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M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Basel Two Norms & Credit Ratings ( and its practical need-to-know knowledge.

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Presentation on theme: "M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Basel Two Norms & Credit Ratings ( and its practical need-to-know knowledge."— Presentation transcript:

1 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Basel Two Norms & Credit Ratings ( and its practical need-to-know knowledge for us, as Advocates, CAs, & ITPs in Faridabad ) Sangeet Kr Gupta, CA Saturday, August 09, 2008

2 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A.

3 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. What is this ? This is the set of International "Banking laws and Regulations", & to be complied in India also.

4 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Why was this brought in ? We remember, some big banks collapsed like Barings plc etc. And the economies lost Billions of Dollars. So, this is a safeguard, which if followed, then, Risk of those problems will be less

5 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. What is the target of BASEL-2 ?

6 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. What is the target of BASEL-2 First Target Ensuring that capital allocation is more risk sensitive; ( see that Bank takes only that much risk, as it can afford to has adequate capital to cover the same C.A.R. ( Capital Adequacy Ratios ).

7 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. What is the target of BASEL-2 Second Target Separating operational risk from credit risk, and Quantifying both; ( Bank must remember both ).

8 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. What is the target of BASEL-2 Third Target Remove the difference in policies of banks in different countries - "Regulatory Arbitrage". ( Some countries have too flexible norms. The unscruplous companies may try to shift to these countries, to save them from tough standards of USA, or India )

9 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. What do we need to know ? As Advocates & CA's & ITP's, practising in Faridabad ???

10 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. What we need to know ? We shall focus on the SME sector. We shall know the key idea behind this. This is an "imposition". But for the better future. So, target of this topic is how we can serve our clients even better, using this knowledge ?

11 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. 1) Business Strategy & Targets The "Project Report", we make/we guide the client to make, must have a detailed working on the Strategy a) Targets should be clear = Management agrees with them. ( And no conflict ) b) Targets are SMART = Specific, Measurable, Achievable, Realistic and Timed

12 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Target section includes Product quality (e.g. number of warranty claims or returned items) Service quality (e.g. number of breakdowns or disruptions in service) Process efficiency (e.g. volumes in a stated period versus cost of process Customer satisfaction (e.g. number of complaints or repeat orders) Staff satisfaction (e.g. staff turnover, training provided) Financial performance (e.g. sales targets; profit margins; return on capital; cash flow management; credit control)

13 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. 2) Business Market & Competition All Risks associated with the business Customer Attractiveness Supplier Attractiveness Competetion Market Growing or not ? Product is attractive or not ? a)Make Notes b)Analyse c)Give mitigating plan ?

14 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. 3) Business Capability 1) General Management 2) Sales & Marketing Management 3) Operational / Production Management 4) Facilities Management 5) Financial Management 6) Planning & Information Management 7) People Management

15 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Business Capability – Wiiifm ?

16 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. 4) Business & Financial Planning This should contain: Purpose of Plan Summary description of the business and any of its unique selling propositions (USP) Overview of key aspects of the marketplace Summary of SWOT analysis (highlighting your business attributes and and key people) Key Business Objectives and Targets Critical Success and Risk Factors (key issues and actions) Financial Analysis & Outcomes of Plan (Key financial results, ratios, sensitivity tests

17 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. So ? Tough work, in case of SME since all jobs by consultant. But ………. Then, if we can manage, it becomes more remunerative. Depends ……..?????

18 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Core Effect ? In India, all these documents were still asked for ……… So, what is the new thing ? Core Effect of Basel-II

19 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Core Effect of Basel II Bank Loan Rating under New Capital Adequacy Framework (BASEL II) On April 27, 2007, the Reserve Bank of India released the final guidelines for implementation of the New Capital Adequacy Framework (Basel II) applicable to the Banking system of the country The new framework mandates that the amount of capital provided by a bank against any loan and facility will be based on the credit rating assigned to the loan issue by an external rating agency. This means that a loan and a facility with a higher credit rating will attract a lower risk weight than one with a lower credit rating

20 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Old Position ( under Basel-I ) * Capital required is computed as Loan Amount × Risk Weight × 9%

21 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. New Position ?

22 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Effect ? Let us see the numerical example

23 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Example for Strong Company Why should bank lose this money ??

24 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Effect ? Either it will prefer that you get yourself rated. Or it will prefer that you pay a higher rate of interest to compensate for the loss

25 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Effect on a Weak company ? Bank will prefer that you pay a higher rate of interest to compensate for the loss. ( no doubts on that ) And If you dont like that ……. Go to some other bank ……..

26 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Effect of Basel-2 CAR Intt % If you dont like that higher rate of interest ……. You have to go to some other bank …….. But Will that bank, give you good interest rates, in coming years also ???

27 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Moral of the story ( for Consultant ) Get your Client's company Rated. And If the rating is not good enough, Educate the Client … to have a better Credit Rating…

28 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Credit Rating ? What is that ? That is an evaluation of Credit Worthiness of a person or company, or instrument. It indicates their willingness to pay the obligation and the net worth

29 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Credit Rating Non-Financial Factors – Marketing, Competition, Raw Material, HR etc Financial Factors this we will discuss.

30 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Over to Excel File

31 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Who Benefits ? The Assessee wins … The Bank wins ……….. And an indirect but real winner is …..

32 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Income Tax ….. Collections are rising every year…. 46% last year

33 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Credit Rating for Mid- Corporates( for Bank Loans ): Reserve Bank of India, has mandated that Indian Banks shall observe the BASEL-II norms. These Basel Two norms mandate a Higher Credit Risk for the Unrated Loans, and Low Credit Risk for AA or AAA rated Loans.

34 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. So, if you have a loan of say, Rs. 50 Crores with a Bank, if you are unrated, the bank will have to cover your risk by 150% of normal, and suppose you get yourself rated, your risk may come down to just 20%(in case of AAA). So, this is a huge Penalty Vs saving scenario. This saving for bank becomes saving for the company too. In coming times, companies with Good Rating shall find cheaper loans and vice versa.

35 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Credit Rating for SSI units : SSI Credit Rating is not a must. Banks are not giving much credence to it. But it is a beneficial report. It helps you in marketing your company before diverse audience like HUDA/PUDA for allotment of Land applications, New Customer for credibility, Export Market development and so on. Some large corporates are also asking for D & B reports etc in case you want to be an approved vendor to them.

36 M.L.G. 09-Aug-2008Presentation on Basel-2 Norms by Mr Sangeet Gupta at F.I.T.B.A. Thank you Contributor : CA.Sangeet Kr Gupta,


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