Basel 2 and Credit Rating FITBAR09Aug2008

M.L.G.
09-Aug-2008 Presentation on Basel-2 Norms by

Mr Sangeet Gupta at F..T.B.A.
Basel Two Norms
&
Credit Ratings
( and its practical "need-to-know
knowledge for us, as Advocates,
CA's, & TP's in Faridabad )
Sangeet Kr Gupta, CA
Saturday, August 09, 2008
M.L.G.
M.L.G.
What is this ?
This is the set of
InternationaI "Banking Iaws and
ReguIations",
&
to be compIied in India aIso.
M.L.G.
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
M.L.G.
What is the target of BASEL-2 ?
M.L.G.
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 Ratio's ).
M.L.G.
Second Target
Separating operational risk from credit
risk,
and Quantifying both;
( Bank must remember both ).
M.L.G.
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 ndia )
M.L.G.
What do we need to know ?
As Advocates & CA's
& TP's, practising in
Faridabad ???
M.L.G.
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 ?
M.L.G.
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
M.L.G.
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)
M.L.G.
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 ?
M.L.G.
3) Business Capability
1) General Management
2) Sales & Marketing Management
3) Operational / Production Management
4) Facilities Management
5) Financial Management
6) Planning & nformation Management
7) People Management
M.L.G.
Business Capability Wiiifm ?
a) make notes on them
b) AnaIyse data,
c) Give mitigating action pIan
Tough work, in case of SME
since aII jobs by consuItant
M.L.G.
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
M.L.G.
So ?
Tough work, in case of SME
since all jobs by consultant.
But .... Then, if we can manage, it
becomes more remunerative .
Depends ....?????
M.L.G.
Core Effect ?
n ndia, all these documents were still
asked for ...
So, what is the new thing ?
Core Effect of Basel-
M.L.G.
Core Effect of Basel
Bank Loan Rating under New CapitaI Adequacy
Framework (BASEL II)
On April 2, 200, the Resere Bank o India released the inal
guidelines or implementation o the New Capital Adequacy
lramework ,Basel II, applicable to the Banking system o the
country
1he new ramework mandates that the amount o capital
proided by a bank against any loan and acility will be based on
the credit rating assigned to the loan issue by an external rating
agency.
1his means that a loan and a acility with a higher credit rating
will attract a lower risk weight than one with a lower credit rating
M.L.G.
Old Position ( under Basel- )
* Capital required is computed as Loan Amount
Risk Weight 9%
M.L.G.
New Position ?
M.L.G.
Effect ?
Let us see the numerical example
M.L.G.
Example for Strong Company
Rs.
Loan is 100 Crores
Rating is AAA
Risk %
Capital
Reqd
Opportunity
ntt lost by
bank
C.A.R. unrated 150% 13.50 1.62 Crores
C.A.R. New 20% 1.80 0.22 Crores
Crores 1.40 Crores
Why should bank lose this money ??
M.L.G.
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
M.L.G.
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
f you don't like that ...
Go to some other bank ....
M.L.G.
Effect of Basel-2 CAR ntt %
f you don't 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 ???
M.L.G.
Moral of the story
( for Consultant )
Get your Client's company Rated .
And
f the rating is not good enough,
Educate the Client . to have a better
Credit Rating.
M.L.G.
Credit Rating ?
What is that ?
That is an evaluation of Credit Worthiness
of a person or company , or instrument.
t indicates their willingness to pay the
obligation and the net worth
M.L.G.
Credit Rating
Non-Financial Factors Marketing,
Competition, Raw Material, HR etc
Financial Factors this we will discuss.
M.L.G.
Over to Excel File
M.L.G.
Who Benefits ?
The Assessee wins .
The Bank wins .....
And an indirect but real winner is ...
M.L.G.
ncome Tax ...
Collections are rising
every year..
Iast year
M.L.G.
Credit Rating for Mid-
Corporates( for Bank Loans ):
Reserve Bank of ndia, has mandated that
ndian Banks shall observe the BASEL-
norms .
These Basel Two norms
mandate a Higher Credit Risk
for the Unrated Loans, and
Low Credit Risk for AA or AAA rated Loans.
M.L.G.
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. n coming
times, companies with Good Rating shall find
cheaper loans and vice versa.
M.L.G.
Credit Rating for SSI units :
SS Credit Rating is not a must. Banks are
not giving much credence to it. But it is a
beneficial report. t 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.
M.L.G.
Thank you
Contributor : CA.Sangeet Kr Gupta,
groupmlg@eth.net
skgupta@mlginfotech.com

Basel 2 and Credit Rating FITBAR09Aug2008

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Basel 2 and Credit Rating FITBAR09Aug2008

Uploaded by

Copyright:

Available Formats

M.L.G.

09-Aug-2008 Presentation on Basel-2 Norms by

You might also like