Raphael’s Triumph of Galatea from 1512

Art is interesting because it is simultaneously distinct and contextual: great art stands on its own, but it also stands in the shadow of that which has come before, and serves as the guiding light to cast the shadows of that which will come after it. Two paintings which share a number of similarities and differences are Raphael’s Triumph of Galatea from 1512 and Bronzino’s Venus, Cupid, Folly, and Time from 1546. Each work concentrates on representing mythological characters and events, and concerns itself with notions of love.However, Raphel’s work represents love and beauty as archetypal, more abstract concepts, where Bronzino’s work has achieved both fame and infamy for its sexual overtones, emphasizing erotic love. Raphael’s painting is a fresco, and uses more washed-out colors to represent the dream-like aspect of the events: even as Galatea is on the cusp of divination, the world becomes less real to her, and more dream-like, which is what th e painting attempts to emphasize.Bronzino’s work emphasizes flesh-colors to bring out the striking nudity of its characters, as well as the barely-concealed sexual nature of the proceedings. Bronzino draws the eye to the sexual proceedings between Cupid and Venus by putting Venus in the foreground, which contrasts quite well with Raphael’s focus on the nymph: while she is centered and obviously the focus of the work (the eyes are inevitably drawn to her), but she is drawn to the same scale (relative to the viewer) as the other mythological figures of the work.Additionally, while each work uses mythological characters, each does so to a very different end: in focusing on ascension to divinity, Raphael concentrates on this event as the culmination of earthly beauty becoming transcendent†¦something to which even we mere mortals can aspire. By contrast, Bronzino’s work serves an allegorical function: the borderline incestuous events that are being enacted by Ve nus and Cupid are being overseen by Folly (looking pleased, as an unsubtle indicator that their action is a foolish one) and a horrified Father Time.Other characters are in similar â€Å"reaction shots† of shock and horror. While both Raphael and Bronzino were Italian, their works were products of very different cultural movements. The allegorical art of Bronzino is the textbook ideal of Mannerism: it is intellectual and thought-provoking while at the same time drawing attention to the artificial nature of what is being portrayed.Arguably, such works function more as spectacle than art, as part of the work’s power lies not within the work itself, but in the reaction it engenders from others. Raphael, of course, epitomized the use of the fresco: being painted to complement the opulence of a home, it focuses on the aspects that the rich commissioner wishes to see in himself (the intersection between earthly existence and spiritual divinity is, of course, featured in the home of someone who earnestly hopes their earthly wealth can be tempered by spiritual riches).Obviously, Raphael and Bronzino utilized different mediums in different time periods to represent different events. However, it is striking how, regarding subject matter, each one approached things so differently. Raphael treated the mythological characters with an almost historical focus, and chose to highlight the spirituality and divinity of a single mythological event.Bronzino’s work takes on the nature of a grotesque hypothetical, and serves to remind cultured art aficionados that the decadence of the mythological characters that they so love is nothing to be admired or emulated. Each artist, however, was concerned with what beauty was, whether that answer is spiritual or simple practical: whether it concerns transcendent godly love or simple earthly passion. In the debate between these two points of view, the substance of their art lives forever.

Reading Strategy Essay

What Is It? To aid their comprehension, skillful readers ask themselves questions before, during, and after they read. You can help students become more proficient by modeling this process for them and encouraging them to use it when they read independently. Why Is It Important? Dolores Durkin’s research in 1979 showed that most teachers asked students questions after they had read, as opposed to questioning to improve comprehension before or while they read. In the late 1990s, further research (Pressley, et al.1998) Revealed that despite the abundance of research supporting questioning before, during, and after reading to help comprehension, teachers still favored post-reading comprehension questions. Researchers have also found that when adult readers are asked to â€Å"think aloud† as they read, they employ a wide variety of comprehension strategies, including asking and answering questions before, during, and after reading (Pressley and Afflerbach 1995). Proficient adult readers: Are aware of why they are reading the text Preview and make predictions Read selectively Make connections and associations with the text based on what they already know. Refine predictions and expectations Use context to identify unfamiliar words Reread and make notes Evaluate the quality of the text Review important points in the text Consider how the information might be used in the future Successful reading is not simply the mechanical process of â€Å"decoding† text. Rather, it is a process of active inquiry. Good readers approach a text with questions and develop new questions as they read, for example: â€Å"What is this story about? † â€Å"What does the main character want? † â€Å"Will she get it? † â€Å"If so, how? † Even after reading, engaged readers still ask questions: â€Å"What is the meaning of what I have read? † â€Å"Why did the author end the paragraph (or chapter, or book) in this way? † â€Å"What was the author’s purpose in writing this? † Good authors anticipate the reader’s questions and plant questions in the reader’s mind (think of a title such as, Are You My Mother? by P. D. Eastman). In this way, reading becomes a collaboration between the reader and the author. The author’s job is to raise questions and then answer them – or provide several possible answers. Readers cooperate by asking the right questions, paying careful attention to the author’s answers, and asking questions of their own. HOW CAN YOU MAKE IT HAPPEN? To help readers learn to ask questions before, during, and after reading, think aloud the next time you are reading a book, article, or set of directions. Write each question on a post-it note and stick it on the text you have the question about. You may be surprised at how many typically unspoken questions you ponder, ask, and answer as you read. You may wonder as you read or after you read at the author’s choice of title, at a vocabulary word, or about how you will use this information in the future. You should begin to model these kinds of questions in the primary grades during read-aloud times, when you can say out loud what you are thinking and asking. Read a book or text to the class, and model your thinking and questioning. Emphasize that even though you are an adult reader, questions before, during, and after reading continue to help you gain an understanding of the text you are reading. Ask questions such as: â€Å"What clues does the title give me about the story? † â€Å"Is this a real or imaginary story? † â€Å"Why am I reading this? † â€Å"What do I already know about___? † â€Å"What predictions can I make? â€Å" Pre-select several stopping points within the text to ask and answer reading questions. Stopping points should not be so frequent that they hinder comprehension or fluid reading of a text. This is also an excellent time to model â€Å"repair strategies† to correct miscomprehension. Start reading the text, and ask yourself questions while reading: â€Å"What do I understand from what I just read? † â€Å"What is the main idea? † â€Å"What picture is the author painting in my head? † â€Å"Do I need to reread so that I understand? † Then reread the text, asking the following questions when you are finished: â€Å"Which of my predictions were right? What information from the text tells me that I am correct? † â€Å"What were the main ideas? † â€Å"What connections can I make to the text? How do I feel about it? † Encourage students to ask their own questions after you have modeled this strategy, and write all their questions on chart paper. Students can be grouped to answer one another’s questions and generate new ones based on discussions. Be sure the focus is not on finding the correct answers, because many questions may be subjective, but on curiosity, wondering, and asking thoughtful questions. After students become aware of the best times to ask questions during the reading process, be sure to ask them a variety of questions that: Can be used to gain a deeper understanding of the text Have answers that might be different for everyone Have answers that can be found in the text Clarify the author’s intent Can help clarify meaning Help them make inferences Help them make predictions Help them make connections to other texts or prior knowledge As students begin to read text independently, you should continue to model the questioning process and encourage students to use it often. In the upper elementary and middle school grades, a framework for questions to ask before, during, and after reading can serve as a guide as students work with more challenging texts and begin to internalize comprehension strategies. You can use an overhead projector to jot notes on the framework as you â€Å"think aloud† while reading a text. As students become comfortable with the questioning strategy, they may use the guide independently while reading, with the goal of generating questions before, during, and after reading to increase comprehension. How Can You Stretch Students’ Thinking? The best way to stretch students’ thinking about a text is to help them ask increasingly challenging questions. Some of the most challenging questions are â€Å"Why? † questions about the author’s intentions and the design of the text. For example: â€Å"Why do you think the author chose this particular setting? † â€Å"Why do you think the author ended the story in this way? † â€Å"Why do you think the author chose to tell the story from the point of view of the daughter? † â€Å"What does the author seem to be assuming about the reader’s political beliefs? † Another way to challenge readers is to ask them open-ended question that require evidence from the text to answer. For example: â€Å"What does Huck think about girls? What is your evidence? † â€Å"Which character in the story is most unlike Anna? Explain your reasons, based on evidence from the novel? † â€Å"What is the author’s opinion about affirmative action in higher education? How do you know? † Be sure to explicitly model your own challenging questions while reading aloud a variety of texts, including novels, subject-area textbooks, articles, and nonfiction. Help students see that answering challenging questions can help them understand text at a deeper level, ultimately making reading a more enjoyable and valuable experience. As students become proficient in generating challenging questions, have them group the questions the time they were asked (before, during or after reading). Students can determine their own categories, justify their reasons for placing questions into the categories, and determine how this can help their reading comprehension. When Can You Use It? Reading/English Students who have similar interests can read the same text and meet to discuss their thoughts in a book club. Members can be given a set of sticky notes to mark questions they have before, during, and after reading the text. Members can then share their question with one another to clarify understanding within their group. Since students’ reading level may not necessarily determine which book club they choose to join, accommodations may need to be made, including buddy reading, audio recordings of the text, or the use of computer-aided reading systems. Writing  Good writers anticipate their readers’ questions. Have students jot down the questions they will attempt to answer in an essay or short story before they write it, in the order that they plan to answer them. Stress that this should not be a mechanical process – as students write they probably will think of additional questions to ask and answer. The key point is to have students think of themselves as having a conversation with the reader – and a big part of this is knowing what questions the reader is likely to ask. Math Students can ask questions before, during, and after solving a math problem. Have students think aloud or write in groups to generate questions to complete performance tasks related to mathematics. Social Studies Use before, during, and after questions when beginning a new chapter or unit of study in any social studies topic. Select a piece of text, and have students generate questions related to the topic. At the end of the unit of study, refer back to the questions and discuss how the questions helped students to understand the content. Science Use before, during, and after questions to review an article or science text. You can discuss articles related to a recent scientific discovery with students and then generate questions that would help them to focus their attention on important information. Lesson Plans Lesson Plan: Questioning, The Mitten This lesson is designed to introduce primary students to the importance of asking questions before, during, and after listening to a story. In this lesson, using the story The Mitten by Jan Brett, students learn how to become good readers by asking questions. This is the first lesson in a set of questioning lessons designed for primary grades. Lesson Plan: Questioning, Grandfather’s Journey. This lesson is for intermediate students using the strategy with the book, Grandfather’s Journey, by Allen Say. Lesson Plan: Questioning, Koko’s Kitten This lesson is designed to establish primary students’ skills in asking questions before, during, and after they listen to a story. You can help students learn to become better readers by modeling how and when you ask questions while reading aloud the true story, Koko’s Kitten, by Dr. Francine Patterson. This is the second lesson in a set of questioning lessons designed for primary grades. Lesson Plan: Asking Pre-Reading Questions This is a language arts lesson for students in grades 3-5. Students will learn about asking questions before reading and will make predictions based on the discussion of the questions. Lesson Plan: Asking Questions When Reading In this lesson, the teacher will read The Wall by Eve Bunting with the purpose of focusing on asking important questions. The students and the teacher will then categorize the questions according to the criteria for each.  © 2000-2012 Pearson Education, Inc. All Rights Reserved. Original URL: http://www. teachervision. fen. com/lesson-plan/reading-comprehension/48698. html Asking Questions When Reading Grade Levels: 4 – 8 Lesson Summary. Generating questions plays a key role in the process of learning how to read, and then again in learning how to read better. There are so many question that students may have about the text that they encounter – questions about the author’s style or purpose, questions about new vocabulary, questions about what might happen, etc. Students need to first begin to feel comfortable asking questions, then learn to ask the vital questions that will direct their focus and clear up confusion. In this lesson, the teacher will read The Wall by Eve Bunting with the purpose of focusing on asking important questions. The students and the teacher will then categorize the questions according to the criteria for each. Materials When you read the story ahead of time, write any questions that pop into your head on post-it notes and have them available. Provide large pieces of paper and post-its for students, and locate enough copies of the book The Wall for partners. Provide a piece of paper for each group of four students. Prepare a piece of chart paper titled QUESTIONS with different columns of categories: Questions that are answered in the text Questions that I have to make an inference to answer Questions that are not important to understanding the story. Questions that require research to answer Questions about the author’s style Questions that clear up confusion Objectives: Students will ask questions before, during, and after reading. Students will categorize important vs. interesting questions with a focus on important questions. Procedure Explain that good readers ask questions before, during, and after reading to help them understand a story better. â€Å"Today, we’re going to focus on asking questions. † Present the book The Wall to the students and say, â€Å"I will read the title, and the back cover and look at the illustrations and think of as many questions as I can. These are the questions that I have before reading. † Read your prepared post-it notes to the students. Read the story to the children and think aloud, asking questions while reading. Stress that these are the questions you have during reading. Read your prepared post-it notes to the students. When you have finished reading the story, ask questions that pop into your head and stress that these are the questions that you have after reading. Read your prepared post-it notes to the students. Take your questions on post-its, think aloud, and categorize them in the appropriate column according to the type of question that you asked. The students partner-read and use post-its on pages where they have a question. Have partners narrow their questions down to two questions. Then have the partners share their questions with another paired group. The groups of four students choose one of their questions and write it on a larger piece of paper. Gather all students and have them share their questions. With help from the class, have students categorize their questions. Discuss the questions that are important vs. interesting, and have students focus on the important questions.  © 2000-2012 Pearson Education, Inc. All Rights Reserved. Original URL: http://www. teachervision. fen. com/lesson-plan/reading-comprehension/48697. html Asking Pre-Reading Questions Grade Levels: 3 – 5 Lesson Summary This is a language arts lesson for students in grades 3-5. Students will learn about asking questions before reading and will make predictions based on the discussion of the questions. Students should be able to differentiate between a question and a statement, generate questions, and work in cooperative, heterogeneous groups. Objectives Students will brainstorm prior knowledge about the topic of a text Students will make predictions about the text by asking effective â€Å"before† reading questions in order to improve our reading comprehension. Key Understandings Asking and discussing questions will improve our comprehension of the text. Good readers ask questions before they read. Materials Two narrative texts Pre-reading Show Rubric Pledge Procedure Select two narrative texts, one will be used to demonstrate the â€Å"before reading† questioning strategy, the other will be used for guided practice. It may be easier to choose two texts by the same author or two texts of the same genre. Discuss the ways in which a pre-game show and asking questions before, during, and after reading are similar. Good readers are like sports casters. Just as sports casters discuss the sports event before, during, and after the game, good readers ask and discuss questions before, during, and after reading. This improves comprehension, or understanding, of the text. You may say something such as, â€Å"Who has watched a football, basketball, or baseball game on television? Sports casters help us understand the game by discussing it. They discuss the game with us before the game, during the game and after the game. Before the game, there is a pre-game analysis. That means that the announcer gives us background information about the game, teams, players, and coaches. This information can be used to make predictions about the outcome of the game. During the game, the announcers provide play-by-play coverage. They discuss important or controversial plays to help us understand what’s going on in the game and to explain how certain plays may affect the outcome of the game. They even provide replays of the most important events of the game to make sure we remember them. Finally, after the game, announcers interview the coaches and players to get different perspectives about how the game was played. They review the highlights of the game, confirm or disprove their predictions, and discuss the implications of the outcome of the game. † Tell students they are going to focus on asking questions before they begin reading a text. If possible, show a video clip of a pre-game sports cast. Use the analogy of a pre-game show and before reading questions to help students ask effective â€Å"before† reading questions. As you generate questions for each topic. Spend some time wondering about the answers and making predictions about the book. Write your predictions about the book in a separate column. Identify a purpose for reading the text. Narrative = for literary experience/enjoyment Expository = for information Functional = to perform a task/follow directions. Examine the cover illustration and read the title, modeling how to ask questions. Write the questions on chart paper or on an overhead projector. Look at the author and model how to generate questions. Activate background knowledge by taking a picture walk with students. Cover the print with sticky notes, and think aloud as you model how to generate questions, make predictions, and build vocabulary by carefully examining and discussing the illustrations in the text. Ask questions about the setting, characters, events, and genre of the book. Pre-Game Show Questions Before Reading Predictions Team A vs. Team B What teams are playing? What do we know about these teams? Where are they from? Have we ever seen either team play? In your opinion, are they skilled? Is one team better than the other? Title of Story/Cover What topic might this story be about? What do we already know about this topic? Have we read any other books about this topic? Do we have any experience related to this topic? Where and when did we have the experience? Coach Who is the coach? What do we know about the coach? What teams has he/she coached in the past? What is his/her coaching style? Author Who is the author? Who is the illustrator? What books have he/she written or illustrated in the past? Can we describe the style of the author/illustrator? Have I ever read other texts by this author? If so, what do I remember about those texts? Stadium Where is the game being played? Who has the home field advantage? What are the current weather conditions? How will the weather conditions affect the game? Setting Where and when does the story take place? Is the place/time familiar or unfamiliar to us? Have we read any other stories with a similar setting? Players Who are the key players? What positions do they play? What are their skills? Characters Who are the main characters? What role might they play in the story? Can we predict some of their character traits by examining the illustrations? Plays What plays are the coaches likely to run? Events What events may take place in this story? Rules/Principles of Game What are the rules of the game? What are winning strategies? Genre of Text What genre of story is this? (fairytale, folktale) Have we read other stories of the same genre? What are the characteristics of this genre? Tell students that the class will read the story together tomorrow, and learn to ask new questions while they are reading to help understand the story. Guided practice Give students the opportunity to practice writing and discussing some â€Å"before† reading questions for a new story. Place students in 6 groups and have each group record or role play a â€Å"pre-reading show† for the new book, just as sports casters broadcast a pre-game show. 1. title/cover 2. author/illustrator 3. setting 4. characters 5. events 6. genre of literature Select student leaders to guide each groups through the process of examining the cover of the new story and taking a picture walk. Allow groups to discuss their topic. Students should generate two of their own â€Å"before reading† questions on their topic, and then share their questions and provide feedback to each other. Have groups include information from their prior knowledge and personal experience as they discuss the â€Å"before reading† questions, and have them discuss the possible answers and make predictions about the book. After each student has had the opportunity to formulate and write two questions, jigsaw the groups to form TV crews for a â€Å"pre-reading† show. Each TV crew should have six students, one student from each group, 1-6. Review the parts of the rubric. Provide a time limit for each TV show, and tell students that each show should include: an introduction of the members of the TV crew slogan, jingle, or music a discussion of their prior knowledge about the topic a discussion of each member’s questions predictions about the book from each member Give groups the opportunity to practice asking and discussing their questions before role playing or videotaping their show. If time permits, allow students to make larger visual aids to display during the discussion. â€Å"Microphones† can be made quickly from rolling paper into tubes. Sharing Ideas Distribute rubrics to the class. Allow students to score each TV crew as they present. Independent Practice Have students think of a younger child that they will spend time with this week. Have them think of a book that they can read to the child. Have students use some of the â€Å"before reading† questioning strategies they learned to help the younger child understand the story. Students can use this questions framework worksheet to help them with questions to ask before reading, and help the child make predictions. The worksheet reminds students to ask questions about the title and cover, author and illustrator, setting, characters, events and genre. Assessment Each group will be assessed using the scores from the presentation rubric, scored by their peers and teacher.  © 2000-2012 Pearson Education, Inc. All Rights Reserved. Running Records Page Description: A running record is a way to assess a student’s reading progress by systematically evaluating a student’s oral reading and identifying error patterns. This template will help you track your students’ oral reading accuracy. Take advantages from kids that love harry potter Book Covers from Around the World: Harry Potter and the Prisoner of Azkaban Page Description: Enjoy comparing and contrasting colorful cover art for J. K. Rowling’s Harry Potter and the Prisoner of Azkaban with this printable handout. Discuss the differences in interpretations from around the world with your students. Grade Levels: 2 – 7 Analyzing a Book Character Page Description: This chart of questions will help students analyze the cover art of a book. Use this worksheet when talking about the different cover art on each international edition of the Harry Potter books. Grade Levels: 3 – 8 Literacy Glossary Page 1 of 2 Accuracy Rate: This is the rate, shown as a percent, at which students accurately read the text. Concept Map: A concept map is a type of graphic organizer which allows students to consider relationships among various concepts. Often students are encouraged to draw arrows between related concepts enclosed in oval or other shapes. Error Rate: This is a ratio of errors to words in the text. Fluency: The rate and accuracy with which a person reads. Fluency results from practicing reading skills often and with a high rate of success. Formative Assessment: These tests are ongoing and based on the curriculum, providing a way to monitor student progress. They can be used to place students in groups, based on instructional needs. Frustrational Level: This is the level at which students are unable to read with adequate comprehension. Genre: A genre is a particular type of literature, such as narratives, poetry, dramas, or fables. Independent Level: This is the level at which students can read without assistance. Materials at this level should be chosen for independent reading, or fluency practice. Independent Reading Inventories: An informal formative assessment that provides graded word lists and passages designed to assess the oral reading and listening comprehension. Insertion: In a running record or informal reading inventory, this is a miscue in which students add another word when reading printed text. For example, if the sentence is: â€Å"The dog played,† the student reads: â€Å"The happy dog played. † Instructional Level: This is the level at which students can read with assistance from the teacher. Materials at this level should be chosen for reading instruction. Metacognition: This is thinking about one’s own thinking, or being aware of one’s own learning. When students are aware of how they think and learn, they can be taught to regulate their thought and learning processes. Omission: In a running record or informal reading inventory, this is a miscue in which students do not read a word or words in the printed text. For example, if the sentence is: â€Å"The sky was bright blue,† the student reads: â€Å"The sky was blue. † Onset: The part of a syllable that comes before the vowel of a syllable. The onset of the word box is /b/. Phoneme: the smallest unit of sound. It distinguishes one word from another (e. g. , man and fan are distinguished by the initial phoneme). Phonemic Awareness: This is a type of phonological awareness that involves the awareness and manipulation of individual sounds. Phonological Awareness: The auditory awareness of sounds, words, and sentences. The understanding that speech is composed of sentences made up of words. Words are comprised of syllables, and syllables are comprised of phonemes. Qualitative Data: Qualitative data consist of verbal or graphic descriptions of behavior and experience resulting from processes of observation, interpretation, and analysis. It is often comprehensive, holistic, and expansive. Qualitative Tools: These are tools that produce qualitative data consisting of verbal or graphic descriptions of behavior and experience resulting from processes of observation, interpretation, and analysis. Quantitative Data: Quantitative data consist of information represented in the form of numbers that can be analyzed by means of descriptive or inferential statistics. It is often precise and narrow data. Reading Conferences: Conferences conducted by teachers during independent reading time provide an opportunity to meet with a student to assess progress, to note reading strategies that are being used, monitor books being read, and to provide guidance in developing reading strategies. Rime: The part of a syllable that consists of its vowel and any consonant sounds that come after it. The rime of the word box is /ox/. Scaffolding: A scaffold is a supporting framework. Scaffolded learning is a teaching strategy that helps support students in their learning when they may have difficulties. A goal of scaffolded learning is to have students use a particular strategy independently. Screening Tests: These tests provide information that serves as a baseline. They are usually given to determine the appropriate starting place for instruction. Self-Correction: In a running record or informal reading inventory, this is a miscue in which students do not read a word or words correctly, but return to the text and read the word or words correctly. Self-Correction Rate: This is the ratio of self-corrections to errors when reading the text. Sound-Print Connection: Understanding the relationship between print and sound. Substitution: In a running record or informal reading inventory, this is a miscue in which students replace the printed word with another word. For example, if the sentence is: â€Å"She said, ‘No,'† the student reads: â€Å"She shouted, ‘No. ‘† Summative Assessment: These tests are usually given at the end of a unit or at the end of the year. They assess a student’s strengths and weaknesses over a period of time.

Basel Norms in India

B. C. D. E. F. G. Background Functions of Basel Committee The Evolution to Basel II – First Basel Accord Capital Requirements and Capital Calculation under Basel I Criticisms of Basel I New Approach to Risk Based Capital Structure of Basel II First Pillar : Minimum Capital Requirement Types of Risks under Pillar I The Second Pillar : Supervisory Review Process The Third Pillar : Market Discipline 3 3 3 3 3 4 4 II. The Three Pillar Approach A. B. C. D. 5 5 6 6 7 7 7 III. Capital Arbitrage and Core Effect of Basel II A. Capital Arbitrage B. Bank Loan Rating under Basel II Capital Adequacy Framework C. Effect of Basel II on Bank Loan Rating IV. Basel II in India A. Implementation C. Impact on Indian Banks D. Impact on Various Elements of Investment Portfolio of Banks E. Impact on Bad Debts and NPA’s of Indian Banks D. Government Policy on Foreign Investment E. Threat of Foreign Takeover 8 8 9 10 10 10 V. Conclusion A. SWOT Analysis of Basel II in Indian Banking Context B. Challenges going ahead under Basel II 11 11 13 13 VI. VII. References The Technical Paper Presentation Team 2 I. Introduction: A. Background Basel II is a new capital adequacy framework applicable to Scheduled Commercial Banks in India as mandated by the Reserve Bank of India (RBI). The Basel II guidelines were issued by the Basel Committee on Banking Supervision that was initially published in June 2004. The Accord has been accepted by over 100 countries including India. In April 2007, RBI published the final guidelines for Banks operating in India. Basel II aims to create international standards that deals with Capital Measurement and Capital Standards for Banks which banking regulators can use when creating regulations about how much banks need to put aside to guard against the types of financial and operational risks banks face. The Basel Committee on Banking Supervision was constituted by the Central Bank Governors of the G-10 countries in 1974 consisting of members from Australia, Brazil, Canada, United States, United Kingdom, Spain, India, Japan, etc to name a few. The ommittee regularly meets four times a year at the Bank for International Settlements (BIS) in Basel, Switzerland where its 10 member Secretariat is located. B. Functions of the Basel Committee The purpose of the committee is to encourage the convergence toward common approaches and standards. However, the Basel Committee is not a classical multilateral organisation like World Trade Organisation. It has no founding treaty and it does not issue binding regulat ions. It is rather an informal forum to find policy solutions and promulgate standards. C. The Evolution to Basel II – First Basel Accord The First Basel Accord (Basel I) was completed in 1988. The main features of Basel I were: †¢ †¢ †¢ Set minimum capital standards for banks Standards focused on credit risk, the main risk incurred by banks Became effective end-year 1992 The First Basel Accord aimed at creating a level playing field for internationally active banks. Hence, banks from different countries competing for the same loans would have to set aside roughly the same amount of capital on the loans. D. Capital Requirements and Capital Calculation under Basel – I Minimum Capital Adequacy ratio was set at 8% and was adjusted by a loan’s credit risk weight. Credit risk was divided into 5 categories viz. 0%, 10%, 20%, 50% and 100%. Commercial loans, for example, were assigned to the 100% risk weight category. To calculate required capital, a bank would multiply the assets in each risk category by the category’s risk weight and then multiply the result by 8%. Thus, a Rs 100 commercial loan would be multiplied by 100% and then by 8%, resulting in a capital requirement of Rs8. E. Criticisms of Basel – I Following are the criticisms of the First Basel Accord (Basel I):†¢ †¢ It took too simplistic an approach to setting credit risk weights and for ignoring other types of risk. Risks weights were based on what the parties to the Accord negotiated rather than on the actual risk of each asset. Risk weights did not flow from any particular insolvency probability standard, and were for the most part, arbitrary. 3 †¢ †¢ †¢ The requirements did not account for the operational and other forms of risk that may also be important. Except for trading account activities, the capital standards did not account for hedging, diversification, and differences in risk management techniques. Advances in technology and finance allowed banks to develop their own capital allocation models in the 1990’s. This resulted in more accurate calculation of bank capital than possible under Basel I. These models allowed banks to align the amount of risk they undertook on a loan with the overall goals of the bank. Internal models allow banks to more finely differentiate risks of individual loans than is possible under Basel – I. It facilitates risks to be differentiated within loan categories and between loan categories and also allows the application of a capital charge to each loan, rather than each category of loan. F. New Approach to Risk-Based Capital †¢ †¢ †¢ By the late 1990’s, growth in the use of regulatory capital arbitrage led the Basel Committee to begin work on a new capital regime (Basel II) Effort focused on using banks’ internal rating models and internal risk models June 1999: The Basel Committee issued a proposal for a new capital adequacy framework to replace Basel – I. In order to overcome the criticisms of Basel – I and for adoption of the new approach to riskbased capital, Basel II guidelines were introduced. G. Structure of Basel – II Basel – II adopts a three pillar approach: †¢ †¢ †¢ Pillar I – Minimum Capital Requirement (Addressing Credit Risk, Operational Risk Market Risk) Pillar II – Supervisory Review (Provides Framework for Systematic Risk, Liquidity Risk Legal Risk) Pillar III – Market Discipline Disclosure (To promote greater stability in the financial system) II. The Three Pillar Approach The first pillar establishes a way to quantify the minimum capital requirements. The main objective of Pillar I is to align capital the adequacy ratios to the risk sensitivity of the assets affording a greater flexibility in the computation of banks’ individual risk. Capital Adequacy Ratio is defined as the amount of regulatory capital to be maintained by a bank to account for various risks inbuilt in the banking system. The focus of Capital Adequacy Ratio under Basel I norms was on credit risk and was calculated as follows: Capital Adequacy Ratio = Tier I Capital+Tier II Capital Risk Weighted Assets Basel Committee has revised the guidelines in the year June 2001 known as Basel II Norms. Capital Adequacy Ratio in New Accord of Basel II: Capital Adequacy Ratio = Total Capital (Tier I Capital+Tier II Capital) Market Risk(RWA) + Credit Risk(RWA) + Operation Risk(RWA) *RWA = Risk Weighted Assets Calculation of Capital Adequacy Ratio: Total Capital: Total Capital constitutes of Tier I Capital and Tier II Capital less shareholding in other banks. Tier I Capital = Ordinary Capital + Retained Earnings Share Premium – Intangible assets. Tier II Capital = Undisclosed Reserves + General Bad Debt Provision+ Revaluation Reserve+ Subordinate debt+ Redeemable Preference shares Tier III Capital: Tier III Capital includes subordinate debt with a maturity of at least 2 years. This is addition or substitution to the Tier II Capital to cover market risk alone. Tier III Capital should not cover more than 250% of Tier I capital allocated to market risk. A. First Pillar : Minimum Capital Requirement B. Types of Risks under Pillar I . Credit Risk Credit risk is the risk of loss due to a debtor’s non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). Basel II envisages two different ways of measuring credit risk which are standarised approach, Internal Rating-Based Approach. The Standardised Approach The standardized approach is conceptually the same as the present Accord, but is more ri sk sensitive. Under this approach the banks are required to use ratings from External Credit Rating Agencies to quantify required capital for credit risk. The Internal Ratings Based Approach (IRB) Under the IRB approach, different methods will be provided for different types of loan exposures. Basically there are two methods for risk measurement which are Foundation IRB and Advanced IRB. The framework allows for both a foundation method in which a bank estimate the probability of default associated with each borrower, and the supervisors will 5 supply the other inputs and an advanced IRB approach, in which a bank will be permitted to supply other necessary inputs as well. Under both the foundation and advanced IRB approaches, the range of risk weights will be far more diverse than those in the standardized approach, resulting in greater risk sensitivity. 2. Operational Risk An operational risk is a risk arising from execution of a company’s business functions. As such, it is a very broad concept including e. g. fraud risk, legal risk, physical or environmental risks, etc. Basel II defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Although the risks apply to any organization in business, this particular risk is of particular relevance to the banking regime where regulators are responsible for establishing safeguards to protect against systematic failure of the banking system and the economy. Banks will be able to choose between three ways of calculating the capital charge for operational risk – the Basic Indicator Approach, the Standardized Approach and the advanced measurement Approaches. 3. Market Risk Market risk is the risk that the value of a portfolio, either an nvestment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices. The preferred approach is VAR(value at risk). C. The Second Pillar : Supervisory Review Process Supervisory review process has been introduced to ensure not only that banks have adequate capital to support all th e risks, but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks. The process has four key principles – a) Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for monitoring their capital levels. b) Supervisors should review and evaluate bank’s internal capital adequacy assessment and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. c) Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. ) Supervisors should seek to intervene at an early stage to prevent capital from falling below minimum level and should require rapid remedial action if capital is not mentioned or restored. D. The Third Pillar : Market Discipline Market discipline imposes strong incentives to banks to conduct their business in a safe, sound and effective manner. It is proposed to be effected through a series of disclosure requirements on capital, risk exposure etc. so that market participants can assess a bank’s capital adequacy. These disclosures should be made at least semiannually and more frequently if appropriate. Qualitative disclosures such as risk management objectives and policies, definitions etc. may be published annually. 6 III. Capital Arbitrage and Core Effect of Basel II Regulatory arbitrage is where a regulated institution takes advantage of the difference between its real (or economic) risk and the regulatory position. Securitization is the main means used by Banks to engage in Regulatory Capital Arbitrage. Example of Capital Arbitrage is given below: A. Capital Arbitrage †¢ Assume a bank has a portfolio of commercial loans with the following ratings and internally generated capital requirements – AA-A: 3%-4% capital needed – B+-B: 8% capital needed – B- and below: 12%-16% capital needed Under Basel I, the bank has to hold 8% risk-based capital against all of these loans To ensure the profitability of the better quality loans, the bank engages in capital arbitrage, it securitizes the loans so that they are reclassified into a lower regulatory risk category with a lower capital charge Lower quality loans with higher internal capital charges are kept on the bank’s books because they require less risk-based capital than the bank’s internal model indicates. †¢ †¢ †¢ B. Bank Loan Rating under Basel – II Capital Adequacy Framework †¢ 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. †¢ †¢ Illustration of capital-saving potential by banks on a loan of Rs 1000 million Rating Basel I Basel II Capital Saved (Rs Long Short Risk Capital Risk Capital Million) Term Term Weight Required* Weight Required Rating Rating (Rs Million) (Rs Million) AAA P1+ 100% 90 20% 18 72 AA P1 100% 90 30% 27 63 A P2 100% 90 50% 45 45 BBB P3 100% 90 100% 90 0 BB P4 P5 100% 90 150% 135 (45) below Unrated Unrated 100% 90 100% 90 0 *Capital required is computed as Loan Amount ? Risk Weight ? 9% C. Effect of Basel – II on Bank Loan Rating †¢ †¢ Banks would either prefer that the Borrower should get itself rated, or, It would prefer that the borrowing institution should pay a higher rate of interest to compensate for the loss. 7 To substantiate the above fact, following example is taken in respect of a strong company: Loan of Rating AAA is taken of Rs 100 Crores @ 12% interest rate Capital Adequacy Rating Risk % Capital Required Opportunity Ratio (Rs Crores) Interest lost by the Bank (Rs Crores) C. A. R. Unrated 100% 9. 00 1. 08 C. A. R. New 20% 1. 80 0. 22 Total Opportunity Interest lost by the Bank (Rs Crores) 0. 86 Hence, Banks would resort to the above-mentioned measures in order to reduce or curb this loss on opportunity interest. Worse affected by this action taken by Banks would be the weaker companies. They would either be charged a higher rate of interest on loans to compensate for the loss or would alternatively have to approach another bank charging a lower rate of interest. The ideal solution to this problem would be that a weaker company should get itself rated and also take steps in order to have a better credit rating. Credit Rating is an evaluation of credit worthiness of a person, company or instrument. Thus, it indicates their willingness to pay for the obligation and the net worth. IV. Basel II in India A. Implementation The deadline for implementing the base approach of Basel II norms in India, was originally set for March 31, 2007. Later the RBI extended the deadline for Foreign banks in India and Indian banks operating abroad to meet those norms by March 31, 2008, while all other scheduled commercial banks were to adhere to the guidelines by March 31, 2009. Later the RBI confirmed that all commercial banks were Basel II compliant by March 31, 2009. Keeping in view the likely lead time that may be needed by the banks for creating the requisite technological and the risk management infrastructure, including the required databases, the MIS and the skill up-gradation, etc. , RBI has proposed the implementation of the advanced approaches under Basel II in a phased manner starting from April 1, 2010 B. Impact on Indian Banks Basel II allows national regulators to specify risk weights different from the internationally recommended ones for retail exposures. The RBI had, therefore, announced an indicative set of weights for domestic corporate long-term loans and 8 bonds subject to different ratings by international rating agencies such as Moody’s Investor Services which are slightly different from that specified by the Basel Committee (Table 1). C. Impact on various elements of the investment portfolio of banks The bonds and debentures portfolio of the banks consist of investments into higher rated companies, hence the corporate assets measured using the standardised approach may be exposed to slightly lower risk weights in comparison with the 100 per cent risk weights assigned under Basel I. The Indian banks have a large short-term portfolio in the form of cash credit, overdraft and working capital demand loans, which were un-rated, and carried a risk weight of 100 per cent under the Basel I regime. They also have short-term investments in commercial papers in their investment portfolio, which also carried a 100 per cent risk weight. The RBI’s capital adequacy guidelines has prescribed lower risk weights for short-tem exposures, if these are rated (Table 2). This provides the banks with an opportunity to benefit from their investments in commercial paper (which are typically rated in A1+/A1 category) and give them the potential to exploit the proposed short-term credit risk weights by obtaining short-term ratings for exposures in the form of cash credit, overdraft and working capital loans. The net result is that the implementation of Basel II provided Indian banks with the opportunity to significantly reduce their credit risk weights and reduce their required regulatory capital, if they suitably adjust their portfolio by lending to rated but strong corporate and increase their retail lending. According to some reports, most of the Indian banks who have migrated to Basel II have reported a reduction in their total Capital Adequacy Ratios (CARs). However, a few banks, those with high exposures to higher rated corporate or to the regulatory retail portfolio, have reported increased CARs. However, a recent study by New Delhi-based industry lobby group Assocham has concluded that Capital Adequacy Ratio (CAR) of a group of commercial banks, which were part of the study improved to 13. 48% in 2008-09 from 12. 35% in 2007-08, due to lower risk weights, implementation of Basel II norms and slower credit growth. 9 D. Bad debts and requirement of additional capital In this context, the situation regarding bad debts and NPA’s is very pertinent. The proportion of total NPAs to total advances declined from 23. 2 per cent in March 1993 to 7. per cent in March, 2004. The improvement in terms of NPAs has been largely the result of provisioning or infusion of capital. This meant that if the banks required more capital, as they would to implement Basel II norms, they would have to find capital outside of their own or the governmentâ₠¬â„¢s resources. ICRA has estimated that, Indian banks would need additional capital of up to Rs. 12,000 crore to meet the capital charge requirement for operational risk under Basel II. Most of this capital would be required by PSBs Rs. 9,000 crore, followed by the new generation private sector banks Rs. 1,100 crore, and the old generation private sector bank Rs. 750 crore. In practice, to deal with this, a large number of banks have been forced to turn to the capital market to meet their additional regulatory capital requirements. ICICI Bank, for example, has raised around Rs. 3,500 crore, thus improving its Tier I capital significantly. Many of the PSBs, namely, Punjab National Bank, Bank of India, Bank of Baroda and Dena Bank, besides private sector banks such as UTI Bank have either already tapped the market or have announced plans to raise equity capital in order to boost their Tier I capital. E. Government Policy on foreign investment The need to go public and raise capital challenged the government policy aimed at restricting concentration of share ownership, maintaining public dominance and limiting foreign influence in the banking sector. One immediate fallout was that PSBs being permitted to dilute the government’s stake to 51 per cent, and the pressure to reduce this to 33 per cent increased. Secondly, the government allowed private banks to expand equity by accessing capital from foreign investors. This put pressure on the RBI to rethink its policy on the ownership structure of domestic banks. In the past the RBI has emphasised the risks of concentrated foreign ownership of banking assets in India. Subsequent to a notification issued by the Government, which had raised the FDI limit in private sector banks to 74 per cent under the automatic route, a comprehensive set of policy guidelines on ownership of private banks was issued by the RBI. These guidelines stated, among other things, that no single entity or group of related entities would be allowed to hold shares or exercise control, directly or indirectly, in any private sector bank in excess of 10 per cent of its paid-up capital. F. Threat of foreign takeover There has been growing pressure to consolidate domestic banks to make them capable of facing international competition. Indian banks are pigmies compared with the global majors. India’s biggest bank, the State Bank of India, which accounts for onefifth of the total banking assets in the country, is roughly one-fifth as large as the world’s biggest bank Citigroup. Given this difference, even after consolidation of 10 omestic banks, the threat of foreign takeover remains if FDI policy with respect to the banking sector is relaxed. Not surprisingly, a number of foreign banks have already evinced an interest in acquiring a stake in Indian banks. Thus, it appears that foreign bank presence and consoli dation of banking are inevitable post Basel II. V. Conclusion A. SWOT Analysis of Basel II in Indian Banking Context Strenghts †¢ †¢ Aggression towards development of the existing standards by banks. Strong regulatory impact by central bank to all the banks for implementation. Presence of intellectual capital to face the change in implementation with good quality. †¢ †¢ †¢ Weaknesses Poor Technology Infrastructure Ineffective Risk Measures Presence of more number of Smaller banks that would likely to be impacted adversely. †¢ Opportunities †¢ †¢ Increasing Risk Management Expertise. Need significant connection among business,credit and risk management and Information Technology. Advancement of Technologies. Strong Asset Base would help in bigger growth. †¢ †¢ Threats Inability to meet the additional Capital Requirements Loss of Capital to the entire banking system, due to Mergers and acquisitions. Huge Investments in technologies †¢ †¢ †¢ B. Challenges going ahead under Basel II †¢ The new norms will almost invariably increase capital requirement in all banks across the board. Although capital requirement for credit risk may go down due to adoption of more risk sensitive models – such advantage will be more than offset by additional capital charge for operational risk and increased capital requirement for market risk. This partly explains the current trend of consolidation in the banking industry. Competition among banks for highly rated corporates needing lower amount of capital may exert pressure on already thinning interest spread. Further, huge implementation cost may also impact profitability for smaller banks. The biggest challenge is the re-structuring of the assets of some of the banks as it would be a tedious process, since most of the banks have poor asset quality leading to significant proportion of NPA. This also may lead to Mergers Acquisitions, which itself would be loss of capital to entire system. The new norms seem to favor the large banks that have better risk management and measurement expertise, who also have better capital adequacy ratios and geographically diversified portfolios. The smaller banks are also likely to be hurt by the rise in weightage †¢ †¢ †¢ 11 of inter-bank loans that will effectively price them out of the market. Thus, banks will have to re-structure and adopt if they are to survive in the new environment. †¢ Since improved risk management and measurement is needed, it aims to give impetus to the use of internal rating system by the international banks. More and more banks may have to use internal model developed in house and their impact is uncertain. Most of these models require minimum historical bank data that is a tedious and high cost process, as most Indian banks do not have such a database. The technology infrastructure in terms of computerization is still in a nascent stage in most Indian banks. Computerization of branches, especially for those banks, which have their network spread out in remote areas, will be a daunting task. Penetration of information technology in banking has been successful in the urban areas, unlike in the rural areas where it is insignificant. An integrated risk management concept, which is the need of the hour to align market, credit and operational risk, will be difficult due to significant disconnect between business, risk managers and IT across the organizations in their existing set-up. Implementation of the Basel II will require huge investments in technology. According to estimates, Indian banks, especially those with a sizeable branch network, will need to spend well over $ 50-70 Million on this. Computation of probability of default, loss given default, migration mapping and supervisory validation require creation of historical database, which is a time consuming process and may require initial support from the supervisor. With the implementation of the new framework, internal auditors may become increasingly involved in various processes, including validation and of the accuracy of the data inputs, review of activities performed by credit functions and assessment of a bank’s capital assessment process. Pillar 3 purports to enforce market discipline through stricter disclosure requirement. While admitting that such disclosure may be useful for supervisory authorities and rating agencies, the expertise and ability of the general public to comprehend and interpret disclosed information is open to question. Moreover, too much disclosure may cause information overload and may even damage financial position of bank. Basel II proposals underscore the interaction between sound risk management practices and corporate good governance. The bank’s board of directors has the responsibility for setting the basic tolerance levels for various types of risk. It should also ensure that management establishes a framework for assessing the risks, develop a system to relate risk to the bank’s capital levels and establish a method for monitoring compliance with internal policies. The risk weighting scheme under Standardised Approach also creates some incentive for some of the bank clients to remain unrated since such entities receive a lower risk weight of 100 per cent vis-a-vis 150 per cent risk weight for a lowest rated client. This might specially be the case if the unrated client expects a poor rating. The banks will need to be watchful in this regard. †¢ †¢ †¢ †¢ †¢ †¢ †¢ †¢ We can conclude by saying that the Basel II framework provides significant incentives to banks to sharpen their risk management expertise to enable more efficient risk-return tradeoffs, it also presents a valuable opportunity to gear up their internal processes to the 12 international best standards. This would require substantial capacity building and commitment of resources through close involvement of the banks’ Top Management in guiding this arduous undertaking. Notwithstanding intense competition, the expansionary phase of the economy is expected to provide ample opportunities for the growth of the banking industry. The growth trajectory, adherence to global best practices and risk management norms are likely to catapult the Indian Banks onto the global map, making them a force to reckon with. VI. References 1. The Evolution to Basel II by Donald Inscoe, Deputy Director, Division of Insurance and Research, US Federal Deposit Insurance Corporation. 2. Basel II – Challenges Ahead of the Indian Banking Industry by Jagannath Mishra and Pankaj Kumar Kalawatia. 3. Basel II Norms and Credit Ratings by CA Sangeet Kumar Gupta. 4. The Business Line Magazine. 5. The Chartered Accountant – Journal of the Institute of Chartered Accountants of India. 6. www. bis. org 7. www. rbi. org. in 8. www. wikipedia. org 9. www. google. com VII. The Technical Paper Presentation Team Name of Member Email ID’s rahulscsharma@icai. org tulsyan. abhishek@yahoo. co. in sikha. kedia0311@gmail. com ca. gouravmodi@gmail. com Praveen_did@yahoo. com 1. Rahul Sharma 2. Abhishek Tulsyan 3. Sikha Kedia 4. Gourav Modi 5. Praveen Didwania 13 Basel Norms in India Basel Norms in India Basel Norms in India B. C. D. E. F. G. Background Functions of Basel Committee The Evolution to Basel II – First Basel Accord Capital Requirements and Capital Calculation under Basel I Criticisms of Basel I New Approach to Risk Based Capital Structure of Basel II First Pillar : Minimum Capital Requirement Types of Risks under Pillar I The Second Pillar : Supervisory Review Process The Third Pillar : Market Discipline 3 3 3 3 3 4 4 II. The Three Pillar Approach A. B. C. D. 5 5 6 6 7 7 7 III. Capital Arbitrage and Core Effect of Basel II A. Capital Arbitrage B. Bank Loan Rating under Basel II Capital Adequacy Framework C. Effect of Basel II on Bank Loan Rating IV. Basel II in India A. Implementation C. Impact on Indian Banks D. Impact on Various Elements of Investment Portfolio of Banks E. Impact on Bad Debts and NPA’s of Indian Banks D. Government Policy on Foreign Investment E. Threat of Foreign Takeover 8 8 9 10 10 10 V. Conclusion A. SWOT Analysis of Basel II in Indian Banking Context B. Challenges going ahead under Basel II 11 11 13 13 VI. VII. References The Technical Paper Presentation Team 2 I. Introduction: A. Background Basel II is a new capital adequacy framework applicable to Scheduled Commercial Banks in India as mandated by the Reserve Bank of India (RBI). The Basel II guidelines were issued by the Basel Committee on Banking Supervision that was initially published in June 2004. The Accord has been accepted by over 100 countries including India. In April 2007, RBI published the final guidelines for Banks operating in India. Basel II aims to create international standards that deals with Capital Measurement and Capital Standards for Banks which banking regulators can use when creating regulations about how much banks need to put aside to guard against the types of financial and operational risks banks face. The Basel Committee on Banking Supervision was constituted by the Central Bank Governors of the G-10 countries in 1974 consisting of members from Australia, Brazil, Canada, United States, United Kingdom, Spain, India, Japan, etc to name a few. The ommittee regularly meets four times a year at the Bank for International Settlements (BIS) in Basel, Switzerland where its 10 member Secretariat is located. B. Functions of the Basel Committee The purpose of the committee is to encourage the convergence toward common approaches and standards. However, the Basel Committee is not a classical multilateral organisation like World Trade Organisation. It has no founding treaty and it does not issue binding regulat ions. It is rather an informal forum to find policy solutions and promulgate standards. C. The Evolution to Basel II – First Basel Accord The First Basel Accord (Basel I) was completed in 1988. The main features of Basel I were: †¢ †¢ †¢ Set minimum capital standards for banks Standards focused on credit risk, the main risk incurred by banks Became effective end-year 1992 The First Basel Accord aimed at creating a level playing field for internationally active banks. Hence, banks from different countries competing for the same loans would have to set aside roughly the same amount of capital on the loans. D. Capital Requirements and Capital Calculation under Basel – I Minimum Capital Adequacy ratio was set at 8% and was adjusted by a loan’s credit risk weight. Credit risk was divided into 5 categories viz. 0%, 10%, 20%, 50% and 100%. Commercial loans, for example, were assigned to the 100% risk weight category. To calculate required capital, a bank would multiply the assets in each risk category by the category’s risk weight and then multiply the result by 8%. Thus, a Rs 100 commercial loan would be multiplied by 100% and then by 8%, resulting in a capital requirement of Rs8. E. Criticisms of Basel – I Following are the criticisms of the First Basel Accord (Basel I):†¢ †¢ It took too simplistic an approach to setting credit risk weights and for ignoring other types of risk. Risks weights were based on what the parties to the Accord negotiated rather than on the actual risk of each asset. Risk weights did not flow from any particular insolvency probability standard, and were for the most part, arbitrary. 3 †¢ †¢ †¢ The requirements did not account for the operational and other forms of risk that may also be important. Except for trading account activities, the capital standards did not account for hedging, diversification, and differences in risk management techniques. Advances in technology and finance allowed banks to develop their own capital allocation models in the 1990’s. This resulted in more accurate calculation of bank capital than possible under Basel I. These models allowed banks to align the amount of risk they undertook on a loan with the overall goals of the bank. Internal models allow banks to more finely differentiate risks of individual loans than is possible under Basel – I. It facilitates risks to be differentiated within loan categories and between loan categories and also allows the application of a capital charge to each loan, rather than each category of loan. F. New Approach to Risk-Based Capital †¢ †¢ †¢ By the late 1990’s, growth in the use of regulatory capital arbitrage led the Basel Committee to begin work on a new capital regime (Basel II) Effort focused on using banks’ internal rating models and internal risk models June 1999: The Basel Committee issued a proposal for a new capital adequacy framework to replace Basel – I. In order to overcome the criticisms of Basel – I and for adoption of the new approach to riskbased capital, Basel II guidelines were introduced. G. Structure of Basel – II Basel – II adopts a three pillar approach: †¢ †¢ †¢ Pillar I – Minimum Capital Requirement (Addressing Credit Risk, Operational Risk Market Risk) Pillar II – Supervisory Review (Provides Framework for Systematic Risk, Liquidity Risk Legal Risk) Pillar III – Market Discipline Disclosure (To promote greater stability in the financial system) II. The Three Pillar Approach The first pillar establishes a way to quantify the minimum capital requirements. The main objective of Pillar I is to align capital the adequacy ratios to the risk sensitivity of the assets affording a greater flexibility in the computation of banks’ individual risk. Capital Adequacy Ratio is defined as the amount of regulatory capital to be maintained by a bank to account for various risks inbuilt in the banking system. The focus of Capital Adequacy Ratio under Basel I norms was on credit risk and was calculated as follows: Capital Adequacy Ratio = Tier I Capital+Tier II Capital Risk Weighted Assets Basel Committee has revised the guidelines in the year June 2001 known as Basel II Norms. Capital Adequacy Ratio in New Accord of Basel II: Capital Adequacy Ratio = Total Capital (Tier I Capital+Tier II Capital) Market Risk(RWA) + Credit Risk(RWA) + Operation Risk(RWA) *RWA = Risk Weighted Assets Calculation of Capital Adequacy Ratio: Total Capital: Total Capital constitutes of Tier I Capital and Tier II Capital less shareholding in other banks. Tier I Capital = Ordinary Capital + Retained Earnings Share Premium – Intangible assets. Tier II Capital = Undisclosed Reserves + General Bad Debt Provision+ Revaluation Reserve+ Subordinate debt+ Redeemable Preference shares Tier III Capital: Tier III Capital includes subordinate debt with a maturity of at least 2 years. This is addition or substitution to the Tier II Capital to cover market risk alone. Tier III Capital should not cover more than 250% of Tier I capital allocated to market risk. A. First Pillar : Minimum Capital Requirement B. Types of Risks under Pillar I . Credit Risk Credit risk is the risk of loss due to a debtor’s non-payment of a loan or other line of credit (either the principal or interest (coupon) or both). Basel II envisages two different ways of measuring credit risk which are standarised approach, Internal Rating-Based Approach. The Standardised Approach The standardized approach is conceptually the same as the present Accord, but is more ri sk sensitive. Under this approach the banks are required to use ratings from External Credit Rating Agencies to quantify required capital for credit risk. The Internal Ratings Based Approach (IRB) Under the IRB approach, different methods will be provided for different types of loan exposures. Basically there are two methods for risk measurement which are Foundation IRB and Advanced IRB. The framework allows for both a foundation method in which a bank estimate the probability of default associated with each borrower, and the supervisors will 5 supply the other inputs and an advanced IRB approach, in which a bank will be permitted to supply other necessary inputs as well. Under both the foundation and advanced IRB approaches, the range of risk weights will be far more diverse than those in the standardized approach, resulting in greater risk sensitivity. 2. Operational Risk An operational risk is a risk arising from execution of a company’s business functions. As such, it is a very broad concept including e. g. fraud risk, legal risk, physical or environmental risks, etc. Basel II defines operational risk as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. Although the risks apply to any organization in business, this particular risk is of particular relevance to the banking regime where regulators are responsible for establishing safeguards to protect against systematic failure of the banking system and the economy. Banks will be able to choose between three ways of calculating the capital charge for operational risk – the Basic Indicator Approach, the Standardized Approach and the advanced measurement Approaches. 3. Market Risk Market risk is the risk that the value of a portfolio, either an nvestment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices. The preferred approach is VAR(value at risk). C. The Second Pillar : Supervisory Review Process Supervisory review process has been introduced to ensure not only that banks have adequate capital to support all th e risks, but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks. The process has four key principles – a) Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for monitoring their capital levels. b) Supervisors should review and evaluate bank’s internal capital adequacy assessment and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. c) Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. ) Supervisors should seek to intervene at an early stage to prevent capital from falling below minimum level and should require rapid remedial action if capital is not mentioned or restored. D. The Third Pillar : Market Discipline Market discipline imposes strong incentives to banks to conduct their business in a safe, sound and effective manner. It is proposed to be effected through a series of disclosure requirements on capital, risk exposure etc. so that market participants can assess a bank’s capital adequacy. These disclosures should be made at least semiannually and more frequently if appropriate. Qualitative disclosures such as risk management objectives and policies, definitions etc. may be published annually. 6 III. Capital Arbitrage and Core Effect of Basel II Regulatory arbitrage is where a regulated institution takes advantage of the difference between its real (or economic) risk and the regulatory position. Securitization is the main means used by Banks to engage in Regulatory Capital Arbitrage. Example of Capital Arbitrage is given below: A. Capital Arbitrage †¢ Assume a bank has a portfolio of commercial loans with the following ratings and internally generated capital requirements – AA-A: 3%-4% capital needed – B+-B: 8% capital needed – B- and below: 12%-16% capital needed Under Basel I, the bank has to hold 8% risk-based capital against all of these loans To ensure the profitability of the better quality loans, the bank engages in capital arbitrage, it securitizes the loans so that they are reclassified into a lower regulatory risk category with a lower capital charge Lower quality loans with higher internal capital charges are kept on the bank’s books because they require less risk-based capital than the bank’s internal model indicates. †¢ †¢ †¢ B. Bank Loan Rating under Basel – II Capital Adequacy Framework †¢ 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. †¢ †¢ Illustration of capital-saving potential by banks on a loan of Rs 1000 million Rating Basel I Basel II Capital Saved (Rs Long Short Risk Capital Risk Capital Million) Term Term Weight Required* Weight Required Rating Rating (Rs Million) (Rs Million) AAA P1+ 100% 90 20% 18 72 AA P1 100% 90 30% 27 63 A P2 100% 90 50% 45 45 BBB P3 100% 90 100% 90 0 BB P4 P5 100% 90 150% 135 (45) below Unrated Unrated 100% 90 100% 90 0 *Capital required is computed as Loan Amount ? Risk Weight ? 9% C. Effect of Basel – II on Bank Loan Rating †¢ †¢ Banks would either prefer that the Borrower should get itself rated, or, It would prefer that the borrowing institution should pay a higher rate of interest to compensate for the loss. 7 To substantiate the above fact, following example is taken in respect of a strong company: Loan of Rating AAA is taken of Rs 100 Crores @ 12% interest rate Capital Adequacy Rating Risk % Capital Required Opportunity Ratio (Rs Crores) Interest lost by the Bank (Rs Crores) C. A. R. Unrated 100% 9. 00 1. 08 C. A. R. New 20% 1. 80 0. 22 Total Opportunity Interest lost by the Bank (Rs Crores) 0. 86 Hence, Banks would resort to the above-mentioned measures in order to reduce or curb this loss on opportunity interest. Worse affected by this action taken by Banks would be the weaker companies. They would either be charged a higher rate of interest on loans to compensate for the loss or would alternatively have to approach another bank charging a lower rate of interest. The ideal solution to this problem would be that a weaker company should get itself rated and also take steps in order to have a better credit rating. Credit Rating is an evaluation of credit worthiness of a person, company or instrument. Thus, it indicates their willingness to pay for the obligation and the net worth. IV. Basel II in India A. Implementation The deadline for implementing the base approach of Basel II norms in India, was originally set for March 31, 2007. Later the RBI extended the deadline for Foreign banks in India and Indian banks operating abroad to meet those norms by March 31, 2008, while all other scheduled commercial banks were to adhere to the guidelines by March 31, 2009. Later the RBI confirmed that all commercial banks were Basel II compliant by March 31, 2009. Keeping in view the likely lead time that may be needed by the banks for creating the requisite technological and the risk management infrastructure, including the required databases, the MIS and the skill up-gradation, etc. , RBI has proposed the implementation of the advanced approaches under Basel II in a phased manner starting from April 1, 2010 B. Impact on Indian Banks Basel II allows national regulators to specify risk weights different from the internationally recommended ones for retail exposures. The RBI had, therefore, announced an indicative set of weights for domestic corporate long-term loans and 8 bonds subject to different ratings by international rating agencies such as Moody’s Investor Services which are slightly different from that specified by the Basel Committee (Table 1). C. Impact on various elements of the investment portfolio of banks The bonds and debentures portfolio of the banks consist of investments into higher rated companies, hence the corporate assets measured using the standardised approach may be exposed to slightly lower risk weights in comparison with the 100 per cent risk weights assigned under Basel I. The Indian banks have a large short-term portfolio in the form of cash credit, overdraft and working capital demand loans, which were un-rated, and carried a risk weight of 100 per cent under the Basel I regime. They also have short-term investments in commercial papers in their investment portfolio, which also carried a 100 per cent risk weight. The RBI’s capital adequacy guidelines has prescribed lower risk weights for short-tem exposures, if these are rated (Table 2). This provides the banks with an opportunity to benefit from their investments in commercial paper (which are typically rated in A1+/A1 category) and give them the potential to exploit the proposed short-term credit risk weights by obtaining short-term ratings for exposures in the form of cash credit, overdraft and working capital loans. The net result is that the implementation of Basel II provided Indian banks with the opportunity to significantly reduce their credit risk weights and reduce their required regulatory capital, if they suitably adjust their portfolio by lending to rated but strong corporate and increase their retail lending. According to some reports, most of the Indian banks who have migrated to Basel II have reported a reduction in their total Capital Adequacy Ratios (CARs). However, a few banks, those with high exposures to higher rated corporate or to the regulatory retail portfolio, have reported increased CARs. However, a recent study by New Delhi-based industry lobby group Assocham has concluded that Capital Adequacy Ratio (CAR) of a group of commercial banks, which were part of the study improved to 13. 48% in 2008-09 from 12. 35% in 2007-08, due to lower risk weights, implementation of Basel II norms and slower credit growth. 9 D. Bad debts and requirement of additional capital In this context, the situation regarding bad debts and NPA’s is very pertinent. The proportion of total NPAs to total advances declined from 23. 2 per cent in March 1993 to 7. per cent in March, 2004. The improvement in terms of NPAs has been largely the result of provisioning or infusion of capital. This meant that if the banks required more capital, as they would to implement Basel II norms, they would have to find capital outside of their own or the governmentâ₠¬â„¢s resources. ICRA has estimated that, Indian banks would need additional capital of up to Rs. 12,000 crore to meet the capital charge requirement for operational risk under Basel II. Most of this capital would be required by PSBs Rs. 9,000 crore, followed by the new generation private sector banks Rs. 1,100 crore, and the old generation private sector bank Rs. 750 crore. In practice, to deal with this, a large number of banks have been forced to turn to the capital market to meet their additional regulatory capital requirements. ICICI Bank, for example, has raised around Rs. 3,500 crore, thus improving its Tier I capital significantly. Many of the PSBs, namely, Punjab National Bank, Bank of India, Bank of Baroda and Dena Bank, besides private sector banks such as UTI Bank have either already tapped the market or have announced plans to raise equity capital in order to boost their Tier I capital. E. Government Policy on foreign investment The need to go public and raise capital challenged the government policy aimed at restricting concentration of share ownership, maintaining public dominance and limiting foreign influence in the banking sector. One immediate fallout was that PSBs being permitted to dilute the government’s stake to 51 per cent, and the pressure to reduce this to 33 per cent increased. Secondly, the government allowed private banks to expand equity by accessing capital from foreign investors. This put pressure on the RBI to rethink its policy on the ownership structure of domestic banks. In the past the RBI has emphasised the risks of concentrated foreign ownership of banking assets in India. Subsequent to a notification issued by the Government, which had raised the FDI limit in private sector banks to 74 per cent under the automatic route, a comprehensive set of policy guidelines on ownership of private banks was issued by the RBI. These guidelines stated, among other things, that no single entity or group of related entities would be allowed to hold shares or exercise control, directly or indirectly, in any private sector bank in excess of 10 per cent of its paid-up capital. F. Threat of foreign takeover There has been growing pressure to consolidate domestic banks to make them capable of facing international competition. Indian banks are pigmies compared with the global majors. India’s biggest bank, the State Bank of India, which accounts for onefifth of the total banking assets in the country, is roughly one-fifth as large as the world’s biggest bank Citigroup. Given this difference, even after consolidation of 10 omestic banks, the threat of foreign takeover remains if FDI policy with respect to the banking sector is relaxed. Not surprisingly, a number of foreign banks have already evinced an interest in acquiring a stake in Indian banks. Thus, it appears that foreign bank presence and consoli dation of banking are inevitable post Basel II. V. Conclusion A. SWOT Analysis of Basel II in Indian Banking Context Strenghts †¢ †¢ Aggression towards development of the existing standards by banks. Strong regulatory impact by central bank to all the banks for implementation. Presence of intellectual capital to face the change in implementation with good quality. †¢ †¢ †¢ Weaknesses Poor Technology Infrastructure Ineffective Risk Measures Presence of more number of Smaller banks that would likely to be impacted adversely. †¢ Opportunities †¢ †¢ Increasing Risk Management Expertise. Need significant connection among business,credit and risk management and Information Technology. Advancement of Technologies. Strong Asset Base would help in bigger growth. †¢ †¢ Threats Inability to meet the additional Capital Requirements Loss of Capital to the entire banking system, due to Mergers and acquisitions. Huge Investments in technologies †¢ †¢ †¢ B. Challenges going ahead under Basel II †¢ The new norms will almost invariably increase capital requirement in all banks across the board. Although capital requirement for credit risk may go down due to adoption of more risk sensitive models – such advantage will be more than offset by additional capital charge for operational risk and increased capital requirement for market risk. This partly explains the current trend of consolidation in the banking industry. Competition among banks for highly rated corporates needing lower amount of capital may exert pressure on already thinning interest spread. Further, huge implementation cost may also impact profitability for smaller banks. The biggest challenge is the re-structuring of the assets of some of the banks as it would be a tedious process, since most of the banks have poor asset quality leading to significant proportion of NPA. This also may lead to Mergers Acquisitions, which itself would be loss of capital to entire system. The new norms seem to favor the large banks that have better risk management and measurement expertise, who also have better capital adequacy ratios and geographically diversified portfolios. The smaller banks are also likely to be hurt by the rise in weightage †¢ †¢ †¢ 11 of inter-bank loans that will effectively price them out of the market. Thus, banks will have to re-structure and adopt if they are to survive in the new environment. †¢ Since improved risk management and measurement is needed, it aims to give impetus to the use of internal rating system by the international banks. More and more banks may have to use internal model developed in house and their impact is uncertain. Most of these models require minimum historical bank data that is a tedious and high cost process, as most Indian banks do not have such a database. The technology infrastructure in terms of computerization is still in a nascent stage in most Indian banks. Computerization of branches, especially for those banks, which have their network spread out in remote areas, will be a daunting task. Penetration of information technology in banking has been successful in the urban areas, unlike in the rural areas where it is insignificant. An integrated risk management concept, which is the need of the hour to align market, credit and operational risk, will be difficult due to significant disconnect between business, risk managers and IT across the organizations in their existing set-up. Implementation of the Basel II will require huge investments in technology. According to estimates, Indian banks, especially those with a sizeable branch network, will need to spend well over $ 50-70 Million on this. Computation of probability of default, loss given default, migration mapping and supervisory validation require creation of historical database, which is a time consuming process and may require initial support from the supervisor. With the implementation of the new framework, internal auditors may become increasingly involved in various processes, including validation and of the accuracy of the data inputs, review of activities performed by credit functions and assessment of a bank’s capital assessment process. Pillar 3 purports to enforce market discipline through stricter disclosure requirement. While admitting that such disclosure may be useful for supervisory authorities and rating agencies, the expertise and ability of the general public to comprehend and interpret disclosed information is open to question. Moreover, too much disclosure may cause information overload and may even damage financial position of bank. Basel II proposals underscore the interaction between sound risk management practices and corporate good governance. The bank’s board of directors has the responsibility for setting the basic tolerance levels for various types of risk. It should also ensure that management establishes a framework for assessing the risks, develop a system to relate risk to the bank’s capital levels and establish a method for monitoring compliance with internal policies. The risk weighting scheme under Standardised Approach also creates some incentive for some of the bank clients to remain unrated since such entities receive a lower risk weight of 100 per cent vis-a-vis 150 per cent risk weight for a lowest rated client. This might specially be the case if the unrated client expects a poor rating. The banks will need to be watchful in this regard. †¢ †¢ †¢ †¢ †¢ †¢ †¢ †¢ We can conclude by saying that the Basel II framework provides significant incentives to banks to sharpen their risk management expertise to enable more efficient risk-return tradeoffs, it also presents a valuable opportunity to gear up their internal processes to the 12 international best standards. This would require substantial capacity building and commitment of resources through close involvement of the banks’ Top Management in guiding this arduous undertaking. Notwithstanding intense competition, the expansionary phase of the economy is expected to provide ample opportunities for the growth of the banking industry. The growth trajectory, adherence to global best practices and risk management norms are likely to catapult the Indian Banks onto the global map, making them a force to reckon with. VI. References 1. The Evolution to Basel II by Donald Inscoe, Deputy Director, Division of Insurance and Research, US Federal Deposit Insurance Corporation. 2. Basel II – Challenges Ahead of the Indian Banking Industry by Jagannath Mishra and Pankaj Kumar Kalawatia. 3. Basel II Norms and Credit Ratings by CA Sangeet Kumar Gupta. 4. The Business Line Magazine. 5. The Chartered Accountant – Journal of the Institute of Chartered Accountants of India. 6. www. bis. org 7. www. rbi. org. in 8. www. wikipedia. org 9. www. google. com VII. The Technical Paper Presentation Team Name of Member Email ID’s rahulscsharma@icai. org tulsyan. abhishek@yahoo. co. in sikha. kedia0311@gmail. com ca. gouravmodi@gmail. com Praveen_did@yahoo. com 1. Rahul Sharma 2. Abhishek Tulsyan 3. Sikha Kedia 4. Gourav Modi 5. Praveen Didwania 13

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