Special Feature:

Risk ManagementExperience Next Generation Banking

Vol:22 Issue:2 Quarterly Publication July 2013-September 2013

Advisory Board:Mr. Cheryan VarkeyExecutive Director

Mr. S.K. ManjiyilDy. General Manager, Plg. & Dev. Dept

Members:Mr. Roshan JoseMr. Jeethu AshishMs. Ramya K.Ms. Deepa Ann Jacob

Cover:

Layout, Typeset & Printing:Lumiere Printing Works, Thrissur

Objectives:

To instil in the bank staff a sense of belonging and involvement in the bank’s affairsTo appreciate and applaud the individual achievements of our members of staffTo act as a communication medium between management and the staffTo increase the professional competence of our bank staff

Corporate Family Magazine ofSouth Indian Bank

INSIDE

Messages

ArticlesThe Risk-hikers Guide Sibi. P.M.Our Journey Towards Basel II Advanced Approach Chithra H.Information Technology / Information System Risk Management Jose Sebastian E.Risk Management – Credit Risk Rakesh T.R.Basel II Norms –an Overview. Bijo AbrahamEmergence Of Basel- III Norms Arjun Sunder S.Credit Risk Managment- Key To Good Financial HealthThanksgiving … Paul V.L.The Road Less Travelled Antony RoshanLoan Life Coverage Ratio Unnikrishnan E.S.Yeh Shaam Mastani… LakshmiIn the Land of Espana Anu MathewThe Legend Never Retires Raakesh P.V.

Regular Features

Inauguration of our Regional office at Ahmedabad by Shri. Sudarshan Sen, Regional Director, Reserve Bank of India Ahmedabad in the presence of Mr.Jayesh Patel, Chairman and MD of Vimal Oil & Foods Ltd., Shri.Nimish U Patel, MD of Shri. Dinesh Mills Ltd, Baroda, Ms. Bhagyesh Soneji, ChairpersonASSOCHAM, Western Region, Shri. Amitabha Guha our Chairman, Shri. Abraham Thariyan our ED, Shri.Sivaraman K, DGM Ahmedabad Region.

Publisher:Mr. Abraham Thariyan, Executive Director

Editor:Ms. Beena Davis

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Dr. V.A. Joseph, MD &CEO South Indian Bank receiving Kerala Based Best Bank Award of State Forum of Bankers Club Kerala in the BankingExcellence Award presentation function, from Prof. K.V.Thomas, Hon’ble Minister of State Govt. of Kerala. Sri Abraham Thariyan, ED, SouthIndian bank and Chief Parton of SFBCK, Sri K.U. Balakrishnan, General Secretary, SFBCK, Sri. K. Babu, Hon’ble Minister, Govt. of Kerala, Sri. P.P.Suresh, President SFBCK, Sri. Anjaneya Prasad, ED, Syndicate Bank and Sri. Eapen Joseph, GM of IOB, and Patron of SFBCK are seen in thepicture.

Our ED Mr. Abraham Thariyan, Mr. Benoy Varghese, GM and Regional Head, Mumbai, Mr. Murali N.A., GM(Treasury) receiving prestigious IBABanking Technology Award 2012-13 from Padma Bhushan Dr. Raghunath A. Mashelkar, Chairman, National Innovation Foundation in the presenceof Mr. K.R Kamath, Chairman, Punjab National Bank & Chaiman, IBA.

Laurels bestowed

Press Meet at Dubai: Our MD Dr. V.A. Joseph, ED Mr. Abraham Thariyan with Mr. Mohd S Al Hadi, Chairman, Hadi Express Exchange and Mr.Paul A.F. GM

SIB Pavilion at Dubai Shopping Festival NRI Meet at Kuwait : Our Executives seen with eminent NRI's in Kuwait

Our Executives seen with eminent NRI's in OmanParticipation of the audience at Kuwait

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MD & CEO Speaks ....Dear SIBians,

There are great things in life achieved by sheer grit and passion of an individual. Thenthere are achievements which are bestowed on him or her by slice of luck. However,singular victories and individual conquests are often forgotten in the annals of historyas they are never repeated. But when a country, a group or an organization worktogether and succeeds repeatedly, it sits heavy in the glowing pages of success stories.You have scripted such a success story, which has few parallels in the industry. Normalmen and women, who worked together as one big team, did the impossible of turningaround our bank, into one of the most respected banks in the country. As we havedone in the past, this quarter too we posted very good result inspite of the tougheconomy position. Today, when awards pour in from various quarters, let us lookahead to what we should do to constantly succeed.

We need to strongly ensure that our retail portfolio is built up aggressively. Wehave taken lot of steps at the corporate level in this direction, and the regions andbranches have started responding positively. We need to capitalize in the lastcouple of months to ensure that our targets are met. CASA growth is the crucialcomponent of our liabilities. Higher CASA portfolio not only translates toincreased business and better profits, but also gives us great opportunity forearning Other Income on a sustained basis. I am sure that this team of doerswill achieve all our goals by the end of March.

As you are aware, our organization completed 85 years last month. TheHonourable Governor of Kerala, His Excellency Sri. Nikhil Kumar inauguratedthe grand celebrations which was held in Thrissur, and was attended by a largeaudience comprising mainly of our beloved customers. In order to commemoratethe memorable occasion, we honoured six eminent personalities who were born inour home state of Kerala, and who by their sheer grit and determination, became rolemodels for the entire society. The SIB Excellence awards were presented to the formerManaging Director of DMRC Padma Vibhushan Dr. E. Sreedharan, renowned poetPadma Vibhushan Dr. O.N.V. Kurup, playback singer Sri. P. Jayachandran, renownedoncologist Dr. V.P. Gangadharan, cine actor Sri. Innocent (President, AMMA) andchairman of V-Guard Industries Sri.Kochouseph Chittilappilly.

Of the many people I meet every day, there are a few who are cynical in their thoughtsand processes. Ask them the reasons, and you can spend an entire day listening totheir woes. Then there are those, who are content with the stiffness of status quo.They are the ones who believe that good things will happen somehow or other, offeredto them on a platter by someone else. But what makes my day special, is the remainingbunch of go-getters who have a spark of enthusiasm in their eyes. They have a passionfor excellence running through their nerves. Tell them about a difficulty and you arebound to get back a solution. It is not that they are always right, but each failure is alesson well learned. They are deep in their thoughts, solid in their conviction andsteely in their action. Look around the world and we see that these are the lynchpinsof any successful organization, the chosen ones who achieve not just once, but againand again.

You have a few more weeks to prove that you are the chosen one in a team of achievers!Let us end this year on a magnificent note. Wish you all the best!

Dr. V.A. JosephMD &CEO

Our Executives at the Executive Conference 2013 held at Lonawala

Our MD & CEO, Dr. V.AJoseph receiving theUnion of GermanMalayalee Associations(UGMA) ExcellenceAward 2013 for “ AForward LookingFinancial Expert” category at Kottayam

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Message from the Executive Director

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Over the years Operational Risk Management has beengaining prominence each time a crisis blows up in the financialworld and these crises are seen to occur in very large scaleseven among the so called global financial giants. The mainconcerns that emerge after the crises generally are lax incontrols and systems. By def inition, Operational RiskManagement deals with the above two and in addition, peopleand external factors.

Until 5 years ago, for many banks, Operational RiskManagement was limited to controls, audits and also quarterlycomputation of capital. These are hands-off management ofOperational Risks. Operational Risk Management must beembedded in the processes and systems which should bedesigned to have an effective control over the operations.

Every Risk Management process starts with setting theobjective, followed by building an organizational structurewith policies and processes. Technology advancement hascreated more problems as well as solutions to the RiskManagement.

Sound Operational Risk Management is about keepingconstant vigil over operations and maintaining a strongreporting mechanism from each corner of the organization.Untiring eyes of Operational Risk Management keep a watchon process errors and omissions round the clock.

We have been giving a lot of thrust on Risk Managementduring the last few years on account of increased emphasisby regulators and due to our own organizational concerns. Aspecial issue on ‘Risk Management’ in SIBlink is a clearindication on the bank’s concern on ‘Risk Management’.

Friends, there are hardly two months remaining for us to reachthe year end targets – And we have miles to go. Our thrustthis year is mainly on CASA growth, increasing our Retailfinance, achieving our other income targets and finallyaccomplishing our profit targets.

Can you sit together with your colleagues at your branch andtake stock of the situation? Can you assess the scores of yourcolleagues on incentive targets specially on Silver accountsand KYC complied SB/CD accounts? Devise new strategies toearn your full incentives. Then the bank is going to achieve allthe above targets.

All the best to you

Abraham Thariyan

Our Legal Officers attending an Exclusive In House Training Programme at NIBM, Pune seen with faculty and our MD, Dr. V.A. Joseph

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Kerala Finance Conclave 2013 conducted by Confederation of Indian Industry at Kochi: Mr Rajeev Suneja (Partner, Ernst & Young LLP), MrVenugopal C Govind (Senior Chartered Accountant & Managing Partner, Varma & Varma), Mr Shyam Srinivasan (Chairman, CII - Kerala FinanceConclave and MD & CEO, Federal Bank), Mr Abraham Thariyan (ED, South Indian Bank) and Mr P Rajendran (MD, KSFE)

SIB Kiosk at Kerala Finance Conclave 2013 held at Hotel Taj Gateway, Kochi

Message from the Executive DirectorHuman beings have the uncanny ability to gloss over problems continuously until adestructive debacle occurs. When the collapse happens, they scamper for quick-fixsolutions with the same disposition displayed in skipping the issues earlier.

This was what precisely happened when the financial universe sank to unprecedentedbottoms in the year 2008. Everyone was comfortable with the way banks had beendoing business till then, but once the collapse occurred, the world found it difficult tograpple with the pitfalls in the way banking was conducted. Opinion of common manturned against banks, and trust, the only product that any commercial bank sells,disappeared from the packages that the banks call products.

In short, banks were viewed with utmost apprehension.

Such an uneasy climate is a fertile ground that can generate positive results, if onedoes not get overly agitated about what had happened. Central banks and the Bank ofInternational Settlement (BIS) put their heads together to devise ways to instil theconfidence back in banking. Their laundry list of solutions had one item in top priority- proper risk management.The Basel-III guidelines thus sprouted from the debris of the financial crisis. It is theresult of the realisation that ‘staying alive is more important than staying ahead’.

Those guidelines do not supplant the existing ones, but supplement them. The currentsystem of capital computation remains unchanged under the guidelines of Basel-II. InIndia, the capital computation continues to be under the standardised on-size-fits-allapproach. However, Reserve Bank has already unrolled the roadmap for moving overto advanced approach that requires banks to develop the internal process and systemsfor the computation. This would enable the banks to measure their own risk-profilerather than using the pre-fixed formula by Reserve Bank.

Our bank initiated the steps for moving over to the advanced approaches. We need tokeep in mind that risk management cannot be done from a corner. As risk pervadesthe entire organisation and the activities, risk management also should emanate fromevery staff and every transaction.

There cannot be a better time than now to familiarise everyone with the concept ofrisk, the way it is currently managed and the various guidelines of risk managementissued by Reserve Bank. ‘Risk Management’ is a timely theme selected by the editorialboard of SIBLINK. All are required to familiarise themselves with the content of thisissue.

We are passing to the fourth, crucial quarter of this financial year. Impacts of changesin global financial climate and of the uncertainty prevailing in the country are likely todelay the recovery of the economy. In addition, entry of new banks would set thecompetition hot. The remaining three months of the fiscal should therefore keep us ontoes. Let us strive hard for achieving the targets.

Wishing you a successful year,

Cheryan Varkey

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Toppers in the last 4 e-Learning Tests (June, July, Aug. & Sept.): Thiruvalla Regional Office headed by Mr. Ajit Jacob, DGM

Sale of 16 kg of bullion in a single day! Manu Jose, Manager, Br. Malviya Nagar and Team along with Mr. T.J. Rapheal, GM, Delhi RO

First Bima Bank branch with regular premium along with double Bima Bank status -John C Lazar AGM, Br. Mangalore Main and Team

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Hats off to these SIBians ...

The business of banking is the life blood ofeconomy and is regulated in various degreesacross the globe. In our country, Reserve Bankof India regulates banking business. As perBanking Regulation Act, 1949, “banking”means the accepting, for the purpose oflending or investment, of deposits of moneyfrom the public, repayable on demand orotherwise, and withdrawable by cheque,draft, order or otherwise.

The Basel Committee on Banking Supervision(BCBS) is the standing body of regulatorsfrom major countries that formulate theregulatory frame work for risk managementby way of prescribing minimum capitalrequirements with the objective to improvethe Banking Sector’s ability to absorb shocksarising from financial and economic stress.The Banks are required to maintain aminimum Capital to Risk weighted AssetsRatio (CRAR) of 9% on an on-going basis.

The minimum capital prescription is with theobjective to avoid possibility of failure ofbanking business which is exposed to variouskinds of Risks. Risk exists in every walk of lifeand Banking is not an exception. However,Risk increases in proportion to volume andcomplexities of products offered. Risk startsfrom entering into relation with a customer,the suitability of the product sold to him, thetransaction, settlement, so on and so forth.

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Capital is the most essential and costlyelement of Liability in a business because thisis the least priority liability to be paid out incase of liquidation thereby leading touncertainty of the investor in getting backeither the principal or return on investment.As such the Risk of investor will be very highin the case of investment in Equity Capital ofany institution.

Risk Management is not Risk Avoidance. Theguiding principle of risk management isassuming appropriate amount of risk for agiven benefit. It becomes possible onlythrough identif ication, measurement,available mitigations and appropriate pricingmethodologies.

The Reserve Bank of India has prescribedGuidelines for Risk Management Systems inBanks way back in 1999 and our bank has beenmeticulously following these guidelines sincethen. IRMD is the monitoring Department inour bank that formulates policies, measures

and monitors risk and formulates strategiesfor managing various risks in a comprehensivemanner.

The risk management becomes effective onlywhen every person in our organizationpractices the guiding principles in true spiritand develops the same as a culture. Each andevery activity done by us on behalf of the bankshall be understood in the right perspectiveand the risk perception shall be clear atoperational level for reaping the desiredresults.

Recently, we took a decision to move over toAdvanced Approaches which is expected toreduce our capital cost and will empower uswith tools to precisely measure various risks,enabling to manage the same moreeffectively. Accordingly, we have to developinternal process and systems to move into theadvanced approach of capital calculation,which would enable us to measure our ownrisk profile rather than the pre-fixed formulaby Reserve Bank. RBI has announced theroadmap for moving over to advancedapproach.

In order to achieve this ambitious goal, thewhole hearted support of each and everySIBian is required to meet the deadlines. Itmay also be noted that this is the backgroundfor moving towards Basel-III norms .

C.P. GireeshCFO & DGMCFM Dept.

Risk Management is not Risk Avoidance

RBI-Out Reach Programme: Inauguration by Hon’ble MP Sri P.C. Chacko with Sri. R Gandhi Executive Director RBI, Smt. M.S. Jaya IAS, Dist.Collector, Thrissur, Shri N.G. Jayaraj President, Chazhoor Panchayat, Dr. V.A. Joseph our MD & CEO , Sri. C.V. George OIC RBI Kochi, Sri. A.G.Varghese, CGM SIB, Sri. Santhakumar K. DGM RBI .

There are good goals, there are great goals.There are bad misses, there are worst misses.There are great saves and there are instancesof sloppy goal-keeping.

But, once the final whistle is blown, when theplayers retire to their raucous passions, whenthe spectators disperse to a plethora ofmental calculations that would still give theirfavourite team a remote chance of winningthe cup, when the stadium broods into a darksilence remembering the cacophony thatreigned a few hours back under the arrogantflood lights, what remains is only the score-line.

We consign those great saves, creative attacksand heart-breaking misses to our memories.Ultimately, what are counted are the goals andthe final data stay intact irrespective of thequalitative aspects of the game, inuredforever. Human memory is strong in retainingthe f inal numbers of the game, as thequalitative aspects get subdued in the longerrun.

Believe me; if you got the whiff of it, you havealready got an intro about risk.

Intro – Risk ManagementRisk, as a theme, is more fabled than isunderstood and practised. Risk! The fairyflying around us, impinging on all ourdecisions and progress! The demon in ourf inancial imaginations!! Even its mostadmirers view risk with a pinch of salt,squinting in suspicion. For most others, riskis a thing to be feared, blamed and cursed.Ardent practitioners of risk managementoften miss the wood for the trees, numbersfor information and thus, invariably miss thelarger picture.

Before a scuba dive into the seabed of risk,we need to bust some myths about risk.

Myth 1 - risk is an impediment

The albatross around our business growth andprofitability, risk is mostly viewed as animpediment in making progress in business,economy, and markets and so on. When wetry to disburse a new loan, risk rating standson the way, when we add a new customer,

THE RISK-HIKERS GUIDE

KYC pulls our efforts back, phishing fear lurksin mind while we transact on net – risks throwcold water on our business enthusiasm incountless ways!

Viewing risk as an impediment to business isakin to considering application of breaksas an impediment to your driving. An expertunderstands that these are life savingequipments. So, let’s call risk as an enabler.It’s the scuba gear in scuba diving. It ensuresthe sustainability of business operations andprof its for the long-term and enhancesshareholders’ value.

Risk Management is a protector, theparachute that will open up the time you needit. It stands by you when your chips are downand perks you up in bad moments like a bestfriend. Let it also be the lucky charm you keepclose to yourself - the amulet that saves youfrom bad luck.

Myth 2 – risk is the probability of lossAny academic speech on risk introduces riskthis way, which is not entirely untrue. If risk isa coin, this statement conveniently exposesonly one side of the coin. Uncover the otherside which reads ‘risk is the managementof profit’.

Okay, let us see how true it is!

The difference between the pricing of assetsand liabilities, the net interest margin, offsetby the operating costs, gives you the netprofit. If the nature of assets, liabilities, peopleprofile and systems remain the same, yourprofit must remain as a constant percentageof the asset size forever, keeping everyone ina happy state.

Unfortunately, world is not an ideal place. Itthrows out unexpected miseries, volatileoutcomes, unthinkably large losses. A suddenshock can knock you off your guard.Unexpectedly, your NPAs may show a spike

or sudden pre-closure of deposits force youto source deposits at higher rate. Or, evenmajority of your people are found lacking inrequired skills. Or, you find a chink in yoursystem. These unexpected costs can eat awaya part of your hard-earned income. On thecontrary, NPA may also suddenly drop, or amajor recovery could be made, boosting theprofits.

In either case, there is a deviation from thenormal profit or expected outcome, be itpositive or negative. This volatility must be theconcern of the discerned, for when the profitis higher, the celebrations start, but when it islower, our financial standing remains vitiated.When an unexpected success is achieved, riskjoins everyone in the celebration, but still hasits ears to the ground and realises that muchof the path is yet to be covered. When thefanfare is over and everyone is ebullient, it getsdown to its drawing board and designs thefuture and prepares for the bad times.

Managing the ProfitThe profit that the bank generates is the sum-total of the contributions of profits from eachactivity, asset and person. Managing the profitdepends on many factors. We expect a normalreturn, which will be, under the conditions thatwe consider possible, within a certain range.In the case of a bank, we analyse the pastrecord of the different classes of loans, sayhousing loans that give us an average returnof 1% for 5 years, with returns ranging from0.80% to 1.10%. Managing of profit does notlook into the ways of increasing the profit. Itrather directs its attention to the ways ofkeeping consistency in profit. If the returnvaries from 0.80% to 1.10%, how can weensure consistency?

The simple way is to keep varying provisionsin the profit and loss account. Saving in goodtimes for the rainy day... When the profit ishigher than the normal, the super profit is keptas provision so that the final profit remains at1%, for the above-cited housing loans. Whenthe profit is less than 1%, we draw down fromthe provisions to keep the profit at 1%. Thus,Risk manages the profit through dynamicprovisioning.

Managing the CapitalIf you invest only your money in a stock valuedRs 100 and if its price falls, you will bear theloss. But, if you borrowed Rs 90 from yourfriend for investing in the stock and the stock’s

Sibi P.M.Asst. Gen. ManagerIRMD HO

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price is down by 25%, you wouldn’t be ableto return the borrowed funds. You are brokeand stand to lose your reputation.In this example, your capital is found to beinsufficient to absorb such amount of loss.Here, the key question is how much moneyyou should have to put in to stay in business,to avoid being broke and a defaulter ondebts. In the ideal situation, you would haveput in the entire stock value, i.e. Rs 100 here,as your investment. But that will be anonsensical sort of management whichwould leave you with little profit. To add, abank’s place in the economy continues to bethat of an intermediary that channelizes thesavings of public into productive assets.Hence, capital cannot form a major part ofthe total assets.

You may analyse how much loss you wouldhave incurred barring a few extreme cases inthe past. Barring some 1% of extreme cases,or 0.10% or 5% or such extremes that youfeel seldom happen, you calculate themaximum loss to be kept as your capital sothat, within this range, or confidence levelyou assumed, the maximum loss could beabsorbed by the capital you put in.

A bank must keep capital to take care of suchlosses unexpectedly happening due to creditrisk, adverse movement in market factors likeinterest rate, currency, equity price orcommodity price (market risk) and anythingother than these two (operational risk).

Reserve Bank stipulates to keep Capital basedon Risk-weighted Assets (9% CRAR) toaddress this aspect, the unexpected losses.Is calculation of CRAR the final step in riskmanagement?

Managing Beyond the Balance SheetWe have not yet touched the most lethal ofthe risks yet. Please be clear that by justaddressing the three common risks that areinvolved in the CRAR calculation won’t takeus to proper risk management. There aremore risks to be addressed as well, like creditconcentration risk, strategic risk, reputationrisk, legal risk etc.

Historically, credit concentration risk (CCR)has earned its fame as the single largest causefor the failure of banks. CCR is mainly theconcentration of credit in a particular regionor in a particular sector or to a particularborrower or a corporate group or to a

particular credit product. If somethinghappens specif ic to that region, sector,borrower or group, the resultant impact willbe more than normal. Say, for example, if oneborrower group that has an exposure of 10%of our loan portfolio is in trouble, the impactwill be severe. The solution for the impact ofCCR is diversification.

Interest rate risk in banking book (IRRBB) isanother major risk that can surprise a balancesheet with its sudden impact. Interest-linkedinstruments occupy a major space of a bank’sassets and liabilities. The discomforting factoris that assets and liabilities have differentsensitivities towards interest rates. Interest onmajority of liabilities is fixed and interest onmajority of assets is floating. While a fall ininterest rate depresses the interest rate onassets, it has little effect on liabilities. But, whenthe interest rate rises, deposits getprematurely closed for higher rates. In such asituation, the change in interest rate can createa deep dent in the profits. This is one reasonwhy banks keep the average maturity of thedeposits low, at around 1 year, so that effectof movement in interest rate is limited toshort-term.

Standing shoulder-to-shoulder with creditconcentration risk in the severity of impact onbanks’ lives is the liquidity risk. It is anothermajor reason for bank-collapses. Mostly, itshows up as the last in the chain of eventsleading to a failure. Liquidity risk is simply theinability of a bank to raise funds to meet itsfund outflows by way of deposit payments,premature payment of deposits, loandisbursements etc. Most lethal manifestationsof liquidity risks include bank runs.

These risks are not addressed in the capitalcalculation for regulatory requirements.Hence, each bank is obligated to assess theserisks internally and to provide capital for this.This process is called Internal CapitalAdequacy Assessment Process (ICAAP). Thisis a major exercise that involves identifyingand assessing all these slithery risks andallocating capital for this.

Capital requirement computed based on thelosses within the range of conf idence(excluding the extremes) for the threecommon risks (through CRAR process) and therisks that are outside those three (throughinternal process) ensures survival in bad times.The caveat is the comfort zone (the range that

excluded the extremes) that we drew for thelosses. If the extreme events happen, even ona rare occasion, what could happen in worsttimes?

Managing the ExtremeThis is too remote a possibility, but still aplausible one: adverse interest rate movementwith severe liquidity strain, coupled withcollapse of equity and currency market andlow GDP growth resulting in high NPAs!!

Don’t read it as a pessimist’s prediction. Youwould not see it as a possibility, but theprudent one is who foresees and prepares forsuch extreme events.

Banks should conduct a scenario analysis ofsuch events that happen outside the comfortzone that they have hemmed themselves in.This exercise is called ‘Stress Testing’.

The CRAR calculation, the ICAAP and StressTesting ultimately help the bank in capitalplanning. These three steps address thecapital requirement for absorbing losses dueto the three common risks, bank specific risksother than those three and the extreme eventshappening outside the comfort zone.

Managing the invisibleNow let us go back to the starting point. Theanalogy of the football game.

If one doesn’t understand that each right passand each save can lead to success and eachwrong pass and miss can lead to failures, andcounts the goals and successes as merely one-off events, one would be losing control of thegame. In the same vein, if we don’tunderstand that each step, each process andeach control leads to healthy profits, we wouldbe losing control of the business. If the systemis sloppy, we might be able to show goodresults for some years, but a certain year’s badweather can devastate us.

Theories, analyses, models and software won’thelp us to manage risk fully, unless we realisethat risk management is an attitude, and is akey factor in any business decision. Itsexistence without business is zilch. If we don’tunderstand the implied chances of a defaultwhen we contract a loan, if we don’t reallydistinguish the risk between a large loan anda small loan of similar risk profile, if we don’tcare about the systems and controls cursingthem as anathema to business and if we don’t

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mind selling a stock if it falls below the cut-loss level, we are willingly entrappingourselves in the prison of being ignorant.

Managing these invisibles, the factors oneapparently ignores in a game, is the mostimportant step towards building a championteam.

Risk management is the art of managing theabstract, the invisible. It is the act of doingso many small things in so many stepswithout fail for so long a period of time,without even seeing the results for much ofthe time. It will never be understood whetherthese steps will result in a desired objective.But it is well understood and experienced bynow that if we don’t take these little difficultsteps, the results will not be what we desired!

The Ultimate Risk ManagerA recent survey by a newspaper conductedin the hospitals in Trivandrum found that thedaily casualty cases halved to about 200against 400 a year back. Deaths due toaccident almost halved in the district to 25 amonth compared to 40 in the previous year.The hospitals are nearly empty in the nightsif one compares the rush and crowds thatruled before.

The statistics tell a tale. No one created amagic of any sort, nor did anyone doanything significantly different.

But there was one person who just took themantle of ensuring that the law is followedand actually implemented the controls onroads that once lay only on paper. The roadsthat were the slaughterhouses once havebeen turned into an organized system whereyou can drive without too much of fear. Itwas also made sure that the little steps likewearing seatbelts, wearing helmets, keepingthe speed-limit etc. that lead to achieving theobjectives were not skipped.

The ones who are used to driving beyondthe speed-limit, shifting lines carelessly andjumping traffic signals might be trying todisplay their driving skills withoutcontemplating what could happen becauseof this behaviour. Their confidence actuallyemanates from their experience of fewaccidents or minor accidents in the past. But,statistics prove otherwise. Strict discipline onroad ensures that number of accidents comedown. The invisibles that contribute to the

ultimate result are not forgotten now.

The Ultimate Risk Manager is one whorelentlessly pursues the objectives in manysmall steps, with an eye kept on the invisibles.

Present PositionAs per the decision taken by our Bank, weare in the process of moving to AdvancedApproach of Basel II for computation ofCapital Adequacy Ratio. At present we followStandardised approach of Basel II forcomputation of Capital Adequacy Ratio.

Why we should move to advancedapproach of Basel II for CRARcomputation?

Efficient capital management:It is a well known fact that our NPA ratios areone of the lowest among banks, which showsour ability to maintain the quality of ouradvance portfolio. This is possible becauseof our good credit appraisal skills, supportedby efficient post sanction formalities and closemonitoring of advance portfolio. Howeverwe are unable to take advantage of the samein Capital Adequacy Ratio computation sincesufficient past data has to be compiled instructured granular form to prove theefficiency of our rating models as well as theexcellent repayment track record of advances.Hence the capital kept aside for credit risk ofour bank under standardized approach canprobably be high; considering our low NPAratio and diligent credit appraisal andmonitoring process.

At present as per RBI guidelines 15% ofaverage annual income for the past 3 years isset aside as capital for operational risk.Hence when we improve our profit figures,capital allocation for operational risk alsoincreases. However if we can prove throughsufficient data and numbers that operationalrisk across branches / offices requires a lesseramount of capital, we will be able to utilizethe saved capital for increasing our business.Meeting expectations of RBI: - In addition tothe savings in capital resulting from adoptionof advanced approach, Reserve Bank of India,our regulator desires that all banks should

OUR JOURNEY TOWARDS BASEL IIADVANCED APPROACH

Chithra HAsst. Gen. ManagerIRMD, HO, Trichur

migrate to advanced approach of Basel II soas to ensure that banks have a mechanism inplace for measurement and mitigation of allrisks.

Preparedness requiredKnowledge and Skill: The movement fromstandardized to advanced approach demandsthat we gather the required knowledge andenhance our skill sets not only inadministrative offices but also in branches.Data: Past and Present

Under advanced approach, risk weights andcapital to be kept aside for different categoriesof advance portfolio has to be computedbased on our experience. This computationdemands collection of enormous granularreliable data including rating history of allaccounts of Rs.10 lacs and above, pooling ofretail portfolio based on certain commoncharacteristics, collection of information ofNPA accounts, recovery pattern etc. Thesedata pertaining to previous f ive years isrequired for calculation of Probability ofDefault of each customer and for projectingthe losses which the bank is likely to suffer ondefault etc. Data capturing has to becontinuously done since risk weights have tobe dynamically modified based on our figures.Transparency in reporting incidents related tooperational risk in branches / offices: - Forcomputing the capital required for meetingoperational risk under advanced approach, thedata on operational losses is absolutelyrequired. This data needs to be gathered frombranches and regional offices. We need todevelop an appropriate mental set up whichenables branch managers/unit heads to reportlosses and near miss events (events whichcould have resulted in loss had the branch/business unit did not succeed in recoveringthe amount) without fear and apprehensions.

Risk management solution for data entry,analysis and computation of Capital Adequacy

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ratio: - Since the computation of capitaladequacy ratio under advanced approachinvolves sophisticated computations usingstatistical techniques, we would need anappropriate software solution for datacapture, analysis and computation of capitaladequacy ratio.

Advantages of Advanced Approach Better pricing for our loan products whichimproves our ability to compete in the marketwith finer interest rates. Under AdvancedApproach we will be arriving at Probabilityof Default (PD) poolwise (depending oncertain common characteristics). Theborrowers in a pool having lower PD will getthe benefit of lower interest rate.

Better control on various risks since ourmethodologies for identif ication andmeasurement of risks will be more structured,scientific and system driven.

Better capital management as weconstantly monitor and mitigate the riskswhich reduces the capital requirement.

Better comfort for Investors and otherstakeholders as their interests are protected.

Better comfort for regulators since weimprove our risk management skills.

ConclusionMany public and private sector banks haveapplied to RBI for moving over to advancedapproach under Basel II. RBI will accordapproval to those banks only if they aresatisf ied with the data quality andcomputation methodology. As per theroadmap given by Board of Directors, we haveto inform RBI about our readiness to moveto advanced approach by 1st half of theFinancial Year 2014-15. Considering therelatively short time frame and enormousinformation that needs to be gathered ,aseparate project management team has beenformed consisting of officers from IRMD andrisk off icers from all Regional Off ices.Dedicated resources are allocated formeaningful completion of the task within theprescribed timelines. However, involvementof business units (branches/ Regional offices)is very essential, as any business decisionmaking will have an impact on our Capitaladequacy. RBI has directed us to allocatecapital to various business verticals which weare already complying with. In future,

fixation of various business targets will have adirect bearing on capital for each businesssegment.

Any change in the system always facesresistance since we are comfortable with whatwe know and whatever we are already usedto. Whatever we know is easy for us andwhatever we don’t know is tough. Toughbecomes easy when we practise it. Anyjourney towards change is little painful butgratifying when we achieve the goal.

We have proved ourselves on variousoccasions that all challenges are opportunitiesto improve our bank’s position in all respects.Here also let us prove ourselves that we areall good

Takers,Managers,Mitigators to take ourbank to greaterheights.

Let us all make ourselves competent toundertake that journey.

Information Technology / InformationSystem Risk ManagementRisk is defined as the uncertainty of an eventoccurring that could have an impact on theachievement of objectives. The definition ofrisk assessment then follows as theidentification, evaluation and estimation of thelevels of risks involved in a situation, theircomparison against benchmarks or standards,and determination of an acceptable level ofrisk. Risk assessment falls into the overalldiscipline of risk management. Riskassessment is increasingly conducted by manygroups within an organization to fulfill avariety of business and regulatoryrequirements. Risk assessment should answerthe following aspects, 1) What can go wrong?2) How can it go wrong? 3) What is thepotential harm? What can be done about it?5) How can we stop it from happening again?

For most of the organizations, riskmanagement is the process of identifyingvulnerabilities and threats to the informationresources used by an organization in achievingbusiness objectives and deciding what

effective steps to be taken to reduce the riskto an acceptable level, if not eliminated fully.

Effective risk management begins with a clearunderstanding of the organization’s appetitefor risk. This drives all risk management effortsand, in an IT context, impacts futureinvestments in technology, the extent towhich IT assets are protected and level ofassurance required. Risk managementencompasses identifying, analyzing,evaluating, treating, monitoring andcommunicating the impact of risk in ITprocesses. Having defined risk appetite andidentif ied risk exposure, strategies formanaging risk can be set and responsibilitiesclarified.

Based on the risk assessment, theManagement may choose any of thefollowing approach to manage the risks.

Avoid – Wherever feasible, choose not toimplement certain activities or processes thatwould incur risk (i.e., eliminate the risk byeliminating the cause). Eg. Allowingmodification of interest rate with effect froma prior date knowingly or unknowingly maylead to income loss to the bank and so banktakes a decision to disable that activity.

Reduce – Lessen the probability or impact ofthe risk by defining, implementing, andmonitoring appropriate controls. E.g. Debitfrom income account. Since this activity cannot be fully avoided, restrict the activity to alimited number of users and monitor suchactivity at higher level.

Transfer (deflect or allocate)- Share the riskwith partners by transfer, via insurancecoverage, contractual agreement, or othermeans.

Jose Sebastian EChief Manager andChief InformationSecurity Officer , DICT

}

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Accept – Formally acknowledge the existenceof the risk and monitor it.

In other words, risk can be avoided, reduced,transferred, or accepted. An organization mayalso choose to reject risk by ignoring it, whichcan be dangerous.

Developing a Risk Management programThe f irst step is to determine theorganization’s purpose for creating a RiskManagement program. The program’spurpose may be to reduce the cost involvedto transfer the impact of risk or reduce thenumber of program-related harm. Bydetermining its intention before initiating riskmanagement planning, the organization candefine key performance indicators (KPIs) andevaluate the results to determine itseffectiveness. Typically, the Top Managementwith the Board of Directors set the characterfor the risk management program.

Assign responsibility for the risk managementplan: The second step is to designate anindividual or team responsible for developingand implementing the organization’s riskmanagement program. While the team isprimarily responsible for the riskmanagement plan, a successful programrequires the integration of risk managementwithin all levels of the organization.Operations staff management should assistthe risk management committee inidentifying risks and developing suitable losscontrol and intervention strategies.

Process of Risk Management.It is a fact that each IT asset is attached withdifferent level of risk.So in the process of riskmanagement, it is a must to have aninventory record for each informationresource or asset that needs protectionbecause they are vulnerable to threats. Thevalue of an IT asset depends widely on theway it is implemented and related to the

business. (The value attached to the MD’slaptop will be much higher compared to alaptop of an AGM). The inventory recordshould have enough information to identifythe asset like distinct identification, relativevalue to the organization, location, riskclassification, owner, designated custodianetc.

The purpose of the classification may beeither to prioritize further investigation andidentify appropriate protection (simpleclassification based on asset value), or toenable as standard model of protectionprovided,based on its criticality and sensitivity.Examples of typical assets associated withinformation and IT include- People, buildings,Information and Data, Hardware, Software,Services and Supplies etc.

The next step in the process is assessingthreats and vulnerabilities associated withinformation resources and likelihood of theiroccurrence. In this context, threats are anycircumstances or events with potential tocause harm to an information resource suchas destruction, disclosure, modification ofdata and/ or denial of service. Commonclasses of threats are - Errors and Omissions,Acts of nature, Malicious hackers/Maliciouscodes, Frauds and Theft, Employee sabotage,Equipment/Software failure.

Threats occur because of vulnerabilitiesassociated with use of information resources.Vulnerabilities are characteristics ofinformation resources that can be exploitedby a threat to cause harm. Examples ofvulnerabilities are: Lack of user knowledge,Lack of security functionality, Poor choice ofpasswords, Untested technology,Transmission of unprotected communication.

The result of any of these threats occurring iscalled an impact and can result in a loss ofone sort or another. In commercial

organizations, threats usually result in a directfinancial loss in the short term or an ultimate(indirect) financial loss in the long term. Thesame could be calculated through qualitativeor quantitative analysis. Quantitative methodsinvolve assigning numerical measurementsthat can be used in the analysis to determinetotal and residual risks. And qualitative analysisinvolves the use of scenarios and attempts todetermine the seriousness of threats andeffectiveness of controls.

Once the elements of risk have beenestablished, they are combined to form anoverall view of risk. The risk is proportional tothe value of the loss/damage and estimatedfrequency of the threat.

Once risks have been identif ied, existingcontrols can be evaluated or new controlsdesigned to reduce the vulnerabilities to anacceptable level of risk. These controls arereferred to as countermeasures or safeguards.They could be actions, devices, procedures ortechniques (i.e., people, processes orproducts). Elements of control that should beconsidered when evaluating control strengthinclude whether the controls are preventive,detective or corrective, manual orprogrammed, and formal (documented inprocedure manuals and evidence operationis maintained) or ad-hoc.

The remaining level of risk, once controls havebeen applied, is called residual risk and themanagement can further reduce risk byidentifying those areas in which more controlis required. An acceptable level or risk targetcan be established by management.Risk inexcess of this level should be reduced by theimplementation of more stringent controls.The identif ication, evaluation andmanagement of IT risk at various levels willbe the responsibility of different individualsand groups within the organization. However,these individuals and groups should not

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operate separately since risks at one level orin one area may also impact another.

In summary, the risk management processshould achieve a cost effective balancebetween the application of security controlsas countermeasures and significant threats.Some of the threats are related to securityissues that can be extremely sensitive forsome industries.

It is often said that, the best defense againstIS/IT related risks is to create a securityawareness against frauds within staff andcustomers. Few of the IS/IT areas, whereincidents have been reported in recent timesin different banks and the possible mitigationsteps are narrated below.

1) Pass word compromisingAny organization will have its own approvedpassword policy; our bank has also anapproved password policy. As per the policy,the password should have a minimum ofeight character length, it should containalphabets, numeric and special characters.When we select a password it should beensured that it shall not be easily guessed.Name of family members, vehicle numbers,employee number etc should generally beavoided. Most of the applications force theusers to created strong passwords. In caseswhere such practices are not forced, weshould be taking the initiative.

If a transaction/activity is carried out by Xusing Y’s password, the ultimate responsibilityof that transaction/activity will fall on thestaff(Y) whose password is compromised, ifnot proved otherwise. So, under nocircumstances your password should berevealed to anybody. Finally, before gettinginvolved in any activity, efforts should betaken to understand the implication of theactivity, and not do things simply trustingothers.

2) Transactions through Internet BankingThe evolution in telecommunicationstechnology and the Internet has boosted arevolution in the development of electronicnetwork, through which customers haveaccess to banking products and services(electronic banking). In these channels, thedegree of automation is usually high, the

human intervention low. This new situationraises fresh legal and ethical dilemmas andchallenges to both the customer and the bank.

To avoid/reduce the risks related to InternetBanking operations,the following methods aresuggested.

a) Use second factor authentication (2FA), ifcustomer has opted for this facility. Thecustomer will get a onetime password(OTP) on his/her registered mobile foreach login, and so if the mobile is in safehands , a fraudster will never be able toaccess it.

b) Register the customer’s mobile no: forInternet Banking alerts.This will not fullyprevent fraudulent transactions, but if thecustomer acts immediately on receivingan alert , further damage could bereduced.

c) If any pop up screens appears demandinglogin credential of ATM card or any suchelectronic payment device, simply ignorethem and inform the bank immediately.Banks will not collect such details fromcustomers, unless warranted specificallyin cases like password reset etc. In suchcases banks cross verify the genuinenessof the password resetting request.

d) Create awareness among customers toensure that, they log in to the secured siteof bank.

3) Phishing AttacksThis is a criminal attempt to steal yourpersonal information through fraudulentemails or smart-phone texts. The emails areoften very believable in nature,a) It may lure the victim to the site of a bank

or any organization that requests themto provide personal financial details suchas account number, card number, card pinnumber etc. It is important to note thatno organization will send an email askingfor personal information.

b) It may be in the form of email fromcustomers requesting to transfer amountsto different other accounts. Thepeculiarity of such fraudulent emails isthat the message may resemble the samestyle of language used by the customerand details mentioned in the email mayrefer to the accounts maintained by thecustomer with the branch. This is done

with the specific intention of making theperson at the other end to believe thegenuineness of the e mail. The fraudstercontinuously studies the emailcommunication between the customerand bank for a long period.

c) Email attachments of scanned letters arealso not safe for that matter. It is notdifficult to get the signature pasted on ascanned document by a fraudster, so asto give a genuine look and feel to theattached letter.

ConclusionConsidering the importance of the IT/IS risks,RBI came out with comprehensive guidelinesprepared by a committee headed byGopalakrishna in April 2011 covering nineareas related to IT/IS with special focus onbanking environment. Most of the banksincluding us are in the path of implementingthe requirements indicated in the guideline.The guideline is expected to enhance security,efficiency in banking processes leading tobenefit of banks and their customers.

The business value and IT risks are two sidesof the same coin and risk is inherent to allenterprises. Since business environments areconstantly changing and new vulnerabilitiesand threats emerging every day ,the processof Risk management is an ongoing iterativeprocess.

In practice, there is no single unified solutionto complex IT related risks. Cyber attacks canoccur any time and so a solely compliancedriven approach to security is no longereffective. Instead, a risk based approach tosecurity is recommended as the bestapproach. When applying a risk basedapproach to security, organizations mustautomate many otherwise manual, labourintensive tasks. This, in turn, results intremendous time and cost savings, reducedrisk, improved response readiness, andincreased risk posture visibility.

IT/IS related risks cannot be fully avoided.Increased awareness, proper reporting,responsive incident management system etc.will surely reduce the impact of threats/vulnerabilities and to a great extentpermanently plug such holes in the system.

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The etymology of the word “Risk” can betraced to the Latin word “Rescum” meaningRisk at Sea or that which cuts. Risk isassociated with uncertainty and reflected byway of charge on the fundamental/ basic i.e.in the case of business it is the Capital, whichis the cushion that protects the liabilityholders of an institution. Banks are compelledto encounter various kinds of financial andnon financial risks.These risks are inter-dependent and events affecting one area ofrisk can have ramifications and penetrationsfor a range of other categories of risks.

Foremost thing is to understand the risks runby the bank and to ensure that the risks areproperly confronted, effectively controlledand rightly managed. Each transaction thatthe bank undertakes changes its risk profile.The extent of calculations that need to beperformed to understand the impact of eachsuch risk on the transactions of the bankmakes it nearly impossible to continuouslyupdate the risk calculations. Hence, providingreal time risk information is one of the keychallenges of risk management exercise.

Banks in the process of f inancialintermediation are confronted with variouskinds of risks viz., credit, interest rate, foreignexchange rate, liquidity, equity price,commodity price, legal, regulatory,reputational, operational, etc. These risks arehighly interdependent. Thus, topmanagement of banks should attachconsiderable importance to improve theability to identify, measure, monitor andcontrol the overall level of risks undertaken.

Credit RiskCredit risk or default risk involves inability orunwillingness of a customer or counterpartyto meet commitments in relation to lending,trading, hedging, settlement and otherfinancial transactions.

Credit risk consists of primarily twocomponents, viz quantity of risk, which isnothing but the outstanding loan balance ason the date of default and the quality of risk,viz, the severity of loss defined by Probabilityof Default as reduced by the recoveries thatcould be made in the event of default. ThusCredit Risk is a combined outcome of Default

RISK MANAGEMENT – CREDIT RISK

Risk and Exposure Risk. The elements of CreditRisk are Portfolio Risk comprising ofConcentration Risk as well as Intrinsic Risk andTransaction Risk comprising of migration/down gradation risk as well as Default Risk.At the transaction level, credit ratings areuseful measures of evaluating credit risk.Portfolio analysis help in identifyingconcentration of credit risk, default/migrationstatistics, recovery data, etc.

Another variant of credit risk is counterpartyrisk. The counterparty risk arises from non-performance of the trading partners. The non-performance may arise from counterparty’srefusal/inability to perform due to adverseprice movements or from external constraintsthat were not anticipated by the principal. Thecounterparty risk is generally viewed as atransient financial risk associated with tradingrather than standard credit risk.

Tools of Credit Risk Management.The instruments and tools, through whichcredit risk management is carried out, aredetailed below:

a) Exposure Ceilings:In order to limit the magnitude of credit risk,prudential limits should be laid down onvarious aspects of credit.

Stipulate benchmark current/debt equityand profitability ratios, debt service orother ratios, with flexibility for deviations.The conditions subject to which deviationsare permissible and the authority for thedeviations should also be clearly spelt inthe Policy;

Single/group borrower limits, may belower than the limits prescribed by theBank to provide a filtering mechanism;

Substantial exposure limit i.e. sum totalof exposures assumed in respect ofborrowers enjoying credit facilities in

excess of a threshold limit, say capitalfunds. The substantial exposure limit maybe f ixed at 800% of capital funds,depending upon the degree ofconcentration risk the bank is exposed;

Maximum exposure limits to industry,sector, etc. should be set up. There mustalso be systems in place to evaluate theexposures at reasonable intervals and thelimits should be adjusted especially whena particular sector or industry facesslowdown or other sector/industryspecific problems. The exposure limits tosensitive sectors, such as, advancesagainst equity shares, real estate, etc.,which are subject to a high degree ofasset price volatility and to specif icindustries, which are subject to frequentbusiness cycles, may necessarily berestricted. Similarly, high-risk industries,as perceived by the bank, should also beplaced under lower portfolio limit. Anyexcess exposure should be fully backedby adequate collaterals or strategicconsiderations; and

Banks may consider maturity profile ofthe loan book, keeping in view themarket risks inherent in the balancesheet, risk evaluation capability, liquidity,etc.

b) Review/Renewal:Each bank should have a carefully formulatedscheme of delegation of powers. The banksshould also evolve multi-tier credit approvingsystem where the loan proposals areapproved by an ‘Approval Grid’ or a‘Committee’. Multi-tier Credit ApprovingAuthority, constitution wise delegation ofpowers, higher delegated powers for better-rated customers; discriminatory timeschedule for review/renewal, Hurdle rates andBench marks for fresh exposures andperiodicity for renewal based on risk rating,etc may be formulated.

Loan Review Mechanism (LRM) is aneffective tool for constantly evaluating thequality of loan book and to bring aboutqualitative improvements in creditadministration. Banks should, therefore, putin place proper Loan Review Mechanism forlarge value accounts with responsibilitiesassigned in various areas such as, evaluatingthe effectiveness of loan administration,maintaining the integrity of credit grading

RAKESH T.R. (CA), DISA,Manager (CA)Credit Sanctions(Corporate)

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process, assessing the loan loss provision,portfolio quality, etc.

The main objectives of LRM could be:to identify loans promptly which developcredit weaknesses and initiate timelycorrective action;to evaluate portfolio quality and isolatepotential problem areas;to provide information for determiningadequacy of loan loss provision;to assess the adequacy of and adherenceto, loan policies and procedures, and tomonitor compliance with relevant lawsand regulations; andto provide top management withinformation on credit administration,including credit sanction process, riskevaluation and post-sanction follow-up.

c) Risk Rating Model:Set up a comprehensive risk scoring / ratingsystem that serves as a single point indicatorof diverse risk factors of a counterparty andfor taking credit decisions in a consistentmanner. The risk rating system should bedrawn up in a structured manner,incorporating financial analysis, projectionsand sensitivity, industrial and managementrisks. It should clearly define rating thresholdsand review the ratings periodically preferablyat half yearly intervals. Rating migration is tobe mapped to estimate the expected loss.

d) Risk based scientific pricing: Risk-returnpricing is a fundamental tenet of riskmanagement. Link loan pricing to expectedloss. In a risk-return setting, borrowers withweak financial position and hence placed inhigh credit risk category should be pricedhigh. Banks should build historical databaseon the portfolio quality and provisioning /charge off to equip themselves to price therisk . Allocate capital to absorb theunexpected loss. Adopt the Risk AdjustedReturn on Capital (RAROC) framework.

There is, however, a need for comparing theprices quoted by competitors for borrowersperched on the same rating /quality. Thus,any attempt at price-cutting for market sharewould result in mispricing of risk and ‘AdverseSelection’.

d) Portfolio ManagementBanks should evolve proper systems foridentification of credit weaknesses well inadvance. Most of the international banks have

adopted various portfolio managementtechniques for gauging asset quality. Thebanks could also consider the followingmeasures to maintain the portfolio quality:

Stipulate quantitative ceiling on aggregateexposure in specified rating categoriesEvaluate the rating-wise distribution ofborrowers in various industries, businesssegments, etc.Exposure to one industry/sector shouldbe evaluated on the basis of overall ratingdistribution of borrowers in the sector/group. In cases where portfolio exposureto a single industry is badly performing,the banks may increase the qualitystandards for that specific industry.Target rating-wise volume of loans,probable defaults and provisioningrequirements as a prudent planningexercise.Undertake rapid portfolio reviews, stresstests and scenario analysis when externalenvironment undergoes rapid changesIntroduce discriminatory time schedulesfor renewal of borrower limits.

Many of the international banks have adoptedcredit risk models for evaluation of creditportfolio.

For example:J. P. Morgan (one of the leading globalf inancial services f irm) has developed aportfolio model ‘Credit Metrics’ for evaluatingcredit risk. The model basically focuses onestimating the volatility in the value of assetscaused by variations in the quality of assets.The volatility is computed by tracking theprobability that the borrower might migratefrom one rating category to another(downgrade or upgrade). Thus, the value ofloans can change over time, reflectingmigration of the borrowers to a different risk-rating grade. The model can be used forpromoting transparency in credit risk ,establishing benchmark for credit riskmeasurement and estimating economiccapital for credit risk under RAROC framework.

Credit Suisse (one of the leading globalf inancial services company) developed astatistical method for measuring andaccounting for credit risk which is known as“Credit Risk+”. The model is based on actuarialcalculation of expected default rates andunexpected losses from default.

Credit Risk and Investment Banking

Signif icant magnitude of credit risk, inaddition to market risk , is inherent ininvestment banking. The proposals forinvestments should also be subjected to thesame degree of credit risk analysis, as any loanproposals. The maximum exposure to acustomer should be bank-wide and includeall exposures assumed by the Credit andTreasury Departments. The banks shouldexercise due caution, particularly ininvestment proposals, which are not rated andshould ensure comprehensive risk evaluation.As a matter of prudence, banks shouldstipulate entry level minimum ratings/qualitystandards, industry, maturity, duration, issuer-wise, etc. limits in investment proposals.

Credit Risk in Off-balance Sheet ExposureBanks should evolve adequate framework formanaging their exposure in off-balance sheetproducts like forex forward contracts, swaps,options, etc. as a part of overall credit toindividual customer relationship and subjectto the same credit appraisal, limits andmonitoring procedures.

Banks should classify their off-balance sheetexposures into three broad categories - fullrisk (credit substitutes) - standby letters ofcredit, money guarantees, etc, medium risk(not direct credit substitutes, which do notsupport existing financial obligations) - bidbonds, letters of credit, indemnities andwarranties and low risk - reverse repos,currency swaps, options, futures, etc

Banks are risk averse to lending owing to lackof proper credit information mechanism, hightransaction cost, weak enforcement ofcollateral, bankruptcy framework, high NPA,directed credit issues, staff accountabilityconcept etc. Laid back banking approach andrelated structural problems in the banks needto be addressed. The large growth in themarket for securitised assets and for creditderivatives has offered banks new ways andmeans in managing as well as transferringcredit risk. Bank should lend according to itsappetite within the need based assessmentof the credit requirement of the borrowers.The ideal credit risk management systemshould throw a single number as to how mucha bank stands to lose on credit portfolio andtherefore how much capital they ought tohold.

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Basel II norms – A brief historyIn late 1980s, due to expansion of footholdof banks across globe, a strong need was feltfor a uniform regime to set minimum levelsof capital which banks must hold across thedeveloped countries. An international regimewas deemed necessary to protect the interestof depositors in particular and global financialsystem at large. It was anticipated that thisregime would ensure a level playing fieldamong banks and they had adequate capitalto meet unexpected losses.

The Bank for International Settlements (BIS),based in Basel in Switzerland, was entrustedwith establishing a framework for setting aminimum level of capital each bank shouldhave to hold. BIS, formed on 17th May, 1930,is an international organisation of centralbanks to foster monetary and financial co-operation. It acts as a forum to promotediscussion and policy analysis among its 58member central bankers.

Basel norms are a set of guidelinesformulated by Basel committee on BankingSupervision (BCBS), a committee formed atBank of International Settlements (BIS) in1975 for effective risk management,meaningful compliance and protection ofinterest of different stake holders engagedin banking transactions. RBI, being an activemember of BCBS, is keen on implementationof Basel norms in India.

Structure of Basel IIBanks are required to hold minimum tier 1capital of 6% of risk weighted assets (RWA)and total capital of at least 9%. Tier 1 capital,the purest form of capital, mainly comprisesof equity share capital and free reserves. Theaim of Basel II is to better align the minimumcapital required by regulators (so-calledregulatory capital) with risk. Minimum levelof capital is determined based on the riskinessof the assets (advances and investments) heldby banks. Risk weight assigned to each assetranges between 0% and 1111%, where 0%represented the safest exposure and 1111%the riskiest exposures. In our advanceportfolio maximum risk weight (i.e. 150%) isassigned to below ‘BB’ externally ratedcorporate claims.

BASEL II NORMS – An Overview.Computation of CRAR:-CRAR = Tier 1 capital + Tier II Capital RWA of credit risk + Operational Risk +

Market Risk

Elements of Capital(i) Tier 1 capital

Paid up capitalStock surplus (share premium of CommonEquity instruments)Statutory reservesCapital reserves representing surplusarising out of sale proceeds of assetsOther disclosed free reserves, if anyBalance in Profit & Loss Account at the endof previous yearPerpetual Non-cumulative Preferenceshares (PNCPS)Stock surplus (share premium of AdditionalTier 1 capital instruments) Innovative Perpetual Debt capitalinstrumentsAny other type of instruments as notifiedby RBI from time to time.

(ii) Tier 2 CapitalGeneral Provisions and Loss ReservesDebt capital instruments issued by banksRevaluation reserves at a discount of 55%Innovative Perpetual Debt Instruments(IPDI) and Perpetual Non-CumulativePreference Shares (PNCPS)Any other type of instruments generallynotified by RBI for inclusion under Tier 2capital

Risks identified under Basel II normsBasel II norms have identified wide range ofrisks faced by banks, while conducting theirbusiness. A proper understanding of theserisks is necessary to appreciate the relevanceof Basel II norms. Meaning of different risksidentified under Basel II norms is given below.

1. Credit risk:It refers to the risk that the borrower orcounterparty fails to meet his obligations asper agreed terms, e.g. risk that the borrowerfails to repay the loan amount and interestdue. Credit risk depends on credit worthinessof borrower, repayment capacity and purposeof loan.

2. Market risk:Market risk is the risk that a firm will lose

money due to changes in market variablessuch as interest rates, foreign exchange rates,equity prices, and commodity prices.

Interest rate risk: It refers to the risk thatthe bank’s net income and value of assetsget adversely affected due to change ininterest rates. For example, recent rise inrates has resulted in Mark to Market (MTM)losses for many banks.Equity risk: Equity risk is the risk that one’sinvestments will depreciate because ofstock market dynamics causing one to losemoney.Foreign Exchange risk: It refers to potentiallosses due to exposure towards forexmarket. For example, real and notionallosses suffered by banks on forwardcontracts due to movement of exchangerates in the direction unexpected bybankers.Commodity prices: - It refers to thepossibility that the bank may suffer lossesdue to movement in commodity prices.

3. Operational risk:Operational risk is defined as the risk of lossresulting from inadequate or failed internalprocesses, people and systems or fromexternal events. This definition includes legalrisk. Legal risk includes, but is not limited to,exposure to f ines, penalties, or punitivedamages resulting from supervisory actions,as well as private settlements.

Pillars of Basel IIBasel II covers the following three pillars:-Pillar I – Minimum capital requirementsPillar II – Supervisory review processPillar III – Market discipline

Pillar I – Minimum capital requirementsAs per Basel II norms, the banks should havesufficient capital to meet the above mentionedrisks. Pillar I deals with regulatory capitalrequirements, giving banks the choice ofvarious approaches in calculation of requiredamount of capital to be held against credit,operational and market risk.

Capital charge for Credit Risk can becalculated by using one of two approaches:

Bijo AbrahamManagerIRMD.

1. Standardized Approach2. Internal Ratings Based Approach (IRB)

Capital charge for Operational Risk can becalculated by using one of twoapproaches:

1. Basic Indicator Approach (BIA),2. Advanced Measurement Approach (AMA).

Capital charge for Market Risk can becalculated by using one of twoapproaches:

1. Standardized Duration Method2. Internal Model Approach (IMA)

Credit Risk:1. Standardized ApproachIn standardised approach, exposures areclassified into a set of specified categoriesand separate risk weights are applied to eachcategory, based on the relative degree ofcredit risk associated with in it. The main assetclasses of exposure in the standardisedapproaches are Sovereign exposures, Bankexposures, Corporate exposures, Retailexposures, Housing loan exposures,Commercial Real Estate exposures etc.

Under standardized approach, the risk weightagainst each category of advance isprescribed by RBI every year in their mastercircular named ‘Prudential Guidelines onCapital Adequacy and Market Discipline -New Capital Adequacy Framework (NCAF)’.Accordingly exposure under each categorywould be multiplied with corresponding riskweight to arrive at the RWA for credit risk.

2. Internal Ratings Based ApproachThe internal ratings-based (IRB) approach tocredit risk is one of the most innovativeelements of the Basel Framework because itallows banks themselves to determine certainkey elements in the calculation of their capitalrequirements. Hence, the risk weights – andthus the capital charges – are determinedthrough a combination of quantitative inputsprovided either by banks or supervisoryauthorities, and risk weight functionsspecif ied by the BCBS. Under the IRBapproach, the required minimum capital isbased on the probability distribution of lossesdue to the default risk in a portfolio of loansor other financial instruments. The calculationof capital requirements for a loan’s defaultrisk under Basel II requires four inputparameters to be entered in supervisory riskweight functions.

1. Probability of default (PD): Estimate of thelikelihood of the borrower defaulting onhis Obligations within one year.

2. Loss given default (LGD): i.e. an estimateof the amount that the bank would expectto lose in the event of a borrower default;

3. Exposure at default (EAD): an estimate ofthe amount the borrower will owe thebank at the time of default, i.e Nominalvalue of the borrower’s outstanding debt.

4. Effective maturity of the loan (M):-Effectivematurity refers to the longest possibleremaining time before the borrower isscheduled to fulfil his obligations

IRB approach is again classified into two; thedifference in the two approaches is givenbelow

Foundation internal ratings based (FIRB)approach: - Banks are able to use their ownmodels to determine their regulatory capital

requirement using the IRB approach. Underthe foundation IRB approach, banks estimatea probability of default (PD) while thesupervisor provides set values for loss givendefault (LGD), exposure at default (EAD) andmaturity of exposure (M). These values areplugged into the Bank’s appropriate riskweight function to provide a risk weightingfor each exposure or type of exposure.

Advanced IRB Approach: Banks with themost advanced risk management systems andrisk modelling skills are able to move to theadvanced IRB approach, under which thebank estimates on his own PD, LGD, EAD andM.

OPERATIONAL RISK:1. Basic Indicator Approach (BIA)Under Basic Indicator Approach the capitalcharge is calculated based on 15% of the

“Jamboreee” Coimbatore family meet graced by Mr. Shanmugham, Chairman,UIT College and Mr. Mohan DGM, Coimbatore RO.

annualised three year average gross incomewhich excludes years in which the grossincome was zero or negative.

2. Advanced Measurement Approach(AMA).Under the AMA, the operational risk capitalcharge will be determined by using the bank’sinternally derived Value at Risk (VaR) ofoperational losses. The VaR is based on:

Internal loss data (Based on events of ourbank)External loss data (Based on events ofvarious banks)Scenario analysisBusiness environment and internal controlfactors

Hence the Bank must track internaloperational risk loss data and assess therelevance of that data to current operations.In order to move towards AMA, Bank mustensure maximum automation in LoanOrigination, document management andcustomer relationship management.Automated systems will provide an enhancedhealth index score for the assessment unitwhich will ease the movement towards AMA.The data must include all material activitiesand exposures in all systems and banklocations.

External loss data must be used for eventsthat are infrequent, yet potentially severe,such as an earthquake. Scenario analysesincluding expert opinion input must beutilized for high-severity events. The riskassessment should cover all key businessenvironments and internal controls factors.A strong Risk Control and Self Assessment(RCSA) framework is a pre- requisite forAMA.RCSA will help in reduction of losses andfixing Key Risk Indicators for the bank as awhole.

MARKET RISK1. Standardized Duration MethodThe capital charge under the standardisedmethodology will be the sum of the followingthree categories of risk measurement:• Interest rate risk (specific risk and generalrisk, derivatives excluding options);• Equity position risk (specific and generalmarket risk, derivatives excluding options);• Foreign exchange risk including gold andderivatives;

2. Internal Model Approach (IMA)Under standardized measurement method,general market risk capital charge is basedon RBI framework. Under Internal ModelApproach, capital charge for general marketrisk would be measured based on internalmodel using VaR (Value at Risk) technique. Insimple terms, VaR is probable maximum losswhich a bank’s investment portfolio is likelyto suffer with certain level of probability, say99%. As per current guidelines on IMA,specific risk capital charge would continue tobe measured based on percentagesprescribed by RBI.

Our bank’s position:-In terms of RBI guidelines vide circularDBOD.No.BP.BC.90/20.06.001/2006-07 datedApril 27, 2007 and subsequent guidelines onthe New Capital Adequacy Framework ourbank has adopted Standardized Approach forCredit Risk, Standardized Duration Method forMarket Risk and Basic Indicator Approach forOperation Risk used for calculating CapitalAdequacy Ratio under BASEL II norms.

Keeping in view the Reserve Bank’s goal tohave consistency and harmony withInternational standards and also have toimprove the risk management practices ofIndian banks, RBI has come out withguidelines & time schedule for migrating toadvanced approaches for all the three risks.Hence we intend to upgrade our existing riskmanagement framework and have appointedM/S Ernst & Young LLP as consultant forhandholding us to migrate to advanced riskmanagement approaches.

Pillar II – Supervisory review processUnder Pillar II, banks assess their capitaladequacy on the basis of own internal riskmanagement methodology and supervisorsanalyse whether a specif ic bank’s capitaladequacy assessment is in line with its overallrisk profile and business strategies. Thesupervisory review process relies on fourprinciples:1. Banks should have a process for assessing

their overall capital adequacy in relationto their risk profile and a strategy formaintaining capital levels.

2. Supervisors should review and evaluatebanks’ internal capital adequacyassessments and strategies, as well as theirability to monitor and ensure compliancewith regulatory capital ratios. If they arenot satisfied with the result of this process,

supervisors should take appropriate action.3. Supervisors should expect banks to

operate above the minimum regulatorycapital ratios and should have the abilityto require banks to hold capital in excessof the minimum.

4. Supervisors should seek to intervene at anearly stage to prevent capital from fallingbelow the minimum levels required tosupport the risk characteristics of a bankand should require rapid remedial actionif capital is not maintained or restored.

Pillar III – Market disciplineUnder Pillar III, banks are required to publishinformation on the key parameters of theirbusiness prof ile, risk exposure and riskmanagement. RBI guidelines state that thebanks should have a policy on disclosure,which covers disclosure of exposure to riskysectors and risk management techniques. TheDisclosure Policy reinforces the commitmentby the Bank to be compliant at all times withthe various Regulatory, Statutory and otherdisclosure obligations imposed by the law ofthe land; and to ensure that its shareholdersand the market are provided with timely andaccurate information in respect of all materialmatters concerning the Bank.

The bank shall provide all applicabledisclosures required under Pillar 3 of the BaselAccord, both qualitative and quantitative, asat the last working day of March each yearalong with the annual financial statements,both in its annual reports as well as in its website. Qualitative disclosures that provide ageneral summary of its risk managementobjectives and policies, reporting system anddefinitions shall be published only on anannual basis. Bank shall also make interimdisclosures on the “quantitative aspects”, ona stand-alone basis, on their websites as atthe end of September each year.

Further to the above, Bank shall disclose theTier I capital, Total capital, Total requiredcapital and Tier II ratio and total capitaladequacy ratio, on a quarterly basis on thewebsite. These additional disclosures must beconsistent with the audited statements.

ConclusionBasel- II norms have laid down prudent riskmanagement principles across the globe. Theprinciples specif ied under three Pillars asexplained above, have created an unparalleledfoundation for building strong banks with

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1. IntroductionIt is widely believed and quite often observedthat thieves always manage to outdo cops.Similarly the regulations in general andfinancial regulations in particular have alwaysbeen behind the fraudsters and have moreoften than not failed to proactively preventthe financial crises and frauds across theworld. In a typical Bollywood movie set policeis always shown to arrive after the climax(commitment of crime/murder) and they areportrayed as mute spectators before theclimax. Strangely this reel life incident hasfound its real life counterpart in financialsector when global financial crisis startedunfolding in 2008. While the financial sectorpolice (read central bankers and capitalmarket regulators like SEBI) were havingheated discussions on capital adequacy andcomplex mathematical models to estimatethe correct capital base the financial sectorgiants who supposedly possess robust capitalbase and sophisticated technology werecrumpling down before their eyes. Later onit would turn out that the insufficient liquidity,unchecked growth of off-balance sheet items(such as forwards, swaps, derivative) andexcessive leverage was the villains hidden inthe closet. But the bewildered group ofcentral bankers (read Basel Committee onBanking Supervision (BCBS), after being hitwith financial tsunami of 2008, the most acutefinancial crisis which world has witnessedafter Great Depression of 1930s soonregained their composure and startedformulating a new set of regulations, whichwould later emerge as most talked abouthighly debated regulations of our times. Theychristened these norms as Basel- III in

December 2010 and Basel- III norms ‘A globalregulatory framework for more resilient banksand banking systems’ was born in that month.

2. Basel-III norms: Meaning and principalelementsBasel- III norms refers to a set of guidelinesdevised by BCBS on capital adequacy, liquidityrisk management, leverage and overallgovernance with an intent to create strongerbanks and stable financial sector. It must benoted that these norms do not fully replaceBasel- II norms. They supplement theminimum capital requirements specif iedunder Basel- II and introduces two freshconcepts namely liquidity ratios and leverageratios. It is worth noting that standardized andadvanced approaches for measurement of riskweighted assets specif ied under Basel- IIremain the same in Basel- III norms also. Themain elements of Basel-III norms are givenbelow.

A. Revised minimum capital requirements:The capital to risk weighted assets ratio(CRAR), an indicator of financial strength is afunction of capital funds and risk weightedassets. It is arrived by dividing the capital fundswith risk weighted assets. The main changesmade by Basel- III norms on minimum capitalrequirements are given in following points.

Emphasis on Common Equity: -The purestform of capital funds is equity share capitaland free reserves of the bank. Even thoughthese funds are the most permanentsource to absorb unexpected losses suchas large NPAs, the Basel-II norms have notprescribed a minimum level of such fundsto be maintained by the bank. Under Basel-III norms these funds are termed ascommon equity and banks in India arerequired to maintain minimum commonequity of 8% of their risk weighted assets.Introduction of Capital conservation buffer(CCB):-Basel- III norms specifies that thebanks should hold capital not less than2.5% of risk weighted assets as CCB to

meet the losses arising out of stressedsituations. However this 2.5% is includedin the 8% mentioned above.Introduction of Counter cyclical buffer: -The economy always goes throughbusiness cycles of booms and depressions.So idea behind this buffer is that the banksshould build their capital base duringgood times (i.e boom period) to meet theunexpected losses which generally arisesduring bad times (i.e recession). The RBIhas not specif ied the quantum of thisbuffer and time line within which thisbuffer should be created till date. RBI hasindicated that the quantum of the buffershould be in range of 0-2.5%.

B. Leverage Ratio: The movement of CRARstipulated under Basel-II norms does not giveany strong indication of the growth in offbalance sheet items or increase in borrowings.So during financial crisis the banks with highCRARs were failing because of excessiveborrowings and huge financial commitmentsarising out of complex financial derivativeswhich do not appear on the balance sheet.Since the rise in off balance sheet items andextent of borrowing was not adequatelyreflected in CRAR their growth wentunnoticed. To prevent such incidents in futurethe BCBS has introduced a new indicator offinancial strength termed as Leverage ratio.The term leverage implies extent of borrowedfunds used in banking business and leverageratio is arrived by dividing the total Tier-1capital funds ( i.e sum of common equity andcertain debt instrument) with the sum of totalassets on balance sheet and off balance sheetitems( such as value of LCs, BGs, forwardcontracts. As per RBI guidelines the minimumleverage ratio to be maintained is 4.5%.

Since the numerator in the equation isshareholders’ funds, higher the leverage ratio,the better is the financial stature of a bank,from risk perspective.

C. Liquidity ratios: As indicated earlier, thetight liquidity conditions were one of mainreasons for the spread of global financialcrisis. The asset sale at drastically low pricesand presence of illiquid assets with banksincreased the severity of crisis. Hence BCBShas prescribed two ratios namely LiquidityCoverage ratio (LCR) and Net stable fundingratio (NSFR) to prevent recurrence of suchsituations.

LCR: - The idea behind LCR is that the

Arjun Sunder S.ManagerIRMD

Emergence of Basel- III norms

robust capital base and sound riskmanagement practices. However theeffectiveness of these norms in ensuringf inancial stability and protection ofdepositors’ interest lies in their transparentimplementation. The banks shall strive toachieve compliance with these norms in bothletter and spirit. The key challenge involvedin successful implementation is improvingour understanding of these norms and its rolein creating financially stable banks among allhierarchies of management. Let us meet thischallenge and ensure the implementation ofBasel- II norms in our bank in true letter andspirit envisaged by our regulator.

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banks should maintain sufficient amountof liquid assets to meet a shortage inliquidity which may last for one month. InIndia RBI has come out with draftguidelines on LCR and NSFR and thedebate is still going on the items of assetswhich should be included as ‘Liquidassets’. Since the Indian banks have tomaintain CRR of 4% and SLR of 23%, weare better positioned compared to ourwestern counterpart on liquidity front.NSFR: - The one of the major reasonsbehind the failure of many banks wasabsence of sizeable low cost stabledeposits in the bank’s books. To increasethe portion of stable funds in the totalsources of funds the BCBS has stipulatedthis ratio. The banks with good CASAdeposit base and loyal customers areexpected to meet this requirementwithout much difficulty.

3. Impact of Basel- III normsSince these norms are expected to be fullyimplemented by F.Y 2017-18 it is quitepremature to discuss on the impact it wouldhave on banking sector. However the impactperceived by banking sector experts andcentral bankers and based on our experiencehas been summarized below.

Impact on global/national banking sector:- The Basel- III norms have increased thetotal capital requirements to 10.5% of totalrisk weighted assets (11.5% in India).Reserve Bank’s estimates project anadditional capital requirement of Rs.5trillion, of which non-equity capital will beof the order of Rs. 3.25 trillion while equitycapital will be of the order of Rs.1.75trillion. Due to high capital requirements,the banks’ earnings per share (EPS) arelikely to fall across the world and theimpact is likely to be felt on marketcapitalization of these banks. Further,these norms are expected to slow downthe economic growth since the capital

required for each loan/ investment is moreunder these norms. However these normsare expected to bring more f inancialstability and prevent financial crises in abetter way.Impact on our Bank :-Our bank hascommenced reporting under CRAR underBasel- III from the half year ended30.09.2013 on wards. The CRAR underBasel- III was 12.97 %, which were only 19basis points lower than CRAR under Basel-II (13.16%). As far as capital adequacy isconcerned Basel –III as such will not posemuch challenge to our bank because ourcommon equity accounts for substantialchunk of our total capital(11.22% of riskweighted assets) and hence we do notperceive any difficulty in complying withthe capital adequacy norms prescribedunder Basel- III norms in near future.

The leverage ratio of our bank as on 30.09.13is 4.94%, which is higher than 4.5% mandatedby RBI. Since the gap between our leverageratio and ratio mandated by RBI is only 44basis points we may need to augment ourTier-1 capital base in near future to maintaina leverage ratio above the level stipulated byRBI.

4. Implementation of Basel- III norms inIndiaThe RBI, being responsible member of BCBShas already rolled out the timelines withinwhich these norms are implemented in India.These norms are proposed to beimplemented in a phased manner. The tableshowing the transition to Basel- III is givenbelow.

The BCBS has prescribed the achievement ofcompliance with Basel- III norms by January2019, whereas RBI has shortened the timeframe by 9 months to March 2018. Similarlythe RBI has stipulated the minimum CRAR of11.5 % as against 10.5% stipulated by BCBS.

So it is evident that the RBI has stipulated morestringent requirements compared to BCBS.

ConclusionTraditionally banking was considered asboring business. However after the evolutionof many innovative products, rise in crossselling of third party products, changes intechnology, emergence of tech-savvy ways ofdelivery of services banking has become moreinteresting and complex. The changingbusiness environment and customer profilehas also forced bankers to design newarrangements to f inance ventures in ameaningful manner. But the rising complexityhas made the banks more vulnerable to fraudsand other risks which were blissfully absentin traditional banking. Further, the riskmanagement practices in individual banks andbanking sector could not catch up with thechanges in the business models of manybanks. Now, many economists (includingprominent ones such as Paul Crugman) hasargued for return to traditional banking, whichwas not as interesting as modern day banking; but was more safer.

Despite, the views expressed by well-intentioned economists as given above, weknow that wheels of time cannot be turnedbackwards and we need to live with thechanged circumstances by suitably adaptingour risk management practices. All stakeholders of the financial community such ascommercial bankers, central bankers, ratingagencies, investors, financial intermediariesand other financial sector regulators need toplay their part in pro-actively introducing andimplementing prudent far-sighted riskmanagement practices in financial sector.

Basel-III norms represent the latest attemptmade by the group of learned central bankersto preserve the safety and stability of financialsector. It also aims to preserve the publicconfidence in banks in a dynamic businessenvironment. Whether these norms will beable to accomplish its objective? Whether itwill contribute in prevention of damagingfinancial crisis like global financial crisis of2008? These are tough questions and onlytime will be able provide answers to thesequestions. As prudent bankers and optimisticindividuals, let us hope that in forthcomingraces between regulators and fraudsters, theformer (armed with norms such as Basel- III)would thrive and thereby prevent theoccurrence of financial disasters.

Minimum capital April 1 March 31 March 31 March 31 March 31 March 31ratios 2013 2014 2015 2016 2017 2018Minimum CommonEquity Tier 1 (CET1) 4.5 5 5.5 5.5 5.5 5.5Capital conservationbuffer (CCB) - - 0.625 1.25 1.875 2.5Minimum CET1+ CCB 4.5 5 6.125 6.75 7.375 8Minimum Tier 1 capital 6 6.5 7 7 7 7Minimum Total Capital* 9 9 9 9 9 9Minimum Total Capital+CCB 9 9 9.625 10.25 10.875 11.5

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INTRODUCTIONIn a bank dominated economy such as India,the asset quality of the banking system hasimportant implications for the stability of theoverall f inancial system. The generalperception about a bank’s health is greatlydetermined by the level of non- performingadvances (NPAs) held in its books.

The business of banking essentially involvesintermediation – acceptance of deposits andchannelling those deposits into lendingactivities - and credit risk is direct fallout ofthis intermediation process. Certain amountof default and impairment of assets are likelyto show up in the normal course of bankingbusiness and hence, credit risk managementassumes a critical role in ensuring that suchimpairment is contained to a minimum.

Credit administration and the asset qualityof banks is the most significant factor thataffects the future of the banks. We intend tohighlight the concerns surrounding the areasof credit risk management with respect to theIndian banking industry. We begin withlooking back at historic trends in asset qualityand credit management of banks and thenuse the ‘learnings’ to suggest acomprehensive solution to tackle the issues.

CREDIT RISK MANAGEMENTWhen banking was simple, credit riskmanagement was also straightforward.Lending decisions were made onimpressionistic basis as the banks knew theirborrowers and their businesses quite closelyand hence they did not appreciate a need tocollect and process elaborate information/data for supporting their credit decisionmaking framework. Over time, as bankingactivities diversif ied and became morecomplex and the products became moresophisticated, risks also increased andbecame more complex. Although, the risksfrom intermediation became more transitiveand contagious, the evolution in the creditrisk management failed to keep pace. Theadvanced credit risk managementnecessitated a granular analysis of the risksthat the banks were being exposed to;however, they failed to appreciate these

requirements and relied on a primitivemanagement information system. To my mind,the failure of the banks to collect and analysegranular data/information on variouselements of credit risk is one of the majorreasons why the banks failed to foresee theimpending problems.

HISTORY OF NPA CLASSIFICATION andCREDIT MANAGEMENTLet me first trace briefly the evolution of NPAregulation in India. Until mid-eighties, themanagement of NPAs in India was left to thebanks and the auditors. As the need for finetuning regulatory structures to deal with thechanging risk-profile of banking was felt, in1985, the first-ever system of classification ofassets for the Indian banking system wasintroduced. This system, called the ‘HealthCode’ system, involved classif ication ofadvances into eight categories ranging from1 (Satisfactory) to 8 (Bad and Doubtful Debts).A significant change in this evolution processin regulatory instructions, however, came inApril 1992 with the introduction of prudentialnorms on income recognition, assetclassification and mathematical methods forthe computation of provisioningrequirements. A graded norm for NPArecognition was brought-in, beginning with afour quarter norm for classif ication ofadvances as non-performing. With theintroduction of 90-day norm for classificationof NPAs in 2001, the NPA guidelines werebrought at par with international standards.

Even as the NPA classification norms werebeing gradually tightened to bring them atpar with international standards, RBI alsointroduced guidelines on “restructuring ofadvances” during the early 1990s. Theguidelines required that standard assets,where the terms of the loan agreement

regarding interest and principal had beenrenegotiated or rescheduled aftercommencement of production, be classifiedas sub-standard. In 2001, the instructionswere further strengthened to clarify the assetclassif ication treatment of restructuredaccounts prior to commencement ofproduction as well.

The classification of advances as per the newlyintroduced “prudential norms” enabled aproper assessment of the extent level of non-performing assets in the Indian bankingsystem for the first time. The initial figuresfor the NPAs in the system were quite highand hence, created sufficient incentive for theregulators and the banks alike to bring themdown to manageable levels. Over time, as thebanks introduced improvements in credit riskmanagement systems and processes, theheadline NPA ratios declined appreciably.

ISSUES in CREDIT MANAGEMENT FACEDBY BANKS IN INDIA(a) Primitive Information Systems - At the

outset I had highlighted how theevolution of information systems had notkept pace with the changing bankinglandscape. Improvement in informationsystems were not in keeping with theincrease in asset size of banks and theincreasing complexities in creditmanagement. The lack of granular dataon slippages, early indications ofdeterioration in asset quality, segmentwise trends, etc., hampered timelydetection of problem accounts andweakened banks’ credit risk managementcapabilities. As a result, banks failed toidentify the reversal in trends in assetquality in the pre-crisis period (before2008).

(b) Lax credit management - RBI reportshave revealed that impairment in assetswere an off shoot of the deficiencies incredit management that had crept induring the pre-crisis “good years”. Bankswith higher credit growth in 2004-08ended up with higher growth in NPAsduring 2008-13 period. A bank wiseanalysis of credit and NPA growthindicates that the compounded annualgrowth rate (CAGR) of NPAs during theperiod 2008-13 was highest in case ofbanks whose CAGR of credit was alsohigher during 2004-09. Thus, it wasduring the pre-crisis years thatdeficiencies in credit appraisal crept in,

CREDIT RISK MANAGMENT- Key to goodFinancial Health

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Sandeep SinghAsst Manageron deputationHadi ExpressExchange, Dubai

credit monitoring was neglected andrecovery efforts slowed.

Let me elaborate on some of these pointswith some specific illustrations about thedeficiencies in credit appraisal.

Evidence suggests that the banks were nottaking adequate cognisance of the build-upof leverage while sanctioning or renewinglimits. In fact, banks’ credit appraisalprocesses failed to differentiate betweenpromoter’s debt and equity and over time,promoters’ equity contribution significantlydeclined and leverage increased. In particular,there has been a significant increase in theindebtedness of large business groups inrecent years. A study of ten large corporategroups by Credit Suisse has revealed that theshare of these ten groups in total bankingsector credit more than doubled between2007 and 2013 even while, the overall debtof these groups rose 6 times (from under Rs.one trillion to over Rs. six trillion).

Ironically, the banks were found to be lendingmore to sectors that had high impairments,pointing to possible lacunae in creditappraisal standards. For example, while theCAGR of credit for the period 2009-2012 forthe banking sector was 19 per cent; thesegments like iron and steel, infrastructure,power and telecom witnessed much highercredit growth despite the impaired assetsratio for these segments being significantlyhigher.

Indian corporates, operating in India andabroad, have been increasingly accessinginternational debt markets to raise capital.While this is presumably being done to takeadvantage of the low interest rate in theinternational markets, in an environment of

fluid exchange rate markets, corporates runthe risk of incurring losses from adversemovement in exchange rates for their un-hedged exposures. The un-hedged exposuresand an eventual increase in interest ratescould put pressure on the corporates andeventually spill-over to their lenders.

THE FUTURE...While we have so far dwelt on the problemsthat characterise the credit management inIndian banking system, let me count somepositives. The first and foremost comfortingfactor is that we have thrived through muchmore challenging times in the past so far asthe NPA ratios are concerned. In fact, in March1994, the NPA levels were much higher thanthe present level. The aggregate bankingsystem GNPA ratio was 19 per cent in March1994 and for PSBs was 21 per cent. Againstthat benchmark, the current position of NPAsin the banking sector is not alarming. In March2013, the GNPA ratio was 3.4 per cent forbanking system and 3.6 per cent for PSBs.Even if we were to consider the impairedassets ratio, for the system as a whole it ismuch lower at 10.6 per cent while for the PSBsit stands at 12.1 per cent.

Another silver lining on the cloudy horizon isprovided by the strong capital position ofIndian banks. Our stress testing of the banks’asset portfolio (by applying different staticcredit shocks, including shocks to banks’restructured accounts) as of June 2013, hasrevealed that the system level CRAR wouldremain above the required minimum of 9 percent. However, only under severe shock of 150per cent on NPA, the Core CRAR would godown to 6 per cent.

The relatively lower level of provisioncoverage ratio (PCR) of banks in India as

compared to their global peers is a weak spotin an otherwise fairly resilient Indian bankingsystem. The sad part is that this ratio has seena declining trend in recent years. A studyconducted in the Reserve Bank (covered in theFinancial Stability Report of June 2013)assessed that, under stressed macroeconomicconditions, the current provision coverage ofbanks in India may not be sufficient to coverexpected losses. The PCR presents a moredismal picture when restructured standardadvances are also considered, as it stood atjust 30 per cent in March 2013 down from 35per cent in March 2009. Hence, it is essentialthe banks increase their provision cover fromcurrent levels and strengthen their balancesheets.

Thus, on the whole while the banks will beable to withstand the present deterioration inasset quality, the rise in slippages and thequantum of restructuring coupled with lowPCR levels is a source of worry and over aperiod of time the situation could pose greaterconcerns especially if timely corrective actionsare not taken.

CONCLUSIONSome concrete steps like careful examinationof existing NPAs for determining furthercourse of action - rehabilitation or recovery,would need to be taken in the short term.Accounts identified as viable will need to bequickly rehabilitated with support from thebank and the borrower through infusion ofnew equity from new promoters. Above all, arobust accountability mechanism for all levelsof hierarchy in the stakeholders – banks,borrowers, regulators, policy makers and thegovernment at large – will have to be put inplace to ensure that banks’ asset qualityimproves on a sustained basis.

Muvattupuzha NRI meet : From Left: Ms. Malavika Nair, Cine Artiste, Smt. Leela Joseph Vazhakkan, Prog. Executive, AIR, Nagercoil, Sri. JosephVazhakkan, MLA, Muvattupuzha, our ED Sri. Abraham Thariyan, Sri. Sathyanarayana Murthy, CA, Senior Partner, Varma and Varma Associates,Sri. A. Narendran, DGM (Mktg) and Sri. Joly Sebastian, AGM & Reg. Head. Dance performance by Master Mohd Ramzan.

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Our bank had recently nominated me toattend a Programme on LeadershipDevelopment for Corporate Excellence atNIBM, Pune in Collaboration with KelloggSchool of Management USA. Thisprogramme had two modules the former ofwhich was at NIBM Pune and the latter atKellogg School of Management EvanstonChicago USA. This was a programmeattended by Senior Executives of PublicSector Banks in India and South Indian Bankwas the sole representation from the PrivateSector Banks. Incidentally, our MD & CEO,Dr.V.A.Jospeh was one of the eminentspeakers who addressed the participants atNIBM. It was indeed a stupendousprogramme covering the major facets ofmodern day leadership with specific focus onbanking. The programme was hosted atEvanston a place close to the famous LakeMichigan. The natural beauty of the lakewas a treat to the eyes even though thetemperature was sub zero.

The days of our assignment at Kellogg sohappened to coincide with the ‘Thanksgivingweek’ in the U.S. Thanksgiving which is oneof the most meaningful verbs in the Englishdictionary is actually considered as anoccasion for celebration in the United States.Having been a part of this great celebration,I thought I will pen my thoughts on theimportance of this wonderful day . Manypeople trace the origin of the modern‘Thanksgiving Day’ to the harvest celebration

Thanksgiving …………………….

that the Pilgrims and the early settlers heldin Plymouth, Massachusetts in 1621.

The last Thursday in November is thecustomary day for celebrating the‘Thanksgiving’.

For the Americans, the word evokes imagesof football, family reunions, roasted turkeywith stuffing and pumpkin pie. Turkey andpumpkin are the two words associated with‘Thanksgiving’. Pumpkin is ‘the’ vegetablewhich is used on every ‘Thanksgiving’ tablein the form of the customary ‘Pumpkin Pie’.Pumpkin leaves are also used as salads.Pumpkin is considered to be one of theimportant symbols of the harvest festival.

‘Thank You’ are two little beautiful words thatopen a million doors of happiness in humanhearts.Giving thanks to the Creator for asuccessful harvest, the birth of a child andother good fortunes had always been a partof their daily life.

If there is one day each year when food andfamily take center stage, it is this ‘Thanksgivingday’. The Sunday following ‘Thanksgiving’ isalways the busiest travel day of the year inthe United States. Each day of the long‘Thanksgiving’ weekend, more than 10 millionpeople take to the skies, another 40 millionAmericans drive hundreds of miles to join theirdear ones for the ‘thanksgiving’ dinner andthe railways teem with travellers going homefor the holiday.

Despite modern-age turmoil—and perhaps,even more so, because of it—gatheringtogether in grateful appreciation for a‘thanksgiving’ celebration with friends andfamily is a deeply meaningful and comfortingannual ritual to most Americans. The need toconnect with loved ones and to expressgratitude is at the heart of all this feasting,

prayerful thanks, and recreation. It wasGeorge Washington, the first president of theUnited States, who proclaimed ‘ThanksgivingDay’ as a national holiday in the year 1789.

Thanksgiving Day parades are held in somecities and towns and it also actually kick startsthe opening of the Christmas shoppingseason. Most government offices, businesses,schools and other organizations remainclosed on ‘Thanksgiving Day’.

It is said that we Indians are very ‘kunjoos’when it comes to expressing ‘thanks’compared to the westerners. By thanking theAlmighty or our fellow brethren we not onlyacknowledge the good that has been doneor the favours that we have received, but alsogives us more hope for our further wants andrequirements in life. I am reminded of a storythat I had read some time ago. It was about ablind boy who sat on the steps of a buildingwith a hat by his feet. He held up a sign whichsaid, “I am blind please help”.

There were only a few coins that had beendropped in the hat. A man was walking by.

Paul V.L.Depty. Gen. ManagerPersonnel Dept. HO

27

He took a few coins from his pocket anddropped them into the hat. He then took thesign, turned it around and wrote somethingnew. He put the sign back so that everyonewho walked would see the new words.

Soon the hat began to fill up. A lot morepeople were giving money to the blind boy.That afternoon the man who had changedthe sign came back to see how things wereturning out.

The boy recognized his footsteps and asked,“Were you the one who wrote something onmy sign board this morning? What exactlydid you write?’The man said, “I only wrote the truth, it waswhat you said, but in a different way”. I wrote:-“Today is a beautiful day but I cannot see it”.Both signs conveyed to the people that theboy was blind. But the first sign simply saidthat the boy was blind. The second signreminded the people that they were luckythey are not blind. It was the second sign thatwas more effective.

The moral of the story is – Let us be thankfulfor what we have. Be Creative, Be Innovative,Think Differently and Positively. When Lifegives you 100 reasons to cry, show Life thatyou have a 1000 reasons to smile. Face yourpast without regrets, handle the present withconfidence and prepare for the future withoutfear.

Let us be more lavish with the two words‘Thank You’.

Rededication of Staff Training College,Hyderabad: Our Chairman Mr. Amitabha Guha, Mr.George Paul, DGM with SIBians at Hyderabad

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Rededication of Staff Training College at T Nagar Branch Chennai: Seen in the picture areMs. Shyamala Jayaprakash, General Secretary Asan Memorial Association, Mr. Rajan Sapra andDr. Rita Vijayan our valuable customers,our MD Dr. V.A. Joseph, Mr. Anto Paul DGM ChennaiRegion, Mr. Viji Yuvaraj Chief Manager, T Nagar branch and cine artist Ms. Kadhal Sandya

Sri. V.L. Paul DGM, Personnel Dept. seen with Senior Executives of Public Sector Banks at Kellogg School of Management USA

In today’s Banking scenario fee based incomefrom third party products like LIC etc. is crucialfor the profitability of the Banks. Here I wouldlike to create awareness about a nicheProduct of LIC which could bring in a goodprofit to the Bank.

The opportunity here is to transfer largevolume of funds in UK Registered PensionSchemes (UK RPS) to a Qualifying RecognisedOverseas Pension Scheme (QROPS). TheQROPS regime was introduced in April 2006.It allows an individual to transfer his/herpension savings in a UK RPS to a pensionscheme that meets the conditions to qualifyfor a QROPS, free of UK tax (subject to thelifetime allowance, which is currently £1.5million).

Our “LIC’s Jeevan Akshay VI” is the onlyAnnuity plan approved by the GovernmentOf India which is listed as QROPS. Thefunds available in UK RPS when transferredto India will be in bulk volume. There is anopportunity to canvass LIC policies of Rs. 50Lakh and above which will bring in precious“Fee Based Income” for our Bank. It will alsoenable us to achieve individual milestoneslike attainment of the “Bhima Branch” status.

Unique Selling Points for Marketing thisproduct

The returns available in UK RPS is very lowwhen compared to similar products inemerging markets like India. LIC JeevanAkshay VI offers returns of approximately7%.The Indian rupee - GBP rate being high,transferring the funds to India will allowthe customer to reap the benefits ofweakening rupee.Jeevan Akshay-VI is the only Govt.Guaranteed Immediate Pension plancurrently available in India.The pension amount is repatriablethrough NRE A/C. LIC will be able to creditthe pension amount to the NRE accountof the customer if required.In case of death, the entire investedmoney will be transferred to the nomineestax free.

Which type of UK Registered PensionSchemes can be transferred?In UK the individuals mainly have two types

THE ROAD LESS TRAVELLEDof Pension1) Government Pension – It will not be ideal

to transfer this pension fund to India asthe individual may lose the benef itsoffered by the UK Government.Moreoverthe customers too may not be willing totransfer this type of Pension Scheme.

2) Company Pension – This type of pensionfunds can be targeted by us. Thesepension funds are created through thecontribution of the individuals and alsocontribution by the employers.

Who are the Target Customers?1. Non-Resident Indians planning tomigrate out of UK permanently will be ableto transfer their Pension Funds to India. TheQROPS Scheme was designed by the UKGovernment for the purpose of allowingindividuals who intend to leave UKpermanently to carry their pension savingswith them, free of tax, to their new country ofresidence in order to continue saving andprovide an income during their retired life.

2. Non-Resident Indians (even customershaving UK Citizenship) who are residing inUK and are not planning to leave UKpermanently and who also makeoccasional visits to India . The QROPS rulesdoes not stop a UK resident to transfer thefunds from UK RPS to a QROPS scheme likeLIC Jeevan Akshay VI. It says “The QROPSregime applies UK tax rules to payments madeout of those transferred funds. Tax charges willapply to the payments where it is consideredthat the individual has not left the UKpermanently”. If the individual is a UK residentor has been a UK resident at any time duringthe five full tax years before a payment is madeout of the funds transferred to the QROPS, theindividual will be subject to the UK tax rulesthat would apply to similar payments made byUK registered pension schemes.

What do you mean by payments made outof transferred funds?This refers to the payout of the fundstransferred from the UK RPS to QROPSScheme. Penalty charges have been devisedto avoid misuse of the scheme whereindividuals transfer the fund from a UKRegistered Pension Scheme to a QROPSScheme or any other pension fund in acountry not governed by strict rules. These

fraudulent individuals use the lenient rules inthose countries to avail payout from the fundstransferred.

Investors in our LIC Jeevan Akshay VI neednot worry about this issue as funds onceinvested in our Pension Scheme is notwithdrawable by the individual and also it isnot possible to avail loan on the funds. LIC isan annuity plan approved by the GovernmentOf India and pays immediate pension whichis not a violation of the rule.

How can we market this product?1) Send a letter to our UK Customers

informing them about this uniqueopportunity.

2) We can merge the monthly annuitypayments from LIC with our RD DepositScheme for high returns.

If Pension Amount is Rs. 40,000/- then RDmaturity at the present interest rate of 8.75% after 10 Years is Rs. 76.60 LakhIf Pension Amount is Rs. 50,000/- then RDmaturity at the present interest rate of 8.75% after 10 Years is Rs. 95.75 LakhIf Pension Amount is Rs. 60,000/- then RDmaturity at the present interest rate of 8.75% after 10 Years is Rs. 114.90 Lakh

How do we transfer the funds from UKRegistered Pension Scheme to our LICJeevan Akshay VI?STEP 1 Ask for the latest details of our

Customer’s UK Registered PensionScheme. This data will provide us withthe following information.Name of the UK Registered PensionScheme (RPS)The type of scheme in which the fundsare investedAmount of funds available in thePension Scheme

STEP 2 The support and active involvementof the local LIC Office Manager shouldbe sought. Analyze the website of theUK RPS to find out whether the fundscan be transferred to a QROPS.

STEP 3 Convince our customer to transfer hisfunds in UK RPS to LIC Jeevan Akshay

Antony RoshanManagerVarkala Branch

29

VI. What is required us is a thoroughunderstanding of UK QROPS Rulesand other related Tax Rules in UK.This is because UK Tax rules are veryrigid and people are generallycautious while dealing with the same.

STEP 4 If the customer is in India at thetime of processing obtain thefollowing:1) Authorization Letter in thename of the LIC Manager authorizinghim to request the UK RPS Managerto transfer the pension funds onbehalf of the customer.2) QROPS Form APSS263(Member Information) whichfurnishes all the information neededfor the UK RPS to transfer the fundsto a QROPS signed by the PensionHolder (our customer).3) Overseas Pension Schemedetails signed by LIC.4) Letter from LIC Manager to theUK RPS requesting to transfer thePension Fund to the bank account ofLICThe procedure to be followed if thecustomer is in UK at the time ofprocessing:1) We may forward the followingdocuments to our customerintending to transfer the fund so thathe may directly submit the same.2) QROPS Form APSS263(Member Information) whichprovides all the information neededfor the UK RPS to transfer fund to aQROPS to be signed by the PensionHolder (customer).3) Overseas Pension Scheme formsigned by LIC Manager.4) Letter from LIC Manager to theUK RPS asking to transfer the PensionFund to the bank account of LIC .

STEP 5 The UK RPS may raise queries to LICwhich need to be answeredimmediately.

STEP 6 Once the fund is received directly tothe account of LIC, further formalitiesin connection to the Policy Openingneed to be completed.

Some Technical Aspects: A transfer is themoving of an individual’s accrued pensionrights from one scheme to another. Thepension tax legislation specifies which are thetransfers that may be made without adversetax consequences. These transfers are known

as “recognised transfers” and are a type ofauthorised member payment. To be anauthorised member payment transfers mustbe made to either a registered pensionscheme or a QROPS.

Tax charges arise on the individual (up to 55per cent of the amount transferred) undersections 208 and 209 of Finance Act 2004 (UK)and on the scheme administrator of the UKregistered pension scheme (15 per cent of theamount transferred) under the transfer section239 of Finance Act 2004 (UK), if the beneficiarypension scheme receiving the transferredpension savings is not a QROPS.

Tax relief: The transfer is not a contributionand so no UK tax relief is due in respect of it.The transfer is merely re-locating the pensionrights represented by UK tax-relievedcontributions to a different pension scheme.

Lifetime Allowance: The transfer to QROPSis treated in the same way as a transfer from aregistered pension scheme to anotherregistered pension scheme.

The transfer is a benefit crystallisation eventfor the purpose of the member’s lifetimeallowance. The amount crystallised is theamount of the transfer. If the transfer resultsin exceeding the member’s lifetime allowance(currently £1.5 million), the rate of taxchargeable is 25%

The taking of benef its relating to thetransferred amount from a QROPS is not abenefit crystallisation event for the purposesof the individual’s lifetime allowance.

Member payment charge: Any futurepayment from the overseas scheme which isa type of payment which would not have beenauthorised from a UK registered scheme willpotentially give rise to a member paymentcharge under Schedule 34 Finance Act 2004on a resident or recently resident individual.

Illustration: We sent e-mails to a few of ourUK Customers and informed them about thisproduct. Mr. Sanjeev (name changed) is anOverseas Indian having UK Citizenship and ispermanently residing in UK. He had initiallyinvested his Company Pension fund in a UKPension Fund linked with Equity Market andsuffered losses. He then shifted the PensionFund to a UK RPS called “Scottish LifePension”. The pension fund available now is£ 1,30,000/- (Worth above Rs. 1.20 Crore atpresent Exchange Rates). The return availablefor him in the UK RPS is below 2%.

We informed him that he will be able to get amonthly pension of approx. Rs. 69,000/-which if reinvested in a Recurring Deposit withSIB for 10 Years will yield an amount of Rs.1.34 Crore. The necessary forms and therequired letter from LIC have been sent to Mr.Sanjeev for submission to “Scottish LifePension”.

The present position is that Mr. Sanjeev hasforwarded the papers to Scottish Life Pensionand requested them to transfer Pension Fundto LIC Jeevan Akshay VI. The result of therequest made to Scottish Life is eagerlyawaited.

Reference available for further informationwww.hmrc.gov.uk

30

Inauguration of Aizawl Br. (Mizoram): Our ED Mr. Abraham Thariyan along with Mr.Nandakumar G. DGM, Kolkota Region and Aizawl Br. Team

Loan Life Coverage Ratio (LLCR) or LoanLife Ratio is a relatively new concept.However now-a-days it is one of the mostcommonly used financial ratios in ProjectFinance and Corporate Loans. The ratio isdefined as the ratio of the Net PresentValue (NPV) of Cash Flow Available for DebtService (CFADS) over the entire life of the loanto the outstanding/proposed debt. It is ameasure of the borrowing company’s abilityto pay and discharge the debt, over the lifeof the loan. The ratio gives an estimate ofthe credit quality of the project from alender’s perspective.

Generally the LLCR is calculated as:LLCR = NPV [CFADS over Loan Life] / PeakAmount of Debt

Net Present ValueNet Present Value (NPV) is the value now ofa stream of future cash flows, negative orpositive. The future cash inflows (positivecashflows) from projects underimplementation suffer from varying degreesof uncertainties. And, uncertainty means risk.The higher the risk, the higher should be thereturn from the value at risk.

A cashflow expected on a future date,however assured and risk-free be it, is notequal to cash in your pocket. That is whybanks pay you interest on your deposits andcharge interest on your loans. This is the timevalue of money.

So, the value of each cash flow needs to beadjusted for risk and time value of money andsuch adjusted value of cashflow is the NetPresent Value.

NPV is calculated as follows:NPV = CF0 + CF1/(1+r) + CF2/(1+r)2 + CF3/(1+r)3 ...where CF 1 is the cash flow the investorreceives in the first year, CF2 the cash flowthe investor receives in the second year etc.and r is the discount rate.

For calculation of LLCR, Net Present Value ofCash Flow Available for Debt Service [NPV(CFADS)] is measured only up to the maturityof the debt tranche. The discount rate usedto calculate NPV is the weighted average

Loan Life Coverage Ratio

interest rate of all debt tranches until maturityand can be calculated simply as:= Total Interest (for all debt tranches) / TotalDebt Balance (for all debt tranches)

In the case of project finance, all the figuresreckoned are those relating to the project, butin other cases, they would be calculated forthe borrower.

Interpretation of the Loan Life CoverageRatioAn LLCR of 2.00x means that the CashflowAvailable for Debt Service (CFADS), on adiscounted basis, is double the amount of theoutstanding debt balance.

An LLCR of 1.00x means that the CFADS, on adiscounted basis, is exactly equal to theamount of the outstanding debt balance. Themovement of a key variable to achieve anLLCR of 1.00x is an important measure of thestrength of the project economics, oftenreferred to as the ‘LLCR break-even’.

Variations in LLCR DefinitionThere may be occasions when Borrowersrequest and Lenders allow other ‘assets’ tobe either included in the numerator orexcluded from the denominator to reflectinstances where there will be other cashdeposits available to the lender in the eventof default rather than just the NPV of thecashflow. For example it is not uncommon tofind the balance of the project’s cash account,or the Debt Service Reserve Account (‘DSRA’)added to the numerator or netted from thedenominator. Extreme caution needs to beapplied when assessing the economics of aproject where the LLCR is supported with cashaccount balances.

When DSRA is included, the Loan LifeCoverage Ratio shall be calculated as:LLCR = (NPV [CFADS over Loan Life] + DSRA/c Balance b/f) / Debt Balance b/f

LLCR Versus DSCRUnlike the Debt Service Coverage Ratio (DSCR)which measures the cashflow strength on aperiod-on-period basis, LLCR is a measure ofthe number of times the cashflow over thescheduled life of the loan can repay theoutstanding debt balance.

The LLCR does not pick up weak periods as itessentially represents a discounted average.For this reason, if the Project has steadycashflows and Credit Foncier Repayment(Repayment in EMIs comprising ofcomponents of both principal and interest),the LLCR should be roughly equal to theaverage DSCR.

Another drawback of the LLCR is that the ratiodoes not account for cyclicality as it is basedon an average discounted cost. The differenceis that the LLCR accounts for the entirescheduled life span of the loan while the DSCRis a measure of the borrower’s ability to repayon a year-to-year basis.

Use of LLCR as a Debt CovenantFinancial modeling of LLCR is now a standardmetric calculated in project finance. The ratiois also used in debt covenants. A specific valuefor LLCR may be stipulated in a loanagreement. This stipulation may be put in bythe lender for ease in knowing that theborrower will be capable of making therequired interest and principal payments, andif they don’t may be subject to a penalty,usually in monetary form. Reserve Bank ofIndia has stipulated a benchmark for Loan LifeCoverage Ratio of 1.40 for allowingrestructuring of advances under the CorporateDebt Restructuring Mechanism.

LLCR as a Credit Control ToolLoan Life Coverage Ratio can be used as acredit control tool. Banks can use the conceptto decide the quantum of advance againstfuture cashflows by way of annuities (from atoll road etc.), lease rentals (from land/building,machinery & movables, aircrafts etc leased out)etc. The risk perception of the bank woulddecide the value of LLCR mandated as the debtcovenant. In our SIB-RENTAL scheme, LLCR of1.00x is considered adequate. If higher risk isperceived by the lender, cushion by way ofhigher LLCR can be added.

ConclusionLoan Life Cover Ratio is definitely a veryvaluable tool to gauge the credit quality of

Unnikrishnan E.S.Chief ManagerCredit Sanctions Dept. HO

31

the project from a lender’s perspective. Theratio gives an insight to the standalone debtservice capacity of a project and thusinfluences the credit decision. It does notreplace the conventional concept of DSCRand so, should be used as an additional tool,along with ratios like Project Life CoverageRatio (PLCR-ratio of discounted cashflows forthe entire life of the PROJECT to aggregatedebt) and Reserve Life Coverage Ratio (RLCR –used for financing Mining Industry, Oilfieldsetc.) wherever relevant.

see the Real Madrid stadium and the LasVentas Bull ring, which were the essence ofwhat Madrid meant to the outside world.At the end of day three, the curtains were setto be raised at the long-awaited awardceremony.

Forgotten was the fatigue and exhaustion ofthree days of travel and sight-seeing.Forgotten were the tensions of the dailygrind. The only thing that mattered toeveryone present was to keep up the imageof the bank and to rise up to the expectationsof the bank. The evening was the culminationof the life time dreams of one and all.

The tension was palpable and every onewaited with bated breath as the functionunfurled the latest entrants to the SIB Hall ofFame. The warm ambience of theauditorium in the Hotel Holiday Inn wherethe programme was hosted added to thecomfort level and instantly put everyone atease.

The grand gala event started right onschedule and was graced by Mr.Birija Prasad,Deputy Chief of Mission, Indian Embassy,Madrid and his glamorous wife, Mrs.Pooja.The young couple lent charm to the warmthof the evening and soon the ball was setrolling with the inspiring speeches by ourChairman Mr. Amitabha Guha, our MD

Dr.V.A.Joseph, our ED Mr.Abraham Thariyanand our CGM Mr. Joseph George Kavalam. Thekeynote address was delivered by the ChiefGuest. The Chief Guest seemed overwhelmedby the whole concept and also suggestedthat we start a branch in Spain. Theperformers also spoke about their travailsand paid rich tributes while the spouseswere thankful and took our MD’s words totheir heart, vowing to ensure their supportto partners who would work hard enough tocome back for the next meet as well.

The formal part of the function came to anend with a colorful replica of the Spanishbull resting in everyone’s hands. The Bullwhich represents the spirit of Madrid city,famous for its bull fights, aptly met andmatched the aspirations of the fastestgrowing bank.

The next few hours held us mesmerized bythe lilting melodies accompanied by karaokeor otherwise. A Thrissur-poora-paramba styleskit had everyone in splits with many staffmembers and also some spouses puttingin sporting appearances. The dinner was alavish affair with both Indian and Spanishstyles thrown in a good measure.

The night ended on a high note witheveryone vowing to try hard to be backwith a bang at the next meet likely to beheld at ‘ a much more beautiful city’ , whichwas all that our MD was willing to reveal.We left Spain the next day morning with thebest ever memories of the proudest momentsof our career and life. The whirlwind tourhad come to an end , but not the journeytowards success and perfection.

Yeh Shaam Mastani………..

Yes, the words just sum up the gala eveningat the magical city of Madrid that witnessedthe honouring of top performers of the bankin a truly royal manner that only South IndianBank does. The function was a glittering affairthat made all the performers feel on top ofthe world.

The group of 65 had travelled half-wayacross the world from various parts of Indiato the beautiful city of Madrid. A quickglance through the tour itinerary gave us apicture of what the bank had to offer tothe top performers in return for thededicated efforts on their part.

Except for day one and four, when mostof the time was spent on journey flight, wewere kept on our toes round the clock.Day two took us to the ancient city ofToledo, a picture perfect city situated besideTagus river, a city declared as a worldheritage centre by UNESCO . A Spanish lunchawaited us at the local cigarral. At theend of the day we were treated to yetanother Spanish dinner complete withflamenco dance. Day three was spentattending a Spanish mass, visiting the Royalpalace, the monument of Cervantes andthe local flea market. We also chanced to

LakshmiChief ManagerChennai Anna Nagar

32

Our Lady Top Performers in Spain

As a true Sagittarian, I always had awanderlust deep within me and dreamt ofseeing places like the character in “Eat, Pray ,Love”. I consider it a great blessing to havegot an opportunity to enjoy the panoramicsplendor of Spain by Providence combinedwith bank’s benevolence in honouring theperformers along with their spouses.

The long awaited trip started on the twentiethof September. We boarded the EmiratesAirways and arrived at Dubai airport in theevening. The group consisting of sixty two ofour staff members from different Regions ofthe Bank then proceeded to embark the flightto Madrid. After an exhausting journey, wereached Madrid Barajas Airport by night time.We checked into Holiday Inn located in theheart of Madrid’s commercial hub.

TOLEDOIt was a beautiful lazy morning that we wokeup to the next day. After breakfast, we leftfor the picturesque walled city of Toledo, onehour journey from Madrid. The stunninglandscape appeared like a scene straight froma fairy tale. The location was picture perfectwith castles; forts surrounded by the TagusRiver and was indeed a feast to the eyes.

Earlier, Toledo was the capital of Spain. It wasdeclared a World Heritage Site by UNESCOand now the medieval city is preserved by theGovernment. Toledo is aptly called the “Cityof Three cultures” because of its rich Christian,Jewish and Moorish heritage. The first stopof the day was at a museum. We spent aconsiderable time gazing at the medievalswords, armours, fans, toys in Spanish apparelon display.

Our guide took us on a tour through thewinding streets of Toledo. The narrow cobbledstreets were lined with souvenir shops andmost of them were teeming with tourists. Thewalk gave us a glimpse of the art, culture andhistory of the city.

On the way, we stopped at the ‘Cathedral ofSaint Mary of Toledo’. The architecture of thechurch was influenced by French gothic style.The original stained glass windows added anaura to the interiors. Many monarchs of Spainlie buried inside the cathedral. The burialplaces of cardinals are marked by their hatsthat are suspended from the ceiling, and lefthanging until they fall apart.

One striking thing we observed was that themailboxes were yellow in colour.It was cool

after being used to the red boxes back home.Lunch is usually a three course meal and foodtends to be Mediterranean based. Menus aredisplayed on blackboards outside restaurantshighlighting the dish of the day. We saw manysuch boards on the way. It was a bit weird tonote that many shop windows displayedcured pig leg ( jamon in Spanish) hanging onhooks. Spanish cuisine includes ham as adelicacy and is a national obsession too.Toledo is known for its tradition in makingswords, knives and armours.Wanderingthrough the winding streets, we saw countlessshops selling decorative swords, shields etcand came across a shop window displayingdoll nuns baking bread and sweets. Later wecame to know that it was a “marzipan shop”(marzipan is a sweet paste made with almondsand honey), attached to the convent, wheredelicacies prepared by nuns are sold to thepublic.

After the elaborate lunch, we proceeded tothe hotel for some siesta leaving the magicalland of Toledo behind.

In the evening our group was taken to thelocal mall for shopping. Later we went toobserve Flamenco dance (a form of Spanishdance consisting of singing, guitar playingand dance) followed by dinner at a localrestaurant.We were enthralled by the movesof the dancers and sat with our eyes glued to

IN THE LAND OF ESPANA

Marzipan shop

Menu of the day

Cured ham on display

Plaza De Toros

33

the stage. Flamenco dance which is similarto tap dance simply blew us away with theincredible footwork of the dancers.

MADRID CITY TOURMadrid is a green city studded with lot oftrees. On Sunday morning, after a heartySpanish breakfast consisting of Spanishtortilla and muffins, we set off for the citytour. We stopped for a couple of minutesbefore the famous “Santiago BernabeuFootball Stadium forclicking photographs.It is one of the world’s most prestigiousfootball venues and is owned by Real MadridClub. On the way, we saw the heraldic symbolof Madrid: a 20-ton statue of ‘the bear andmadrona tree’.

Our next stop was ‘Plaza de Toros’. It isconsidered as the cathedral of bullfighting,huge enough to seat 24,000 spectators. Wedidn’t venture inside and so were spared fromwitnessing the bloody and cruel sport inwhich the bull is killed and mutilated at theend. After that, we visited the monument inhonour of Miguel de Cervantes, the authorof the world famous classic ‘DON QUIXOTE’.The monument consists of the stonesculpture of Cervantes, overlooking thesculptures of his characters Don Quixote andSancho Panza. Following the visit, half thegroup set off for the flea market forshopping and the other half to attend theSunday mass at ‘Cathedral De LaAlmudena’,named after the female patronsaint of the city ‘Our Lady of Almudena’.Webought picture postcards from the souvenirshop adjacent to the church.

After lunch from an Indian restaurant ,wewent to visit the Royal Palace .It was theofficial residence of the Spanish royal familyand is now used only for state ceremonies.Itis considered as one of the finest palaces inEurope .The palace consists of approximately2500 rooms and is now owned and operatedby the Spanish Government.The huge crystalchandeliers and lavish interior spoke of abygone era .

Madrid is an amazing city and a sharp contrastto the colourful, noisy, crowded streets ofindia.Life moves at a slow pace and the citycomes to a bustle during the night.

Award CeremonyThe most coveted and glittering awardceremony was set for the second day eveningwith photo session of all performers and theirspouses. The chief guest of the day Mr. BirajaPrasad, Deputy Chief of Mission, Embassy ofIndia, Madrid in his address emphasized onIndian Banks going global, and suggested thatSIB should open a representative office inSpain. The Awards were given away by him inthe presence of our Chairman Mr. Amitabh

Guha, MD Dr V A Joseph,EDs Mr.CheriyanVarkey & Mr.Abraham Tharyan and CGM Mr.Joseph George Kavalam.The award functionwas followed by a grand dinner accompaniedby a few mesmerizing performances by theManagers and their spouses, with Mr. AntoGeorge , DGM in the lead.

We checked out of the hotel in the morning.We bid adieu to Madrid and left for Dubaiand from there took the early morning flighthome. We landed at Delhi in the morning of24th September.

Spain is indeed a traveler’s delight and thewanderlust in me was quenched to a certainextent .As a team we would like to expressour warm heartfelt gratitude to ourorganization for making this trip memorablefor us.

A travelogue preparedby Ms Anu Mathew,spouse of Nobby JosephBr. Manager, Noida

Kudos to the Regional Heads for surging their Regions towards excellence...

Nadakumar G., DGM,Kolkotta

CASA League II Mobi Loan

Rajeevu M.A. , AGMMadurai

Housing Loan

Jose Manuel, AGMKannur

Abraham K.George, GMErnakulam

Jose Paul, AGMIrinjalakuda

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“It’s time to go”- The breaking news hit theworld on 11th October 2013 dampening thespirit of every diehard fan of Sachin Tendulkar,a toddler to a golden-ager. Yes that wasSachin Ramesh Tendulkar, the most belovedson of Mother India, who was looked uponby us as the “God of Cricket” for almost twoand half decades and had decided to hanghis boots. Politics, Bollywood, everything elsehad taken a back seat on that day. Suddenlythe test match series against West Indies wasall about a grand adieu to the Master Blaster.The Master’s retirement was the talk of thetown. Such was the impact of this great manin our lives. Many might wonder why so muchhype was created about a cricketer who wasgoing to retire just like any other sportsperson at the twilight of his or her career. Theanswer is very simple. Tendulkar was soembedded in our collective consciousness,that we simply couldn’t imagine the void thatwould be created post his retirement. He wasthe common language that everyone whocared about the sport understood. Acricketing landscape bereft of Sachin will beakin to new and unfamiliar territory. This manwas meant to be around for ages; the humanequivalent of the Taj Mahal.

“Is Tendulkar still batting?” was what everyIndian fan wanted to know during the Indianinnings in the late 1990’s. If the answer wasyes, there was still hope of a win. If it was no,then TV sets would be turned off and dreamsput to bed. “As we did not lose to a teamcalled India...we lost to a man called Sachin.”-was famously quoted by Mark Taylor,Australian captain in 1998 when his team lostthe Chennai test match. Tendulkar had scored155 unbeaten runs in second innings,bewildering the star spinner Shane Warne bysmashing hits all around Chepauk stadium.Barack Obama once said - “I don’t knowcricket but still I watch cricket to see Sachin

The Legend, Never Retires

play...Not because I love his game, it’s b’coz Iwant to know the reason why my country’sproduction goes down by 5 percent when he’sbatting”... which elucidates his impact on thehearts of billions of people around the world.

To me personally, Sachin Tendulkar is specialnot only because his name speaks volumesabout statistics. Over 24 years that herepresented India, he shaped out an identityfor India, an India which discovered itself as ayoung and ambitious nation. If we rewind theclock, Tendulkar made his debut at a timewhen India was not at its prime in fields likefilm or sports. The cricketing legend calledSunil Gavaskar had already quit the field whileanother icon Amitabh Bachchan was past hisprime. The country was desperate to find itsnext hero and that’s when this lad with curlyhair made his entry.

There have been national heroes beforeSachin Tendulkar and there will be pan- Indiasuperstars after him. But no one has either

given us nor will give us such preciousmoments.

What changed in India when Sachin was aconstant?Two decades-and-a-half is a pretty long timefor anyone to survive at the helm butTendulkar showed how dedication,determination and focus fuel longevity. From1989, the year in which Sachin first made hisdebut in International cricket till today in 2013,the face of India, as a nation has changed alot. The below stats will give us an exact ideaabout how the master has been a constantfactor amidst all these changes.

Interesting trivia about TendulkarSachin wanted to become a fast bowler inhis early days but was rejected by DennisLillee at MRF pace academy. In 1988, Sachin fielded for Pakistan as asubstitute during a one-day practicematch against India at the Brabournestadium in Mumbai, a year before hisinternational debut against the sameteam.In 1989, Sachin scored a century each ondebut in Ranji, Duleep and Irani Trophy, arecord.In 1989, Sachin made his debut in Tests,batting in pads gifted by his hero SunilGavaskar.In 1992, Sachin was the first batsman to

Changed Factors 1989(Debut Year) 2013 ( Retired)Rupee Dollar Exchange Rate Rs. 16.9 Rs. 62.64Stock market 389 20,896Size of India’s Economy 300 billion $ 1.8 trillion $Size of Scam Bofors Scam Rs.64 Crores Coal gate Rs.1.86 lakh croreCricketers earnings Rs.40000 for test and Rs.7.00 lakh per test and

25,000 for ODI 4 lacs for an ODIPetrol Price Rs.8.50 Rs.71Prime Ministers Sri. Rajiv Gandhi Dr. Manmohan Singh(His career saw 8 PM’s of which 5 are no more)

Raakesh P.V.Asst. ManagerStaff Training CollegeThrissur

35

be given out through TV replay, in theDurban Test.In 1995, Sachin married Anjali, a doctor.She does not eat or drink when he is atthe crease.In 1996, Allan Mullally was so psyched bySachin that he claimed he was using abroader bat.195- The identical number of innings ittook Sachin and Lara to reach 10,000 Testruns.Sachin missed his first Test after playing84 consecutive matches over 12 years.The number of times Sachin has hit thewinning runs in Test matches is the mostby an Indian.

Courtesy: India Today

Sachin’s last innings as cricketerIt would have been inappropriate, almostdiscourteous, had Tendulkar gone withoutallowing his fans a suitable opportunity tobid him goodbye. But he did exactly whatthe fans expected him to do in his last innings.In his 200th and last Test match, Tendulkarshowed how a genius can keepoverwhelming emotions under control as hescored a majestic 74 in what will probably behis last international innings. The numbersmattered for the uninitiated but for thosewho loved the man for the last 24 years, eachand every stroke that came out from thatblade was a celebration. His 74 came from118 balls with 12 boundaries. That inningswas a vintage Tendulkar, who made everyonesit on a ‘Time Machine’ as he rolled backthose years. As he took the long walk backto the pavilion for one last time, millions oftears just flowed and it was a befitting tributethat the crowd and the Indian Team gave tothe legend called Sachin.

Tendulkar wore the India flag on his helmetwith pride; he cared passionately aboutwinning, and was determined to be the best.I would even go as far as to say that this sortof sustained excellence by one individual isunprecedent in the history of Indian sport.Who better a role model for a country to havewho is so humble and grounded and alwaysknew what he was doing? During difficulttimes in his career he perfectly answered allhis critics with his bat.

His farewell speech after the match wassimply unexpected and heartwarming andcame as a surprise. He beautifully summedup how family & friends had played a major

role in his life and were pivotal to his success.Even though he couldn’t manage a ton withhis bat during his last innings on the field hesigned off in his grand style with the perfectlyportrayed farewell speech.

Sachin – Post RetirementSachin has started his 2nd Innings of his life ina grand style. Post retirement, he was honoredby the Govt. of India with the highest civilianaward ‘’Bharat Ratna’’ which is the icing onthe cake for his already glittering career. Theannouncement was made on the very sameday of his retirement. Many wanted him totake up the coaching mantle as his professionto train young Indian players after retirement.Some want him to get actively involved inpolitics for which he has already expressedhis reservations. Recently UNICEF has namedhim the first brand ambassador for South Asiaand is all set to work in promoting hygieneand sanitation in the region. This shows thathis popularity is here to stay with us. The entirenation will be keen to know how the 2nd

Innings of Cricket less Sachin unfolds.

And there is a lesson that every one of uscould learn from the master’s career.A) To practice the skill we have. Hours and

hours of practice made him the batsmanhe was.

B) Dedication towards work we do. Hebatted with great dedication anddisplayed the same throughout his career.

C) Staying grounded at all times even whenin limelight.

D) And above all passion towards the workwhich we are involved in. He had this childlike attitude towards the game which isthe rarest of rare quality that he was ableto sustain even after 24 long years whichshows his pure love towards the game.

When I saw this cricketing colossus departingthe arena one final time to the chants of“Sacchiiin, Sachinnnn”, the only parallel scenethat came to my mind was the closing scenefrom the movie Gladiator, the one in whichthe Emperor’s daughter stands beside a fallenMaximus and makes one short, simpleexhortation to the masses: “He was a soldierof Rome. Honour him.” Yes. He was a truesoldier of the Indian cricket team and agenuine hero who will live forever in ourhearts. Thank you, Thank you & Thank youfor all the wonderful memories you gave us.

Cricke‘T’ will never be the same withoutTendulkar again.

SudokuCornerPuzzle No.10

Email us the right answer on or before 15th March, 2014 and you could be the lucky one to befeatured in the next issue!

Solution for the previouspuzzle. The lucky one to bepicked out from the 302en-tries with the solutions is Ms.Meenakumari Br.Saravanampatty

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BOOK REVIEW:

FAULT LINESby Raghuram G.RajanWinner of the 2010 Business Book of theYear Award, Financial Times and GoldmanSachs

In brief about the author:Currently: Governor of the Reserve Bank ofIndiaPreviously: Chief Economic Advisor to theGovernment of India

Raghuram Rajan was one of the feweconomists who warned of the globalfinancial crisis before it hit. Now, as the worldstruggles to recover,Rajan shows how theaction of Bankers, Governments etc. broughtabout the economic meltdown. He traces thedeepening fault lines in a world overlydependent on external funding to powerglobal economic growth and stave offdownturns.

In Fault Lines, Rajan outlines the hard andunpopular choices needed to ensure a morestable world economy.

First published in 2010, the review wasundertaken with the intention of validatingthe ideas assimilated in the book, three yearson, and how we, as bankers could draw onthe issues and proposed remedies, to better

face the troubled economic times we are apart of.

To begin with, the author talks about incomeinequality in the USA that precipitated an easycredit regime, primarily for housing, thatworked as a quick fix that kept all partiesconcerned happy. He illustrates how thisdistorted the real estate market and how eventhe most well-meaning government programsended up achieving the opposite.He moves on to discuss how Japan andGermany, exported to grow while the erstwhileAsian Tigers depended on flighty foreignfinancing, borrowing recklessly and runninglarge deficits to grow and absorb the surplusesbeing exported, further deepening the faultlines in the global economy and causing largeimbalances. The author discusses the weaksafety net for the unemployed in the USA, howthat affected the recovery from downturns andthe political push towards a moreexpansionary policy post the 2000 bust.

It follows on to the response to the 2000 bust:very low interest rates for a sustained periodof time and an asymmetric policy from theFederal Reserve that instead of stabilisinggrowth, encouraged financial profligacy, withthe implied assurance that any future bubblesthat burst would be bankrolled by thetaxpayer. An important observation is made:that while the Fed may be the de-facto centralbanker to the world, its objective, and moreimportantly, its mandate, is to manage theAmerican economy.

The sections on the FIs and the rising assetprices and the decoupling of asset prices fromtheir fundamentals, gives an interesting insightinto how the f inancial markets andparticipants quite literally, ‘bet the bank’.

The final sections address the fault lines andpossible solutions to ensure that the financialsector is reformed and restructured to preventa repeat of the crisis that is just starting towithdraw now, albeit slowly. The proposedreforms touch upon competition, the logic ofgovernment intervention and the need to endsubsidies. There are further highlights, suchas the need to prevent institutions frombecoming systemically important orirreplaceable. Another important theme is theneed for buffers and resilience.

The f inal chapters address the new worldorder and the need to upgrade human capital

and provide peoplewith a strongersafety net, as wellas better adjustedincentives andrewards. The needfor a multilateraleffort and co-ordinated action isalso stressed on.

The book isdef initely a mustread if one wishesto put in contextthe variousresponses, theworld over, to theeconomic crisis. The clarity of thought andstructure makes it very easy to read, andtechnical terms are kept to a minimum. Theroles of the various stakeholders in the newglobal structure are much easier to identifyand relate to.

Also, it provides an interesting insight intowhat could be the basic principles our newCentral Bank Governor relies on, whenformulating India’s response and hopefullymuch needed financial reform. The variousideas do definitely put in perspective Rajan’spolicy actions so far.

The modern banker is viewed as one with adegree of being a one stop for financial advice,at least in India, in addition to the traditionalrole of being a custodian of assets. He/She isalso expected to bring something different tothe table, in the modern organisation.

In this light, I would definitely recommend thebook,which is still as relevant today as it waswhen it was written.That, in my opinion wouldbe reason enough to pick up this book- theneed to be ready and equipped to understandand respond to the needs of our customersand more importantly, to explore and developnew opportunities for ourselves and the bank.

Philip MathenManagerMumbai Treasury

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Vysakh JayanKattapana Br. 2nd in

CD Premium

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1st in CD premium & SBSilver,

2nd in Mahila

Gopeekrishnan C.K.Senior Manager

Changanachery MC Rd.

Thomas A.A.Chief Manager

Chalakudy

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Dindgul

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2nd in SB Silver

Jijo JosephBr. Secunderabad3rd in SB Silver

Greenal JosephSenior ManagerBr.Rajagiri Valley

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Rajapalayam

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Geetha.KChief Manager

Ernakulam MG Rd.

Mathew StaniSenior Manager

Tellakom

Mohan Kumar M.P.Senior Manager

Kolencherry

Mathew T.JSM, Kuravilangad

Winners of CASA League IISreejil Mukund, SM, Bangalore Christ College and Team - Pan IndiaFirst

Jus t ine K .A . , M a n a g e r B a n g a l o reKothanur & Team - Pan India II

Thomas A.A., CM, Br. Chalakudy & Team-Pan India III

Praveen JoseSM, Indirapuram

Romel JosephManager

Mala

Aneesh.K.NairManager

Kannur South

Athul.U.SManagerKoyilandi

Toppers inHousingLoan - II

ToppersinMobiloan

Congratulations to the outstanding performers...

38

RecentCAIIBiansat SIB

Ankush MahajanManager

Br. Tondpalle

Anoop Johnson Manager

Arunapuram

Divya A Asst Manager

Br.Sarjapur Road

Jerin C JosephAsst.Manager

Br. Tirupur

Nideesh T KPogalur

Reena.RBr. Karunagappally

Ms. Reshma T.KBr. Parappanangadi

Roopa M.Br. Thrissur M.G.Rd

Ruvina L FBr. CBE NGGO Colony

Samantha AndradeIBD

Sandeep JainProb. Manager (CA)

Mumbai RO

Sangeet Kumar VAsst. Manager Thrissur RO

Satish Kumar Reddy M.Prob. OfficerBr. Tondpalle

Savan PrakashBr. Manager

Br.Annojiguda

Sitara S Kattanam

Shreekantha.RAsst.Manager

Mumbai Girgaum

Subha KSSt Thomas Mount

Chennai

Sumy S NairTVM Main

Valendu TripathiAsst. managerBr NR Mohalla

VikasBr. New DelhiSer.

Arun A GBr. Nerul

Asha JamesBr.Kesavadasapuram

Nalluri NareshBr. Jayalakshmipuram

Mysore

Jisu Mathew JosephAsst M’ger, Br.

Perambra

Mr. George Paul DGM,Hyderabad RO has beenelected as Fellow of In-dian Institute of Banking& Finance

Congratulations !

Winners of ‘SIB Vyapar Contest’- 1st Sibin Paul, Br.Kattapana & Team

2nd C.K. Simon, Br. Salem Leigh Bazar & Team

39

Personnel Dept under the leadership of our CGM Sri Joseph George Kavalam at Alapuzha

Fun & Frolic

Women’s Day Out : Mumbai Bandra Team at Lavasa

Coimbatore Main Br. Team chilling out at the Ootty hillsTrivandrum Main Br. celebrate at Poovar Island Resort

Kolenchery Team at Vagamon

Thrissur North Br. Team enjoy at Nelliyampathi

IRMD Team relax risk free at Kumarakom

PPC Name Branch/Office Designation534 Abraham Pulikodan C. Thrissur Regional Office Sr. Manager1383 Francis Xavier J. Kollam Sr. Manager2867 Parthasarathi Sen Guptha Kolkata Regional Office Sr. Manager1823 Jose C.D. O & M & Compliance Manager2020 Rajendra Kumar New Delhi Service Manager2029 Sreenivasan R.S. Chennai Regional Office Manager2288 Thomas A.P. Thrissur Regional Office Manager2766 Ramesh Prabhu S. Alapuzha Asst. Manager2736 Joy Singh Thanickal R. Thrissur Main Asst. Manager2222 Varghese C.P. Wadakkancherry Asst. Manager2126 Sunny Jacob Thevara Asst. Manager2130 Jose Kadavy Secretarial Dept Asst. Manager2886 Subas Chandra Kishore D. Suchitra Jn-Quthbullapur Asst. Manager1979 Simon M.A. Thrissur East Fort Asst. Manager12111Gopinathan Nair C.K. Thellakom, Kottayam Asst. Manager3935 Babu D. Insp. & Vigil. Dept Asst. Manager2899 Elsy Thomas Palai Clerk2223 David T.l. Perambra Clerk1497 Annamma P. Mathew Kuttapuzha Clerk2317 Nancy John C. Con. Square, Alappuzha. Clerk2038 Radha K. Cfm Dept Clerk3036 Johny K.V. Mullassery Clerk1254 Mathai E.V. Kanjiramattom Clerk2701 Peduri Sathyanarayana Vijayawada Clerk2276 Jegannathan R. Salem Main Stenographer2332 Usha John Thrissur M G Road Stenographer3185 Joseph M.J. Muvattupuzha Main Daftary4232 Johnson E.C. Ollukkara Daftary4030 Deenadhayalan A. Pasumathur Daftary4448 Gopal Das Kolkata Burra Baza Sweeper4793 John Varghese Theodical Sweeper5024 Muthukannu Nochium Sweeper5654 Ramalingam D.R. Dheevanur Sweeper5299 Savithri Alias Ammasai Pogalur Sweeper

You will always remain a part of the SIBian family....Siblink appreciates the dedicated service during their tenure. Theircontributions will always be remembered with gratitude

Mr. K.C. Francis, DGM Mr. Francis Antony P., DGM

Mr. Prasoon P. J. , Manager,Murikkassery Br. has secured Secondhighest marks in Subject CustomerService & Banking Codes &Standards conducted by IIBF for theyear 2012-13.

Graduation asFighter Pilot of P. R.Shankara Subra-manian S/o Mr. P.S.Ravi , Sr. Manager,Mumbai conferredon behalf ofPresident of India byChief Air Marshal SriBrown at Air ForceAcademy, Dundigal,Hyderabad.

Durga Pramod, D/o C.P. Pramod,Chief Manager Regional Office, Delhiwho has won the Girls Singles eventof All Kerala Association of ISC SchoolsBadminton (Shuttle) Championshipheld in Udyogamandal, Kerala.

Kavitha M.V, Prob. Clerk BrPuthenpeedika secured II nd rank inM.Sc Statistics from MG University

Digitial drawing made through“Typography” : Creating a pictureusing words.Ranjith J, Sr.ManagerInspection & Vigilance

Painting

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Arun Ignatious Kangapadan,Asst. Manager, ErnakulamBanerji Rd. & Alina Joseph -Asst. Manager, DICT

Arya Sudha D/o M.K. Prakash, CM,Erode Br. & Praveen Gopikrishnan

Diana Varghese, Asst. Manager, Br.Uzhavoor & Joseph Aldrine Mendez

Joseph Dony, S/o Mr Dony C.J., CM, RO Kannur & MrsMaria Dony, Asst. Manager, HO-Personnel Dept. &Linda Joseph

Anu Mohan-Asst. Manager, DICT &Sanjeev M., Manager, Thamarassery

Shyam Mohan, Salem Leigh-Bazar &Geethu Raj

Tony Thomas Br. Paripally & Seena Mary Alex Varun Bathula, Pro. Officer, SalemLeigh-Bazar Br. & Swathi

Anish Varghese& Deepa Varghese D/o Thressia CT, HOPlng & Dev. Dept.

Senthil Guru & BrindhaPriyadarshni D/o K.Chelliah SM, ROCoimbatore

Anu Joseph D/o C.V. Joseph, CM, HOCredit & Hamish

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CLICKZ !!!

Clickz!!!A Platform to showcase yourPhotographic skills ....Your’s might be the next......Send in your entries to siblink@sib.co.in

Vaibhav MurumkarAsst. Manager, Br. Khanapur

“ Dusky view“ of Peruvannamuzhi dam, KozhikodeJebin PaulBr. Chembanoda

“Paddy field” at Pullu, Thrissur

Jovins JoyBr. Ramapuram

“Two is company”

* SIBLINK VOL 22 ISSUE 2 *