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PRESENTED BY: NISHANT SINHA

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Introduction.

Basel accord and its implementation in India.

Limitation of basel 1. The Rise and Fall of GTB.

Research Methodology- THE CAMEL MODEL.

CONTENTS

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A series of bank failures in the 1980s a committee was

formed comprising central bank and supervisoryauthorities of 12 countries in 1987.It was famously known

as BASEL COMMITTEE ON BANKING SUPERVISION(BCBS). It was entrusted with the task of setting standardsfor banking operations.

INTRODUCTION

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The BCBS developed a set of international capitaladequacy guidelines for commercial banks, which

came to be known as Basel 1 Accord. India implemented the Basel framework with effect

from 1992-93 which was spread over three years-banks with branches abroad were required to

comply fully by the end of March 1994,while otherbanks were required to comply by the end of March1996.

BASEL 1 ACCORD

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It is a set of agreements which provides recommendations

on banking regulations with regard to capital risk, marketrisk and operational risk. The purpose of the accord is toensure that financial institutions have enough capital onaccount to meet obligations and absorb unexpected losses.

The first accord was Basel 1.It was issued in 1988 andfocused primarily on credit risk T-the risk of loss due to

borrower or counter party default, by creating a bankclassification system. This classification system grouped abanks assets into five risk categories:

Basel accord and its

Implementation in India

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0%- Cash, Central bank and government debt, OECD govt.

debt.

0%,10%,20%or 50%- public sector debt. 20%- development bank debt, OECD bank debt, OECD

securities firm debt, non-OECD public sector debt, cash incollection.

50%-residential mortgages 100%-private sector debt, non OECD bank debt, real estate,

plant and equipment, capital instrument issued at otherbanks.

Five categories

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It gave an equal risk weighting to all corporate credit,

irrespective of the difference in their underlying credit

risk. It failed to recognize that by undertaking credit portfolio

diversification , banks can have potential capital savings

It led to an extensive regulatory capital arbitrage, which

adds to the riskiness of bank asset portfolios.

Limitations of Basel 1

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The experience with Basel 1 (1988),the Bank for

International Settlements (BIS) proposed a new

capital adequacy framework (1999) also known asBasel II .The characteristic feature of Basel II is that ituses a three-pillars.

A minimum capital requirement pillar,

A supervisory review pillar to ensure that the bankscapital is aligned to its actual risk profile

A market discipline pillar to enhance the role ofother market participants in ensuring thatappropriate capital is held by prescribing greater

discloser.

Basel II

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GTB was established in 1993 and was headquartered in

secunderabad . It was a private sector bank . With 40 %contribution by the core promoters , the bank was the firstin India to attract equity participation from twointernational institutions IFC and ADB.

GTB had been running successfully with Rs. 11.8 cr in netprofits for the nine-month period ending.

The banks IPO of Rs. 1040 mn was oversubscribed by arecord 60 times, with subscriptions of Rs 62.40 bn fromover 1 million investor.

The rise and fall of GTB

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GTB was also recognized as one of the fastestgrowing banks in India when it received Rs 1 bn

worth of deposit in its first day of the operations. The Bank was given top billing in a survey of Indias

best banks conducted by The Financial Express inFebruary 2001.

At the end of 35 months , its total business exceededRs 43.02 bn.

CONTD

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Its financial position start deteriorating from 2002.

On 24 of July, the RBI and the government issued a

three month moratorium on GTB. It aimed at freezing the asset and liabilities of the

bank in order to protect the banks health fromfurther deterioration.

The bank was amalgamated with the Oriental Bankof Commerce on August 14, 2004.

Fall of GTB

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The bank had a large Rs 2.7 bn net loss in FY03 mainly

due to large provisioning for NPAs.

The failure of the bank is also attributed to its pooroperational efficiency .

After amalgamation with OBC it has been detected thatthe actual loss of GTB ran into over Rs 1400 cr.

It has also been noticed that GTB had taken high credit

exposure in certain accounts, even exceeding exposurenorms prescribed by the RBI.

There is also a view that its failure lies in GTBsinvolvement in the Ketan Parekh securities scam in 2001and the ouster of promoter Ramesh Gelli.

CONTD

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To anticipate a banks financial deterioration , procedures

have been developed to identify banks approaching

financial distress a model was designed which was calledCAMEL MODEL.

C - Capital adequacy.

A - Asset quality.

M - Management competency. E - Earning quality.

L Liquidity.

CAMEL MODEL

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