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Indian
Banking System - Gearing up for Basel II
- - K Satyanarayana
Adequate
capital backup, to take care of unexpected losses, has become
the real license to conduct and expand banking business, especially
in the case of asset portfolio. The Indian banking system
is better prepared to adopt Basel II than it was for Basel
I. Nevertheless, the task is daunting enough, requiring more
rigor and improvement in risk management systems, especially
credit risk measurement and related database. The past trends
indicate that to maintain the present 12% level of Capital
to Risk Weighted Assets Ratio), even in March 2007, banks
in India may fall short of capital by Rs. 30,000-Rs. 57,000
cr. Owing to an estimated increase of risk weighted assets
by 15-30%, mainly on account of operational and market risk
(if not credit risk) during Basel II era, nationalized banks
and private sector banks seem to be more vulnerable when compared
to the State Bank group and foreign banks in accomplishing
such task. The size of bank being a helpful factor to improve
the risk-bearing capacity, consolidation through orderly mergers
and acquisition may be necessary. Asset expansion through
proper risk management culture is another important strategic
dimension in the Basel II context with matching supervision,
audit and vigilance systems, which should encourage capturing
business rather than driving it away. Degovernmentalization
of public sector banks, through managerial autonomy, will
ensure prompt organizational responses to the fast changing
market developments. Draft guidelines issued by RBI in February
2005 on Basel II implementation clearly indicate a phased
approach, without putting undue pressure on the banking system
and, at the same time, aiming to reach international standards
and best practices. Basel II transition should further strengthen
the banks to play a crucial role in ensuring that the fruits
of economic reforms, especially the financial sector reforms,
are in the reach of the vast and vulnerable sections of the
society.
©
2005 IUP. All Rights Reserved.
Computation
of EVA in Indian Banks
- - Roji
George
Economic
Value Added (EVA) is a value-based framework that provides
a unique insight into value creation and unites the finance
theory with the competitive strategy framework. EVA is the
net operating profit minus an appropriate charge for the opportunity
cost of all capital invested in an enterprise. Creation of
wealth is an important task for banks. The banking sector
in India has not so far addressed itself to the need of analyzing
its performance from the angle of shareholder value addition.
The analysis of EVA achieved by banks bears relevance in this
context. A review of literature reveals that Indian banks
do not create any economic value. In other words, they destroy
the wealth of the shareholders. Is it so? The main objectives
of this study are to measure the economic value added; to
analyze the relationship between EVA and non-performing assets;
and the relationship between EVA and employee productivity.
This study analyzes the performance of 21 banks (8 public
sector banks and 13 private sector banks) during the years
2000-01, 2001-02 and 2002-03. A comparative study based on
the public and private sector banks is also made. It is found
that banks, both private and public sector ones, create economic
value and that there is a positive relationship between EVA
and productivity, and a negative one between EVA and non-performing
assets.
©
2005 IUP. All Rights Reserved.
Market
Structure of the Indian Banking Sector
- - Yogesh
Doshit, Rohit Dhokai and Nilesh Lodhia
Market
structure is an important determinant of both competitiveness
and consumer welfare. This paper examines the market structure
of the Indian banking industry over the last three years.
Liberalization, deregulation and globalization could result
in a more competitive structure or a more monopolistic one,
depending on the ability of the Indian banks to compete with
each other and with foreign banks. The standard methods of
Concentration Index and Herfindahl Index indicate that the
market structure is competitive and has remained so in the
recent times. Surprisingly, the econometric estimates based
on the Panzer-Ross methodology indicate that the market is
monopolistic competitive and has become more monopolistic
in the last three years. This trend appears to be slow but
one cannot rule out its efficiency in the future. Only when
full competitive forces are allowed in the nature of wholesome
foreign competition that the market structure stabilizes.
©
2005 IUP. All Rights Reserved.
Exchange
Rate Volatility and Trade Balance: An Indian Study
- -
Nikhil
Rastogi
The
exchange rate of a country has a major impact on its level
of trade. In the era of currency convertibility, volatility
of exchange rate seems to largely affect the level of trade
or trade balance. However, the presence of hedging instruments
could neutralize this effect.This study is an attempt to find
the relationship between the trade balance of India and the
exchange rate volatility. It has taken quarterly data from
January 1993 to March 2004. REER (Real Effective Exchange
Rate) is used for the purpose of determining exchange rate
volatility. The study uses two measures of volatility to find
out its impact on trade balance. It concludes that during
the said period, volatility in the currency has failed to
have an impact on the trade balance of India. Also, there
exists no lagged impact of exchange rate on the trade balance
of India, which proves that the J-curve effect is not observed
here.
©
2005 IUP. All Rights Reserved.
Forecasting
Exchange Rate:A Univariate Out-of-Sample Approach
- -
Mahesh
Kumar Tambi
In
this paper, the author has tried to build a univariate model
to forecast the exchange rate of the Indian rupee in terms
of different currencies like SDR, USD, GBP, Euro and JPY.
This paper uses the Box-Jenkins Methodology of building the
ARIMA model. Sample data for the paper was taken from March
1992 to June 2004, out of which data till December 2002 were
used to build the model, while the remaining data was used
to conduct out-of-sample forecasting and check the forecasting
ability of the model. The data was collected from the Indiastat
database. The paper shows that the ARIMA models provide a
better forecasting of exchange rates than the simple autoregressive
models or moving average models. The author was able to build
a model for all the currencies except USD, which shows the
relative efficiency of the USD currency market.
©
2005 IUP. All Rights Reserved.
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