CAIIB-BFM-Chap 24- Pillar 3-Market Discipline

Chap 24- Pillar 3-Market Discipline

 

·         Market Discipline is to compliment the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). Pillar 3 provides disclosure requirements for banks using Basel-II framework.

·         Information would be regarded as material if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions.

CAIIB-BFM-Chap 25- Asset Classification and Provisioning Norms

Chap 25-  Asset Classification and Provisioning Norms

·         Banks should classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter

·         An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'.

·         Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank.

·         interest on advances against term deposits, NSCs, IVPs, KVPs and life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.

·         a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. a substandard asset would be one, which has remained NPA for a period less than or equal to 12 months.

·         If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as nonperforming and may be classified as 'standard' accounts.

·         Advances against Term Deposits, NSCs, KVP/IVP, etc, need not be treated as NPAs. Advances against gold ornaments, Government securities and all other securities are not covered by this exemption.

CAIIB-BFM-Chap 27- Interest Rate Risk Management

Chap 27- Interest Rate Risk Management

·         Interest rate risk is the exposure of a bank's financial condition to adverse movements in interest rates.

·         Gap: The gap is the difference between the amount of assets and liabilities on which the interest rates are reset during a given period.

·         Interest rate risk refers to volatility in Net Interest Income (NiI) or in variations in Net Interest Margin (NIM)

·         The degree of basis risk is fairly high in respect of banks that create composite assets out of composite liabilities.

·         The risk that the interest rate of different assets and liabilities may change in different magnitudes is called basis risk.

·         When assets and liabilities fall due to repricing in different periods, they can create a mismatch. Such a mismatch or gap may lead to gain or loss depending upon how interest rate in the market tend to move.

·         The degree of basis risk is fairly high in respect of banks that create composite assets out of composite liabilities

·         When the variation in market interest rate causes the Nil to expand, the banks have experienced a favourable basis shift and if the interest rate movement causes the Nil to contract, the basis has moved against the bank.

·         An yield curve is a line on a graph plotting the yield of all maturities of a particular instrument

·         Price risk occurs when assets are sold before their maturity dates.

·         The price risk is closely associated with the trading book which is created for making profit out of short-term movements in interest rates.

·         Uncertainty with regard to interest rate at which the future cash flows can be reinvested is called reinvestment risk.

·         When the interest rate goes up, the bonds price decreases

·         When the interest rate declines the bond price increases resulting in a capital gain but the realised compound yield decreases because of lower coupon reinvestment income.

·         Duration is a measure of the percentage change in the economic value of a position that will occur, given a small change in the level of interest rates.

·         Higher duration implies that a given change in the level of interest rates will have a larger impact on economic value.

·         Interest Rate Sensitive Gap: Interest Rate Sensitive Assets(RSA) - Interest Rate Sensitive Liabilities (RSL).

·         Positive Gap or Asset Sensitive Gap - RSA - RSL > 0 & Negative Gap or Liability Sensitive - RSA - RSL < 0

CAIIB-BFM-CHAP 16-FUNDING AND REGULATORY ASPECTS

CHAP 16-FUNDING AND REGULATORY ASPECTS

·         The Reserve Bank of India is the Note Issuing Authority.

·         The money in circulation is indicated by 'Broad Money' or M3, which includes currency in circulation, demand and time deposits with banks and post office saving deposits.

·         Cash reserve ratio (CRR)  is intended to reduce the multiplier effect.

·         CRR and SLR are important instruments in the hands of RBI to control liquidity in the inter-bank market. The liquidity in turn impacts overall money supply, inflation, interest rates and exchange rates.

·         Reserve assets refer to the cash deposited by scheduled commercial banks with RBI to comply with Cash Reserve Ratio (CRR) requirement. The reserve ratios are calculated on the basis of demand and time liabilities (DTL) of the banks.

·         Exemptions from DTL are the “Transactions in CBLO and CCIL”

·         Funds invested in Government securities and other approved securities to comply with the Statutory Liquidity Ratio (SLR) requirement.

·         Liquidity refers to surplus funds available with banks, which is an indicator of money supply that has not been absorbed by the real economy.

·         Treasury back-office should report relevant information to RBI in the fortnightly return (Form A).

·         The CRR is to be calculated on the basis of DTL, with a lag of one fortnight, i.e. on the reporting Friday, the DTL as at the end of previous fortnight will form the basis for CRR calculation.

·         An increase in the reserve ratios will reduce money supply (excess liquidity) and reduction in the reserve ratios will increase the money supply.

·         LIQUIDITY ADJUSTMENT FACILITY (LAF) is used to monitor day-to-day liquidity in the market.

·         LAF refers to RBI lending funds to banking sector through Repo instrument. RBI also accepts deposits from banks under Reverse Repo.

·         Real Time Gross Settlement System (RTGS) has been fully activated by RBI from October 2004.

·         RTGS is a paperless clearing system, where settlements are on gross basis.

·         The Institute for Development and Research in Banking Technology (IDRBT) has developed the Indian Financial Net Work (INFINET) as a secure communication backbone for the banking and financial sectors.

·         The INFINET has helped introduction of Structured Financial Messaging System (SFMS) which facilitates domestic transfer of funds and authenticated messages, similar to the SWIFT used by banks for international messaging.

·         Negotiated Dealing System(February 2002) is an electronic platform for facilitating dealing in Government securities and money market instruments.

·         CCIL a specialized institution promoted by major banks for clearing of securities, repo trades and trades in CBLO (securities borrowing and lending scheme).

·         FX Clear is a forex dealing system developed by CCIL for foreign exchange transactions (USD/ INR as well as cross currencies).

·         Repo/Reverse Repo rates dictate the liquidity parameters.

·         NSDL and CSDL facilitate delivery Vs payment(DVP) for secondary market deals in equity and debt paper.

·         CCIL as an intermediary settles inter-bank USD/Rupee deals on net basis, so that individual banks need not exchange payments for each transaction.