m.l.g. 09-aug-2008presentation on basel-2 norms by mr sangeet gupta at f.i.t.b.a. basel two norms...
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09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Basel Two Norms&
Credit Ratings
( and its practical “need-to-know” knowledge for us, as Advocates,
CA’s, & ITP’s in Faridabad )
Sangeet Kr Gupta, CASaturday, August 09, 2008
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
What is this ?
• This is the set of
• International "Banking laws and Regulations",
• &
• to be complied in India also.
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Why was this brought in ?
• We remember, some big banks
• collapsed like Barings plc etc.
• And the economies lost Billions of Dollars.
• So, this is a safeguard, which if followed , then, Risk of those problems will be less
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
What is the target of BASEL-2 ?
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
What is the target of BASEL-2
• First Target
• Ensuring that capital allocation is more risk sensitive;
• ( see that Bank takes only that much risk, as it can afford to has adequate capital to cover the same C.A.R. ( Capital Adequacy Ratio’s ).
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
What is the target of BASEL-2
• Second Target
• Separating operational risk from credit risk,
• and Quantifying both;
• ( Bank must remember both ).
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
What is the target of BASEL-2
• Third Target
• Remove the difference in policies of banks in different countries - "Regulatory Arbitrage".
• ( Some countries have too flexible norms. The unscruplous companies may try to shift to these countries , to save them from tough standards of USA, or India )
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
• What do we need to know ?
As Advocates & CA's
& ITP's, practising in Faridabad ???
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
What we need to know ?
• We shall focus on the SME sector .
• We shall know the key idea behind this .
• This is an "imposition". But for the better future.
• So, target of this topic is how we can serve our clients even better, using this knowledge ?
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
1) Business Strategy & Targets
• The "Project Report", we make/we guide the client to make, must have a detailed working on the “Strategy”
a) Targets should be clear = Management agrees with them . ( And no conflict )
b) Targets are SMART = Specific, Measurable, Achievable, Realistic and Timed
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Target section includes
• Product quality (e.g. number of warranty claims or returned items)
• Service quality (e.g. number of breakdowns or disruptions in service)
• Process efficiency (e.g. volumes in a stated period versus cost of process
• Customer satisfaction (e.g. number of complaints or repeat orders)
• Staff satisfaction (e.g. staff turnover, training provided)• Financial performance (e.g. sales targets; profit margins;
return on capital; cash flow management; credit control)
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
2) Business Market & Competition
• All Risks associated with the business
• Customer Attractiveness
• Supplier Attractiveness
• Competetion
• Market Growing or not ?
• Product is attractive or not ?
a) Make Notesb) Analyse
c) Give mitigating plan ?
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
3) Business Capability
1) General Management
2) Sales & Marketing Management
3) Operational / Production Management
4) Facilities Management
5) Financial Management
6) Planning & Information Management
7) People Management
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Business Capability – Wiiifm ?
a) make notes on themb) Analyse data, c) Give mitigating action plan
Tough work, in case of SMEsince all jobs by consultant
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
4) Business & Financial Planning
• This should contain: • Purpose of Plan • Summary description of the business and any of its unique selling propositions (USP) • Overview of key aspects of the marketplace • Summary of SWOT analysis (highlighting your business attributes and and key people) • Key Business Objectives and Targets • Critical Success and Risk Factors (key issues and actions) • Financial Analysis & Outcomes of Plan (Key financial results, ratios, sensitivity tests
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
So ?
• Tough work, in case of SME
• since all jobs by consultant.
• But ………. Then, if we can manage, it becomes more remunerative .
• Depends ……..?????
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Core Effect ?
• In India, all these documents were still asked for ………
• So, what is the new thing ?
Core Effect of Basel-II
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Core Effect of Basel II
• Bank Loan Rating under New Capital Adequacy Framework (BASEL II)
• On April 27, 2007, the Reserve Bank of India released the final guidelines for implementation of the New Capital Adequacy Framework (Basel II) applicable to the Banking system of the country
• The new framework mandates that the amount of capital provided by a bank against any loan and facility will be based on the credit rating assigned to the loan issue by an external rating agency.
• This means that a loan and a facility with a higher credit rating will attract a lower risk weight than one with a lower credit rating
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Old Position ( under Basel-I )
* Capital required is computed as Loan Amount × Risk Weight × 9%
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
New Position ?
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Effect ?
• Let us see the numerical example
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Example for Strong CompanyRs.
Loan is 100 CroresRating is AAA
Risk %Capital Reqd
Opportunity Intt lost by bank
C.A.R. unrated 150% 13.50 1.62 CroresC.A.R. New 20% 1.80 0.22 Crores
Crores 1.40 Crores
Why should bank lose this money ??
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Effect ?
• Either it will prefer that you get yourself rated.
• Or
• it will prefer that you pay a higher rate of interest to compensate for the loss
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Effect on a “Weak” company ?
• Bank will prefer that you pay a higher rate of interest to compensate for the loss.
• ( no doubts on that )
• And
• If you don’t like that …….
• Go to some other bank ……..
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Effect of Basel-2 CAR Intt %
• If you don’t like that higher rate of interest ……. You have to go to some other bank ……..
• But
• Will that bank, give you good interest rates, in coming years also ???
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
• Moral of the story
( for Consultant )
• Get your Client's company Rated .
• And
• If the rating is not good enough,
• Educate the Client … to have a better Credit Rating…
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Credit Rating ?
• What is that ?
• That is an evaluation of Credit Worthiness of a person or company , or instrument.
It indicates their willingness to pay the obligation and the net worth
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Credit Rating
• Non-Financial Factors – Marketing, Competition, Raw Material, HR etc
• Financial Factors this we will discuss.
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Over to Excel File
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Who Benefits ?
The Assessee wins …
The Bank wins ………..
And an indirect but real winner is …..
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Income Tax …..Collections are rising every year….46% last year
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Credit Rating for Mid-Corporates( for Bank Loans ):
• Reserve Bank of India, has mandated that Indian Banks shall observe the BASEL-II norms .
• These Basel Two norms
mandate a Higher Credit Risk
for the Unrated Loans, and
Low Credit Risk for AA or AAA rated Loans.
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
• So, if you have a loan of say, Rs. 50 Crores with a Bank, if you are unrated, the bank will have to cover your risk by 150% of normal, and suppose you get yourself rated, your risk may come down to just 20%(in case of AAA). So, this is a huge Penalty Vs saving scenario. This saving for bank becomes saving for the company too. In coming times, companies with Good Rating shall find cheaper loans and vice versa.
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
Credit Rating for SSI units :
• SSI Credit Rating is not a must. Banks are not giving much credence to it. But it is a beneficial report. It helps you in marketing your company before diverse audience like HUDA/PUDA for allotment of Land applications, New Customer for credibility, Export Market development and so on. Some large corporates are also asking for D & B reports etc in case you want to be an approved vendor to them.
09-Aug-2008 Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. M.L.G.
• Thank you
• Contributor : CA.Sangeet Kr Gupta,– [email protected]– [email protected]