Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance Management of Financial Institutions - II - Question Paper

a few fundamental flaws in Basel I resulted in the failure of a few major international banks including the high profile collapse of Barings Bank that redefined the approach to operational risk management in banks. Therefore, Basel II makes special prescription based on the underlying risk for the credit risk in the bank's balance sheet, market risk in the trading books and banking books of the bank as well as the charge for operational risk such as people and processes risk, internal control and IT risk in the bank.

It is in the above situation a few economists have been apprehensive about the shrinking size of bank credit to the small and medium sector including the SSIs (i.e. SMEs) and feel that it will be further accentuated by the implementation of Basel II because of its risk averse approach by moving credit away from the deserving industrial units in the small sector and consequently that will affect the employment, industrial production and exports where this sector plays an important role. However, SMEs exposures are also entitled for a 75% risk weight under Basel II as against the current 100%. Hence, it is too early to anticipate the drying of funds for the Small Sector due to the shortage of bank lending once Basel II is put in place.

As per the draft guidelines issued by the Reserve Bank of India in February, 2005 this year, to have consistency and harmony with international standards all banks in India will adopt Standardized Approach for credit risk with effect from March 31, 2007. Banks which expect to meet the minimum requirements for entry and on-going use of the Internal Rating Based Approaches (IRBA) for credit risk under the revised framework, may evaluate the necessary processes and if the minimum requirements for adopting the above advanced approaches are met, they may approach the Reserve Bank with a roadmap that has the approval of their Board of Directors for migration to these approaches.



END OF part E



END OF ques. PAPER













Suggested Answers
Management of Financial Institutions - II (322) : January 2006

part D : Case Study

1. Capital provides a cushion to absorb possible losses so that entities or individuals dealing with banks are protected all the time. To assess the adequacy of capital based on the quality of assets, the capital to Risk Weighted Assets Ratio (CAR) is calculated.

The change in the avg. risk weighted assets (ARWAs) should be ascertained, to comment on the risk profile of the bank

Earning:   Approval pending.