Cover
Story
South
Korean Banks : Woori
Bank - Katuri Nageswara Rao
Woori
Bank is the second largest bank in terms of loan assets
in South Korea. It has an extensive network. It is still
a government bank but there could be disinvestment to
below 50% level this year. It has a strong capital base,
impressive profitability and financial ratios. While
there is marginal slippage in its CAR and NPL ratios,
the bank is far ahead of system's average. Its Internet
banking is becoming popular. While its expanding retail
credit portfolio, especially to the housing sector could
be a cause of concern, its credit card portfolio has
been taken out of the bank to be handled by a separate
entity of the holding company. Woori Bank has good cross-selling
opportunities being a part of a financial holding company.
© IUP . All Rights Reserved.
South
Korean Banks : Gaining
Strength - Katuri Nageswara
Rao
South
Korea with a population of over 4.8 crore is hailed
as a miracle of Asia in view of its excellent economic
growth during seventies and eighties. It, however, faced
its worst banking and economic crisis during 1997 due
to many adverse factors like excessive credit supply
to Chaebols, government interference in bank managements,
poor regulatory oversight, weak financial structures
etc. South Korean won has been massively depreciated
in the wake of financial crisis following massive outflow
of foreign currency funds. There was substantial depletion
of foreign currency assets as well.
International
Monetary Fund has implemented a rescue package and certain
banking and economic reforms have then been implemented
to minimize governmental control, strengthen supervisory
oversights of banks and enhance transparency and governance
practices. South Korean banks have implemented BIS regulations
regarding CAR, asset classification and provisioning.
Weak banks have either been closed or merged with stronger
banks. There was massive recapitalization of banks besides
purchase of problem loans by asset management companies.
Major banks have been nationalized but once the crisis
is over, the privatization process has been put in place.
Banks have now become more stronger and healthier with
good profitability and sound capital bases. There are
still challenges in the form of excessive pile up of
retail credit and higher default rate in credit card
business besides huge government expenditure.
© IUP . All Rights Reserved.
Regulatory
Environment
Deferred
Tax Assets A Mirage? -
S Shankar
Banks
create Deferred Tax Assets (DTAs) by writing off bad
loans. This helps in boosting the capital adequacy (CAR)
ratio. These assets are helpful for a bank that is in
profit but if the profit projections are weak then reliance
on DTAs to boost the capital base becomes a questionable
proposition. Earlier, there were no guidelines for the
treatment of DTAs in India. Now, putting in place accounting
standard 22 by ICAI and RBI guidelines for the treatment
of DTAs would ensure that CAR is not propped up because
RBI guidelines treat the DTAs as intangible assets and
deducted from capital base.
These
guidelines would help the banks in identifying and averting
potential disaster by devising suitable and timely strategies
while it will be difficult for banks to meet the 9%
CAR as regulatory requirement.
© IUP . All Rights Reserved.
Risk
Management
Credit
Derivatives : Is the Future Perfect? - Yash Paul Pahuja
Introduction
of credit derivatives in India is a watershed development
for bank's credit risk management practices. It will
fundamentally change the way banks price, manage, transact,
originate, distribute and account for credit risk. Banks
can use the credit derivatives to diversify their portfolios
of loans and other risky assets. Credit derivatives
are contracts that transfer an asset's risk and return
from one counter party to another without transferring
ownership of the underlying assets. The three major
types of credit derivatives are default swaps, total
rate of return swaps and credit spread put options.
© IUP . All Rights Reserved.
Foreign
Currency Options : A
Hedge with an Edge - George Cherian
RBI
has recently allowed the foreign currency options which
corporate treasurers can use to hedge against volatility
of currency market. RBI appears to be cautious, permitting
the instrument with a number of checks in place: Limit
available to corporates for options transactions has
been kept within the limit of forward contracts. RBI
wants the market to absorb the nuances of the product
before permitting the exotic options like digital or
binary options.
The
launch of foreign currency options got a roaring welcome
on the first day of trade. But with most agreeing on
the rupee's outlook, it may be sometime before the market
sees sustained volumes.
© IUP . All Rights Reserved.
International Banking
Japanese banks : Banking
on bailouts - D
Satish
Resona,
Japan's fifth largest bank has recently shown its capital
adequacy ratio (CAR) of 2%, lower than minimum of 4%
regulatory requirement. The bank has more than ¥2
tn bad loans. Japanese banks are making full use of
Deferred Tax Assets (DTAs) to boost up their CAR and
DTAs accounts for more than half of the core capitalization
of all major banks compared to US banks, which are allowed
to use DTAs for maximum of 10%. Big accounting scandals
in US are forcing the auditors to show their creditability.
The profit prediction of major banks after posting huge
losses is in doubt because they were unable to prove
their words in the past.
Japan's
chronic economic problems may even meltdown the banking
system. Is the latest Resona Holdings dilemma an iceberg
of banking crisis?
© IUP . All Rights Reserved.
Banking
Scenario
34th
Anniversary of Bank Nationalization PSBs:
A complete makeover - Dharmalingam
Venugopal
The
future of nationalized banks hinges on their ability
to build good quality assets in an increasingly competitive
milieu while maintaining capital adequacy and prudential
norms. Consolidation, to enhance managerial efficiency,
and competition, to transform customer service, are
the key factors that will impact nationalized banks.
©Business
Line, July 19, 2003. Reprinted with permission.
Banks:Close
to the Chest - Aloka Majumdar
State
Bank of India and its associates are maintaining around
70% of the currency chests and the remaining are by
nationalized banks and government treasuries. ICICI
Bank, HDFC Bank, UTI Bank etc. are planning to roll
out their currency chests. RBI's recent policy to widen
the currency chest can be both a risk mitigation measure
and a business opportunity. Currency chest balances
are eligible for CRR and also earn an interest. The
major hurdles opening a currency chest are cost of setting
up and cost of operations. Recent clean note policy
of the RBI is also a major challenge for the currency
chests because stapled notes would not be accounted
for while calculating the bank's CRR.
© Business India, June 23-July 6, 2003. Originally
published as "Close to the Chest". Reprinted
with permission.
Banking
Products
Mortgage
Rates: A Bottomless Pit - Tamal Bandyopadhyay
Indian
mortgage market is around Rs. 80,000 cr, which showed
a CAGR of 32% in the last five years. This CAGR is far
less if compared to China, which is around 113% for
five years. Home loan rates are falling day by day and
are presently around 8% p.a. There are five major players
in the market, which collectively hold 65% market share.
Tax breaks in interest rates and falling interest rates
made the home loan affordable and according to one report,
housing loan market may grow to around Rs. 4,50,000
cr by FY 2012. Increasing fierce competition between
players might force the smaller housing finance companies
to close their shops.
In
the absence of growth in corporate loans, banks are
aggressively marketing home loans, triggered by low
capital risk weight for these loans.
© Business Standard, July 3, 2003. Originally published
as "Mortgage Rates are a Bottomless Pit".
Reprinted with permission.
SME
finance in Europe: Introduction and overview
- Rien Wagenvoort
Bank
consolidation and Basel II have widely raised the fear
that banks may reduce their participation in the SME
loan market segment. So far, these expectations cannot
be borne by empirical findings. On the contrary, there
are indications that recent and future developments
in the European banking industry will actually foster
SME lending. It is worth noting that lack of financing
does not necessarily imply a lack of debt. Indeed, credit
rationing in the strict sense is rarely observed in
France, Italy, and Germany. However, this does not rule
out that banks overcharge SME loans and, as a consequence,
those financial market imperfections have a negative
impact on the growth of SMEs and thus the economy at
large.
Public
policy in support of SMEs needs to be designed in such
a way that relief is offered where finance constraints
are most binding. In this respect, equity financing
deserves more attention. According to a recent OECD
report, small businesses experience considerable difficulty
in obtaining risk capital. In Europe, small firms are
relatively unimportant on the equity market in comparison
to the United States. Therefore, the promotion of secondary
capital markets and venture capital funds need to rank
high on the political agenda.
© European Investment Bank (EIB), Volume 8 No.
2, 2003. Reprinted with permission. |
