1.

Role of CIBIL in NPA management for banks

The rise in Non Performing Assets for banks in last few years has significantly increased
the role of CIBIL (Credit Information Beaureau of India Ltd). The risk arising due to Non
Performing Assets (NPAs) can be reduced by providing accurate and timely information
about risk to the banks. CIBIL plays the role of an independent central agency offering a
comprehensive base of information.

CIBIL provides an objective tool for risk management which helps lenders to reduce their
risk arising due to NPA. CIBIL provides consumer and commercial credit reports to
banks, financial institutions and credit grantors, who agree to contribute credit related
data. This concept of aiding credit decisions through a credit report that is independent,
centralized, comprehensive and reliable has been essential and popular all over the world
for many years.

Now customers can find out their credit worthiness at just Rs 142, thanks to the recent
initiative by the Credit Information Bureau of India that provides the Credit Information
Report to individuals. CIR is your credit payment history compiled from information
from credit guarantors.

Every time you apply for any loan the concerned bank or financial institution accesses
your CIR from CIBIL to take informed lending decisions. And from a customer
perspective a good CIR could help in faster processing of your loan applications and
loans sanctioned on better terms.

Hence CIBIL provides win - win situation for both banks as well as customers.

2. Impact of Basel 3 Norms on Banks

The Basel Committee announced on September 12 2010 that it has endorsed the capital
and liquidity reform package originally proposed in December 2009 and amended in July
2010, known as 'Basel 3'. The Basel 3 package was proposed to ensure that the financial
system cannot suffer the type of collapse and resultant economic slowdown that occurred
between 2007 and 2009. It encompasses:

• an unweighted leverage ratio;

• two new capital buffers - a conservation buffer and a countercyclical buffer;
• new and substantial capital charges for non-cleared derivative and other financial
market transactions; and
 • significant revisions to the rules on the types of instrument that count as bank
capital

The impact of the Basel 3 rules on an individual bank will depend on its asset/capital base
and on the relevant regulator's application of the rules, the publication of the calibrated
ratios and rules is one of the most significant developments for banks.

The Basel 3 rules replace the Basel 2 concept with a tougher categorisation: 'common
equity'. This basically consists of common shares plus retained income. The rules require
banks to hold 4.5% of common equity.

Total Tier 1
The total Tier 1 requirement increases from 4% to 6% under Basel 3, which means that
other types of Tier 1 instrument, known as additional going concern capital, can account
for up to 1.5% of Tier 1 capital.

Total capital
The total minimum capital requirement remains at 8%, subject to a new capital buffer.
However, 6% of capital must be Tier 1, which means that Tier 2 (which will no longer be
divided into upper and lower tiers) can account for no more than 2% of capital. Tier 3,
which is used solely for market risk purposes, will be removed completely.

Deductions from capital

Under Basel 3, deductions from capital must generally be made from common equity
Tier 1. This requirement is stricter than the current rule, whereby a number of deductions
are made from total capital. However, the July 2010 Basel 3 amendments relaxed some of
the proposed deductions, allowing partial inclusion of minority interests and certain
deferred tax assets and mortgage-servicing rights (rather than their deduction, which had
been proposed in December 2009).

3. The Management FOREX Risks

Exchange risk is simple in concept: a potential gain or loss that occurs as a result of an
exchange rate change. For example, if an individual owns a share in Hitachi, the Japanese
company, he or she will lose if the value of the yen drops.

In most currencies there are futures or forward exchange contracts whose prices give
firms an indication of where the market expects currencies to go. And these contracts
offer the ability to lock in the anticipated change. So perhaps a better concept of
exchange risk is unanticipated exchange rate changes.
These and other issues justify a closer look at this area of international financial
management.

Many firms refrain from active management of their foreign exchange exposure, even
though they understand that exchange rate fluctuations can affect their earnings and
value. They make this decision for a number of reasons.

First, management does not understand it. They consider any use of risk management
tools, such as forwards, futures and options, as speculative. Or they argue that such
financial manipulations lie outside the firm's field of expertise. "We are in the business of
manufacturing slot machines, and we should not be gambling on currencies." Perhaps
they are right to fear abuses of hedging techniques, but refusing to use forwards and other
instruments may expose the firm to substantial speculative risks.

Second, they claim that exposure cannot be measured. They are right -- currency
exposure is complex and can seldom be gauged with precision. But as in many business
situations, imprecision should not be taken as an excuse for indecision.

Third, they say that the firm is hedged. All transactions such as imports or exports are
covered, and foreign subsidiaries finance in local currencies. This ignores the fact that the
bulk of the firm's value comes from transactions not yet completed, so that transactions
hedging is a very incomplete strategy.