decrease the cost of funds to banks
• 'ank rate cut by 9C from ;C to BC
• $-- cut by
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) landmark ". $O" ventures in +ndia between +$+$+ ')0? and #+%2 for online distribution of
retail banking products and services.
+n a maor development in the +nternet world, +$+$+ 'ank, the banking subsidiary of +$+$+ 1td.
=02#E +$ and +$.(> and #atyam +nfoway 1td. =0)#()HE #+%2> announced the setting up of a
new ".$O" company for on&line distribution of retail banking products and services on the
+nternet. This landmark agreement marks the coming together of +ndiaJs first +nternet 'anking
provider, +$+$+ 'ank, and +ndiaJs largest private +#/ and mega&/ortal, #atyam +nfoway, to create a
unique partnership between a maor 'ank and a mega&/ortal. The marriage between banking and
portals is expected to be a win&win potent combination, which is expected to result in improved
customer orientation, lower distribution cost, long&term customer relationships with ease of
banking wherever and whenever the customer wants it and enhanced profitability. The range of
retail banking products to be distributed through the portal would include savings accounts, current
accounts, fixed deposits, bill payments and other retail banking products that +$+$+ 'ank may
offer through this on&line channel.
The surge in demand for e&commerce related services stems from the rapid growth in +nternet
penetration in the country and a fundamental change in the business paradigm. The two companies
would therefore also explore several opportunities to complement each otherJs strengths to
capitalise on the opportunities in e&commerce. This would include providing a platform for trade
facilitation and payments over the +nternet using innovative banking products of +$+$+ 'ank. #+%2
has a buyer to seller orderingKselling website, #eekand#ource.com, which is on&line except for the
payments that are still physical. +$+$+ 'ank has developed an +nternet based Jbusiness to businessJ
payment module for purchasers and sellers to effect payments online. ) synergistic offering of
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these two products would be made so that such customersKusers can complete the entire transaction
and payments online.
The two companies would expect to co&operate wherever feasible to extend the reach and channels
for distribution of financial products from +$+$+ 'ank and +nternet products from #+%2. +$+$+
'ank, as a part of its "$lick and 'rick" strategic focus would set up )Ts at the #atyam )ccess
/oints and $yber $afes, thereby increasing its reach across the country. +t would also offer #atyam
+nternet terminals at its branches, enabling visitors to surf the +nternet, thereby attracting new
customers to its branches.
The two companies shall examine further business opportunities, which would effectively
synergise the financial services strength of +$+$+ 'ank and its )ffiliates and the technological
expertise of #atyam +nfoway and its )ffiliates. +$+$+ 'ank and #atyam +nfoway through this
partnership will play a strategic role in providing revolutionary e&commerce solutions in +ndia.
The memorandum of understanding was signed today between r. *.0 #inor, anaging (irector
F $O of +$+$+ 'ank and r. -. -amra, anaging (irector of #atyam +nfo way.
+$+$+ is a diversified financial services company offering a wide range of products and services to
corporate and retail customers in +ndia. +$+$+ 'ank, a subsidiary company has been the pioneer of
+nternet banking in +ndia. +$+$+ 'ank has been gearing itself for the opportunities that would be
created from the e&$ommerce revolution.
#atyam +nfo way 1td. is the leading integrated +nternet and &commerce $ompany operating in
+ndia. #atyamOnline, the most comprehensive portal site of +ndian origin is one of the key
offerings from #+%2 in the business to consumer segment. -ecently it entered into an agreement to
acquire +ndiaorld $ommunications /rivate 1imited, which would result in the integration of
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+ndiaorldJs popular websites like samachar.com, khel.com and kho.com with #+%2Js portals. The
combined portal would be the largest +ndia related +nternet portal.
* Ke4 B&s"ness O#ject"$es
Organi7ations are facing tremendous competition word&wide. There is pressure on the
organisations to improve their profitability and efficiency for their survival and growth. The
customer’s expectations about the product and services are increasing and they do not hesitate to
change their brand loyalty or the loyalty towards the organisations with whom they have been
dealing for a long time. The deregularisation, liberali7ation and globalisation process have given
freedom to the organisations in terms of selecting and producing the products and services,
selecting the market segment and targeting a customer group at the same time they have to meet
more rigid and regulatory requirements to satisfy the regulators that the deregulation or
liberali7ation does not work against the interest of the customers and the society. The organisations
also have to safeguard their resources to protect the interest of shareholders.
The changing environment particularly that of competition, customer expectations and emerging
technology have influenced the banks word&wide. Thus, the key business obectives of a bank are
to manage increasing competition by improving their product and services, improving efficiency
and productivity by restructuring their systems and work procedures and improving employees
productivity, ensuring compliance with the regulatory requirements and safeguarding the assets.
)ll these issues can be addressed by implementation of the right type of technology for the right
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purpose. The technology&based solutions have put the banks in a competitive advantage, improved
the efficiency of the operations and provided excellent customer service. The technology has
helped the organisations to take strategic decisions based on the on&line data rather than based on
the past experience and intuitive decisions. The computer assisted audit techniques have helped the
banks to ensure safeguarding of resources and to ensure that the banks are operating efficiently and
effectively. The extensive use of technology has also brought down the transaction cost and the
rental cost of the premises. Thus, the computerisation of banks operations had tremendous impact
on their future prospects. The central bank of any country though operate in a monopoly situation
but has to demonstrate as a role model its efficiency and effectiveness to guide and supervise the
whole banking system.
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0 %han2es "n IT Scenar"o
The banks have undergone changes as far as the implementation of +T is concerned. They have
moved from manual systems to batch processing systems, batch processing systems to on&line
systems and now striving for real time systems. They have moved from centrali7ed computing to
decentrali7ed computing in which each business unit can now take care of its computing
requirement. The focus of use of computers has moved from back office to front office where most
of the computeri7ed operations are providing customer interface in order to improve customer
service. Thus, the computerisation has refocused the predominance of its applications from
business orientation to customer orientation.
The computer operations which were mainly on stand alone environment about a decade back have
taken the advantage of data communication and networking technology to share the data and
computer resources and provide anywhere and anytime services. The online systems make the data
and information available to the decision maker at the press of a button. The +#, which was
predominantly used for performance reporting, is now being extensively used for decision&making.
The +T supported tools like (ecision #upport #ystems =(##>, xpert #ystems, (ata arehousing
and (ata ining, etc play an important role in designing an xecutive +nformation #ystem =+#>.
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+ IT Ena#)ers
a. De$e)op(ents "n HC8 Techno)o24
(uring last decade there has been tremendous improvements in hardware technology in
terms of storage capacity and processing speed. The processing speed is getting almost
doubled every year and there is no constraint in terms of storage space. Today’s
microprocessors have more speed, processing power and storage capacity than a five years
old mainframe. The networked environment and the client server architect have provided
almost an unlimited processing power to microprocessor& based systems. The only
limitation is the availability of bandwidth for wide area networks =)0s>. The cost of
hardware has drastically come down to make it affordable to organisations and individuals.
The spread of ?iosks has facilitated the accessibility of computers and +nternet to common
people. +nvent of smart card technology has come out with many uses in banking and
payment systems. The individuals need not carry the cash. The plastic cards with microchip
can store the details of transactions and the balance amount to serve as an electronic purse.
b. De$e)op(ents "n So1t=are Techno)o24
ore than the developments in the hardware technology there have been developments in
software technology. 0ewer and newer software systems are implemented to facilitate the
users. The software systems are becoming more and more user friendly and interactive to
provide on&line help and validation facilities. The !raphic 3ser +nterface =!3+>
environment facilitated the users to use the systems by clicking the appropriate icons to
perform various common functions without bothering about the syntax of commands. The
software packages are now supporting multimedia i.e. text, audio, video and graphics. The
software systems have also been developed to support presentations, desktop printing, 5(
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graphics, animations, etc. #oftware has also been developed to support any human
activities to improve the efficiency, productivity, housekeeping and customer service.
#pecial packages have been developed for facilitation the auditors. The $omputer )ssisted
)udit ToolsK Techniques =$))Ts> have made the ob of auditors easy and more effective.
c De$e)op(ents "n %o((&n"cat"on Techno)o24
The synergy between computer and communication technology has really changed the
banking scenario. +t has facilitated the banks to reach to the customers without their
physical presence. The technologies available for 1)0, )0, +ntranet, +nternet and
!roupware have improved the efficiency of the banks. 'anks are able to provide better and
innovative services to customers using these technologies. The satellite based
communication systems provide high reliability and scalability. This technology is highly
suitable for remote locations. The fibre optic technology has also improved the reliability,
quality and speed of communication besides providing considerably higher bandwidth for
the data transfer.
; Iss&es "n %o(p&ter Techno)o24
The maor problem the +T users are facing today relates to fast obsolescence in *ardware
Technology. The obsolescence is fast because newer and newer software systems with more
capabilities are developed which require higher processing speed and storage. The other concern of
the user of the technology particularly of the banks is the data security and the disaster
management as the data in the computerised systems represents financial transactions.
+nadequately secured systems may lead to frauds and other computer related crimes. To provide
uninterrupted services to its customers, the banks are also concerned with the proper maintenance
of hardware and software systems. The adequate and trained manpower is generally not available
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at different business locations. +t is also a very strategic issue for a bank whether to develop and
maintain the systems in&house or to outsource them. There are always some relative advantages
and disadvantages for outsourcing the systems depending upon the circumstances.
5 Iss&es "n %o((&n"cat"on Techno)o24
There are varieties of communication media available for networking and data communication.
The selection of suitable communication media in terms of its reliability, cost and durability is an
important decision. The selection of appropriate topology and the communication protocols are
also important considerations for the banks. )nother maor issue the banks are facing is to ensure
network security. The physical security is not considered adequate and effective in a networked
environment particularly in a wide area network. There is also shortage of communication
infrastructure in developing countries and the infrastructure is costly. There are not many choices
as the infrastructure is generally provided by the government agencies and there are always some
regulatory hassles. There is also shortage of bandwidth to support data, voice and image. The
reliability of the infrastructure is also one of the maor issues when it is required to provide
services like banking anytime and anywhere.
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- I(pact on Sta11
There are number of issues related to the staff while implementing and using +T in banks. These
relate to availability of trained personnel to exploit the benefits of technology, continuous up
gradation of their skills, retention of trained manpower in the organisation and utili7ation of staff
rendered surplus due to implementation of technology.
/ The F&t&re Tren7s
)nimation software, fusion of computer and communication technology, image processing and
video conferencing all will aid and present simulated environment for various business activities
including banking. mergence of electronic commerce, electronic and +nternet banking, electronic
payment systems and use of e&cash will bring our drastic changes in the banking activities.
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“BANKIN9 SYSTE' IN NE8 'ILLENIU'!
INTRODUCTION: -
conomic growth and development of a country depends on the health of its financial sector that
includes banking sector. 'anking sector provides a very vital input wi7. %inance to all other
commercial and scientific fields thusL it should be always one step ahead of all the other fields. +n
addition it provides mobiliasation of savings. +t also plays an important role in capital formation of
the country.
The 9::9 new economic policy adopted by the government of +ndia is based on the three features
1/! A+M. 1iberali7ation, /rivati7ation, !lobali7ation. +t created a huge improvement in the
economy of our country. Than
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-'+, he has accorded priority towards the implementation of some important recommendations of
the Naras"(ha( %o(("ttee Report
+n order to visuali7e the reforms, it is necessary to trace its development in a historical prospective.
F&t&re O1 Ban
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This has an adverse effect on the banks income and profitability. 'anks now have to
constantly lookout for the new ways of earning income
+ 0on&performing assets =0/)s> is a one of the serious challenges of banking system is
facing. ) high level of 0/)s adversely affects the profitability of our banks. +n future, bank
should adopt intensive techniques to reduce the 0/)s.
; Technological changes in a hi&tech +T era customers, expect quick and efficient service.
The paper&based payment system is gradually changing into electronic payment system.
ith the growth of computer network in +ndia, some banks have also introduces +nternet
'anking, $ustomers, who are linked to computers, find it very convenient.
Opport&n"t"es
1et us have a look, at the opportunities that a banking sector has in future.
9. !rowing banking business, a steady increase in personal income of people an incoming of
0$s has increases the demand for bank loans to buy consumer durables. (emand for
housing loan has also increased.
4. %inancial supper market banks have entered the area of financing and other services like
depository, underwriting, gilt trading and even brokering. $ommercial banks are now
operating as a financial supper markets.
5. +nsurance business&now insurance sector is open to the private sector as well. +t is easer for
banks with a wide network to capture the widely speared&out market for insurance
business.
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6. $ash&less system&growth of credit card business in +ndia is another possibility for
commercial banks to exploit. +t is possible to increase market share of credit card business
on account of the increase in middle and higher middle&class population.
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%onstra"nts
The constraints that need to be removed to make our banking sector progressive areE
9. To remove inflexibility like lack of users friendly front and environment for bank officialsL
4. 3se of a very technical and proprietary back and software, which cannot be customi7ed
easily.
5. 3sers in banks as we know are not +T professionals and though they are trained in various
aspects, it really makes impractical for them to covers themselves suddenly to new
upcoming systems.
%onc)&7"n2 Re(ar to improve our banking sector, for better tomorrow.
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“BANKIN9 S%ENE INDIA!
'"7 Ter( Appra"sa) o1 the *,th P)an Tar2ets
The id Term )ppraisal of The 9< th /lan conducted by the 0ational (evelopment $ouncil =0($>
noted that in some areas of the economy is doing well and these gains need to be consolidated, but
there are also important weaknesses, which if not corrected could undermine even the performance
of the economy and problems of the economy are assumed as followsE
!(/ growth has averaged @.8C in the first three years, which is below the 9 +mprovement in private corporate sector investments,
'> /ositive international perceptions on +ndia
$> Tolerant inflation level
(> $omfortable external payment position with substantial inflow from abroad lending to
comfortable foreign exchange position.
+ndustrial sector also showed signs of improvement. The ultimate aim should be to consolidate
the gains in these developments and to overcome the weaknesses in the economy. ?ey
weaknesses are identified as followsE
* A22re2ate 9ro=th
Though the plan fixed a target of ;.9C, it is difficulty to achieve the target and the likely
growth rate expected to below BC during the plan period. )n important reason for the lower
growth is that investment did not increase in line with available investible resources.
0 A2r"c&)t&ra) 9ro=th
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)griculture !rowth is very poor over the last two decades. )griculture !rowth has decelerated
sharply from 5.4C to 9.:C between 9:;
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Our social indicators are not only lower then the levels in ast )sian countries, but they are
lower even in comparison with the levels achieved by these countries twenty&five years ago.
The social indicators are also show wide disparity in the gender gaps, large rural and urban
differences and wide variation across states.
- E(p)o4(ent
This is another area of grave concern. #tudies based on data collected from organi7ed and
unorgani7ed sectors state that while employment may be increasing in the unorgani7ed sector
in response to growth, there is actually a contraction in employment in the organi7ed sector,
which is the preferred sector for employment by new entrants to the labour force.
/ Ine&a)"t4 an7 Po$ert4
Though the poverty has declined the decline was less then targeted. The moderate
improvement in education ad health indicators implies that access to more productive
employment remains limited, especially in backward regions and amongst disadvantaged
groups.
. Ba)ance Re2"ona) De$e)op(ent
-egional imbalance in the development of different states presents a picture, which requires a
focused attention. #ome states were able to reap the benefits of the economic reforms, but
some others were not able to do so. ven district backwardness in a well performing state also
presents a grim picture.
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? Reso&rces "n the P)"c Sector
The availability of resources in the public sector to meet targeted levels of plan expenditure is
an area, which deserves attention. 0either the center nor the state have been able to mobeli7e
the resources needed to keep outlays in line with 9< th plan proections and this has led to
significant under funding in many sectors. The consolidated public debt of the $enter and
#tates taken together is about ;
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a> $apital to risk&weighted assets ratio =$-)-> of at least :C for preceding
two completed years and the accounting year for which it proposes to declare dividends
b> 0et 0on&performing )ssets =0/)s> of less then BC.
c> +n case any bank does not meet the above $-)- norm, but is having a
$-)- of at least :C for the accounting year for which it proposes to declare dividend. +t
would be eligible to declare dividend provided, its net 0/) ratio is less then 8C.
0 The bank should comply with the provisions of section 98 and 9B of the 'anking -egulations
)ct, 9:6:.
+ The bank should comply with the -eserve 'ank’s prevailing regulationsKguidelines, including
creating adequate provisions for impairment of assets and staff retirement benefits, transfer of
profits to statutory reserves, etc.
; The proposed dividend should be payable out of the current year’s profit.
5 The -eserve 'ank of +ndia should not have placed any explicit restrictions on the bank for
declaration of dividends.
-egarding the quantum of dividend, the -'+ made the following stipulations.
'anks, which fulfill the eligibility criteria, may declare and pay dividends, provided&
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a> The divined payout ratio does not exceed 6< per cent. =(ivined pay out ratio should be
calculated as a percentage of Ndividend payable in a year =excluding dividend tax> to Nnet
profit during the year.
b> +n case the profit for relevant period includes any extraordinary profitsKincome, the payout
ratio should be computed after excluding such extraordinary items for reckoning
compliance with the prudential pay out ratio.
c> The financial statements pertaining to the financial year to which the dividend is declared,
should be free of any qualification by the statuary auditors, which have an adverse bearing
on the profit during that year. +n case of any qualification to that effect, the net profit should
be suitably adusted while computing the dividend pay out ratio.
The reserve bank will not entertain any application for a higher dividend payout ratio than the
one for which the banks qualify.
DoorGStep Ban
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“PERFOR'AN%E HI9HLI9HTS OF PUBLI% SE%TOR BANKS IN 0,,;G,5!
+n this note we analyse the performance of public sector banks =except /unab and sind bank> on
important parameters such as total assets, (eposits, +nvestments, )dvance, 0on&performing )ssets
=!ross and net>, +nterest +ncome, other +ncome, Total +ncome, +nterest xpenditure, Operating
xpenditure, Total xpenditure, Operating profit, provisions and $ontingencies and 0et profit and
important ratios like credit&(eposit ratio, +nvestment&(eposit -atio, spared to Total )ssets,
Operating expenses to Total xpenses, -eturn on )ssets, $apital )dequacy -atio, 0/) ratio and
productivity ratios. #ignificant features of the operations of banks on each of the above&mentioned
parameters are given belowE
Tota) Assets
)s on 59st arch 4
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Depos"tsG
Total deposits mobili7ed by the public sector banks increased from -s. 94,4@,;5; crores as on 59 st
march, 4
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showing an impressive growth of 56.9 per cent as against the previous years growth of 98.4 per
cent. xcluding the +('+ 'ank 1td., the growth was 4@.: per cent during 4
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Total income of the public sector bank recorded a growth of 5.; per cent during 4
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/rofit& the total operating profit if the /#'s declined from -s. 5:,85@ crores during 4
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4
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)s mentioned before, both the gross and net non&performing assets showed declined in absolute
terms ad as percentage of net advance during 4
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%onc)&s"on
$ompared to 4
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EGBANKIN9
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8HAT IS EGBANKIN9@
lectronic banking is one of the truly widespread avatars of &commerce the world over.
Aarious authors define &'anking differently but the most definition depicting the meaning and
features of &'anking are as followsE
1. 'anking is a combination of two, Electronic technology and Banking.
2. lectronic 'anking is a process by which a customer performs banking
Transactions electronically without visiting a brick&and&mortar institutions.
5. &'anking denotes the provision of banking and related service through
xtensive use of information technology without direct recourse to the bank by the
customer.
NEED FOR EGBANKIN9
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Ban
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One has to approach the branch in person, to withdraw cash or deposit a cheque or request a
statement of accounts. +n true +nternet banking, any inquiry or transaction is processed online
without any reference to the branch =anywhere banking> at any time. /roviding +nternet banking is
increasingly becoming a "need to have" than a "nice to have" service. The net banking, thus, now
is more of a norm rather than an exception in many developed countries due to the fact that it is the
cheapest way of providing banking services.
'anks have traditionally been in the forefront of harnessing technology to improve their products,
services and efficiency. They have, over a long time, been using electronic and telecommunication
networks for delivering a wide range of value added products and services. The delivery channels
include direct dial P up connections, private networks, public networks etc and the devices include
telephone, /ersonal $omputers including the )utomated Teller achines, etc. ith the popularity
of /$s, easy access to +nternet and orld ide eb =>, +nternet is increasingly used by
banks as a channel for receiving instructions and delivering their products and services to their
customers. This form of banking is generally referred to as +nternet 'anking, although the range of
products and services offered by different banks vary widely both in their content and
sophistication.
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Tra7"t"ona) #an
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EGBan
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EGBANKIN9 PRODU%TS
A&to(ate7 Te))er 'ach"ne AT'>
These are cash dispensing machine, which are frequently seen at banks and other locations such as
shopping centers and building societies. Their main purpose is to allow customer to draw cash at
any time and to provide banking services where it would not have been viable to open another
branch e.g. on university campus.
)n a&to(ate7 te))er (ach"ne or a&to(at"c te))er (ach"ne =AT'> is a computeri7ed
telecommunications device that provides a financial institutionJs customers a method of financialQ
transactions in a public space without the need for a human clerk or bank teller. On most modern
)Ts, the customer identifies him or herself by inserting a plastic )T card with a magnetic
stripe or a plastic smartcard with a chip that contains his or her card number and some security
information, such as an expiration date or $A$ =$AA>. #ecurity is provided by the customer
entering a personal identification number =/+0>.
3sing an )T, customers can access their bank accounts in order to make cash withdrawals =or
credit card cash advances> and check their account balances. any )Ts also allow people to
deposit cash or checks, transfer money between their bank accounts, pay bills, or purchase goods
and services.
)Ts are known by various casual terms including cash machine, hole&in&the&wall, cash point or
'ancomat =in urope and -ussia>. The occasionally&used )T achine is an example of -)#
syndrome.
#ome of the advantages of )T to customers areE&
• )bility to draw cash after normal banking hours
• Huicker than normal cashier service
• $omplete security as only the card holder knows the /+0
• (oes not ust operate as a medium of obtaining cash.
• $ustomer can sometimes use the services of other bank )T’s.
Te)e#an
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Telephone banking is relatively new lectronic 'anking /roduct. *owever it is fastly becoming
one of the most popular products. $ustomer can perform a number of transactions from the
convenience of their own home or officeL in fact from anywhere they have access to phone.
$ustomers can do followingE&
• $heck balances and statement information
• Transfer funds from one account to another
• /ay certain bills
• Order statements or cheque books
• (emand draft request
This facility is available with the help of Aoice -esponse #ystem =A-#>. This
system basically, accepts only TO0 dialed input. 1ike the )T customer has to follow particular
process, initially account number and telephone /+0 are fed for the process to start. )lso the A-#
system provides the users within additional facilities such as changing existing password with the
new desired, information about new products, current interest rates etc.
'o#")e Ban
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'o(ents o1 cr"s"s o1ten present &n&s&a) #&t 1)eet"n2
opport&n"t"es to pro1"t 1ro( strate2"c repos"t"on"n2.
The 1o))o="n2 "s a co(prehens"$e )"st o1 act"ons that sho&)7 #e cons"7ere7
• 'uy protection or insurance for risks that can be immuni7ed.
• -estructure business, client, or product mix.
• /rice differently to include previously unidentified risk.
• !et out of the position, market, or business.
• (on’t change the business but systematically monitor and manage the business through
more stressTesting, and develop contingency plans for the shocks.
• valuate the returns over the life cycle of the business for the total economics.
• 'eware of the industry herd mentality and the resulting concentration of risks.
• 'e careful of the .greater fool. )ssumption.
• /repare for liquidity and funding issues that naturally occur in stressful market
environments by increasing
$reditKcounterparty linesK limits and funding sources, and managing liability structure for
adequate short&, medium&, and long&term funding in a crisis.
+n general, a capital charge is not a useful tool for dealing with the results of stress tests. One or
more of the above solutions should provide the protection more effectively.
Taken together, the above seeks to first ensure that the firm can survive the stress events
=which include the impact on capital adequacy, reported earnings, firm liquidity, credit ratings, and
customer and investor confidence>. +n addition, the actions aim to preserve enough resilience in
distressed market conditions and to enable the firm to take the offensive and move quickly,
because moments of crisis often present unusual but fleeting opportunities to profit from strategic
repositioning.
R"s< 'ana2e(ent
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#ince the occurrence of these incidents, the importance of risk management has been
extensively recogni7ed by banks and securities firms when deciding the amount of risk they are
willing to take.
oreover, bank regulators now put an emphasis on risk management practices in
attempting to reduce the fragility of financial and banking system.
#etting up of risk management cell is been practiced by various banks, brokerage houses
and other financial firms. 'asic obective of this department was to eliminate risk exposure to the
firm and the client’s portfolio as much as possible.
+n volatile financial markets, both market participants and market regulators need models
for measuring, managing and containing risks. arket participants need risk management models
to manage the risks involved in their open positions. arket regulators on the other hand must
ensure the financial integrity of the stock exchanges and the clearing houses by appropriate
margining and risk containment systems.
The successful use of risk management models is critically dependent upon estimates of
thevolatility of underlying prices. The principal difficulty is that the volatility is not constantovertime & if it were, it could be estimated with very high accuracy by using a sufficiently long
sample of data. Thus models of time varying volatility become very important. /ractitioners and
econometricians have developed a variety of different models for this purpose. hatever intuitive
or theoretical merits any such model may have, the ultimate test of its usability is how well it holds
up against actual data. mpirical tests of risk management models in the +ndian stock market are
therefore of great importance in the context of the likely introduction of index futures trading in
+ndia.
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There are se$era) r"s< (ana2e(ent (o7e)s a$a")a#)e6 #&t the (ost
pop&)ar "n the( are G
Aalue&at&-isk,
#tress Testing,
Va)&eGatGR"s
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+nformation breakdowns, fraud and rogue trading>, computation errors =including failure to
produce a Aa- on time> and market movements.
Risk eas!re a"# Risk etri$
The term NAa- is used both for a risk measure and a risk metric. This sometimes leads to
confusion. #ources earlier than 9::8 usually emphasi7e the risk measure, later sources are more
likely to emphasi7e the metric.
The Aa- risk measure defines risk as mark&to&market loss on a fixed portfolio over a fixed
time hori7on, assuming normal markets. There are many alternative risk measures in finance.
+nstead of mark&to&market, which uses market prices to define loss, loss is often defined as change
in fundamental value. %or example, if an institution holds a loan that declines in market price
because interest rates go up, but has no change in cash flows or credit quality, some systems do not
recogni7e a loss. Or we could try to incorporate the economic cost of things not measured in
daily financial statements, such as loss of market confidence or employee morale, impairment of
brand names or lawsuits.
-ather than assuming a fixed portfolio over a fixed time hori7on, some risk measures
incorporate the effect of expected trading =such as a stop loss order > and consider the expected
holding period of positions. %inally, some risk measures adust for the possible effects of abnormal
markets, rather than excluding them from the computation.
The Aa- risk metric summari7es the distribution of possible losses by a quantile, a point
with a specified probability of greater losses. $ommon alternative metrics are standard deviation,
mean absolute deviation, expected shortfall and downside risk .
VaR risk a"a%ee"t
#upporters of Aa-&based risk management claim the first and possibly greatest benefit of
Aa- is the improvement in systems and modeling it forces on an institution. +n 9::B, /hilippe
Dorion wroteE
The greatest benefit of A)- lies in the imposition of a structured methodology for criticallythinking about risk. +nstitutions that go through the process of computing their A)- are forced to
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http://en.wikipedia.org/wiki/Fraudhttp://en.wikipedia.org/wiki/Rogue_traderhttp://en.wikipedia.org/wiki/Measure_(mathematics)http://en.wikipedia.org/wiki/Metrichttp://en.wikipedia.org/wiki/Mark_to_market_accountinghttp://en.wikipedia.org/wiki/Intrinsic_valuehttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Order_(exchange)http://en.wikipedia.org/wiki/Probability_distributionhttp://en.wikipedia.org/wiki/Standard_deviationhttp://en.wikipedia.org/wiki/Absolute_deviationhttp://en.wikipedia.org/wiki/Expected_shortfallhttp://en.wikipedia.org/wiki/Sortino_ratiohttp://en.wikipedia.org/wiki/Systemshttp://www.derivativesstrategy.com/magazine/archive/1997/0497fea2.asphttp://en.wikipedia.org/wiki/Fraudhttp://en.wikipedia.org/wiki/Rogue_traderhttp://en.wikipedia.org/wiki/Measure_(mathematics)http://en.wikipedia.org/wiki/Metrichttp://en.wikipedia.org/wiki/Mark_to_market_accountinghttp://en.wikipedia.org/wiki/Intrinsic_valuehttp://en.wikipedia.org/wiki/Loanhttp://en.wikipedia.org/wiki/Interesthttp://en.wikipedia.org/wiki/Economicshttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Order_(exchange)http://en.wikipedia.org/wiki/Probability_distributionhttp://en.wikipedia.org/wiki/Standard_deviationhttp://en.wikipedia.org/wiki/Absolute_deviationhttp://en.wikipedia.org/wiki/Expected_shortfallhttp://en.wikipedia.org/wiki/Sortino_ratiohttp://en.wikipedia.org/wiki/Systemshttp://www.derivativesstrategy.com/magazine/archive/1997/0497fea2.asp
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confront their exposure to financial risks and to set up a proper risk management function. Thus
the process of getting to A)- may be as important as the number itself.
/ublishing a daily number, on&time and with specified statistical properties holds every part
of a trading organi7ation to a high obective standard. -obust backup systems and default
assumptions must be implemented. /ositions that are reported, modeled or priced incorrectly stand
out, as do data feeds that are inaccurate or late and systems that are too&frequently down. )nything
that affects profit and loss that is left out of other reports will show up either in inflated Aa- or
excessive Aa- breaks. N) risk&taking institution that does not compute Aa- might escape disaster,
but an institution that cannot compute Aa- will not.
The second claimed benefit of Aa- is that it separates risk into two regimes. +nside the Aa-
limit, conventional statistical methods are reliable. -elatively short&term and specific data can be
used for analysis. /robability estimates are meaningful, because there are enough data to test them.
+n a sense, there is no true risk because you have a sum of many independent observations with a
left bound on the outcome. ) casino doesnJt worry about whether red or black will come up on the
next roulette spin. -isk managers encourage productive risk&taking in this regime, because there is
little true cost. /eople tend to worry too much about these risks, because they happen frequently,
and not enough about what might happen on the worst days.
Outside the Aa- limit, all bets are off. -isk should be analy7ed with stress testing based on
long&term and broad market data.R96S /robability statements are no longer meaningful. ?nowing the
distribution of losses beyond the Aa- point is both impossible and useless. The risk manager
should concentrate instead on making sure good plans are in place to limit the loss if possible, and
to survive the loss if not.
One spec"1"c s4ste( &ses three re2"(es
9. Out to three times Aa- are normal occurrences. 2ou expect periodic Aa- breaks. The lossdistribution typically has fat tails, and you might get more than one break in a short period
of time. oreover, markets may be abnormal and trading may exacerbate losses, and you
may take losses not measured in daily marks such as lawsuits, loss of employee morale
and market confidence and impairment of brand names. #o an institution that canJt deal
with three times Aa- losses as routine events probably wonJt survive long enough to put a
Aa- system in place.
4. Three to ten times Aa- is the range for stress testing. +nstitutions should be confident theyhave examined all the foreseeable events that will cause losses in this range, and are
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http://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Regimehttp://en.wikipedia.org/wiki/Statisticalhttp://en.wikipedia.org/wiki/Statistical_independencehttp://en.wikipedia.org/wiki/Stress_testinghttp://en.wikipedia.org/wiki/Value_at_risk#cite_note-13http://en.wikipedia.org/wiki/Kurtosishttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Stress_testinghttp://en.wikipedia.org/wiki/Statisticshttp://en.wikipedia.org/wiki/Regimehttp://en.wikipedia.org/wiki/Statisticalhttp://en.wikipedia.org/wiki/Statistical_independencehttp://en.wikipedia.org/wiki/Stress_testinghttp://en.wikipedia.org/wiki/Value_at_risk#cite_note-13http://en.wikipedia.org/wiki/Kurtosishttp://en.wikipedia.org/wiki/Financial_statementshttp://en.wikipedia.org/wiki/Stress_testing
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prepared to survive them. These events are too rare to estimate probabilities reliably, so
riskKreturn calculations are useless.
5. %oreseeable events should not cause losses beyond ten times Aa-. +f they do they should
be hedged or insured, or the business plan should be changed to avoid them, or Aa- should
be increased. +tJs hard to run a business if foreseeable losses are orders of magnitude larger
than very large everyday losses. +tJs hard to plan for these events, because they are out of
scale with daily experience. Of course there will be unforeseeable losses more than ten
times Aa-, but itJs pointless to anticipate them, you canJt know much about them and it
results in needless worrying. 'etter to hope that the discipline of preparing for all
foreseeable three&to&ten times Aa- losses will improve chances for surviving the
unforeseen and larger losses that inevitably occur.
") risk manager has two obsE make people take more risk the ::C of the time it is safe to do so,
and survive the other 9C of the time. Aa- is the border."
VaR risk eas!ree"t
The Aa- risk measure is a popular way to aggregate risk across an institution. +ndividual
business units have risk measures such as duration for a fixed income portfolio or beta for
anequity business. These cannot be combined in a meaningful way.+t is also difficult to aggregate
results available at different times, such as positions marked in different time 7ones, or a high
frequency trading desk with a business holding relatively illiquid positions. 'ut since every
business contributes to profit and loss in an additive fashion, and many financial businesses mark&
to&market daily, it is natural to define firm&wide risk using the distribution of possible losses at a
fixed point in the future.
+n risk measurement, Aa- is usually reported alongside other risk metrics such as standard
deviation, expected shortfall and Ngreeks = partial derivatives of portfolio value with respect to
market factors>. Aa- is a distribution&free metric, that is it does not depend on assumptions about
the probability distribution of future gains and losses. The probability level is chosen deep enough
in the left tail of the loss distribution to be relevant for risk decisions, but not so deep as to be
difficult to estimate with accuracy.
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http://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Bond_durationhttp://en.wikipedia.org/wiki/Fixed_incomehttp://en.wikipedia.org/wiki/Portfoliohttp://en.wikipedia.org/wiki/Beta_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Time_zonehttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Additive_functionhttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Standard_deviationhttp://en.wikipedia.org/wiki/Standard_deviationhttp://en.wikipedia.org/wiki/Expected_shortfallhttp://en.wikipedia.org/wiki/Greeks_(finance)http://en.wikipedia.org/wiki/Partial_derivativehttp://en.wikipedia.org/wiki/Non-parametric_statisticshttp://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Bond_durationhttp://en.wikipedia.org/wiki/Fixed_incomehttp://en.wikipedia.org/wiki/Portfoliohttp://en.wikipedia.org/wiki/Beta_(finance)http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Time_zonehttp://en.wikipedia.org/wiki/Market_liquidityhttp://en.wikipedia.org/wiki/Additive_functionhttp://en.wikipedia.org/wiki/Financehttp://en.wikipedia.org/wiki/Standard_deviationhttp://en.wikipedia.org/wiki/Standard_deviationhttp://en.wikipedia.org/wiki/Expected_shortfallhttp://en.wikipedia.org/wiki/Greeks_(finance)http://en.wikipedia.org/wiki/Partial_derivativehttp://en.wikipedia.org/wiki/Non-parametric_statistics
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-isk measurement Aa- is sometimes called parametric Aa-. This usage can be confusing,
however, because it can be estimated either parametrically =for examples, variance&covarianceAa-
or delta&gamma Aa-> or nonparametrically =for examples, historical simulation Aa-
or resampled Aa->. The inverse usage makes more logical sense, because risk management Aa- is
fundamentally nonparametric, but it is seldom referred to as nonparametric Aa-.
Aa- has been controversial since it moved from trading desks into the public eye in 9::6. )
famous 9::B debate between 0assim Taleb and /hilippe Dorion set out some of the maor points of
contention. Taleb claimed Aa-ER4
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9. -eferring to Aa- as a "worst&case" or "maximum tolerable" loss. +n fact, you expect two or
three losses per year that exceed one&day 9C Aa-.
4. aking Aa- control or Aa- reduction the central concern of risk management. +t is far
more important to worry about what happens when losses exceed Aa-.
5. )ssuming plausible losses will be less than some multiple, often three, of Aa-. The entire
point of Aa- is that losses can be extremely large, and sometimes impossible to define,
once you get beyond the Aa- point. To a risk manager, Aa- is the level of losses at which
you stop trying to guess what will happen next, and start preparing for anything.
6. -eporting a Aa- that has not passed a backtest. -egardless of how Aa- is computed, it
should have produced the correct number of breaks =within sampling error > in the past. )
common specific violation of this is to report a Aa- based on the unverified assumption
that everything follows a multivariate normal distribution
R"s< (ana2e(ent "n In7"an cap"ta) (ar
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%or the first month and till the time of monthly review a newly listed security is categorised
in that !roup where the market capitali7ation of the newly listed security exceeds or equals the
market capitali7ation of ; or
three times the index Aa-, and it is scaled up by root 5.
• %or the securities listed in !roup +++ the Aa- margin is equal to five times the index Aa-
and scaled up by root 5.
The index Aa-, for the purpose, is the higher of the daily +ndex Aa- based on #F/ $0 0+%T2 or
'# #0#, subect to a minimum of 8C.
0#$$1 may stipulate security specific margins from time to time.
The Aa- margin rate computed as mentioned above is charged on the net outstanding position
=buy value&sell value> of the respective clients on the respective securities across all open
settlements. There is no netting off of positions across different settlements. The net position at a
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client level for a member is arrived at and thereafter, it is grossed across all the clients including
proprietary position to arrive at the gross open position.
%or example, in case of a member, if client ) has a buy position of 9tre(e Loss 'ar2"n
The xtreme 1oss argin for any security is higher ofE
9. 8C, or
4. 9.8 times the standard deviation of daily logarithmic returns of the security price in the last
six months. This computation is done at the end of each month by taking the price data on a
rolling basis for the past six months and the resulting value is applicable for the next
month.
The xtreme 1oss argin is collectedK adusted against the total liquid assets of the member on a
real time basis.
The xtreme 1oss argin is collected on the gross open position of the member. The gross
open position for this purpose means the gross of all net positions across all the clients of a
member including its proprietary position.
There is no netting off of positions across different settlements. The xtreme 1oss argin
collected is released on completion of pay&in of the settlement.
'ar
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• The members shall not be permitted to trade with immediate effect.
• There is a penalty for margin violation
/enalty applicable for margin violation is levied on a monthly basis based on slabs as mentioned
belowE
Instances o1
D"sa#)e(entPena)t4 to #e )e$"e7
9st instance
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L"&"7 assets
mbers are required to provide liquid assets which adequately cover various margins
and #ecurity (eposit requirements. ) member may deposit liquid assets in the form of cash, bank
guarantees, fixed deposit receipts, approved securities and any other form of collateral as may be
prescribed from time to time. The total liquid assets comprise of the cash component and the non
cash component wherein the cash component shall be at least 8
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• /ublic %inancial +nstitutions as defined under #ection 6) of the $ompanies )ct, 9:8@.
=(%+>
• 'anks, i.e., a banking company as defined under #ection 8=9>=c> of the 'anking
-egulations )ct, 9:6:. ='0?>
• +nsurance companies registered with +-(). =+0#>
/ension %unds registered with /%-() =/0%>
Le$4 o1 (ar2"ns
• +nstitutional transactions are identified by the use of the participant code at the time of
order entry.
• +n respect of institutional transactions confirmed by the custodians the margins are levied
on the custodians.
• +n respect of institutional transactions reectedKnot accepted by the custodians the margins
are levied on the members who have executed the transactions.
• The margins are computed and levied at a client =$ustodial /articipant code> level in
respect of institutional transactions and collected from the custodiansKmembers.
Reta") Pro1ess"ona) %)ear"n2 'e(#er
+n case of transactions which are to be settled by -etail /rofessional $learing embers
=/$>, all the trades with /$ code are included in the trading member’s positions till the same
are confirmed by the /$. argins are collected from respective trading members until
confirmation of trades by /$.
On confirmation of trades by /$, such trades are reduced from the positions of trading
member and included in the positions of /$. The /$s are then liable to pay margins on the
same.
E>e(pt"on &pon ear)4 pa4G"n o1 sec&r"t"es
+n cases where early pay&in of securities is made prior to the securities pay&in, such
positions for which early pay&in =/+> of securities is made are exempt from margins. embers are
required to provide client level early pay&in file in a specified format. The /+ of securities is
allocated to clients having net deliverable position, on a random basis unless specific client details
are provided by the memberK custodian. *owever, memberK custodian shall ensure to pass on
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appropriate early pay&in benefit of margin to the relevant clients. )dditionally, memberKcustodian
can specify the clients to whom the early pay&in may be allocated.
E>e(pt"on &pon ear)4 pa4G"n o1 1&n7s
+n cases where early pay&in of funds is made prior to the funds pay&in, such positions for
which early pay&in =/+> of funds is made are exempt from margins based on the client details
provided by the memberK custodian in the specified format . arly pay&in of funds specified by the
memberKcustodians for a specific client and for a settlement is allocated against the securities in the
descending order of the net buy value of outstanding position of the client.
%ross 'ar2"n
Sa)"ent 1eat&res o1 the cross (ar2"n"n2 a$a")a#)e are as &n7er
9. $ross margining benefit is available across $ash and (erivatives segment
4. $ross margining benefit is available to all categories of market participants
5. %or clientKentities clearing through same clearing member in $ash and (erivatives
segments, the clearing member is required to intimate client details through a file
upload through $ollateral +nterface for embers =$+> to avail the benefit of $ross
margining
6. %or clientKentities clearing through different clearing member in $ash and (erivatives
segments they are required to enter into necessary agreements for availing cross margining
benefit.
8. %or the clientKentities who wish to avail cross margining benefit in respect of positions in
+ndex %utures and $onstituent #tock %utures only, the entity’s clearing member in the(erivatives segment has to provide the details of the clients and not the copies of the
agreements. The details to be provided by the clearing members in this regard are stipulated
in the %ormat
9. /ositions eligible for cross&margin benefit
4. ntitiesKclients eligible for cross margining
5. %acility of maintaining two client accounts
6. $omputation of cross margining benefit
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8. /rovisions in respect of default
@. )dditional -eports for $ross argin
* Pos"t"ons e)"2"#)e 1or crossG(ar2"n #ene1"t
$ross margining is available across $ash and %FO segment and to all categories of market
participants. The positions of clients in both the $ash and %FO segments to the extent they offset
each other are being considered for the purpose of cross margining as per the following priority
a. +ndex futures and constituent stock futures in %FO segment
b. +ndex futures and constituent stock positions in $ash segment
c. #tock futures in %FO segment and stock positions in $ash segment
i. +n order to extend the cross margin benefit as per =a> and =b> above, the basket of
constituent stock futuresK stock positions should be a complete replica of the index
futures. 0#$$1 specifies the number of units of the constituent stocksK stock
futures required in the basket to be considered as a complete replica of the index on
the website of the exchange =www.nseindia.comK0#$$1K0otification> from time to
time.
ii. The number of units are changed only in case of change in share capital of the
constituent stock due to corporate action or issue of additional share capital or
change in the constituents of the index.
iii. The positions in %FO segment for the stock futures and index futures should be in
the same expiry month to be eligible for cross margining benefit.
iv. The position in a security is considered only once for providing cross margining
benefit. .g. /ositions in #tock %utures of security U)’ used to set&off against index
futures positions will not be considered again if there is an off&setting positions in
the security U)’ in $ash segment.
v. /ositions in option contracts are not considered for cross margining benefit.
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0 Ent"t"esCc)"ents e)"2"#)e 1or cross (ar2"n"n2
The clearing member has to inform 0#$$1 the details of client to whom cross margining
benefit is to be provided. The cross margining benefit is available only if clearing members
provide the details of clients in such manner and within such time as specified by 0#$$1 from
time to time.
* %)"entCent"t4 sett)"n2 thro&2h sa(e c)ear"n2 (e(#er "n #oth %ash an7
F3O se2(ent
i. The clearing member has to ensure that the code allotted =code used while
executing client trade> to clientKentity in both $ash and %FO segment is same
ii. The clearing member must inform the details of clients to whom cross margining
benefit is to be provided through a file upload facility provided in $ollateral
+nterface for embers =$+>.
0 %)"entCent"t4 sett)"n2 thro&2h 7"11erent c)ear"n2 (e(#er "n %ash an7 F3O se2(ent
i. +n case a client settles in the $ash segment through a trading member K custodian
and clears and settles through a different clearing member in %FO segment, then
they are required to enter into necessary agreements.
ii. +n case where the clientKentity settles through $ustodian in $ash segment, then the
clientKentity, custodian and the clearing member in %FO segment are required to
enter into a tri&partite agreement as per the format
iii. +n case where the clientKentity clears and settles through a member in $ash segment,
and a different clearing member in %FO segment, then the member in $ash
segment and the clearing member in %FO segment have to enter into an agreement
as per the format. %urther, the clientKentity must enter into an agreement with the
member as per the format.
iv. The clearing member in the %FO segment must intimate to 0#$$1 the details of
the clientKentity in %FO segment along&with letter from trading memberKcustodian
giving details of clientKentity in $ash segment who wish to avail cross margining
benefit.
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+ Fac")"t4 o1 (a"nta"n"n2 t=o c)"ent acco&nts
)s specified by #'+, a client may maintain two accounts with their respective members to avail
cross margin benefit only. The two accounts namely arbitrage account and a non&arbitrage account
may be used for converting partially replicated portfolio into a fully replicated portfolio by taking
opposite positions in two accounts. *owever, for the purpose of compliance and reporting
requirements, the positions across both accounts shall be taken together and client shall continue to
have unique client code.
; %o(p&tat"on o1 cross (ar2"n"n2 #ene1"t
i. The computation of cross margining benefit is done at client level on an online real time
basis and provided to the trading member K clearing member K custodian, as the case may
be, who, in turn, shall pass on the benefit to the respective client.
ii. %or institutional investors the positions in $ash segment are considered only after
confirmation by the custodian on TG9 basis and on confirmation by the clearing member in
%FO segment.
iii. The positions in the $ash and %FO segment are considered for cross margining only till
time the margins are levied on such positions.
iv. hile reckoning the offsetting positions in the $ash segment, positions in respect of which
margin benefit has been given on account of early pay&in of securities or funds are not
considered.
v. The positions which are eligible for offset, are subect to spread margins. The spread
margins are 48C of the applicable upfront margins on the offsetting positions or such other
amount as specified by 0#$$1 from time to time.
vi. The difference in the margins on the total portfolio and on the portfolio excluding off&
setting positions considered for cross margining, less the spread margins is considered as
cross margining benefit. xample
5 Pro$"s"ons "n respect o1 7e1a&)t
+n the event of default by a trading member K clearing member K custodian, as the case