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Risk
Credit
Derivatives Banks, Protect Thyself!
--K
Seethapathi
Credit
risk happens to be one of the most common risks that
banks and corporates face. The probability of default
generally depends on the credit rating of the borrower
and an event of default may not always lead to a situation
of total loss. There is always a possibility of recovery
but again the quantum of recovery is unpredictable.
In this scenario, the best technique, which the banks
and corporates can do is to transfer their risks to
another party. The instruments, which facilitate this
process, are credit derivatives. These credit derivatives
are basically over- the- counter (OTC) transactions,
which banks and other corporates can use to mitigate
their credit risks.
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Credit
culture Impact on asset quality
--
GRK Murty
The
credit culture of a bank, which is a blend of the policies,
practices and experiences of the bank, determines the
lending behavior acceptable to the bank. A poor credit
culture has adverse impact on the asset quality of the
bank. It generally results in providing loans for non-commercial
reasons, scant regard for the purpose of loan, unrealistic
payment schedules etc. For a bank to exhibit an excellent
credit culture, the top management should ensure a positive
and valuing attitude towards their employees. The management
should ensure that they create a healthy credit culture
and go beyond the frontiers to fend off the evilcredit
risk.
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Credit
Risk Modeling A Tool for finding competitive advantage
--Ravi Madapati
Given
credit and market upheavals that can threaten a bank's
survival, a defensive posture involving the rudimentary
measurement of risk is understandable. However, taking
a proactive approach that goes beyond the usual elements
of loss avoidance and risk measurement is also vital
to the continued well being and prosperity of a bank.
While it may not be possible for a bank to maintain
a full portfolio of well performing loans, still they
can be expected to lend in a more prudential manner.
CRM models help banks project risk, measure profitability
and reduce the NPA levels. how does CRM lead to better
allocation of capital by banks and financial institutions?
Read on.
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Operational
Risk Management Management Framework and Technology
Issues
-- N
Rajshekar
Credit
risk and market risks are the ones, that more or less
have defined parameters and a structured approach can
be followed to mitigate them. Operational risks, on
the other hand, may sometimes arise from an area which
is considered to be a risk free zone in an organization.
It might result from inadequate or failed internal processes,
or from any external events. A right kind of management
framework and a significant commitment to technology
issues are required to prevent the loss arising from
operational risks. The technology has to be inline with
the strategy followed by the organization and its culture.
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Treasury
Debt
capital markets and the corporate treasury
-- John
Tan
There
has been a dramatic change in the role and functions
of Corporate Treasury. Liquidity management has assumed
a top priority for corporate treasuries, which encompass
cash, working capital and debt management. Yet, banks
present them with inappropriate derivatives products
and hedging strategies, without a clear-cut understanding
of the internal operations of companies and changing
needs of corporate treasuries. The banks should clearly
differentiate between the assumed risks and the apparent
risks that the corporates face, and make themselves
aware of the various types of treasury structures to
add value to corporate treasury relationships. They
should stop suggesting "one size fits all"
debt market strategies and suggest strategies, which
are helpful to the corporate treasuries.
©
PPP Company Limited and HSBC Global Payments and Cash
Management. Originally published in HSBC's Guide to
Cash and Treasury Management in Asia Pacific 2002. Reprinted
with permission.
Forex
What
Might Account for Limited Contagion from Argentina?
--Simon
Hall, Ashley Taylor
Some
crises spread quickly while some have a lesser impact
on other economies. The crisis in Asia in 1997-98 caused
a lot of turbulence in other emerging market economies
(EMEs) as compared to the recent crisis in Argentina,
which has been notable for the lack of spillovers to
other EMEs. One of the factors that accounts for this
change can be Argentina's less direct linkage to most
of the emerging economies. The vulnerability to shocks
of those EMEs with close trade and financial ties to
Argentina happens to be lower than what was the case
in previous crises such as the one in Asia. Another
can be the shift in investor behavior. Want to know
more Read On.
©
Financial Stability Review, June 2002, published by
Bank of England (www.bankofengland.co.uk). Reprinted
with permission. Originally published as "Spillovers
From Recent Emerging Market Crises: What Might Account
for Limited Contagion from Argentina?"
Issues
on Optimum Foreign Exchange Reserves
--Dr.
Arun Kumar Misra
Since
1994, foreign currency reserves have been increasing
in India. With reserves of more than $60 bn today, India
already has the capacity to cover nearly one year of
import requirements. A high level of reserves is what
the Central Bank of any country looks for at any time,
as high level of reserves not only proclaim a country's
financial strength but also help in meeting its financial
obligations. However, such huge reserves have opportunity
cost and therefore it is necessary to put forward some
policy to redefine the concept of reserve adequacy,
as it might so happen that India might be losing valuable
investment opportunities by holding excessive reserves.
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