Insights as a Treasurer

Insights as a treasurer Being bestowed upon me the task to collect and protect the fund of our club is tough and keeping it safe from corruption and theft a lot tougher. When making difficult decisions to the whole group, I must consider being prepared and clear- minded all the time for me to be able to make decisions for the good of the many. This task serves as a training for me to be ready and aware on what will need to do when I reach the stage when I will support my in the future.This will be the start in which I can show my classmates and teachers that I can be trustworthy to whatever they want me to accomplish. Even being confronted with the temptation of wealth and riches, this time I can prove myself that I can be trusted In little things as well as the big things. I am glad that I've served my classmates well and in five months that Vive been doing this Job, encountering problems are inevitable but with the help and purport of my classmates, I managed to hold on do the Job the right way. Paul John Man-on SITS Club Treasurer Insights as a treasurer Treasurer tough and keeping It safe from corruption and theft a lot tougher. When making 1 org and riches, this time I can prove myself that I can be trusted in little things as well as the big things. I am glad that Vive served my classmates well and in five months that Paul John Man-on SITS Club Treasurer

Bates Boatyard

Table of Contents Facts| †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦| 2| Analysis| †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦| 2| ConclusionsReferences| †¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦| 56| Issues 1. a. What would you tell Bates concerning her ac counting needs, emphasizing the uses of the accounting information for all stakeholders within and without the business? 2. a. The boatyard operates how many businesses? b. What are the accounting information needs for managing these businesses? FactsSarah Bates a returning Navy civilian decides to buy a business with the money she has saved along all this time. Bates buys a small boatyard in a town on the coast of Maine where she had spent many summers. The business being somewhat larger than she could finance alone, she had borrowed the additional funds required from a friend, giving a mortgage on the property as security. Along this way she realized she needs adequate accounting records. The records on hand were for cash receipts and disbursement only, as well actual balance sheet and profit and loss statement.Bates did not have any background on accounting therefore she finds helps from a friend of her, who advice her on what kind of accounting records should be kept and what ki nd of financial and cost information should be developed to control operations and to make proper charges to customers for services rendered. Some of the facts of the business are, one of the properties was a large shed for the winter storage of boats. Since the place was very suitable for larger boats there was a great demand for the space in it on the part of owners of expensive boats among the summer people.Also there was plenty of empty land on the shore front outdoor storage, the space was rented and also hired to haul the boats in equipment that it had for the purpose. During spring and other seasons there was a lot of business in painting and repair work for boats. Also she had a large sized work shed containing woodworking tools and space for when the weather was not the best to work outside it could be done inside. Lastly the property included a good sized wharf and float, a store for the sale of marine hardware and supplies, and gasoline pumps.Analysis 1. Bates did not hav e any proper accounting system; Bates only has record for cash disbursement and cash receipts. Bates should use the cost accounting system. This system is suitable for her as she can identify and assign the cost to each department. Bates should implement segmental reporting for each of the department so that she can assess the contribution and profitability of different departments by comparing the revenues and costs that they generate.Based on the segmental reporting, she can identify whichever departments that contribute profit or loss to her business. At the same time she can remove the unprofitable department. Bates needs to keep other accounting records other than the cash disbursement and cash receipts. She has too many business activities without any proper accounting management. Bates should identify which activity she wants to focus more on and, to be able to make it as her core business.Based on the segmental reporting used, Bates can analyze and determine which continuous ly gives profit to her. There a couple of suggestions Bates should implement on her accounting needs, first of all to implement a computerized accounting system in order to generate proper accounting records, since manual records are subject to greater human error, and can be easily misplaced. As for inventory purpose on her store, she should have an automated system that can help her keep track of inventory.Also Bates should conduct a cost benefit analysis, she wants to invest more money from capital that she does not have at the moment by adding a fishing tackle, sporting goods, and refreshment to her retail shop and without finding out if by adding the shop would really add more value into her business. Also she needs to study on what seasons is her business more profitable, in order to use the space more efficiently and effectively, and at the same time to segregate duties accordingly to demand of customers. . a. The Boatyard operates 3 different businesses. The first one is a l arge shed for winter storage of boats. There is great demand for space since it is a very suitable space for boats. Also there is more space for storage and haul of boats in on equipment on the front. The second one is a large sized work shed containing woodworking tools and space to construct about six boats up to 40 feet in length at one time. This space also it could be used for painting and repair shop.Lastly a good size wharf and float, store for the sale of marine hardware, supplies, and gasoline pumps, also a great spot for people who surfs to be around. b. One of the accounting information that Bates needs in order to manage his business, would be to calculate certain business functions costs. Bates needs to determine how much labor is used and the amount of materials used. Since managerial accounting helps decide the amount of time spent on each customer to maximize profit. Cost Objects need to be identified for measuring and assigning costs.For Bates there are different co st objects involved, which are; a large shed for winter storage, empty land for outdoor storage, and a yard at the same time as painting and repairing department. Another cost objects include; work shed for construction of boats, hardware and supplies store, gasoline pump, wharf and float. Each of these cost objects should be clearly defined as a separate department. The cost must be identified, measured and assigned to each department for planning, controlling and decision making.The direct cost can be identified through direct tracing that recognizes costs that are exclusively and actually associated with each department. To assign costs that have a cause and effect relationship with each department, the driver tracing method should be used, and this method is less expensive than assignment or allocation and the result is usually more accurate. At the same time indirect cost must be assigned through allocation. These costs must be measured with high degree of accuracy so that the profit can be calculated correctly.This cost information is needed for setting up objectives such as quality of painting and repair work; in order to reduce inspection costs, customer complaints, and waste material. Another objective would be evaluation suppliers and signing a contract with the suppliers for long term supply of defect free hardware tools and supplies at a fixed rate. An additional objective is that, maintenance costs must be identified as well as budgeted, and a maintenance schedule should be made to reduce labor costs. This is accomplished by having performance reports that compare the actual data with budgeted, planned data.A schedule must be maintained for employees working in painting, repair department and hardware store to avoid overtime premium. In order to achieve all the objectives, the best strategies need to be chosen and implementation of all objectives must be monitored so that corrective action can be taken. Conclusions 1. I would extremely recommend B ates to analyze her economically and business position at this moment. She needs to understand that she is involved in so many different businesses at this moment, and she is really the only one who is somehow on control and management of the all businesses.She should either take some intensives classes in how to use managerial accounting correctly or hire someone with accounting background that would advise her and collect the necessary data in order to used it properly, and to make the right decisions. Also since she just started her business she should study the industry that she is getting involved in first, before she make any further decisions in investing more money or expanding her business. At the same time she should try to focus in one business at the time to make sure everything gets handle the way it should be, as she could start earning some profit as soon as possible.Lastly she needs to understand that since she borrow some money she would need to start adjusting her finances, and increase profit in order to comply with all of her obligations that would be coming up. 2. a. the business operated by Bates Boatyard are described on analysis 2a along the analysis we could observed how many different business she is operating, and once again recommender her to focus one by one at the time, to ensure everything is running well on her business.

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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Marijuana Legalization - Essay Example The most important reason for anyone to debate on the subject of marijuana legalization is because of its relevance to young people. Advocates of marijuana legalization in Washington, DC have voted on the legalization of marijuana and approved the move by an overwhelming majority. Kleiman mentions in his article that the district officials of the states are now looking to create a market for buying and selling of marijuana which was previously prohibited from selling under the ‘grow and give’ framework. In the article, Kleiman points out his argument against the creation of a profit motivated market for marijuana. It is true that commercialization of marijuana is disadvantageous. For one, it can cause many problems for states where marijuana is still illegal. Legalization of marijuana in Washington alone is likely to have its repercussions on other states where the drug is prohibited, a risk which also pointed out by Kleiman. Creation of an official market for marijuana will spark its trafficking to other states through underground channels. The most obvious impact is the rise in inter-state travelling in Washington for recreational usage of the drug. As such, there is a great likelihood that marijuana availability in Washington will result in easy acquisition and trafficking of the drug to other states. In his article, Mark Kleiman has argued against the commercialization of marijuana. Marijuana legalization comes at great social costs especially for the young user base of the illicit drug.

Pearson VUE Corp and Current Information Architecture of the Firm Research Paper

Pearson VUE Corp and Current Information Architecture of the Firm - Research Paper Example Forming a section of Pearson plc., Pearson VUE is a cooperation worth 8 billion making it the largest commercial education publishers and testing company (Rinehart and Sloan, 2010). Its main operation facilities are situated in India, the United States, and the United Kingdom while its satellites cover Japan and China. This has enabled Pearson VUE to stand out as a global leaders when it comes to information technology electronic testing , government, academic and professional clients offering services ranging from data management to test development (Morgan, 2010). Pearson VUE Testing Process Pearson VUE has had great impacts with reference to ICT testing providing skills that are fundamental and offer credentials to start people and all knowledge level in ICT careers. These initiatives have attracted the attention of several entrants to the ICT field as well as partners such as the higher education and government (Pivar, 2008). Pearson VUE incentives on professional development thr ough certification and training programs have led to the realization of ICT workforce that is well equipped with skills that are relevant in this industry. Pearson VUE testing has been observed to lead to proficiency when it comes to SQL queries running and writing ensuring a combined set of skills in data complex database, resolved KPIs queries from candidates and clients, timely reports for SMT/OMT and clients which are effectively completed, doing away with ICT procedures that are outdated and support of the VSS (Hondros, 2005). The Pearson VUE has been designed in such a way that its exams in any classroom setups are standardized , measurable, are taken as frequent as possible while its analyzing and grading process are faster (Hondros, 2005). This has been achieved through a convenient and easy exam rescheduling and registration in its centers across the world, the complete utilization of Internet in the process of securing data and transmitting it to its test centers, making i t possible for its exams to be downloaded and always available as scheduled, having its exam results accurately and promptly presented to agencies who are certified after which they are merged with the test database that already exists, connections and monitoring all Pearson VUE hub and protection of its certifications through the Digital Embosser that cannot be tampered with (Ondrus and Pigneur, 2009). The above testing process ensures complete satisfaction to the clients as it enables a registration that is painless and quick, having its exams readily available when needed, testing results reported promptly to the chosen and certified agency. To improve its testing processes, Pearson VUE has employed different technologies including the use of biometric identification in the authentication of test takers. The PalmSecure and the Camera biometric technologies used in the identification have been employed in over 500 facilities globally. These technologies have ensured that those tak ing tests are in a position to accurately, conveniently and quickly determine their identity before sitting down for a scheduled test. The one to many matching technology offers an enhanced fraud prevention layer making use of biometric acceleration distribution technology. The Sensometrix is an additional technology in support of the biometric acceleration technology that compares the biometrics of each test taker

Question for analysis 4 Assignment Example | Topics and Well Written Essays - 250 words

Question for analysis 4 - Assignment Example The move also follows the directive given concerning the full exploitation of internet to broaden the scope of sourcing reference materials. The limits include inaccurate or biased sources of Information. Not all the information available via the internet are credible, the user must be able to select the right kind of information. Some of the available information consists of other people’s thoughts and views are bound to have errors occasionally. Information Overload when users go through a bunch of many information sources, and they still locate the most appropriate ones The lecturers should recommend a number of credible, relevant and resourceful sites to avert such problems (Folk and Shawn 161). The second alternative will be to filter certain computer sites that can draw away the students’ keenness. There is minimal time required for sourcing information hence reduces time wastage. In addition, the information acquired will be credible and accurate, as the lecturers would recommend only relevant sources. Acquisition of bias information still exists on the end users side. The process promotes laxity in learning at the expense of critical thinking. The students should make it a routine to allow them make presentations in class to promote critical thinking about subject matters eliminating overreliance on internet

Accounting Information Systems of Air New Zealand Assignment

Accounting Information Systems of Air New Zealand - Assignment Example According to the research findings, it can, therefore, be said that Air New Zealand has a total workforce of 10,453 employees and a reported income of 71$ Million as of August 2012. Air New Zealand can be considered as one of the lifeblood of New Zealand’s economy since it provides services that are essential in the dynamics of commerce. At about 9 am on November 10, 2009, an outage of the computer system of Air New Zealand affected its airport check-in systems as well as its online bookings and call center systems. The outage affected more than ten thousand passengers contributing to the chaos and confusion of affected airports. The disruption not only caused millions of dollars in actual damages to Air New Zealand itself but also to its customers and related business depending on the airline for its logistic needs. On June 18, 2007, Air New Zealand/Eagle Airways Flight 2300 was forced to land on its belly due to the hydraulic system that was being drained via a fatigue crack in its actuator that caused the landing gear to being stuck. There was no recorded fatality in the incident and the damage to the aircraft is repairable. Both incidents while considered accidents could have been prevented if the right information security management system is in place to protect the information assets of Air New Zealand. It should be noted that incidents similar to the ones described may cause the company more in terms of legal if not goodwill costs. Threats not only impact the corporation itself as an entity but also affect its employees, clients, and partners. As predicted on threats not only affect the operation of Air New Zealand, it likewise creates doubt about the safety of its clients and equally affects its financial assets as well as those of its partners. Identification of the threats is therefore not only essential in managing the risks associated to the operation and service provisioning of Air New Zealand it is similarly essential in setting up the inf rastructure that would support its overall security management systems. Threats by any definition is an entity or process if not events that threaten life, disrupt operation, or cause damage to the corporate image of any entity and in this particular case—Air New Zealand—its cause damage to assets of the company, its employee, its clients and even its partners. In the context of information technology in particular Accounting Information System, a threat is a process, thing, or person that will affect the confidentiality, integrity, and availability of the information system, its data, and programs. Natural Disasters and Terrorist Attacks – these are often remediated with the use of backup sites Software Errors and/or Equipment Malfunctions – This will be discussed further at the operational threats Unintentional Acts – These are often done by unsuspecting clients and at times even employees. Strict information security policy is the best way to ad dress these threats. Intentional Acts – This can be done by hackers from the external front and disgruntled employees from the internal front.

Computer Questions Final Assignment Example | Topics and Well Written Essays - 1250 words

Computer Questions Final - Assignment Example In use since the late 1960's, it is a popular choice for airline tickets, photo developing envelopes and internal warehouse systems. Bar code scanners are manufactured to read the imprinted bar code where as mark sensors are designed to read mechanically or manually read items passed by their scanners. They can be fixed at any location. It makes the most sense to think of bandwidth in terms of a rive Bluetooth wireless technology uses adaptive frequency hopping as its form of the maximum possible rate of data transfer under optimal conditions access point to transfer information to one another, as well as receive internet signal. A polynomial code can detect any error burst of length less than or equal to. Usually the actual serial binary data to be transmitted over the cable are not channel is the theoretical maximum information transfer rate of the channel. Transmission errors increase and S/N ratio decreases. As the 'true' signal power decreases the receiver has greater difficulty separating it from 'false' signal elements (i.e., noise and distortion) and thus makes more interpretation errors. An amplifier increases the power of whatever is present at its input. A repeater listens to its input, interprets its data content, and generates a new outgoing signal of equivalent data content. Amplifiers are simpler but amplify noise and distortion in their input signal. Repeaters are more complex, but generate a 'clean' output signal. 12. What are the advantages of wireless transmission using RF waves as compared to infrared waves Wireless transmission allows the information to transfer without any cable or wire. It boost up the speed of information to be transferred. 13. Describe the relationship between Type I and Type II errors Type I (): reject the null-hypothesis when the null-hypothesis is true, and Type II (): fail to reject the null-h

Human resource management in Foxconn Essay Example | Topics and Well Written Essays - 1000 words

Human resource management in Foxconn - Essay Example It began in 2009 where a factory by the name of Sun Dayong, committed suicide just because he lost an iPhone 4 prototype in his posession (Barbosa 2008). It was followed by 14 suicides 2010 until 2012, the latest in June of 2012 where suicides were directly related to wage. Obviously, there is something very wrong in the human resource management practice of Foxconn which needs to be addressed. Human resource issue The kind of technology that Foxconn supplies to Apple may be cutting edge and its client, Apple Inc may be a revolutionary company but the human resource practice of Foxconn is medieval that even predated classical management theorists whose theorists were already debunked by modern practice of management. Foxconn workplaces were often described as labor camps due to the horrible treatment of its employees that include abuse and illegal overtimes to the point that employees commit suicide. Worst, Foxconn also make their employees sign waivers that gurantee that Foxconn wil l not be sued by its employees up to their descendants if something happened to them whether they died, get injured and committed suicide (Malone 2010). In its Mexico plant, it was even alleged that the bus that was supposed to take the workers to and from the plant were deliberately delayed by Foxconn so that the managemend could force its employees to do an overtime work without pay while waiting for the bus. This issue had been compounded until riot broke loose in February 19, 2010 where employees set fire in the company’s gymnasium. These actions only manifests how callous and abusive Foxconn in treating its employees. Their human resource practice virtually breaks every rule in good human resource management. Their human resource practice did not even conform to the basic tenet of Taylor’s scientific management which is the most basic management concept available today. Taylor management theories may have been dismissed as outdated but at least, Taylor had the mot ivation concept that if employees will be paid well, they will also be motivated to work well (Butler 1991). Foxconn is notorious in this aspect that its employees are even driven to suicide out of frustration of the company ‘s level of pay. It would find ways where it can force its employees to work overtime without pay such as delaying their commuter bus. It may be a cheap strategy but Foxconn would resort to it for as long as it can make more money out of its employees never mind if they will commit suicide later. Foxconn has also no regard for its employees welfare. Instead of addressing the root cause of its suicide issues in the company which is mismanagement and oppressive pay, it instead made its employees sign a contract that would deter them in suing the company if anything happen to them in the company. This is Foxconn’s response to its human resource issue which is to protect itself from legal complications instead of mending its management practice (Dalrymp le 2009). What Foxconn should have done? Applicable human resource theories. Had Foxconn been a conscientious company, it should have addressed the employees grievances instead of seeking legal protection. If the issue is pay, Foxconn should have increased the wages of its workers at least for it to become competitive industry and not at its current level where it drives employees to suicide. Second, it should have conducted leadership and management trainings to its

Radio Control Office Essay Example for Free

Radio Control Office Essay The first radio regulatory office was known as the Radio Construction and Maintenance Section under the Telegraph Division of the Bureau of Posts. This section was charged with the enforcement of radio laws and regulations, particularly the provisions of Act No. 3396, known as the Ship Radio Station Law which was enacted on December 5, 1927. This law provides for the installations of radio obligatory for ships of Philippine register to protect life and property at sea. On November 11, 1931, the Philippine Legislature enacted Act No. 3846, known as the Radio Control Law of the Philippines.Section 8 of the law provides that the Secretary of Commerce and Communications is hereby authorized to create a Radio Regulation Section, Division or Office which shall take charge of carrying out the provisions of this Act and the regulations prescribed by him, to any bureau or office of his Department, subject to his general supervision and control. Thus, the Radio Control Division in the Bureau of Posts was created under the Secretary of Commerce and Communications. In 1939, the Department of National Defense was organized pursuant to Executive Order No. 230. It was realized then that the functions of supervising and regulating the establishment and operation of all radio stations in the country were important to national defense and security. Consequently, the Radio Control Division was transferred to the Department of National Defence. Pursuant to Executive Order No. 94, series of 1947, the Department of Commerce and Industry was created. The Radio Control Division was again transferred from the Department of National Defense to the Department of Commerce and Industry. The reason for the transfer was that in time of peace, the function of radio regulations was a vital factor in the promotion of commerce and industry and in the economic development of the country. On January 1, 1951, by virtue of the provisions of Executive Order No. 392, the Radio Control Board were transferred to the Department of Public Works and Communications. Actually, The Radio Control Division and the Radio Control Board were two distinct agencies with separate functions. The Division was charged with the supervision and regulation of the establishment and operation of all radio stations in the country. On the other hand, the Board implemented the provisions of the Radio Broadcasting Law, Act No. 3997, regarding the administration of the national radio broadcasting fund derived from radio receiver registration fees collected by the BIR, and the purchase, distribution, and installation of radio receivers to fourth and fifth class municipalities, municipal districts, barrios and selected government institutions. In the Department of Public Works and Communications, the Radio Control Division was under the supervision of the Radio Control Board. In 1956, R.A. No. 1476 was enacted, abolishing the radio receiver registration fees in effect also abolished the Radio Control Board. The Radio Control Division remained and continued to fuction under the Office of the Secretary of Public Works and Communications. On August 23, 1962, Department Order No. 51 was issued by the Secretary, Department of Public Works and Communications, changing the name of the Radio Control Division to Radio Control Office. As provided in the Integrated Reorganization Plan of 1972, the Radio Control Office was retained and assumed the functions relative to the supervision and enforcement of policies, rules and regulations involving telecommunications. The Office, which was later named on July 1, 1974, as the Telecommunications Control Bureau, was headed by a Director who was assisted by an Assistant Director. The Office had four divisions and district offices, the number and locations of which were determined on the basis of necessity and effectiveness of the service. Board of Communications The Board of Communications, which was created under the Integrated Reorganization law of 1972, was the first quasi-judicial body with the adjudicatory powers on matters involving telecommunication services. The Board was composed of a full-time chairman who was of unquestioned integrity and recognized prominence in previous public and/or private employment; and two full-time members who were competent in all aspects of communications, preferably one of whom was a lawyer and the other an economist. The Director of the Radio Control Office and a senior representative of the Institute of Mass Communication of the University of the Philippines were made ex-oficio members. It may be noted that the regular members of the board were experts on telecommunications. The Chairman must have previous employment on telecommunications, and the other two full-time members must be competent on all aspects of communications, preferably one of whom was a lawyer and the other an economist. The reason f or this organizational set-up is aptly stated in the Integrated Reorganization Plan which states that: Since technical and economic determinants will govern decisions with respect to economic regulation, the expertise involved should be strongly reflected on the composition of the body so that it can adequately review, revise, and decide on proposals and applications. The Board itself must also have the capability to adequately review, revise, and decide on all aspects under its coverage from both technical and economic points of view. Knowledge of the economic consideration involved must be coupled with the ability to distinguish, detect, and resolve possible conflicts with the corresponding technical considerations. The Board of Communications was attached to the Department of Public Works, Transportation and Communications for administrative supervision. According to the IRP, the DPWTC was in direct possession of facts and situational appraisals inherent in its role in the fields of communications. Adjudicative Boards operating under its umbrella would thus have direct access to the substantive bases for decision. The National Telecommunications Commission By virtue of Executive Order No. 546 dated July 23, 1979, the Telecommunications Control Bureau and the Board of Communications were abolished and have been integrated into a single entity now known as the National Telecommunications Commission. It is composed of a Commissioner and two Deputy Commissioners, preferably one of whom is a lawyer and another an economist. The Commissioner and Deputy Commissioners should be of unquestioned integrity, proven competence, and recognized experts in their fields, related as much as possible to communications. The integration of the TCB and BOC into a single entity has for its purpose the effective and unified control and supervision of communications facilities and services. Executive Order No. 546 has also created the Ministry of Transportation and Communications which has administrative jurisdiction over the National Telecommunications Commission. Pursuant to Executive Order No. 125 as amended by Executive Order No. 125-A dated April 13, 1987, the National Telecommunications Commission is now an attached agency of the Department of Transportation and Communications (Sec.14). The Philippines National Telecommunications Commission (Filipino: Pambansang Komisyon sa Telekomunikasyon), abbreviated as NTC, is an agency of the Philippine government under the Commission on Information and Communications Technology responsible for the supervision, adjudication and control over all telecommunications services throughout the Philippines.

Turkey Joining the European Union Essay Example for Free

Turkey Joining the European Union Essay In December 1999 Turkey became an official candidate for joining the EU, along with a number of other developing countries, mainly of Eastern Europe. After fundamental studies of current situation in Turkey and its future outlooks, followed by a series of negotiations between the representatives of Turkey and the EU, it became clear that it would take not less than a decade for Turkey to make necessary reformations and meet the Copenhagen criteria. There are different opinions on the issue of possible effects of Turkey joining the EU. The country has many proponents in its desire to create a common future with the EU. But some political, economic and cultural problems can create difficulties for Turkey on its way to the EU and can come out with unpredictable effects on social wellbeing of European nations. This work is an attempt to show that Turkey joining the EU can result in a number of negative and undesirable consequences, both for Turkey and for the European community. The population of Turkey exceeds 70 million people of diverse ethnic origins, and its major territories are located in Asian continent. Geostrategic location of Turkey is important, because the country controls navigation along the Bosporus and four seas nearby. Turkey has a long and dynamic history. The roots of Turkish nation go back to a number of early Asian civilizations united into the powerful Ottoman Empire. Modern history of Turkey started in the 1920s, when a military leader, Mustafa Ataturk, won the Independence war and founded the Republic setting the country on the way of democratic development and westernization. Current Turkish economy is a mix of heavy industry and traditional agriculture. Economic indexes show that the economy is quite poor (GDP is only $358.2 billion), but at the same time it is steadily developing (GDP growth rate is 5.2%) (CIA).   Principal industries are textile, food processing, construction, mining and electronics. Also, Turkey is one of the main importers of commodities from Germany, Russia, Italy, China, etc. Turkey has very advanced and up-to-date communication and transportation infrastructure, but the greatest asset of the country is its people, as well as their highly-respectable moral values. It is possible to name several major drawbacks which seriously influence the position of the EU countries toward granting Turkey the EU membership. Paul Kubicek writes in his study of the problem of Turkey’s accession to the EU: â€Å"Turkeys supposed shortcomings are well-known: it is too big, too poor, too agricultural, too authoritarian, and, perhaps above all, too Muslim† (Kubicek, p.33). A specialist from Stockholm University Harry Flam considers political reasons to be the most important obstacle (Flam, p. 171). According to the Copenhagen criteria, the EU membership requires: â€Å" stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities† (Flam, p. 175). For some last years political situation in the country has been changing since the Justice and Development Party came to the power. Its leader and current Prime-Minister, Recep Tayyip Erdogan, proclaimed joining the EU to be one of his main political goals and directed the efforts on implementing necessary political reformations to meet the Copenhagen criteria. Turkish Constitution sets the military as the exclusive guarantor of internal security and empowers it to take over the situation in cases of political instability or a social crisis. Certainly, such crucial role of the military does not correspond to the idea of democracy, because army should be controlled by government. Nevertheless, Turkish authorities do not accept this position, being supported by public opinion. Another substantial political problem is minority and human rights. There is a large Kurdish minority with population of about 13 million people (around 20% of the country’s total population), which is concentrated in southeastern regions. Turkish government takes Kurdish nationalism as a serious threat to the existing integrity of the country. That is why Turkish laws prohibit official use of Kurdish language and other expressions of their cultural identity. For decades there were severe restrictions as to such issues as religious education, rights for communal property and others. Finally, one of the greatest obstacles on the way to the EU is refusal of Turkish government to recognize the Republic of Cyprus, a current member of the EU. Claiming for receiving the whole territory of the island, for some decades Turkey has been ignoring the Greek side of Cyprus. Therefore, as Turkey refuses to recognize a member of the EU, the negotiations with the European community can not be held. In addition, Turkey will have a dangerous impact on foreign policy of the EU bringing the borders of the Union closer to volatile Middle East. This may affect external political affairs of the EU. Economic factors are, probably, the most depressing. Turkish economy is making progress, but still remains very poor and the situation will not improve in the nearest future. Currently Turkey reached only 1.9% of EU25 GDP, and with average annual growth of 5%, it would be only 2.9% of GDP in 2015. Moreover, country’s GDP per capita is only 27% of the EU average (CIA). It is obvious that country with large population and poor economy will affect general economic situation of the EU. Turkey will need a lot of investments, budget transfers, special privileged tariffs, and other resources to stimulate country’s economy. A serious problem of Turkish economy, which is a point of concern of the EU specialists, is agriculture. Its contribution to GDP exceeds 14% and, at the same time, the majority of labor force (over 33%) employed in agriculture. But agriculture in Turkey needs considerable governmental support, which results in heavy taxation burden on national taxpayers. Turkey does not have a lot of arable lands, that’s why cultivation and farming are very expensive. Flam underlines possible problem for the European community, saying that â€Å"†¦the size of the Turkish agricultural sector threatens to be costly for EU taxpayers if Turkish farmers are to have the same terms as the farmers of the CCEC-8†¦Ã¢â‚¬  (Flam, p. 186). Other disadvantages of Turkish economy include considerable regional inequality and necessity to restructure labor market. Overwhelming majority of Turkish industries is concentrated on the West and the North of the country, while Eastern parts rely more on agriculture and remain considerably underdeveloped. Turkish labor market needs to be reformatted in order to use its potential and improve low unemployment rates, especially among youth and women. Religious issue is, probably, the most controversial among the others. With its 98% Muslim population, Turkey will be the only non-Christian community in the EU. Undoubtedly, such a huge Muslim population will contribute to the development and acceptance of multiculturalism in the Union, but in a secular society this issue is rather complex. Turkey itself has a long history of serious difficulties and conflicts between religious leaders and the state. In addition, many specialists fear that Islamic conservatism and numerous traditional restrictions will cause serious pressure on personal freedoms. Many associate Muslim countries with terrorism and cruelty, but it can not be said about Turkey. The analysts argue that despite possible difficulties based on religious factor, prevalence of Islam in Turkey must not be a reason for Europe to turn its back to Turkey. Kirsten Hughes writes: â€Å"At a time, when the ‘war on terror’ is creating global tension †¦, Turkey’s relations to the EU take on a broad geopolitical significance.   A rejection of Turkey by the Union would be taken as a strong negative signal by many† (Hughes, p. 26). Many specialists suppose, that not only religious, but other cultural differences will bring to negative outcomes of Turkey’s assertion. They think that cultural problems may cause difficulties for Turkish population when integrating into the European community. Some years ago, the chairman of the European Convention on the Future of Europe, Giscard d’Estaing, said that he was against Turkish membership because Turkey had â€Å"a different culture, a different approach, a different way of life† and â€Å"its capital is not in Europe, 95 percent of its population is outside Europe, it is not a European country. (Flam, p.176)† Crowded Turkish Diaspora in Germany, which counts more than 2.5 million people, is the brightest example of this idea. Many Turks go to Germany in order to find better career opportunities and better-quality life. Turkish people get adapted to European life-style rather fast and, usually, express no desire to be back to their poor homelands, but very frequently serious cultural disconnections take place. Turkish immigrants reject European moral norms and customs and often their children have to stand for the consequences. That is why potential migration of Turkish people to the EU is considered as a serious threat to cultural unity of Europe. Europeans remember that after accession of Bulgaria and Romania to the EU, thousands of people from these poor countries hurried up to move to Germany, France, Italy and other developed lands to find some work and earn some money. Recent researches demonstrated that if Turkey were accepted to the EU, about 44% of Turkish population would look for better job somewhere in Europe (Kubicek, p. 38). Demographic issues can also be taken both in favor and against Turkey. It has a good population growth rate (1,06%), and more than 25% of the population are children below 14 (CIA). Thus, Turkish nation is very young, and this is quite attractive for aging European community. But, on the other hand, in case of accession, Turkey will become the most crowded country in the EU. Therefore, it will take a large number of seats in the European Parliament and become a powerful player. That is undesirable for European parliamentarians, who are aware of inflexibility and intolerance of Turkish diplomats on many crucial issues. There are many other key matters, which remain in concern of the EU experts. They include the problems of meeting the requirements as to environmental standards, or the implementation of many democratic reforms, the problems of corruption, which is especially prevalent and deep-rooted in the highest levels of public sectors. Finally, a very important problem is limitation of the freedom of expression and censorship in Turkish media. Nevertheless, it must be mentioned that currently there is a great number of positive and progressive reforms are initiated in the country. In particular, educational opportunities are becoming more equal, that’s why teenagers and youth from different remote areas on the East are getting more socially mobile. Democratization, together with the increase in communication, is among the key factors, which brought to a rise in awareness. Therefore, according to the Copenhagen criteria, a sequence of political and social changes must be made by Turkish government in order to see the door to the EU opened. But still there is no guarantee for Turkey on its accession. Besides, with its decision regarding Turkey, the EU relies not only on the opinion of its members, but also on the idea of other major political powers, like the U.S. â€Å"In Washingtons eyes, Turkey has transformed from a Cold War bulwark against Soviet aggression into a critical bridge linking the industrialized Christian West to the pre-industrial Muslim East.† (Robbins, p.17). Some specialists can see possible benefits of Turkey joining the EU, especially for dynamic and developing European community. Paul Kubicek summarizes his research on the problem â€Å"Turkey the EU† with the following statement: â€Å"Turkish membership is at least another decade away and its accession is far from assured, but the very prospect of Turkish membership presents the EU with many challenges and opportunities† (Kubicek, p.32). Nevertheless, there are more problems and uncertainties which can create serious difficulties for Turkey and the EU both on internal and external stages. This thought is greatly summarized by Gerard Baker, who resumes that: â€Å"Fear of the economic consequences of admitting millions of relatively low-paid workers into the European labor market, together with rising concern over the dilution of European identity by an alien Middle Eastern culture makes the idea of Turkish membership highly unpopular† (Baker, p.26). Works Cited:  ·Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Baker, Gerard. Let’s Not Talk Turkey: Guess Who Won’t Be Joining the European Union Anytime Soon. The Weekly Standard. Vol. 010, Issue 46 29 Aug. 2005: 26-30 ·Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Flam, Harry. Turkey and the EU: Politics and Economic Accession. CESInfo Economic Studies. Vol. 50,   Jan. 2005: 171-210 ·Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Hughes, K. Turkey and the European Union: Just Another Enlargement? Friends of Europe. The European Commission. June 2007. 3 Dec. 2007. http://www.friendsofeurope.org/pdfs/TurkeyandtheEuropeanUnion-WorkingPaperFoE.pdf. ·Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Kubicek, Paul. Turkish Accession to the European Union: Challenges and Opportunities. World Affairs. Vol. 3 Fall 2005: 32-41 ·Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   Robbins, Gerald. Germans Are Talking Turkey; The European Union Is In No Rush to Expand Into Anatolia. The Weekly Standard. Vol. 010, Issue 44 2 Aug. 2006: 16-17  ·Ã‚  Ã‚  Ã‚     Ã‚  Ã‚  Ã‚  Ã‚   Turkey. Central Intelligence Agency. The World Factbook. 15 Mar. 2007. 3 Dec. 2007. https://www.cia.gov/cia/publications/factbook/geos/tu.html.