DYPDBM

ASSIGNMENT:

Basel Norms Followed By Indian Banks

(BANK- DENA BANK)

SUBMITTED TO: Dr. Gopal

SUBMITTED BY: 1- Mayuri More (Finance) 2- Sukeshi Singh (HR) 3- Neha Sharma (Finance) 4- Rashi Shetty (HR)

Introduction:
There is always a risk associated with the activities of financial institutions or banks or businesses. The greater the risk associated with an activity the greater will be the chances to generate high returns. There are various types of risks involved in banking sector like operation risk, market risk etc . Indian banking companies are required to ensure full implementation of Basel II guidelines. Under Basel !, in 1992,RBI decided to introduce a risk asset ratio system for banks in India, as a capital adequacy measure to adopt the framework on capital adequacy, recommended by Basel Committee on Banking Supervision (BCBS). Later on the BCBS released a comprehensive version of the revised framework (Basel 2) in June 2006 which aim to arrive at significantly more risk sensitive approaches to capital requirement. The first phase of Basel II was implemented in India with foreign banks operating in India and Indian banks having operational presence outside India complying with the same effective end of March 2008. With Basel II norms coming into force in 2009, maintaining adequate capital reserves will become a priority for banks. Basel II mandates Capital to Risk Weighted Assets Ratio (CRAR) of 8% and Tier I capital of 6%. The RBI has stated that Indian banks must have a CRAR of minimum 9%, effective March 31, 2009. All private sector banks are already in compliance with the Basel II guidelines as regards their CRAR as well as Tier I capital. Further, the Government of India has stated that public sector banks must have a capital cushion with a CRAR of at least 12%, higher than the threshold of 9% prescribed by the RBI. What are Basel I and Basel II norms : While Basel I framework was confined to the prescription of only minimum capital requirements for banks, the Basel II framework expands this approach not only to capture certain additional risks in the minimum capital ratio but also includes two additional areas, viz. Supervisory Review Process and Market Discipline through increased disclosure requirements for banks. Thus, Basel II framework rests on the following three mutually- reinforcing pillars: Pillar 1: Minimum Capital Requirements prescribes a risk-sensitive calculation of capital requirements that, for the first time, explicitly includes operational risk along with market and credit risk.

Pillar 2: Supervisory Review Process (SRP) envisages the establishment of suitable risk management systems in banks and their review by the supervisory authority. Pillar3: Market Discipline seeks to achieve increased transparency through expanded disclosure requirements for banks.

Implications of Basel 2 on Indian Banking : The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The first accord by the name .Basel Accord I. was established in 1988 and was implemented by 1992. It was the very first attempt to introduce the concept of minimum standards of capital adequacy. It is only related with credit risk. Basel II is a new capital adequacy framework applicable to Scheduled Commercial Banks in India as mandated by Reserve Bank of India (RBI). Basel Capital Accord deals with Capital Measurement and Capital Standards for Banks, which align regulatory capital requirements more closely with underlying risks. The Accord has been accepted by over 100 countries including India. In April 2007, RBI published the final guidelines for Banks operating in India. The main structure of Basel II rests on three pillars: I. Minimum Capital Requirements II. Supervisory Review Process; and III. Market Discipline

Basel II Norms for Indian Banks : it is the second accord which focuses on operational risk along with market risk & credit risk. Basel II tries to ensure that the abnormalities existed in Basel I are corrected. The process of Implementating Basel II norms in India is being carried out in phases. Phase I has been carried out for foreign banks operating in India & Indian banks having operational presence outside India with effect from March 31,2008.

In phase II, all other scheduled commercial banks (except Local Area Banks & RRBs) will have to adhere to Basel II guidelines.for full implementation of Basel II norms. The minimum capital to risk-weighted asset ratio (CRAR) in India is placed at 9%,one percentage point above the Basel II requirement. All the banks have their Capital to Risk Weighted Assets Ratio(CRAR) above the stipulated requirement of Basel guidelines (8%) & RBI guidelines (9%). As per Basel II norms, Indian banks should maintain tier I capital of atleast 6%. The Government of India has emphasized that public sector banks should maintain CRAR of 12%. For this, it announced measures to re-capitalize most of the public sector, as these banks cannot dilute stake further, as the Government is required to maintain a stake of minimum 51% in these banks. Implication of DENA Bank (Basel norms) 1. DENA Banks Capital Adequacy Ratio is 13.41%. It fulfills the first criteria of Basel Norm 2 Minimum Capital Standard.
2. The total eligible capital comprises of:

In Crores Tier I Tier II Total 3605.57 1343.84 4949.41

A. Credit Risk Management

The Bank has been using a comprehensive credit risk rating System for all exposures of over Rs10 lakhs internally that serves as A single point indicator of the extent of risk taken in counter party and for taking credit decision in a consistent manner. The bank has a well laid down credit monitoring system designed to capture early warning signals in its exposures.

B. Market Risk and Liquidity Risk management

The market risk and liquidity risk are managed by integrated treasury of the bank in line with the provisions of the Board approved asset liability management policy and investment policy. These policies provide for identification, measurement, monitoring and mitigation of market risk and liquidity risk. C. Operational Risk Management Bank has put in place an elaborate operational risk management framework with a well defined ORM poloicy and necessary mechanism to capture required information. The ORM fuction is overseen by the operational risk management committee. Bank is also in the process of developing a suitable platform for moving on to advanced approaches viz. The Standardised Approach and Advanced Measurement Approach (AMA).

The banks Risk Weighted Assests (RWA), Minimum Capital Requuirement and Actual Capital Adequacy as on 31.03.2011 are as under i Capital requirement for credit risk RWA for credit risk Securitization exposures ii Capital requirement for market risk in rescpect of: RWA for interest rate risk RWA for foreign exchange risk RWA for equity risk Total RWA for Market risk RWA for FFC iii Capital requirement for operational risk RWA for operational risk under basic indicator approach iv Total capital and CRAR Minimum capital requirement for credit, market & operational risk Actual position of total eligible capital 3321.76 4949.41 2328.59 760.41 50 258.15 1068.56 10.67 In crores 32180.52 0.00

Eligible Tier 1 Capital Eligible Tier 2 Capital CRAR Tier 1 Capital to RWA Tier 2 Capital to RWA

3605.57 1343.84 13.41% 9.77% 3.64%

Conclusion
As per the analysis of Annual report 2010-11 of DENA Bank, it is concluded that DENA Bank has fulfilled all the conditions of Basel Norms stated by RBI.