1.

Introduction to subject
1.1The Bank
The word bank means an organization where people
and business can invest or borrow money ; it to foreign
currency etc. According to Hulsbury “A Banker is an
individual, partnership or corporation whose sole pre-
dominant business is banking that is the receipt of
money on current or deposite account ,and the
payment of cheque drawen and the collection of the
cheque paid in by a customer”

1.2 The Origin and use of Bank

The word ‘Bank’is derived from the Italian word ‘Banco’
signifying a bench,which was erected in the market
place, where it place, where it was customery to
exchange money. The Lowbard Jews were the first to
practies this business, the first bench having been
established it Itely A D 808. some authorities assert
that the Lombard marchants commensed the business
of money dealing, employing bills of exchange as
remittance, about the beginning of thirteenth centuy.

1.3 Nationalized Bank in India

The RBI was nationalized on January 1, 1949 in terms of the Reserve
Bank of India (Transfer to Public Ownership) Act, 1948

By the 1960s, the Indian banking industry had become an important tool to
facilitate the development of the Indian economy. At the same time, it had
emerged as a large employer, and a debate had ensued about the possibility to
nationalise the banking industry. Indira Gandhi, the-then Prime Minister of
India expressed the intention of the GOI in the annual conference of the All India
Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalisation." The paper was received with positive enthusiasm. Thereafter,
her move was swift and sudden, and the GOI issued an ordinance
and nationalised the 14 largest commercial banks with effect from the midnight of
July 19, 1969.Jayaprakash Narayan, a national leader of India, described the
step as a "masterstroke of political sagacity." Within two weeks of the issue of the
ordinance, the Parliament passed the Banking Companies (Acquisition and
Transfer of Undertaking) Bill, and it received the presidentialapproval on 9
August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980.

The stated reason for the nationalization was to give the government more
control of credit delivery. With the second dose of nationalization, the GOI
controlled around 91% of the banking business of India. Later on, in the year
1993, the government merged New Bank of India with Punjab National Bank. It
was the only merger between nationalized banks and resulted in the reduction of
the number of nationalised banks from 20 to 19. After this, until the 1990s, the
nationalised banks grew at a pace of around 4%, closer to the average growth
rate of the Indian economy.

Nationalized banksmin India

• Andhra Bank
• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Canara Bank
• Central Bank of India
• Corporation Bank
• Dena Bank
• Indian Bank
• Indian Overseas Bank
• Oriental Bank of Commerce
• Punjab and Sind Bank
• Punjab National Bank
• State Bank of Bikaner & Jaipur
• State Bank of Hyderabad
• State Bank of India (SBI)
• State Bank of Indore
• State Bank of Mysore
• State Bank of Patiala
• State Bank of Saurashtra
• State Bank of Travancore
• Syndicate Bank
• UCO Bank
• Union Bank of India
• United Bank of India
• Vijaya Bank
• IDBI Bank

1.4 The Banking Reforms

The final version aims at:

1. Ensuring that capital allocation is more risk sensitive;

2. Separating operational risk from credit risk, and quantifying both;
3. Attempting to align economic and regulatory capital more closely to reduce the
scope for regulatory arbitrage.

While the final accord has largely addressed the regulatory arbitrage issue, there are still areas
where regulatory capital requirements will diverge from the economic.

Basel II has largely left unchanged the question of how to actually define bank capital, which
diverges from accounting equity in important respects. The Basel I definition, as modified up to
the present, remains in place.

Basel II uses a "three pillars" concept –

(1) minimum capital requirements (addressing risk)

(2) supervisory review and

(3) market discipline.

The first pillar

The first pillar deals with maintenance of regulatory capital calculated for three major components
of risk that a bank faces: credit risk,operational risk, and market risk. Other risks are not
considered fully quantifiable at this stage.

The credit risk component can be calculated in three different ways of varying degree of
sophistication, namely standardized approach,Foundation IRB and Advanced IRB. IRB stands for
"Internal Rating-Based Approach".
For operational risk, there are three different approaches - basic indicator approach or
BIA, standardized approach or TSA, and the internal measurement approach (an advanced form
of which is the advanced measurement approach or AMA).

For market risk the preferred approach is VaR (value at risk).

As the Basel 2 recommendations are phased in by the banking industry it will move from
standardised requirements to more refined and specific requirements that have been developed
for each risk category by each individual bank. The upside for banks that do develop their own
bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital
requirements. In future there will be closer links between the concepts of economic profit and
regulatory capital.

Credit Risk can be calculated by using one of three approaches:

1. Standardised Approach

2. Foundation IRB (Internal Ratings Based) Approach

3. Advanced IRB Approach

The standardised approach sets out specific risk weights for certain types of credit risk. The
standard risk weight categories are used under Basel 1 and are 0% for short term government
bonds, 20% for exposures to OECD Banks, 50% for residential mortgages and 100% weighting
on unsecured commercial loans. A new 150% rating comes in for borrowers with poor credit
ratings. The minimum capital requirement (the percentage of risk weighted assets to be held as
capital) remains at 8%.

For those Banks that decide to adopt the standardised ratings approach they will be forced to rely
on the ratings generated by external agencies. Certain Banks are developing the IRB approach
as a result.

The second pillar

The second pillar deals with the regulatory response to the first pillar, giving regulators much
improved 'tools' over those available to them under Basel I. It also provides a framework for
dealing with all the other risks a bank may face, such as systemic risk, pension risk,concentration
risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord combines under
the title of residual risk. It gives banks a power to review their risk management system.

The third pillar

This pillar aims to promote greater stability in the financial system
2 CAMEL FRAMWORK
2.1 CAMEL MODEL