CHAPTER 1

Reserve Bank of India

1.1 INTRODUCTION ABOUT RBI

The Reserve Bank of India was established on April 1st, 1935 in accordance with the provisions
of the Reserve Bank of India Act, 1934. This marked the culmination of prolonged efforts,
spanning more than a century, to setup a central bank in the country.

1.2 ESTABLISHMENT OF THE BANK

The efforts to setup a central bank in India started way back in January 1773, when Warren
Hastings the then governor of Bengal recommended the establishment of a ‘General Bank in
Bengal and Bahar’. The Bank was setup in April 1773, but it proved to be only a short lived
experiment. The amalgamation of the three presidency banks was finally effected in 1921, and
the Imperial Bank of India was established. Though primarily a commercial bank, the Imperial
Bank undertook certain central banking functions also in particular, the function of bankers to the
government and to some extent the banker’s bank. However the regulation of note issue and the
management of foreign exchange became the direct responsibility of the Central Government. In
1926, the Royal Commission on Indian currency and finance (Popularly known as the Hilton
Young Commission), recommended that the dichotomy of the functions and division of the
responsibility for control of currency and credit should be ended. The commission therefore
suggested the establishment of a central bank, to be called the ‘Reserve Bank of India’, by
charter, independently of the Imperial Bank, whose separate continuance was considered
necessary for enlargement of banking facilities throughout the country.

1
The Gold Standard and the Reserve Bank of India Bill to give effect to the commission’s
recommendation, introduced in the Indian Legislative Assembly in January 1927, did not make
much headway and was dropped on account of sharp differences of the Bank’s ownership and
constitution and composition of its Board of Directors. The issue emerged again in 1930-31 in
the context of the debate on constitutional reforms for the country. The white paper on the Indian
Constitutional Reforms published in 19333, underscored in its proposals the transfer of the
responsibility at the centre from British to Indian hands, and the need for establishment of
Reserve Bank of India free from political influence. Meanwhile, the Indian Central Banking
Enquiry Committee (1931) had also strongly recommended the establishment of Reserve Bank
of India at the earliest. These events lead to a fresh Bill being introduced in the Indian
Legislative Assembly on December 22nd, 1933 and by the Council of State on February 16, 1934.
It received the Governor General’s assent on March 5th 1934. Certain Sections of the Reserve
Bank of India Act were brought into force on January 1st, 1935 and rest of the sections on April
1, 1935. After the completion of preliminaries, the Bank commenced operations on April 1,
1935.

1.3 CORE FUNCTIONS OF THE BANK

The basic function of the bank, according to the preamble of the reserve bank of India act is to ‘
regulate the issue of bank notes and the keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit of the country to its advantage.’
This function imposes on the bank the responsibility of:

• Operating monetary policy for ensuring price stability and ensuring adequate financial
resources for development purposes
• Promotion of an efficient financial system and
• Meeting the currency requirement of the public

2
In the process of discharging these responsibilities the bank, over the years, has acquired a wide
range of promotional and developmental roles. The functions of the bank also warrant a
complementary impact on the government’s efforts to accelerate and sustain growth of the
economy through planned development process and to realize its socio-economic goals.
The demands and events during the first 15 years of the bank’s existence were marked by the
consolidation of its traditional central banking functions, namely, those of note issue and banker
to the government, apart from attending to the problem of war and post-war finance, repatriation
of sterling debt, setting up of a system of exchange control and tackling the banking an monetary
problems which arose from the partition of the country.
The bank functions as the note issue authority, banker’s bank, banker to the government and
regulator of the financial system. The bank has the sole right to issue currency notes and also acts
as the banker to commercial banks, holding custody of their cash reserve and granting them
discretionary financial accommodation. For the performance of its duties as the regulator of
credit, the bank possesses not only the usual instruments of general credit control such as bank
rate, open market operations and the power to vary the reserve requirements of banks, but also
extensive powers of selective and direct credit regulation.
Another important function of the bank relates to the conduct of the banking and financial
operations of the government and tendering advice to it on economic matters in general and on
financial problems in particular. The bank advises the government on public debt management
and operationalizes the government borrowing programmes.
The bank has an important role to play in the maintenance of the stability of the external value of
the rupee for the purpose of realizing the viability of external sector and ensuring monetary
stability. The bank also acts as the agent of the government in -respect of India’s membership of
the international monetary fund. It exercises control over payment and receipts arising from
international financial transactions under current and capital accounts and regulates the flow of
foreign exchange for sub serving the objective of control of current account deficit.

3
 CHAPTER 2

BANK FOR INTERNATIONAL SETTLEMENTS

2.1 ABOUT BIS

The Bank for International Settlements (BIS) is an international organization which fosters
international monetary and financial cooperation and serves as a bank for central banks.

The BIS fulfils this mandate by acting as:

➢ A forum to promote discussion and policy analysis among central banks and within the
international financial community
➢ A centre for economic and monetary research
➢ A prime counterparty for central banks in their financial transactions
➢ Agent or trustee in connection with international financial operations
The head office is in Basel, Switzerland and there are two representative offices: in the Hong
Kong Special Administrative Region of the People's Republic of China and in Mexico City.
Established on 17 May 1930, the BIS are the world's oldest international financial organization.
As its customers are central banks and international organizations, the BIS does not accept
deposits from, or provide financial services to, private individuals or corporate entities. The BIS
strongly advises caution against fraudulent schemes.

4
2.2 BIS MISSION STATEMENT

“Excellence in service to central banks and financial

authorities”

The BIS

• Aims at promoting monetary and financial stability

• Acts as a forum for discussion and cooperation among central banks and the financial
community
• Acts as a bank to central banks and international organizations

BIS staff emphasise

• Excellence in performance

• Highest ethical standards

• Professional discretion

5
 CHAPTER 3
ROLE OF BOARD FOR FINANCIAL SUPERVISION (BFS)

The board for financial supervison was setup 1994 as a committee of the Central Board of
Directors of the Reserve Bank of India. The prime objective of BFS is to undertake consolidated
supervision of the financial sector comprising commercial banks, financial institutions and non-
banking finance companies. The Board meets once in every month. It considers inspection
reports and other supervisory issues placed before it by the supervisory departments. BFS
through the Audit Sub-Committee also aims at upgrading the quality of the statutory audit and
internal audit functions in banks and financial institutions. The audit sub-committee includes
Deputy Governor as the chairman and two Directors of the Central Board as members.The BFS
oversees the functioning of Department of Banking Supervision (DBS), Department of Non-
Banking Supervision (DNBS) and Financial Institutions Division (FID) and gives directions on
the regulatory and supervisory issues.

FUNCTIONS
Some of the initiatives taken by BFS include:

1. Restructuring of the system of bank inspections

2. Introduction of off-site surveillance,
3. Strengthening of the role of statutory auditors and
4. Strengthening of the internal defences of supervised institutions.
The Audit Sub-committee of BFS has reviewed the current system of concurrent audit, norms of
empanelment and appointment of statutory auditors, the quality and coverage of statutory audit
reports, and the important issue of greater transparency and disclosure in the published accounts
of supervised institutions.

DEPARTMENT OF BANKING SUPERVISION (DBS)

“The Fortress against Distress”

6
3.1 FUNCTIONS AND WORKING OF DBS

3.1.1 Organization of the Supervision Function

Prior to the year 1993, the supervision and regulation of commercial banks was handled by the
Department of Banking Operations & Development (DBOD). In December 1993 the Department
of Supervision was carved out of the DBOD with the objective of segregating the supervisory
role from the regulatory functions of RBI.
The Department of Banking Supervision at present exercises the supervisory role relating to
commercial banks in the following forms:
a) Preparation of independent inspection programmes for different financial institutions.
b) Undertaking scheduled and special on-site inspections, off-site surveillance while ensuring
follow-up and compliance of the regulations framed by the Reserve Bank of India.
c) Determination of the criteria for appointment of statutory and special auditors and also the
assessment of audit performance and disclosure standards.
d) Dealing with frauds in the financial sector.
e) Exercising supervisory intervention in the implementation of regulations which includes –
recommendation for removal of managerial and other persons, suspension of business,
amalgamation, merger/winding up, issuance of directives and imposition of penalties.

3.1.2 Supervisory Process of DBS

The major way of supervision of the financial sector in India or for that matter anywhere in the
world is through inspections. The process of inspection focuses mainly on those aspects which
are crucial to the financial soundness of the banks, for the past decade or so there has been a shift
towards risk management which started with the “Basel Committee on Banking Regulation and
Supervisory practices”. Areas related to internal control, credit management, overseas branch
operations, profitability, compliance with prudential regulations, developmental aspects, proper
valuation of asset/ liability portfolio investment portfolio, and the bank’s role in social lending
are covered in the course of this inspection. The department undertakes annual inspection of
commercial banks at the end of which a supervisory letter is sent to the bank based on the

7
findings of the inspection and a monitor able action plan is given to the bank for the rectification
of those deficiencies.

3.1.3 Onsite Inspections—Banks

The Department of banking supervision uses a model called CAMELS (Capital adequacy, Asset
quality, Management, Earnings appraisal, Liquidity and Systems & controls) which is an
accepted model worldwide for the onsite inspection of Banks. This method avoids those aspects
which do not have a direct bearing on either the internal management of the bank or the
evaluation of the bank as a whole. The method was first introduced in India in the year 1998 and
has been reviewed by 2001. The department also carries out customer audits to evaluate the
quality of customer service at the branches of commercial banks. Some of the public sector
banks have also been placed under special monitoring, with a Senior Officer in the jurisdictional
Regional Office of the Bank entrusted with the special monitoring efforts. The Deputy Governor
/ Executive Director in-charge of banking supervision call the CEOs of those banks, wherein
serious deficiencies have been reported in the inspection reports, for a discussion on the specific
steps the bank’s top management would need to take to improve its financial strength and
operational soundness.

3.1.4 Off-Site Monitoring and Surveillance Systems (OSMOS)--Banks

As in the case of Offsite monitoring and Surveillance, a proper monitoring system was put in
place in the year 1996 by the Reserve Bank of India. The first tranche of OSMOS returns require
quarterly reporting on assets, liabilities and off balance-sheet exposures, CRAR, operating results
for the quarter, asset quality and large credit exposures in respect of domestic operations by all
banks in India. Data on connected and related lending and profile of ownership, control and
management are also obtained in respect of Indian banks. Bank profiles containing bank-wide
database on all important aspects of bank functioning including global operations were obtained
for the years commencing from 1994 and are being updated annually on an on-going basis. The
database provides information on managerial and staff productivity areas besides furnishing
important ratios on certain financial growth and supervisory aspects of the bank’s functioning.
Analysis of financial and managerial aspects under the reporting system is done on quarterly

8
basis in a computerized environment in respect of banks and reviews are placed before BFS for
its perusal and further directions. The second tranche of returns covering liquidity and interest
rate risk exposures were introduced in June 1999. To accommodate the increased data and
analysis required by the second tranche of returns, a project to upgrade the OSMOS database has
been completed and the new processing system has been put in place for the Returns
commencing from the quarter ended September 2000. Trend analysis reports based on certain
important macro level growth/performance indicators are placed before BFS at periodical
intervals. Some of the important reports generated by the Department include half-yearly review
of the performance of banks, half-yearly key banking statistics, analysis of impaired credits,
analysis of large credits, analysis of call money borrowings, analysis of non SLR investments,
etc. The Bank also provides details of peer group performance under various parameters of
growth and operations for the banks of a comparative business size to motivate them to do self
assessment and strive for excellence. The Indian banks conducting overseas operations report the
assets and liabilities, problem credits, maturity mismatches, large exposures, currency position
on quarterly basis and country exposure, operating results etc. on an annual basis. The reporting
system has been reviewed and rationalized in 1999 in consultation with the banks and the revised
system put in place in June 2000. The revised off-site returns focus on information relating to
quality and performance of overseas investment and credit portfolio, implementation of risk
management processes, earning trends, and viability of the branches.

3.1.5 All India Development Financial Institutions

Quarterly returns have been designed based on data on the liabilities and assets as well as data on
sources and deployment of funds.

3.1.6 Non-Banking Financial Companies

Off-site surveillance of NBFCs involves scrutiny of various statutory returns (quarterly/half
yearly/annual), balance sheets, profit and loss account, auditors’ reports, etc. A format for
conducting the off-site surveillance of the companies with asset size of Rs.100 crore and above
has also been devised.

9
3.2 FUTURE AGENDA OF DBS

3.2.1 Consultative Process: One of the major changes brought about in the supervisory
functioning is to introduce a consultative process with banks preceding the introduction of major
measures. The guidelines on Asset-Liability Management (ALM) and on comprehensive Risk
Management Systems have been finalizedin 1999 on the basis of feedback received from banks
and the banks advised to implement the guidelines. The supervisory focus in the coming years
will be to monitor the progress of implementation of these systems and to ensure their full
coverage. Consultative process has also been followed while introducing the guidelines for
investment in non-SLR securities and review of reporting system covering overseas branches of
Indian banks.

3.2.2 Risk-Based Supervision: A risk based supervisory regime as a means of more efficient
allocation of supervisory resources have been under consideration. The risk based supervision
project, which was initially guided by international consultants with the assistance of Department
for International Development (UK), would lead to prioritization of selection and determining of
frequency and length of supervisory cycle, targeted appraisals, and allocation of supervisory
resources in accordance with the risk perception of the supervised institutions. The Risk Based
Approach will also facilitate the implementation of the supervisory review pillar of the proposed
New Capital Accord, which requires that national supervisors set capital ratios for banks based
on their risk profile.

3.2.3 Prompt Corrective Action:To guard against regulatory forbearance and to ensure that
regulatory intervention is consistent across institutions and is in keeping with the extent of the
problem, a framework for Prompt Corrective Action has been developed. The PCA framework,
which will link regulatory action to quantitative measures of performance, compliance and
solvency such as CRAR, NPA levels and profitability, has been circulated for discussion and
suggestions to a wider audience of banks and interested public, and would now be considered by
the BFS before being implemented.
10
3.2.4 Consolidated Supervision: An approach of consolidated supervision that, while leaving
the responsibility of supervision of bank subsidiaries to their respective regulators, will allow
bank supervisors to obtain a consolidated view of the operations of bank groups has been
approved. This will also require greater coordination between the different supervisors in the
financial sector. Quarterly reporting by parent banks on key areas of functioning of subsidiaries
has been introduced from the quarter ending September 2000. The banks are now being required
to annex the financial statements of their subsidiaries along with their annual accounts. A
Working Group has been set up to look into the introduction of consolidated accounting and it
would submit its report by May 2001. Thus, the components of this diversified approach are
being gradually put in place.

3.2.5 Skills Up Gradation: The skill-set required by supervisors has changed radically over the
past few years. With the introduction of technology and new products and the move towards risk-
based supervision, the demands on supervision have also increased. Thus, meeting the training
needs of supervisors in this changing environment will be a priority area and will be monitored
continuously.

11
 CHAPTER 4

Capital Standards

4.1 THE EVOLUTION OF CAPITAL STANDARDS

It is interesting to note that till the 1980s, the risk-weighted approach to capital adequacy was not
in vogue but the bank’s capital was measured through the traditional gearing ratios. During the
1980s, the increasing competition amongst the international banks and rapid growth in their
assets had led to concerns about their deteriorating capital levels. This concern was aggravated
by the debt crisis in some of the emerging markets. While the national authorities and regulators
in many countries began exhorting their banks to improve their capital ratios, it was realized that
varying approaches to capital measurement across countries made international comparisons
difficult and there was a need to evolve an internationally consistent approach to capital
measurement. Moreover, the market developments by the mid-1980s, coupled with the
regulatory pressures for improving the capital ratios for the on-balance sheet activities of the
banks, had also witnessed a phenomenal growth in the banks’ off-balance sheet business –
which, at that time, was not subject to regulatory capital charge. In this background, the efforts
were intensified in 1986 to evolve a common and risk-weighted approach to capital measurement
rather than the traditional gearing measure. During 1987, the “Basle Committee on Banking
Regulations and Supervisory Practices”, as it was then named, arrived at a consensus on 8% as
the minimum capital adequacy ratio. After a period of consultation with the banks around the
world, this framework was formally adopted in 1988 and was widely endorsed by the
supervisory community, world-wide. This standard came to be commonly known as the Basel
Accord or Basel I Framework. It was the first ever attempt at harmonizing the banks’ capital
standards across the countries, for securing greater international competitive equality and to
obviate regulatory capital as a source of competitive inequality.
The Accord, in its original form, addressed only the credit risks in the banks’ operations. It was
only in 1996 that an amendment was made to cover the market risks also. The Accord had
12
adopted a risk-sensitive approach for making the banks’ capital more responsive to the riskiness
of their operations. This meant that a bank with a higher risk profile would have to maintain a
higher quantum of regulatory capital while also ensuring the minimum capital ratio. The
framework also stipulated, for the first time, a regulatory capital charge for the off-balance sheet
business of the banks so as to capture their risk exposures more comprehensively. Pursuant to the
recommendations of the Committee on the Financial System (the first Narsimham Committee,
1991), this framework was implemented in India in 1992 in a phased manner.

4.2 DRAWBACKS OF BASEL I AND THE ROAD TO BASEL II

With the passage of time, it was realized that the Basel I framework had several limitations. The
limitations related mainly to the underlying approach as also a less-than-comprehensive scope of
the Accord in capturing the entire risk universe of the banking entities.

First, the Accord had a broad-brush approach under which the entire exposures of banks were
categorized into three broad risk buckets viz., sovereign, banks and corporate, with each category
attracting a risk weight of zero, 20 and 100 per cent, respectively. Such a risk weighting scheme
did not provide for sufficient calibration of the counterparty risk since, for instance, a corporate
with “AAA” rating and one with “C” rating would attract identical risk weight of 100 per cent
and require the same regulatory capital charge, despite significant difference in their credit
standing. This, in turn, engendered a rather perverse incentive for the banks to acquire higher-
risk customers in pursuit of higher returns, without necessitating a higher capital charge. Such
bank behavior could potentially heighten the risk profile of the banking systems as a whole. The
design of the Accord was, therefore, viewed as distorting the incentive structure in the banking
markets and dissuading better risk management.

Second, the Accord addressed only the credit risk and market risk in the banks’ operations,
ignoring several other types of risks inherent in any banking activity. For instance, the
operational risk, that is, the risk of human error or failure of systems leading to financial loss,

13
was not at all addressed – as were the liquidity risk, credit concentration risk, interest rate risk in
the banking book, etc.

Third, since 1988, the emergence of innovative financial products had transformed the contours
of the banking industry and its business model the world over. The credit-risk transfer products,
such as securitization and credit derivatives, enabled removal of on-balance sheet exposures
from the books of the banks when they perceived that the regulatory capital requirement for such
exposures was too high and hiving off such exposures would be a better strategy. The Basel I
framework did not accommodate such innovations and was, thus, outpaced by the market
developments.

In this background, a need was felt to create a more comprehensive and risk-sensitive capital
adequacy framework to address the infirmities in the Basel-I Accord. The Basel Committee on
Banking Supervision (BCBS), therefore, after a world-wide consultative process and several
impact assessment studies, evolved a new capital regulation framework, called “International
Convergence of Capital Measurement and Capital Standards: A Revised Framework”, which was
released in June 2004. The revised framework has come to be commonly known as “Basel II”
framework and seeks to foster better risk management practices in the banking industry.

14
 CHAPTER 5

BASEL II

According to Ms. Susan Schmidt Bies, former governor of the Federal Reserve System of USA,
“The major objectives of Basel II include creating a better linkage between the minimum
regulatory capital and risk, enhancing market discipline, supporting a level playing field in an
increasingly integrated global financial system, establishing and maintaining a minimum capital
cushion sufficient to foster financial stability in periods of adversity and uncertainty, and
grounding risk measurement and management in actual data and formal quantitative techniques.
Critical to Basel II is the effort to improve risk measurement and management, especially at our
largest, most complex organizations.”

It would be reasonable to infer that the main focus of the new framework (Basel II) is on
providing the right incentives to the banks to adopt data-based, quantitative risk management
systems to be able to adopt the advanced risk-sensitive approaches of the revised framework,
which, in turn, would contribute to systemic and financial stability.
Figure: 5.1

Classifications under 3 Pillars

15
 Credit Risk Supervisory Review Enhanced
Disclosures
Market Risk Capital Adequacy
assessment for all risks
Operational
5.1 SCOPERisk
OF APPLICATION OF BASEL II

The revised capital adequacy norms is applicable uniformly to all Commercial Banks (except
Local Area Banks and Regional Rural Banks), both at the solo level (global position) as well as
at the consolidated level.
A Consolidated bank is defined as a group of entities where a licensed bank is the controlling
entity. A consolidated bank will include all group entities under its control, except the exempted
entities. A consolidated bank may exclude group companies which are engaged in insurance
business and businesses not pertaining to financial services. A consolidated bank has to maintain
a minimum Capital to Risk-weighted Assets Ratio (CRAR) as applicable to a bank on an
ongoing basis.

5.2 BASEL II: IMPLEMENTATION

One of the unique aspects of the Basel II accord is its comprehensive approach to risk
management in the banking entities categorized as the 3 pillars namely:
Pillar I – The minimum capital ratio
Pillar II – The supervisory review process and
Pillar III – The market discipline

Keeping in view Reserve Bank’s goal to have consistency and harmony with international
standards, it has been decided that all commercial banks in India (excluding Local Area Banks
and Regional Rural Banks) shall adopt Standardized Approach (SA) for credit risk and Basic
Indicator Approach (BIA) for operational risk. Banks shall continue to apply the Standardized
Duration Approach (SDA) for computing capital requirement for market risks.

16
5.2.1 What Is Parallel Run?

With a view to ensuring smooth transition to the Revised Framework and with a view to
providing opportunity to banks to streamline their systems and strategies, banks were advised to
have a parallel run of the revised Framework. The Boards of the banks were supposed to review
the results of the parallel run on a quarterly basis. The broad elements which were needed to be
covered during the parallel run are as under:
i) Banks are supposed to apply the prudential guidelines on capital adequacy – both current
guidelines and the guidelines as per the New Revised Framework – on an on-going basis and
compute their Capital to Risk Weighted Assets Ratio (CRAR) under both the guidelines.

ii) An analysis of the bank's CRAR under both the guidelines should be reported to the board at
quarterly intervals.

iii) A copy of the quarterly reports to the Board supposed to be submitted to the Reserve Bank,
one each to Department of Banking Supervision, Central Office and Department of Banking
Operations and Development, Central Office. While reporting the above analysis to the board,
banks are also supposed to furnish a comprehensive assessment of their compliance with the
other requirements relevant under the Revised Framework, which includes the following, at the
minimum:
a) Board approved policy on utilization of the credit risk mitigation techniques, and
collateral management
b) Board approved policy on disclosures
c) Board approved policy on Internal Capital Adequacy Assessment Process (ICAAP)
along with the capital requirement as per ICAAP
d) Adequacy of bank's MIS to meet the requirements under the New Capital Adequacy
Framework, the initiatives taken for bridging gaps, if any, and the progress made in this
regard
e) Impact of the various elements / portfolios on the bank's CRAR under the revised
framework
17
f) Mechanism in place for validating the CRAR position computed as per the New
Capital Adequacy Framework and the assessments / findings/ recommendations of these
validation exercises
g) Action taken with respect to any advice / guidance / direction given by the Board in the
past on the above aspects.

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 CHAPTER 6

PILLAR I – MINIMUM CAPITAL REQUIREMENTS (MCR)

The Pillar 1 provides a menu of alternative approaches, from simple to advanced ones, for
determining the regulatory capital towards credit risk, market risk and operational risk, to cater to
the wide diversity in the banking system across the world.

Figure: 6.1

Methods of calculation of Pillar I MCR

Simple Sophisticated

Low level of detail High level of detail

Little sensitivity to risk Highly sensitivity to risk

19
There are 2 approaches to calculate the credit risk of the banks:

6.1 THE STANDARDIZED APPROACH

The Standardized Approach follows the pattern of Basel 1 by assigning standard risk-weights to
different classes of assets to adjust their values. However it does this in a far more sophisticated
and risk-sensitive way than Basel I. It makes the important innovation of allowing risk-weights
for loans and other credit exposures to be based on the external rating of the counterparty or loan
facility. It sets up a regime for supervisors to recognize external credit rating agencies for this
purpose. The Reserve Bank has for this purpose identified the external credit rating agencies that
meet the eligibility criteria specified under the revised Framework. Banks may rely upon the
ratings assigned by the external credit rating agencies chosen by the Reserve Bank for assigning
risk weights for capital adequacy purposes.

6.1.1 Claims against Corporations

Assets that represent claims against corporations (including insurance companies) are assigned a
risk weight according to credit rating assigned to the corporation or the asset. The credit rating
must be assigned by an external recognized rating agency that satisfies certain criteria described
in the Accord.
Table: 6.1

External Ratings model

Credit Assesment AAA to AA- A+to A- BBB+to BBB- BB+to B- Below B- Unrated
Risk Weights 0% 20% 50% 100% 150% 100%

20
The above is just an example of Ratings followed by Standard and Poor’s (an external rating
agency) for claims against commercial borrowings.

6.1.2 Retail Exposures (Loans to Individuals and Small Businesses)

Loans to individuals and small businesses, including credit card loans, installment loans, student
loans, and loans to small business entities are risk weighted at 75 percent, if the bank supervisor
finds that the bank’s retail portfolio is diverse (for example, no single asset exceeds .2 percent of
the entire retail portfolio. Under Basel I retail and small business loans are placed under the
100% risk weight basket.

6.1.3 Residential Real Estate

Prudently written residential mortgage loans are risk weighted at 35 percent. Under Basel I
residential mortgage loans are placed in the 50 percent basket.

6.1.4 Commercial Real Estate Loans

In general, loans secured by commercial real estate are assigned to the 100 percent risk basket.
However, the Accord permits regulators the discretion to assign mortgages on office and multi-
purpose commercial properties, as well as multi-family residential properties, in the 50 percent
basket subject to certain prudential limits. Basel I – commercial real estate assigned to the 100
percent basket

6.1.5 Claims against Sovereign Governments and Central Banks

Assets that represent claims against Governments or Central Banks are risk weighted according
to the risk rating assigned to that Government by recognized Export Credit Agencies. The

21
correlation between credit rating and risk weight is as follows: Basel I assigns claims against
OECD member countries to the 0% basket.

6.1.6 Claims on Banks and Securities Firms

Countries are given two options, but must apply the same option to all banks within their
country. The first option risk weights claims on banks and securities firms at one risk weight
category below the country’s risk weight. The second option is to risk weight banks and
securities firms based on an external credit assessment score, and with lower risk weights for
short term obligations (original maturity is of 3 months or less). Basel I assign a 20 percent
basket to claims on banks and securities firms organized in OECD member countries.

6.2 THE FOUNDATION INTERNAL RATINGS BASED APPROACH

Subject to certain minimum conditions and disclosure requirements, banks that have received
supervisory approval to use the IRB approach may rely on their own internal estimates of risk
components in determining the capital requirement for a given exposure. The risk components
include measures of the probability of default (PD), loss given default (LGD), the exposure at
default (EAD), and effective maturity (M). In some cases, banks may be required to use a
supervisory value as opposed to an internal estimate for one or more of the risk components.

6.2.1 Probability of Default (PD)

The probability of default is the likelihood that a loan will not be repaid and will fall into default.
PD is calculated for each client who has a loan (for wholesale banking) or for a portfolio of
clients with similar attributes (for retail banking). The credit history of the counterparty /
portfolio and nature of the investment are taken into account to calculate the PD. There are many
alternatives for estimating the probability of default. Default probabilities may be estimated from
a historical data base of actual defaults using modern techniques like logistic regression. Default
probabilities may also be estimated from the observable prices of credit default swaps, bonds,
22
and options on common stock. The simplest approach, taken by many banks, is to use external
ratings agencies such as Egan Jones, Fitch, Moody's Investors Service, or Standard and Poors for
estimating PDs from historical default experience.

6.2.2 Loss Given Default (LGD)

LGD is the fraction of Exposure at Default (EAD) that will not be recovered following default.
Loss Given Default is facility-specific because such losses are generally understood to be
influenced by key transaction characteristics such as the presence of collateral and the degree of
subordination. LGD is calculated in different ways, but the most popular is 'Gross' LGD, where
total losses are divided by EAD. Another method is to divide Losses by the unsecured portion of
a credit line (where security covers a portion of EAD - Exposure at Default). This is known as
'Blanco' LGD. If collateral value is zero in the last case then Blanco LGD is equivalent to Gross
LGD.

6.2.3 Exposure at Default (EAD)

EAD can be seen as an estimation of the extent to which a bank may be exposed to a counter-
party in the event of that counterparty’s default. It is a measure of potential exposure (in
currency) as calculated by a Basel Credit Risk Model for the period of 1 year or until maturity
whichever is sooner. Based on Basel Guidelines, Exposure at Default (EAD) for loan
commitments measures the amount of the facility that is likely to be drawn if a default occurs.
All these loss estimates should seek to fully capture the risks of an underlying exposure. Under
Foundation IRB approach EAD is calculated taking account of the underlying asset, forward
valuation, facility type and commitment details. This value does not take account of guarantees,
collateral or security (i.e. ignores Credit Risk Mitigation Techniques with the exception of on-
balance sheet netting where the effect of netting is included in Exposure At Default). For on-
balance sheet transactions, EAD is identical to the nominal amount of exposure. On-balance
sheet netting of loans and deposits of a bank to a corporate counterparty is permitted to reduce

23
the estimate of EAD under certain conditions. For off-balance sheet items, there are two broad
types which the IRB approach needs to address: transactions with uncertain future drawdown,
such as commitments and revolving credits, and OTC foreign exchange, interest rate and equity
derivative contracts.

6.3 ADVANCED INTERNAL RATING BASED APPROACH

Approaches to operational risk are continuing to evolve rapidly, but are not likely in the near
term to attain the precision with which market and credit risk can be quantified. This situation
has posed obvious challenges to the incorporation of a measure of operational risk within pillar
one of the New Accord. Nevertheless, the Committee believes that such inclusion is essential to
ensure that there are strong incentives for banks to continue to develop approaches to operational
risk measurement and to ensure that banks are holding sufficient capital buffers for this risk. It is
clear that a failure to establish a minimum capital requirement for operational risk within the
New Accord would reduce these incentives and result in a reduction of industry resources
devoted to operational risk.

The Committee is prepared to provide banks with an unprecedented amount of flexibility to

develop an approach to calculate operational risk capital that they believe is consistent with their
mix of activities and underlying risks. In the AMA, banks may use their own method for
assessing their exposure to operational risk, so long as it is sufficiently comprehensive and
systematic. The extent of detailed standards and criteria for use of the AMA are limited in order
to accommodate the rapid evolution in operational risk management practices that the Committee
expects to see over the coming years.

The Committee intends to review progress in regard to operational risk approaches on an

ongoing basis. It has been strongly encouraged by the advances made at those banks that have
been developing operational risk frameworks consistent with the spirit of the AMA. Management
at these banking organizations has concluded that it is possible to develop a flexible and
comprehensive approach to operational risk measurement within their firms.

24
Internationally active banks and banks with significant operational risk exposure (for example,
specialized processing banks) are expected to adopt over time the more risk sensitive AMA.
Basel II contains two simpler approaches to operational risk: the basic indicator and the
standardized approach, which are targeted to banks with less significant operational risk
exposures. In general terms, the basic indicator and standardized approaches require banks to
hold capital for operational risk equal to a fixed percentage of a specified risk measure.

In the basic indicator approach, the measure is a bank's average annual gross income over the
previous three years. This average, multiplied by a factor of 0.15 set by the Committee, produces
the capital requirement. As a point of entry for the capital calculation, there are no specific
criteria for use of the basic indicator approach. Nevertheless banks using this approach are
encouraged to comply with the Committee's guidance on sound practices for the management
and supervision of operational risk, which was released in February 2003.

In the standardized approach, gross income again serves as a proxy for the scale of a bank's
business operations and thus the likely scale of the related operational risk exposure for a given
business line. However, rather than calculate capital at the firm level as under the basic indicator
approach, banks must calculate a capital requirement for each business line. This is determined
by multiplying gross income by specific supervisory factors determined by the Committee. The
total operational risk capital requirement for a banking organization is the summation of the
regulatory capital requirements across all of its business lines. As a condition for use of the
standardized approach, it is important for banks to have adequate operational risk systems that
comply with the minimum criteria outlined in CP3.

Banks using the basic indicator or standardized approaches to operational risk are not permitted
to recognize the risk mitigating impact of insurance. However banks using the AMA are
permitted to do so subject to certain conditions

6.4 MARKET RISK UNDER PILLAR I

25
With regulators becoming more focused on advancing the risk management practices of banks,
they also used the opportunity of revising the original capital adequacy accord and consider other
types of banking risk as needing capital backing. One such risk category has been market risk, a
form of price risk from adverse fluctuations in the market value of a securities portfolio, which
may potentially arise in the wake of various negative scenarios weighing on financial markets.
Inclusion of that risk category was prompted not least by structural changes causing banks to
carry much larger amounts of securities on their balance sheets. Key here is the worldwide
convergence towards a financial structure centered on multi-functional universal banks
combining traditional commercial banking (i.e. taking deposits, making loans) with market-
making investment banking (i.e. acting as brokers, dealers, and underwriters of securities). That
convergence, which has undone decades of separation between those two different types of
banking in such crucial economies as the United States, Japan, and Britain, has been fuelled as
much by financial innovation, most importantly securitization and derivatives, as by regulatory
changes.

Market risk is defined as the risk of losses in on and off-balance-sheet positions arising from
movements in market prices. The risks subject to this requirement are:
• The risks pertaining to interest rate related instruments and equities in the trading book;
• Foreign exchange risk and commodities risk throughout the bank.

6.4.1 Market Risk – The Standardized Measurement Method

Interest Rate Risk

The minimum capital requirement is expressed in terms of two separately calculated charges, one
applying to the “specific risk” of each security, whether it is a short or a long position, and the
other to the interest rate risk in the portfolio (termed “general market risk”) where long and short
positions in different securities or instruments can be offset. With banks increasingly vested in
the securities markets, they have gone beyond market-making investment banking and have
engaged themselves in either setting up or managing institutional investors with large holdings of

26
securities, notably mutual funds, pension funds, and insurance companies. Today’s banks face
not only credit risk (i.e. loan defaults), but also market risk which reflects the possibility of
losses arising from declines in the prices of securities (e.g. stocks, bonds, derivatives) held in its
portfolio.

Specific risk

The capital charge for specific risk is designed to protect against an adverse movement in the
price of an individual security owing to factors related to the individual issuer. In measuring the
risk, offsetting will be restricted to matched positions in the identical issue (including positions in
derivatives). Even if the issuer is the same, no offsetting will be permitted between different
issues since differences in coupon rates, liquidity, call features, etc. mean that prices may diverge
in the short run. Specific risk capital charges for issuer risk “710”. The new capital charges for
“government” and “other” categories will be as follows.

27
 Table: 6.2

6.4.2 Market Risk— The Maturity Method

In the maturity method, long or short positions in debt securities and other sources of interest rate
exposures including derivative instruments are slotted into a maturity ladder comprising thirteen
time-bands (or fifteen time-bands in case of low coupon instruments). Fixed rate instruments
should be allocated according to the residual term to maturity and floating-rate instruments
according to the residual term to the next re-pricing date. Opposite positions of the same amount
in the same issues (but not different issues by the same issuer), whether actual or notional, can be

28
omitted from the interest rate maturity framework, as well as closely matched swaps, forwards,
futures and FRAs which meet the conditions below:

Table: 6.3
Maturity method: Time-Bands and Weights

Modified Duration:
Modified duration is a measure of the weighted average term to maturity of a security. It is a
useful concept in measuring the price-sensitivity of a security to interest rate movements. The
higher the duration, the higher the price sensitivity of a security to interest rate movement.
6.5 Operational Risk

Three approaches have been finalized for assessing the operational risk capital charge:
1. Basic Standard approach
29
 2. Standardized Approach
3. Advanced Measurement Approach

6.5.1. Basic Indicator Approach (BIA)

The Basic Indicator Approach (BIA) is the simplest of all the approaches. Under this approach,
gross income is viewed as a proxy for the scale of operational risk exposure of the bank. Gross
income is defined by the Basel Committee as the net interest income plus net noninterest income.
The operational risk capital charge under the BIA guidelines is calculated as fixed percentage of
average over previous three years of positive annual gross income.
The total capital charge can be calculated as
KBIA = [ ∑(GI1…n × α)]/n

Where
GI = annual gross income,
n = the number of the previous three years for which the GI is positive
α = the fixed percentage of the positive GI
Currently α as set by the committee stands at 15% and is supposed to reflect the industry-wide
level of minimum required regulatory capital (MRC).
Gross annual Income = Net Profit (+) Provisions and contingencies (+) Operating expenses
(Schedule 16) (-) items as defined by the definition as in Basel 2 draft.
The main advantages of the BIA are:
• It is easy to implement.
• It does not require time or resources to develop other sophisticated models.
• It is useful at the primary stage implementation of the Basel II.
• This model is particularly applicable for the small and the medium banks.

The chief drawbacks of BIA are:

30
• No account is given to the specifics of the bank’s operational risk exposure and control,
business activities structure, credit rating and other indicators.

31
 • It often results in the overestimation of the true amount of the capital required to
capitalize the operational risk.
• It is not applicable at the large and internationally active banks.

6.5.2 The Standard Approach (TSA)

In the general standardized approach (TSA), banks’ activities are divided into eight business
lines. Within each business lines, gross income (GI) is a broad indicator that serves as a proxy for
the scale of business operations and operational risk exposure. The capital charge for each
business line is calculated by multiplying GI by a factor, denoted by β, assigned to each business
line. β serves as proxy for the industry-wide relationship between the operational risk loss
experience for a given business line and the aggregate level of GI for that business line.
The total capital charge is calculated as the three year average of the maximum of (a) the simple
summation of the regulatory capital charges across each of the business lines and (b) zero.

Table: 6.4

Table No: Business Line-wise Betas( β)

Beta Factors
Business Lines
(in %)
Corporate finance (β1) 18
Trading and sales (β2) 18
Retail banking (β3) 12
Commercial banking (β4) 15
Payment and settlement (β5) 18
Agency services (β6) 15
Asset management (β7) 12
Retail brokerage (β8) 12

The total capital charge (KTSA) can be expressed as:

32
 KTSA = ∑ (GI1-8 × β1-8)
Where
KTSA= the capital charge under the Standardized Approach.
GI1-8= the average annual level of gross income over the past three years, as defined above in the
Basic Indicator Approach, for each of the eight business lines.
Β1-8 = fixed percent age set by the committee, relating to the level of required capital charge to
the level of GI for each of the eight business lines.

6.5.3 Advanced Measurement Approaches (AMA)

The Advanced measurement approach is the most sophisticated approach currently available,
presented by the Basle Committee. Under the Advanced Measurement Approaches, the
calculation of the regulatory capital requirements for operational risk is based on a bank’s
internal risk measurement system. A bank must satisfy several criteria set out by the committee
before they are permitted to use the Advanced Measurement Approach (AMA). However, within
these criteria, banks are not provided with specification on distributional assumptions to generate
the operational risk measure. So, banks are flexible to use any distribution to calculate the
potential loss.

The Internal Measurement Approach (IMA)

The Internal Measurement Approach provides discretion to individual banks in the use of
internal loss data. In this approach banks estimate the operational risk capital based on the
measurement of the total expected losses. The IMA approach assumes a fixed, direct relationship

33
between expected loss (the mean of the loss distribution) and the unexpected loss (the tail of the
distribution). The relationship can be linear; this implies that the capital charge is a simple
multiplication of the expected loss with a fixed number. Or non-linear, implying that total capital
charge will be a more complex function of expected losses; the capital charge is determined by
the product of three parameters:
• PE: The probability that an operational risk event occurs over some future horizon.
• LGE: The average loss given that an event occurs.
• EI: An exposure indicator that is intended to capture the scale of the bank’s activities in a
particular business line.
The product EI x PE x LGE is used to calculate the expected loss (EL) for each of the business
line/loss type combination. The EL is then rescaled to account for the unexpected losses (UL)
using a parameter (), different for each business line/ loss type combination. The total one-year
capital charge (KIMA) is calculated as:
The Expected loss (EL) for each business line and event combination will be calculated with the
following formula:

EL = EI * PE * LGE

Combining these parameters, the IMA capital charge for each business line and event type
combination would be:

K ij = γ ij ∗ EI ij ∗ PE ij ∗ LGE ij = γ ij ∗ ELij

In this formula we expect a linear relationship between expected losses and the tail of the
distribution. The parameter translates the estimates of expected losses, for the business line and

event type combination into a capital charge. The γ for each business line and event type
combination would be specified by the supervisor.
The drawbacks of this approach are the assumptions of
1. Perfect correlation between the business line/loss type combinations.
2. Linear relationship between the expected and the unexpected losses.
34
The loss distribution approach

The Loss Distribution Approach (LDA) is an advanced measurement approach that makes use of
the exact operational loss frequency and severity distributions. Under the LDA the bank's
activities are classified into a matrix of business lines/event type combinations. The number of
business lines and the event type would depend on the complexity of the bank. For a general case
of 8 business lime and 7 event type, we have to deal with 56-cell matrix of possible pairs. For
each pair the key task is to work out the loss severity and the loss frequency distribution. Based
on these two distributions, the bank works out the probability distribution function of the
cumulative operational loss.

The major advantages of the LDA are:

• It is highly risk sensitive, making direct use of the bank's internal loss data.
• No assumptions are made about the relationship between the expected and the
unexpected losses.
• The approach is applicable to banks with solid databases.
• The LDA capital charge is accurate if the methodology assumed is correct.
However, while taking the simple sum of VaR measures for calculating the capital charge the
LDA approach assumes perfect correlation between the "business line/event type" combinations.
The drawbacks of the LDA approach are:
• Loss distributions may be complicated to estimate.
• VaR confidence level is not agreed upon, whether 99.9% confidence level should be
lower or higher is an issue.
• The LDA approach requires extensive internal data for at least 5 years.
• The approach is historical in nature as it is based on past data.

The scorecard approach

35
In the scorecard approach, banks initially determine a level of operational risk capital at the
firm’s business line and over time these amounts will be modified according to the Scorecard.
Banks aims to improve the risk control environment that will reduce both the frequency and
severity of future operational risk losses. By identifying a number of risk indicators for particular
risk types within business lines, one can captures the underlying risk profile of the various
business lines. These risk indicators represents indirectly the altitude of the operational risk. A
combination of risk indicator will be combined into a score, to allocate the altitude of the
operational risk. After a certain time, the performance of these indicators will be assessed. Based
on these assessments one can decide which point must still be improved. Also, based on the
scorecard, one can analyze what was effectively the indirect influence of the indicators on
eventual operational risk losses.
Where the Scorecard approach differs from other approaches (Internal Measurement Approach
and Loss Distribution Approach) is that it relies less exclusively on historical loss data in
determining capital amounts. Instead of this, after the size of the regulatory capital is determined,
its overall size and its allocation across business lines will be modified on a qualitative basis.
However, historical operational risk loss data must be used to validate the results of scorecards.
It is a highly qualitative approach, under which banks determine an initial level of operational
risk capital at the business line level. The amounts are then modified on the basis of scorecards.
The approach aims at reducing both the frequency and the severity of the risks. The scorecard
generally depends on a number of indicators within the business line. The scorecards are
completed by the line personnel at regular intervals.

36
 CHAPTER 7

PILLAR 2: SUPERVISORY REVIEW PROCESS (SRP)

The second pillar of the New Basel Accord is based on a series of guiding principles, all of
which point to the need for banks to assess their capital adequacy positions relative to their
overall risks, and for supervisors to review and take appropriate actions in response to those
assessments. These elements are increasingly seen as necessary for effective management of
banking organizations and for effective banking supervision, respectively.

The inclusion of a supervisory review element in the New Accord, therefore, provides benefits
through its emphasis on the need for strong risk assessment capabilities by banks and supervisors
alike. Further, it is inevitable that a capital adequacy framework, even the more forward looking
New Accord, will lag to some extent behind the changing risk profiles of complex banking
organizations, particularly as they take advantage of newly available business opportunities.
Accordingly, this heightens the importance of, and attention supervisors must pay to pillar two.

One of the updates which the Basel committee is working on is in relation to stress testing. The
Committee believes it is important for banks adopting the IRB approach to credit risk to hold
adequate capital to protect against adverse or uncertain economic conditions. Such banks will be
required to perform a meaningfully conservative stress test of their own design with the aim of
estimating the extent to which their IRB capital requirements could increase during a stress
scenario. Banks and supervisors are to use the results of such tests as a means of ensuring that
banks hold a sufficient capital buffer. To the extent there is a capital shortfall, supervisors may,
for example, require a bank to reduce its risks so that existing capital resources are available to
cover its minimum capital requirements plus the results of a recalculated stress test.

37
Other refinements focus on banks' review of concentration risks, and on the treatment of residual
risks that arise from the use of collateral, guarantees and credit derivatives. Further to the pillar
one treatment of securitization, a supervisory review component has been developed, which is

intended to provide banks with some insight into supervisory expectations for specific
securitization exposures. Some of the concepts addressed include significant risk transfer and
considerations related to the use of call provisions and early amortization features. Further,
possible supervisory responses are outlined to address instances when it is determined that a
bank has provided implicit (non-contractual) support to a securitization structure.
The objective of the SRP is to ensure that the banks have adequate capital to support all the
material risks in their business and also to encourage the banks to adopt sophisticated risk
management techniques for monitoring and managing their risks. This, in turn, would require a
well-defined internal assessment process within the banks through which they would determine
the additional capital requirement for all material risks, internally, and would also be able to
assure the RBI that adequate capital is actually held towards their all material risk exposures. The
process of assurance could also involve an active dialogue between the bank and the RBI so that,
when warranted, appropriate intervention could be made to reduce the risk exposure of the bank
or augment / restore its capital. Thus, ICAAP is an important component of the Supervisory
Review Process. The important point here is that the Pillar 1 stipulates only the minimum capital
ratio for the banks whereas the Pillar 2 provides for a bank-specific review by the supervisors to
make an assessment whether all material risks are getting duly captured in the ICAAP of the
bank. If the supervisor is not satisfied in this behalf, it might well choose to prescribe a higher
capital ratio, as per its assessment.

7.1 IMPORTANCE OF SUPERVISORY REVIEW

1. The supervisory review process of the Framework is intended not only to ensure that
banks have adequate capital to support all the risks in their business, but also to
encourage banks to develop and use better risk management techniques in monitoring and
managing their risks.

38
2. The supervisory review process recognizes the responsibility of bank management in
developing an internal capital assessment process and setting capital targets that are
commensurate with the bank’s risk profile and control environment. According to the
Framework, bank management continues to bear responsibility for ensuring that the bank
has adequate capital to support its risks beyond the core minimum requirements.

3. Supervisors are expected to evaluate how well banks are assessing their capital needs
relative to their risks and to intervene, where appropriate. This interaction is intended to
foster an active dialogue between banks and supervisors such that when deficiencies are
identified, prompt and decisive action can be taken to reduce risk or restore capital.
Accordingly, supervisors may wish to adopt an approach to focus more intensely on those
banks with risk profiles or operational experience that warrants such attention.

4. The Basel committee recognizes the relationship that exists between the amount of
capital held by the bank against its risks and the strength and effectiveness of the bank’s
risk management and internal control processes. However, increased capital should not be
viewed as the only option for addressing increased risks confronting the bank. Other
means for addressing risk, such as strengthening risk management, applying internal
limits, strengthening the level of provisions and reserves, and improving internal controls,
must also be considered. Furthermore, capital should not be regarded as a substitute for
addressing fundamentally inadequate control or risk management processes.

39
7.3 PRINCIPLES OF SUPERVISORY REVIEW

The Supervisory review is entirely based on four key principles which complement the guidance
given by the Basel committee.

7.3.1 Principle 1 Banks should have a process for assessing the overall capital adequacy
in relation to their risk profile and a strategy for maintaining their capital levels.

The Banks must be able to demonstrate that chosen internal capital targets are well founded and
that these targets are consistent with their overall risk profile and their current operating
environment. In assessing the capital adequacy the bank managements need to be mindful of the
particular stage of the business cycle in which the bank is operating. Rigorous forward looking
stress testing that identifies possible events or changes in market condition that could adversely
impact the Bank, should be performed. Bank management clearly bears primary responsibility
for ensuring that the bank has adequate capital to support its risks.
The Committee enlists 5 major features that form the characteristics of the rigorous process
system, they are as listed below:

Board and senior management oversight;

A sound risk management process is the foundation for an effective assessment of the adequacy
of a bank’s capital position. Bank management is responsible for understanding the nature and
level of risk being taken by the bank and how this risk relates to adequate capital levels. It is also
responsible for ensuring that the formality and sophistication of the risk management processes
are appropriate in light of the risk profile and business plan.
The bank’s board of directors has responsibility for setting the bank’s tolerance for risks. It
should also ensure that management establishes a framework for assessing the various risks,
develops a system to relate risk to the bank’s capital level, and establishes a method for
monitoring compliance with internal policies. It is likewise important that the board of directors

40
adopts and supports strong internal controls and written policies and procedures and ensures that
management effectively communicates these throughout the organization.

Sound capital assessment;

The fundamental elements of sound capital assessment include:
1. Policies and procedures designed to ensure that the bank identifies, measures, and reports
all material risks;
2. A process that relates capital to the level of risk;
3. A process that states capital adequacy goals with respect to risk, taking account of the
bank’s strategic focus and business plan; and
4. A process of internal controls reviews and audits to ensure the integrity of the overall
management process.

Comprehensive assessment of risks;

All material risks faced by the bank should be addressed in the capital assessment process.
Credit risk: Banks are supposed to have methodologies that enable them to assess the credit risk
involved in exposures to individual borrowers or counterparties as well as at the portfolio level.
For more sophisticated banks, the credit review assessment of capital adequacy, at a minimum,
should cover four areas: risk rating systems, portfolio analysis/aggregation,
securitization/complex credit derivatives, and large exposures and risk concentrations.

Market risk: Banks are supposed to maintain methodologies that enable them to assess and
actively manage all material market risks, wherever they arise, at position, desk, business line
and firm-wide level. For more sophisticated banks, their assessment of internal capital adequacy
for market risk, at a minimum, should be based on both VaR modeling and stress testing,
including an assessment of concentration risk and the assessment of illiquidity under stressful
market scenarios, although all firms’ assessments should include stress testing appropriate to
their trading activity.

41
Liquidity risk: Liquidity is crucial to the ongoing viability of any banking organization. Banks’
capital positions can have an effect on their ability to obtain liquidity, especially in a crisis. Each
bank must have adequate systems for measuring, monitoring and controlling liquidity risk. Banks
should evaluate the adequacy of capital given their own liquidity profile and the liquidity of the
markets in which they operate.

Other risks: Although the Committee recognizes that ‘other’ risks, such as reputational and
strategic risk, are not easily measurable, it expects industry to further develop techniques for
managing all aspects of these risks.

Monitoring and reporting;

The bank should establish an adequate system for monitoring and reporting risk exposures and
assessing how the bank’s changing risk profile affects the need for capital. The bank’s senior
management or board of directors should, on a regular basis, receive reports on the bank’s risk
profile and capital needs. These reports should allow senior management to:
1. Evaluate the level and trend of material risks and their effect on capital levels;
2. Evaluate the sensitivity and reasonableness of key assumptions used in the capital
assessment measurement system;
3. Determine that the bank holds sufficient capital against the various risks and is in
compliance with established capital adequacy goals; and
4. Assess its future capital requirements based on the bank’s reported risk profile andmake
necessary adjustments to the bank’s strategic plan accordingly.

Internal control review.

The bank’s internal control structure is essential to the capital assessment process. Effective
control of the capital assessment process includes an independent review and, where appropriate,
42
the involvement of internal or external audits. The bank’s board of directors has a responsibility
to ensure that management establishes a system for assessing the various risks, develops a
system to relate risk to the bank’s capital level, and establishes a method for monitoring
compliance with internal policies. The board should regularly verify whether its system of
internal controls is adequate to ensure well-ordered and prudent conduct of business.

7.3.2 Principle 2: Supervisors should review and evaluate banks’ internal capital adequacy
assessments and strategies, as well as their ability to monitor and ensure their compliance
with regulatory capital ratios. Supervisors should take appropriate.

The supervisory authorities should regularly review the process by which a bank assesses its
capital adequacy, risk position, resulting capital levels, and quality of capital held. Supervisors
should also evaluate the degree to which a bank has in place a sound internal process to assess
capital adequacy. The emphasis of the review should be on the quality of the bank’s risk
management and controls and should not result in supervisors functioning as bank management.
The periodic review can involve some combination of:
1. On-site examinations or inspections;
2. Off-site review;
3. Discussions with bank management;
4. Review of work done by external auditors (provided it is adequately focused on the
necessary capital issues); and
5. Periodic reporting.

43
7.3.3 Principle 3: Supervisors should expect banks to operate above the minimum
regulatory capital ratios and should have the ability to require banks to hold capital in
excess of the minimum.
Banks are supposed to maintain a buffer for a combination of the following:
(a) Pillar 1 minimums are anticipated to be set to achieve a level of bank creditworthiness in
markets that is below the level of creditworthiness sought by many banks for their own reasons.
For example, most international banks appear to prefer to be highly rated by internationally
recognized rating agencies. Thus, banks are likely to choose to operate above Pillar 1 minimums
for competitive reasons.

(b) In the normal course of business, the type and volume of activities will change, as will the
different risk exposures, causing fluctuations in the overall capital ratio.

(c) It may be costly for banks to raise additional capital, especially if this needs to be done
quickly or at a time when market conditions are unfavorable

(d) For banks to fall below minimum regulatory capital requirements is a serious matter. It may
place banks in breach of the relevant law and/or prompt non-discretionary corrective action on
the part of supervisors.

(e) There may be risks, either specific to individual banks, or more generally to an economy at
large, that are not taken into account in Pillar 1.

44
7.3.4 Principle 4: Supervisors should seek to intervene at an early stage to prevent capital
from falling below the minimum levels required to support the risk characteristics of a
particular bank and should require rapid remedial action if capital is not maintained or
restored.

Supervisors should consider a range of options if they become concerned that a bank is not
meeting the requirements embodied in the supervisory principles outlined above. These actions
may include intensifying the monitoring of the bank, restricting the payment of dividends,
requiring the bank to prepare and implement a satisfactory capital adequacy restoration plan, and
requiring the bank to raise additional capital immediately. Supervisors should have the discretion
to use the tools best suited to the circumstances of the bank and its operating environment.
The permanent solution to banks’ difficulties is not always increased capital. However, some of
the required measures (such as improving systems and controls) may take a period of time to
implement. Therefore, increased capital might be used as an interim measure while permanent
measures to improve the bank’s position are being put in place. Once these permanent measures
have been put in place and have been seen by supervisors to be effective, the interim increase in
capital requirements can be removed.

45
 CHAPTER 8

PILLAR 3: MARKET DISCIPLINE

8.1 SCOPE OF APPLICATION

Pillar 3 applies at the top consolidated level of the banking group to which the Framework
applies. Disclosures related to individual banks within the groups would not generally be
required to fulfill the disclosure requirements set out below. An exception to this arises in the
disclosure of Total and Tier 1 Capital Ratios by the top consolidated entity where an analysis of
significant bank subsidiaries within the group is appropriate, in order to recognize the need for
these subsidiaries to comply with the Framework and other applicable limitations on the transfer
of funds or capital within the group.

8.2 THE PURPOSE

The purpose of pillar three is to complement the minimum capital requirements of pillar one and
the supervisory review process addressed in pillar two. The Basel Committee had sought to
encourage market discipline by developing a set of disclosure requirements that allow market
participants to assess key information about a bank's risk profile and level of capitalization. The
Committee believes that public disclosure is particularly important with respect to the New
Accord where reliance on internal methodologies will provide banks with greater discretion in
determining their capital needs. By bringing greater market discipline to bear through enhanced
disclosures, pillar three of the new capital framework can produce significant benefits in helping
banks and supervisors to manage risk and improve stability.

Over the past year, the Committee has engaged various market participants and supervisors in a
dialogue regarding the extent and type of bank disclosures that would be most useful. The aim
has been to avoid potentially flooding the market with information that would be hard to

46
interpret or to use in understanding a bank's actual risk profile. After taking a hard look at the
disclosures proposed in its second consultative package on the New Accord, the Committee has
since scaled back considerably the requirements, particularly those relating to the IRB
approaches and securitization.

Another important consideration has been the need for the Basel II disclosure framework to align
with national accounting standards. Considerable efforts have been made to ensure that the
disclosure requirements of the New Accord focus on bank capital adequacy and do not conflict
with broader accounting disclosure standards with which banks must comply. This has been
accomplished through a strong and co-operative dialogue with accounting authorities. Going
forward, the Committee will look to strengthen these relationships given that the continuing
work of accounting authorities may have implications for the disclosures required in the New
Accord. With respect to potential future modifications to the capital framework itself, the
Committee intends to also consider the impact of such changes on the amount of information a
bank should be required to disclose.

8.3 INTERACTION WITH ACCOUNTING DISCLOSURES

The management of the bank is supposed to its own discretion in determining the appropriate
medium and location of the disclosure. In situations where the disclosures are made under
accounting requirements or are made to satisfy listing requirements promulgated by securities
regulators, banks may rely on them to fulfill the applicable Pillar 3 expectations. In these
situations, banks should explain material differences between the accounting or other disclosure
and the supervisory basis of disclosure. This explanation does not have to take the form of a line
by line reconciliation.

8.4 MATERIALITY

47
A bank should decide which disclosures are relevant for it based on the materiality concept.
Information would be regarded as material if its omission or misstatement could change or
influence the assessment or decision of a user relying on that information for the purpose of
making economic decisions. This definition is consistent with International Accounting
Standards and with the national accounting framework. The Reserve Bank recognizes the need
for a qualitative judgment of whether, in light of the particular circumstances, a user of financial
information would consider the item to be material (user test). The Reserve Bank does not
consider it necessary to set specific thresholds for disclosure as the user test is a useful
benchmark for achieving sufficient disclosure. However, with a view to facilitate smooth
transition to greater disclosures as well as to promote greater comparability among the banks’
Pillar 3 disclosures, the materiality thresholds have been prescribed for certain limited
disclosures. Notwithstanding the above, banks are encouraged to apply the user test to these
specific disclosures and where considered necessary make disclosures below the specified
thresholds also.

8.4 FREQUENCY

The disclosures which have been mentioned under the Pillar 3 are supposed to be made on a
semi-annual basis, subject to the following exceptions. Qualitative disclosures that provide a
general summary of a bank’s risk management objectives and policies, reporting system and
definitions may be published on an annual basis. In recognition of the increased risk sensitivity
of the Framework and the general trend towards more frequent reporting in capital markets, large
internationally active banks and other significant banks (and their significant bank subsidiaries)
must disclose their Tier 1 and total capital adequacy ratios, and their components. Furthermore, if
information on risk exposure or other items is prone to rapid change, then banks should also

disclose information on a quarterly basis. In all cases, banks should publish material information
as soon as practicable and not later than deadlines set by like requirements in national laws.

48
8.5 PROPRIETARY AND CONFIDENTIAL INFORMATION

Proprietary information encompasses information (for example on products or systems), that if

shared with competitors would render a bank’s investment in these products/systems less
valuable, and hence would undermine its competitive position. Information about customers is
often confidential, in that it is provided under the terms of a legal agreement or counterparty
relationship. This has an impact on what banks should reveal in terms of information about their
customer base, as well as details on their internal arrangements, for instance methodologies used,
parameter estimates, data etc. The Basel Committee believes that the requirements set out below
strike an appropriate balance between the need for meaningful disclosure and the protection of
proprietary and confidential information. In exceptional cases, disclosure of certain items of
information required by Pillar 3 may prejudice seriously the position of the bank by making
public information that is either proprietary or confidential in nature. In such cases, a bank need
not disclose those specific items, but must disclose more general information about the subject
matter of the requirement, together with the fact that, and the reason why, the specific items of
information have not been disclosed. This limited exemption is not intended to conflict with the
disclosure requirements under the accounting standards.

CHAPTER 9
RESEARCH METHODOLOGY and LIMITATIONS

49
9.1 WHAT IS EXPERT INTERVIEW?
Expertly guided form of interviewing, with a prepared form and scheme of questions, in order to
obtain an expert view, opinion and information from the professional public or experts with
interactions according to results.

9.2 WHY EXPERT INTERVIEW?

In order to get a firsthand knowledge of the challenges faced by the commercial banks while
implementing Basel II norms, I found, in consultation with my project coordinator at RBI that
“Expert Interview” would be the best way to deal with since the number of bankswith head
offices in Tamil Nadu is only 6. The project has been limited to Tamil Nadu only because of the
RBI regional office restriction. Hence, I chose expert interview as my research methodology.

9.3 HOW WAS IT DONE?

The Interviews were guided by an interview protocol prepared by taking inputs from various
published and unpublished sources and also by taking inputs from experts at RBI, after which
interview appointments were fixed with various bank heads relevant to the implementation of
Basel II in their respective banks by my mentor at the Reserve Bank. The bank heads were later
personally met and the interviews taken. The interviews were recorded in a recorder and then the
transcripts used to write the findings. Each interview lasted for around 25-30 min.

9.4 LIMITATIONS
1. The project has been confined to Tamil Nadu; hence the suggestions and conclusion
given are relevant only to the banks with registered head offices in Tamil Nadu.
2. The number of Banks under study is only 6 due to the above said limitation.
3. Some suggestions based on confidentiality data could not be published.

50
 CHAPTER 10

1
FINDINGS FROM THE INTERVIEWS

1. Changes have been and will be there in the quantum of data collected due to the new
Basel II norms. This has had an impact on the manpower requirements and the time
availability for the job, which was one of the common problems faced by the banks
during this phase, though some bankers feel it’s just the aggregating of the data available
in various databases. This data collection though is critical for the banks for the purpose
of ratings.

2. While some bankers say that there have been privacy and security issues faced during the
collection of data for the purpose of rating but they were not clear on how they had
overcome those issues, most others say that they did not have any issues related to
privacy since the customer is obliged to provide data for the processing of the application
with regards to security issue they were not aware of any security issues faced so far. The
bankers say that industry risk data, business risk data are also available with the banks
which help in the rating process, so data privacy is not a major problem they say.

3. With regards to the specific allocation of man power for the purpose of Basel II
implementation all the banks interviewed had designated people for the implementation
of Basel II, in a few organizations it was being handled by the Risk Management
department, in some specific issues were handled by specific departments like market
risk was handled by the funds management department and operational risk handled by
the inspection department. None of the banks had the need to recruit outside experts for
this process since the staff involved in this process was trained mostly at the Staff College
or National Institute for Banking Management (NIBM), therefore covering the

51
 knowledge management aspect. Some of the banks have dedicated intranet websites for
staff desirous of gaining knowledge in these aspects.
2

4. Most of the banks are of the view that with the advent of Basel II there will be better
capital adequacy since they are based on the risks involved unlike the ones in Basel I,
where a single brush approach was adopted without taking any specific risks into
consideration. But it has also been affecting their business in a way; like for instance the
underarm limits for NPAs has been increased from 100% to 150% so there is an impact
on the amount available for lending.

5. Basel II has not affected the short term lending of the banks, the way it was predicted to
affect, but the bankers say that there will be an impact on the pricing of these short term
lending of the banks. The banks have a firm belief that short term lending is a major
weapon in the bank’s armory for the better utilization of the bank’s short term resources.
Further the banks are of the view that the excess liquidity with the banks can be diverted
through into this route.

6. Most of the banks except for few had their ICAAPs in tune with the regulatory capital
requirements set by the regulatory authorities and IBA. Some of the banks had used
Liquidity risk, Interest risk on banking book (MVE & Earning Perspective), Credit
concentration risk and others to calculate the ICAAP. Those that had actually calculated
ICAAPs had their capitals at well above the regulatory requirements averaging at around
12%.

7. The interviews with different bankers threw up contradicting views regarding the number
of rating agencies available in the country. Some of them were of the view that in India
there is no much demand for rating of corporate bonds and other instrument, their
argument is that very few organizations which go for ratings, get a good rating, so the
purpose of ratings which is actually to increase the value of the instrument is actually not

52
 working. Some also argue that the situation is opposite where the rating agencies are
behind the banks to rate their instruments. The other set of bankers are of the view that

the number of rating agencies is insufficient when viewed from the perspective of
corporate accounts which need to be rated.
3

8. Most of the bankers were of the view that it’s difficult to classify the expense incurred as
a capital expenditure or revenue expenditure. There was feeling that there needs to be
proper demarcation of the expenses incurred in order to have better comparability
between the banks. Some of the banks were already demarcating some expenses as
capital expenditure or revenue expenditure but this has been varying from bank to bank.

9. The question related to pro-cyclicality seemed to be irrelevant as none of the banks felt
that they have been affected or find any reason that they will be affected in the near future
because of this. They were also of the view that their portfolios are well diversified to
handle any such situation.

10. Except for one of the banks, the others were of the view that the prevalent economic and
market conditions are pointers for consolidation and that the impact of the Basel II norms
needs to be understood by both the banks and its customers. They feel it’s good to wait
for the stabilization period to end rather than to proceed to advanced measurement
approaches in haste. The one exception which I said earlier was eager to proceed to the
advanced approaches as they were confident of handling it.

11. Regarding the comparability of the capital standards post Basel II, banks had varying
views some were of the view to wait and watch what happens next, some were of the
view that it definitely achieves the purpose it was set due the basic theme, i.e. the ideas
propounded by Basel II and because it advocates for the international best practices to be

53
 adopted by banks, others were of the view that there needs to be further study regarding
this.

CHAPTER 11

SUGGESTIONS AND CONCLUSION

The Suggestions and conclusions mentioned herewith does not confine to the reserve bank in
particular but also the Indian Banking Association.

1. Data which is a major requirement for the implementation of Basel II needs to bettered,
which can be done only with proper financial inclusion policy in place without any loop
holes for example some banks are opening no-frill accounts with improper customer data,
which could later cause problems.

2. Though data privacy and data security issues have not posed a major problem with the
banks in Tamil Nadu, I feel that this could be an issue in the future considering the issues
the developed countries are facing. Especially with the rise of the out sourcing culture in
India too there could be security issues with regards to data security; hence it’s worth the
regulators give a look at this.

3. A special forum within the framework of the Indian Bank’s Association to facilitate the
bankers to discuss live issues faced during the implementation of the Basel II. This would
make the transition easy especially for small banks implementing the norms in India.

54
4. The opening of more branches of National Institute of Bank Management (NIBM) could
help in driving the reserve banks policies more efficiently and quickly. This I feel could
reduce the time spent by the banks on acquiring knowledge on complex norms like Basel.

5. With regard to the treatment of Basel II implementation expenses incurred by the banks,
the reserve bank could support the banks with proper demarcation of the expenses other
than those provided by the Indian Companies Act, since it was one of the problems faced
by the commercial banks.

6. Themajor problem facing the regulators is about the current crisis, it’s not the crisis in
itself that’s the problem but the underlying factor that the countries and banks which
implemented Basel II have faced the most of the heat of the current crisis, so it’s time the
Basel Committee on Banking Supervision revisits the Basel II.

7. The methods and assumptions used to calculate the ICAAP needs to be made clear,
though ICAAP is totally the banks own calculations there needs to be some regulation
with regards to this since there could be possibility that the banks could use future profits
or other probabilities to set against capital requirements.

8. Though Basel II has reduced the amount available with the banks for lending its for the
good of the banking system as a whole so the strict capital standards.

9. The number of rating agencies available in India is low compared to the number of
corporate accounts that need to be rated. But first awareness has to be created about the

55
uses and advantages of external ratings, among the consumers and with provided demand
at the later stage the regulators could authorize more rating agencies.

56
10. The central banks counter cyclical measures are good enough to ward off the pro-
cyclicality issues faced by the developed countries. So I feel pro cyclicality would not be
a major issue with the banks in the near future.

11. I feel that the banks would still face problems in capturing the IT systems losses under
the current framework. There needs to be a proper mechanism set in place to measure
future IT systems loss, and the potential monetary losses it could cause, especially since
the Indian banking sector is in a transformational process, upgrading the data bases in IT
systems.

12. Finally, Basel II is fundamentally about better risk management anchored in sound
corporate governance. The central bank needs to ensure strong corporate governance
practices in the banking industry, the Indian Banking Association needs to conduct
regular workshops on corporate governance for the bank’s board members.

57
 APPENDIX-1

Interview protocol:
Basel II implementation and
challenges faced by commercial
banks.
Name of the Bank:

Address of the Head-Office:

Name and designation of the person in charge:

Contact’s email ID:

1. Did/Will Basel II cause changes in the way (intensity, depth etc) that you collect
and process rating data?

If YES how did it affect your business? How have you overcome it?
Does it impact your business in any way?
If NO, Do you think you will face any problem related to collecting and processing rating
data?

2. Have you so far faced any privacy or security issues with regards to collection of
additional data for the purpose of Basel II?

If YES, what was the issue in specific? And how did you tackle it?

58
If NO, do you think you would face any such situation in the future?

3. Does your bank have designated people to work exclusively as suggested by RBI
on implementing the various stages of the Basel II norms?
If YES... how many?
If NO... didn’t you find the need to employ personnel exclusively for that?
Or was the current staff sufficient enough?

4. Do you think the high rise in the risk weights would increase the cost of
borrowings for your consumers?

Comment

5. How much in Percentage terms is your short term lending? Has Basel II
discouraged you from such lending?

If YES do you think it is good for the bank in the long term perspective?
If NO so you would say that STL should be continued what is the major reason behind this
view of yours?

6. Has the lack of knowledge of employees posed any problems in implementing

BASEL II norms in your bank?

If YES... what were the specifics?

If NO... How did you equip the employees?
Did you get any help for the central bank’s side in this regard?

59
7. What, is the current ICAAP of your bank, how different is it from the regulatory
capital requirement?

What are the variables you use to calculate this?

8. Do you think there are insufficient numbers of external rating agencies in India?

Would your decision have been different in case you had more options?

9. Do you have any reservations in classifying the expenses incurred in

implementing Basel II?

If YES, How do you think the expenses should be treated?

If NO, So you agree that the additional expenses incurred in technology, resources up
gradation need not be treated as Investments right?

10. Has pro-cyclicality affected your lending obligations?

If YES, how have you overcome it?

 If NO, Do you think you would face such a situation in the future?

11. Given your bank’s current condition and situation, would you pitch in with the
Reserve Bank for the introduction of advanced credit measurement models?

If YES, What are the factors that you consider are the forces behind this view?
IF NO, when would you think would be the right time for ...the bank...to move to such
methods?

60
12. In, your view does Basel II achieve its purpose of international comparability of
the bank-capital standards given that there could be 130 different frame works
under different jurisdictions?

----Thankyou---

61
 REFERENCES

Papers by single authors

1. Will the proposed new Basel capital accord have a net negative effect on developing

countries? By, Stephany Griffith-Jones, Economic Commission for Latin America and the

Caribbean (ECLAC)

2. Basel II: Panacea or a Missed opportunity? By Maximilian J. B. Hall, professor of

banking and financial regulation, Department of Economics, Loughbrough University.

Papers by more than one author

1. The Ripple Effect: How Basel II will impact institutions of all sizes. By, Hans

Helbekkmo, Shahram Elghanayan, David Samuels, Rob Jameson

Papers presented at conferences (Speeches)

1. Remarks by former US FED Governor Susan Schmidt Bies (At the Risk USA 2005

Congress, Boston, Massachusetts June 8, 2005)

3. Approach to Basel II (Speech) by Mrs.Shyamala Gopinath.

4. Challenges and implications of Basel II for Asia (Speech) by Dr.Y.V.Reddy

5. Demystifying Basel II (Speech) by Shri V.Leeladhar, Deputy Governor, Reserve Bank of

India

6. Basel II and Credit Risk Management (Speech) Shri V. Leeladhar, Deputy Governor, and

Reserve Bank of India at the program me on Basel II and Credit Risk Management.

62
 7. The Evolution of Banking Regulation in India – A Retrospect on Some Aspects (Speech)

by Shri V Leeladhar, Deputy Governor, Reserve Bank of India at the Bankers’

Conference (BANCON) 2007

8. Global Financial Crisis: Causes, Consequences and India’s Prospects By Rakesh Mohan,

Deputy Governor, Reserve Bank of India at London Business School on April 23, 2009

9. Regulation and Risk Management: Implementing Basel II (Speech) by Address of Shri V

Leeladhar, Deputy Governor, delivered at the Platinum Jubilee Celebrations of the South

Indian Bank Ltd., Thirussur on July 9, 2005

10. India’s Preparedness for Basel II implementation,(Speech) The Special Address delivered

by Shri V. Leeladhar, Deputy Governor, Reserve Bank of India at the Panel Discussion

during “FICCI-IBA Conference on Global Banking : Paradigm Shift”

Articles from the Internet:

1. Greater international links in banking—challenges for banking regulation, an article

found in www.articlesarchive.com

2. Reports and speeches from the Bank for International Settlements website www.bis.org

3. Basel 2 Implementation FSA Annual Public Meeting www.fsa.gov.uk

4. Presentation by Y K Choi Deputy Chief Executive (Banking) Hong Kong Monetary

Authority http://www.garp.com/documents/Presentations/choi.pdf
5. Certain definitions for glossary have been take from http://www.wikipedia.org

63
 EDDINGTON PRATHISH PEERIZ
1/13 King Street
Virapandianpatnam
Tutcorin District
Tamilnadu 628 216
Email: prathishpeeriz@gmail.com
(M) +91-99403 57191
EDUCATION

Percentage/CGPA
Year Degree/Examination Institute/University
(out of 9)

2008 PGDM* LIBA, Chennai

2006 B.Com Andhra Loyola (Vijayawada,A.P) 77.8%

79.8%
2003 Intermediate Andhra Loyola (Vijayawada,A.P)

2001 Xth St.Mathews P.S (Vijayawada,A.P) 64.4%

*Course in progress
WORK EXPERIENCE

Philips shared services. A Philips group Company (Acquired by Infosys as on October 2007)
 Financial Officer, Consumer Lifestyle, March 2007 -May 2008
End user knowledge of SAP (FICO), Worked in Accounts payable division of Philips Mexicana.
Responsible for payments to 3rd party vendors of Philips.
Responsible for financial account closing every month.
Successfully semi-automated the processing of Journals (a critical activity during month ends)
ACADEMIC PROJECTS / PAPERS PRESENTED

 Project work on Customer satisfaction at Indian Overseas Bank Branch, at Loyola Vijayawada.

AWARDS & ACHIEVEMENTS

 Class Topper for three consecutive years in B.Com
 Best Outgoing student of the college during B.com
 Special award (Silver medal) for overall performance in B.com
 Received awards for submitting 4 Kaizens , 2 Best performer awards in Philips.

Languages Known: English, Telugu, Tamil and Hindi

__________________________ 64
Eddington Prathish Peeriz