basel 2 and credit rating fit bar aug 2008

8/8/2019 Basel 2 and Credit Rating Fit Bar Aug 2008

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

Basel Two Norms&

Credit Ratings

( and its practical need-to-knowknowledge for us, as Advocates,

CAs, & ITPs in Faridabad )

Sangeet Kr Gupta, CASaturday, August 09, 2008


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What is this ?

This is the set of International "Banking laws and

Regulations",&to be complied in India also.


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Why was this brought in ?

We remember, some big bankscollapsed 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


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What is the target of BASEL-2 ?


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What is the target of BASEL-2

First TargetEnsuring that capital allocation is more risk

sensitive;( see that Bank takes only that much risk,as it can afford to has adequate capitalto cover the same C.A.R. ( Capital

Adequacy Ratios ).


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Second TargetSeparating operational risk from credit

risk,and Quantifying both;( Bank must remember both ).


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Third TargetRemove the difference in policies of banks

in different countries - "Regulatory Arbitrage".( Some countries have too flexible norms.The unscruplous companies may try toshift to these countries , to save them fromtough standards of USA, or India )


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What do we need to know ?

As Advocates & CA's& ITP's, practising in

Faridabad ???


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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 canserve our clients even better, using thisknowledge ?


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1) Business Strategy & Targets

The "Project Report", we make/we guidethe client to make, must have a detailedworking on the Strategy

a) Targets should be clear = Managementagrees with them . ( And no conflict )

b) Targets are SMART = Specific,Measurable, Achievable, Realistic andTimed


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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)


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2) Business Market & Competition

All Risks associated with the businessCustomer Attractiveness

Supplier AttractivenessCompetetionMarket Growing or not ?

Product is attractive or not ?

a) Make Notesb) Analyse

c) Give mitigating plan ?


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3) Business Capability

1) General Management2) Sales & Marketing Management

3) Operational / Production Management4) Facilities Management5) Financial Management

6) Planning & Information Management7) People Management


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Business Capability Wiiifm ?

a) make notes on themb) Analyse data,c) Give mitigating action plan

Tough work, in case of SME

since all jobs by consultant


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4) Business & Financial Planning

This should contain: Purpose of Plan Summary description of the business and any of its unique selling propositions (USP) Overviewof key aspects of the marketplace Summary of SWOT analysis (highlighting your businessattributes and and key people) Key BusinessObjectives and Targets Critical Success andRisk Factors (key issues and actions) Financial

Analysis & Outcomes of Plan (Key financialresults, ratios, sensitivity tests


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So ?

Tough work, in case of SMEsince all jobs by consultant.

But . Then, if we can manage, itbecomes more remunerative .

Depends ..?????


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Core Effect ?

In India, all these documents were stillasked for

So, what is the new thing ?

Core Effect of Basel-II


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Old Position ( under Basel-I )

* Capital required is computed as Loan Amount Risk Weight 9%


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New Position ?


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Effect ?

Let us see the numerical example


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Example for Strong Companys.

oan is 00 Croresating is AAA

isCapital

e

pportunityIntt lost byban

C.A. . unrate 0 . 0 . 2 CroresC.A. . Ne 20 .80 0.22 Crores

Crores . 0 Crores

Why shoul ban lose this money ??


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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


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M.L.G .09-Aug-2008 Presentation 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 rateof interest to compensate for the loss.

( no doubts on that )AndIf you dont like that .

Go to some other bank ..


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Effect of Basel-2 CAR Intt %

If you dont like that higher rate of interest. You have to go to some other bank

..ButWill that bank, give you good interestrates, in coming years also ???


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Moral of the story( for Consultant )

Get your Client's company Rated .AndIf the rating is not good enough,

Educate the Client to have a better Credit Rating


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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


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Credit Rating

Non-Financial Factors Marketing,Competition, Raw Material, HR etc

Financial Factors this we will discuss.


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Over to Excel File


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Who Benefits ?

The Assessee wins The Bank wins ..

And an indirect but real winner is ..


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Income Tax ..Collections are risingevery year.

46% last year


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Credit Rating for Mid-Corporates( for Bank Loans ):Reserve Bank of India, has mandated thatIndian Banks shall observe the BASEL-IInorms .These Basel Two norms

mandate a Higher Credit Risk

for the Unrated Loans, andLow Credit Risk for AA or AAA rated Loans.


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So, if you have a loan of say, Rs. 50 Crores witha Bank, if you are unrated, the bank will have tocover your risk by 150% of normal, and suppose

you get yourself rated, your risk may come downto just 20%(in case of AAA). So, this is a hugePenalty Vs saving scenario. This saving for bankbecomes saving for the company too. In coming

times, companies with Good Rating shall findcheaper loans and vice versa.


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Credit Rating for SSI units :

SSI Credit Rating is not a must. Banks arenot giving much credence to it. But it is abeneficial report. It helps you in marketingyour company before diverse audiencelike HUDA/PUDA for allotment of Landapplications, 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 bean approved vendor to them.


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Thank you

Contributor : CA.Sangeet Kr Gupta, [email protected]

[email protected]

basel 2 and credit rating fit bar aug 2008

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