Methodology for STRESS TESTING of Banks

The Reserve Bank of India in its communication in 2007 had stated that in the present liberalised environment, banks need to have a robust and sound stress testing process for assessment of capital adequacy. The stress testing involves identifying possible events, future economic conditions that could unfavourably impact bank’s credit exposures and making an assessment of the ability of banks to withstand the loss arising out of such events. There is also a need for carrying out stress tests on the asset portfolio incorporating various scenarios, like economic downturns, industrial downturns, market risk events and sudden shifts in liquidity conditions.

Some of the steps involved could be :

* The banks are required to project their credit losses and revenues for the current year and next, including the level of reserves that they would need at the end of next year to cover expected losses in the third year.

* Projections are to be made based on two different economic scenarios. A "baseline scenario" that reflects the current economic expectations and a “more adverse scenario,”* Banks are required to provide supporting documentation, including information on projected income and expenses. to help authorities to decide whether the bank’s loss estimates were appropriate – and how the bank would absorb those losses.

* Each bank’s projected losses, revenue and changes in reserve are combined to evaluate the amount and quality of capital the bank would have at the end of next year. If a bank is found to have less capital than projected by the stress test under the adverse scenario, it would have to augment its capital, or create a “capital buffer” that it could use to offset losses if the economy turns out to take an even bigger turn for the worse than expected.

Contributed by:
Prof. Bikramjit Sen
(Globsyn Business School)

STRESS TESTING for assessing stability of banks finally getting due importance

Stress testing - a well recognized tool for assessing the financial stability of banks had been talked about for quite some time now. But surprisingly, little seems to have been done till the recent financial crisis engulfed the world. The entire regulatory system world over seems to have finally shaken off its lethargy and taking up stress testing as an effective tool for assessing the stability of banks, in real earnestness.

In fact in the US, the incubator of modern innovative concepts and techniques, this is yet to be completed although their Indian counterpart has already come out with their results and seems to have passed with flying colours. Results were published in the Volume III of the report on assessment submitted in March 2009 by the Committee on Financial Sector Assessment fomed by Government of India jointly with RBI (ref: http://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=544#3RANN2.2)

Unfortunately it seems that the US financial world had been more busy in innovating and putting to use more and more leveraged products aimed at earning higher and higher profits, without much attention to the risks associated with them and taking appropriate protective measures.

In fact it took a fast building public opinion against increased funding of loss making financial institutions out of funds available under Troubled Assets Relief Program to into action the central banking authority which was evident from the statement made by Mr Ben Bernanke, Federal Reserve Chairman recently "We're going to do an honest evaluation. We're going to do a tough evaluation [to] try to figure out how much hole there is, if there is a hole,".

Under the program, the country's 19 largest banks will undergo "stress tests" which will measure if banks can weather what-if economic conditions that could emerge over the next two years. If they can't, the banks stand to receive more federal aid on top of the hundreds of billions already provided by the Troubled Assets Relief Program.

According to analysts, taxpayers need accountability, and using a stress test is one method of the government confirming to the public that they have looked at the matter and found that this is a prudent investment for the taxpayers to make.

The US government is expected to release the results today which is widely awaited and is likely to answer the question ”How healthy are the country's leading financial institutions, and will they need more cash to survive should the economy get worse?”

While consumer outrage has been obvious, the health of the banks themselves has been harder to judge. Everyone knows that the ongoing recession has taken a toll on the banks, but how dramatically they have been affected is the question.

News reports Wednesday indicated that at least three big banks will need tens of billions more - nearly $34 billion for Bank of America, $10 billion for Citigroup and $15 billion for Wells Fargo.

Contributed by:

Prof Bikramjit Sen

(Globsyn Business School)

Source:
http://www.abcnews.go.com/Business/Economy/story?id=7522101&page=1
http://www.smartmoney.com/investing/economy/anatomy-of-a-stress-test-how-banks-are-judged/

Fighting Recession – Protectionism to be Avoided at All Costs

There is now a growing concern about possible protectionist measures that might be adopted by some of the nations fighting recession within their country to prop up domestic industries. The need of the hour is to think globally about the recession issue.

In a recent statement made after Finance ministers and central bankers from the Group of Seven industrialized democracies met in Rome on 14th February 2009 the group confirmed that “..The G7 remains committed to avoiding protectionist measures, which would only exacerbate the downturn, to refraining from raising new barriers and to working towards a quick and ambitious conclusion of the Doha Round….”

Some of the participants had warned that any return to the levels of protectionism seen during the great depression of 1930-s will only further aggravate the situation. What was needed was taking appropriate long term measures and cooperate with each other particularly in the area of managing foreign exchange rates which has been extremely volatile in the recent past.

The Governor of the Bank of Italy said that the IMF forecasts that the downturn was expected to last the major part of 2009, assumed that various stimulus plans announced by the different governments had immediate effect but he noted that most of them had not yet been implemented. In fact every one seemed to be eagerly waiting for the plans unveiled by the US government to be implemented.

Contributed By:
Prof. Bikramjit Sen
(Globsyn Business School)

Source: http://www.ft.com

B-school grads grow liking for FMCG jobs

The fast moving consumer goods (FMCG) sector is back in the reckoning as the most popular job sector for management graduates in the wake of the recent global financial turmoil. The latest Nielsen Campus Track-B School 2008 Survey of top 10 companies places P&G at number two and HUL at number five among the top 10 dream companies, according to interviews conducted at top 40 management institutes.

Management graduates are also largely voting in favour of IT and management consulting companies. Google, McKinsey & Co, Accenture, BCG, Microsoft, Goldman Sachs, Barclays Capital and TAS are the other top 10 dream companies in the Nielsen tracker.

The other top popular job sectors on campus include foreign banks and retailing. “In particular, students are opting for FMCG companies over the financial sector as a consequence of the current global financial turmoil. The security offered by the FMCG industry has become a major attraction for students,” said The Nielsen Company associate director Vatsala Pant.

Students cited factors like personal growth, independence in decision making, take-home salary, reputation of the company and flexible working hours as some of the very important factors for joining a company.

P&G head of HR Sonali Roychowdhury said: “Our focus on early responsibility ensures that fresh recruits get to be in charge of multi million dollar brands and lead decision making. This naturally makes for rich and stimulating job content. Besides this, P&G is attractive because of its focus on leadership development. As a company that primarily recruits from campuses and promotes from within, grooming leaders for the future is critical and therefore, we invest significantly.”

While most sectors are under pressure in the wake of the financial turmoil, FMCG sales have bucked the trend and are expected to remain steady at a time when consumer sentiments are otherwise shaky. The sector is growing at 15-17% in both urban and rural markets.

IT companies are faring relatively better than the investment banks, which were earlier a hotseat for the management graduates. The IT sector has not been directly impacted by the financial meltdown and companies like Google and Microsoft are perceived to be more stable as the services offered by them are diversified.

Says Microsoft India director HR Joji Gill, “At Microsoft, we believe in building the best software and also in helping people and organisations achieve their potential. As an employer, we constantly strive to attract, develop and retain talent by offering enriching jobs and giving opportunities to build great careers.”

Heavy dependence on the agri-sector and not being very capital-intensive have insulated the sector from the downturn. Also, emerging markets like India are significant contributors to sales and profits of global FMCG companies like P&G, HUL and Cadbury among others.

Contributed By:
Prof. Amit Dey
(Globsyn Business School)

Source: The Economic Times

India’s IT export growth likely to plunge to 20%

The recession in the US, the principal market for the Indian IT/ITeS industry, is likely to take its toll on Indian IT exports. According to the Electronics & Computer Software Export Promotion Council (ESC), IT exports have already been hit in the April-September period and are likely to grow at 20-22% at best this fiscal, compared to the 35% growth achieved in 2007-08. ESC has about 2,300 Indian IT and BPO companies under its fold and accounts for nearly 95% of the country’s electronics and IT exports valued at $48.2 billion in 2007-08. The council has now set a revised IT export target of $58 billion for this fiscal. It has also started lobbying with the Centre to dole out special incentives to the domestic IT industry to tide over the bad time.

“IT export growth has slid in the first six months of this year to 22% and we estimate that it might grow at best by 20% in the second half. We are taking stock of the situation and actively promoting a market diversification strategy for the Indian companies. The target markets now should be Africa, Latin America and the Asean nations,” ESC executive director DK Sareen told ET. Mr Sareen said ESC has started discussions with the union IT and finance ministries to extend the Software Technology Parks of India (STPI) scheme and provide 100% income tax exemption for software and hardware exports. The STPI scheme is due to expire on March 31, 2010.

“If both the demands are implemented, it will provide respite to the IT companies hit hard by external factors, especially the SMEs,” he said.

ESC has also decided to set up six export facilitation and business support centre over the next two years in the US, France and South Africa. These centres, set up under the Market Access Initiative (MAI) programme of the union commerce ministry will provide an incubation and market access platform for the Indian IT companies, especially the SMEs. It has recently set up one such centre in the US.

“We plan to set up at least two more such centres by March 2009 in the US and looking at Virginia and Los Angeles for such opportunities. We have also identified Durban and two places in France for such centres. The IT companies in these foreign locations are keen to outsource their projects to India and even enter into joint-venture with the Indian companies,” said Mr Sareen.

ESC will host the ninth edition of its global IT networking event, Indiasoft, in Kolkata between February 26-27, 2009. The partner state for this year’s event will be West Bengal. Around 200 software and services buyers from over 50 countries are expected to take part in the event and interact with the 100-odd exhibitors. This is the first time the event will be held in Kolkata.

Contributed By:
Prof. Amit Dey
(Globsyn Business School)

Source: The Economic Times

Sops for Exporters

Exporters who have purchased export credit protection are set to get an additional dole-out from the government over and above the cover they have already bought.

The government is expected to come out with a Rs 350-crore additional package for exporters soon. This will be in addition to Rs 5,000-crore refinance package announced earlier in the month by the Reserve Bank of India for Exim Bank to provide liquidity support to troubled exporters. The funds will be used to provide export credit insurance cover to exporters over and above the protection provided by Export Credit Guarantee Corporation, ECGC executive director S Prabhakaran said at a CII seminar.

Mr Prabhakaran said: “Exporters who have ECGC cover will get an additional 10% of money depending on the type of cover. It will cover those entities who are covered by the MSMED (Micro Small and Medium Enterprises Development) Act.” While the details of the package are still being worked out, the non-SME beneficiaries from the package are likely to be from sectors like textiles, gems and jewellery and leather. The list is expected to cover the list of beneficiaries in detail, Mr Prabhakaran added.

One of the fall-outs of the global financial markets in most western markets since September this year is that many Indian exporters saw a dip in demand and had to cancel order. For the first time in several years, the country’s exports saw an absolute dip in exports this year. Many even faced payment and credit problems, leading them to enforce their claims with the credit insurer. Many have also been facing problems because of a volatile rupee.

Contributed By:
Prof. Amit Dey
(Globsyn Business School)

Source: The Economic Times

IMF backs a new Bretton Woods deal

With the current financial crisis which originated in the U.S. and quickly engulfed the entire world, experts have now started seriously thinking about restructuring the global financial architecture. In a recent report from PTI, it appears that the recently held G-20 ministerial meet, this proposal has been mooted by the IMF to the participants which also included the Indian Finance Minister and Dy. Governor of the Reserve Bank of India. Perhaps it is time to seriously consider replacing the US Dollar as the reserve currency, and the Euro has now emerged as a strong contender.

“There have been numerous calls in recent months for a new Bretton Woods agreement which I strongly endorse,” IMF chief Dominique Strauss-Kahn wrote to heads of G20 countries including Indian prime minister Manmohan Singh.

Dr Singh had said last week “we will seek reform of the international financial institutions and improve regulation and supervision to prevent recurrence of such crisis.”

IMF, which has recently come out with a gloomy forecast of world economic growth, is likely to present a fresh report on the global scenario at the summit on November 15.

The fund in its latest update has said the world economic growth rate would slip from 5% in 2007 to 3.7% in 2008 and further dip to 2.2% next year.

Similarly, the global trade growth rate, which has implications for the emerging economies like India and China, will nosedive from a high of 9.4% in 2006 to 4.6% in the current year and 2.1% in 2009.

Contributed By:
Prof. Bikramjit Sen
(GLobsyn Business School)