What is TAN?
TAN or Tax Deduction and Collection Account Number is a 10 digit alpha numeric number required to be obtained by all persons who are responsible for deducting or collecting tax. It is compulsory to quote TAN in TDS / TCS return (including any e-TDS / TCS return), any TDS / TCS payment challan and TDS/TCS certificates.
Who needs to apply for TAN? What law requires it to be obtained?
All those persons who are required to deduct tax at source or collect tax at source on behalf of Income Tax Department are required to apply for and obtain TAN.
The provisions of section 203A of the Income-tax Act require all persons who deduct or collect tax at source to apply for the allotment of a TAN. The section also makes it mandatory for TAN to be quoted in all TDS/TCS returns, all TDS/TCS payment challans and all TDS/TCS certificates to be issued. Failure to apply for TAN or comply with any of the other provisions of the section attracts a penalty of Rs. 10,000/-
PAN (PERMANENT ACCOUNT NUMBER)
Permanent Account Number (PAN) is a ten-digit alphanumeric number allotted by Income Tax Department. Normally it is, issued in the form of a laminated card, by the IT Department.
It is mandatory w.e.f.1 January 2005 to quote PAN on challans for any payments due to Income Tax Department. Moreover, now it is mandatory to quote PAN on return of income, all correspondence with any income tax authority.
In all documents pertaining to financial transactions notified from time-to-time by the Central Board of Direct Taxes.it is necessary to quote PAN. Some of the transactions where it is compulsory to quote PAN are as follows-
Sale and purchase of immovable property or motor vehicle;
Payments in cash, of amounts exceeding Rs. 25,000/-to hotels and restaurants;
In connection with travel to any foreign country.
For obtaining a telephone or cellular telephone connection.
For making a time deposit exceeding Rs. 50,000/- with a Bank Post Office;
depositing cash of Rs. 50,000/- or more in a Bank.
It is mandatory w.e.f.1 January 2005 to quote PAN on challans for any payments due to Income Tax Department. Moreover, now it is mandatory to quote PAN on return of income, all correspondence with any income tax authority.
In all documents pertaining to financial transactions notified from time-to-time by the Central Board of Direct Taxes.it is necessary to quote PAN. Some of the transactions where it is compulsory to quote PAN are as follows-
Sale and purchase of immovable property or motor vehicle;
Payments in cash, of amounts exceeding Rs. 25,000/-to hotels and restaurants;
In connection with travel to any foreign country.
For obtaining a telephone or cellular telephone connection.
For making a time deposit exceeding Rs. 50,000/- with a Bank Post Office;
depositing cash of Rs. 50,000/- or more in a Bank.
ASSET LIABILITY MANAGEMENT IN BANKS (ALM)
What is ALM ?
ALM is a comprehensive and dynamic framework for measuring, monitoring and managing the market risk of a bank. It is the management of structure of balance sheet (liabilities and assets) in such a way that the net earning from interest is maximised within the overall risk-preference (present and future) of the institutions. The ALM functions extend to liquidly risk management, management of market risk, trading risk management, funding and capital planning and profit planning and growth projection.
Benefits of ALM - It is a tool that enables bank managements to take business decisions in a more informed framework with an eye on the risks that bank is exposed to. It is an integrated approach to financial management, requiring simultaneous decisions about the types of amounts of financial assets and liabilities - both mix and volume - with the complexities of the financial markets in which the institution operates
The concept of ALM is of recent origin in India. It has been introduced in Indian Banking industry w.e.f. 1st April, 1999. ALM is concerned with risk management and provides a comprehensive and dynamic framework for measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity and commodity price risks of a bank that needs to be closely integrated with the banks’ business strategy.
Therefore, ALM is considered as an important tool for monitoring, measuring and managing the market risk of a bank. With the deregulation of interest regime in India, the Banking industry has been exposed to the market risks. To manage such risks, ALM is used so that the management is able to assess the risks and cover some of these by taking appropriate decisions.
The assets and liabilities of the bank’s balance sheet are nothing but future cash inflows or outflows. With a view to measure the liquidity and interest rate risk, banks use of maturity ladder and then calculate cumulative surplus or deficit of funds in different time slots on the basis of statutory reserve cycle, which are termed as time buckets.
As a measure of liquidity management, banks are required to monitor their cumulative mismatches across all time buckets in their Statement of Structural Liquidity by establishing internal prudential limits with the approval of the Board / Management Committee.
The ALM process rests on three pillars:
ALM Information Systems
Management Information Systems
Information availability, accuracy, adequacy and expediency
ALM Organisation
Structure and responsibilities
Level of top management involvement
ALM Process
Risk parameters
Risk identification
Risk measurement
Risk management
Risk policies and tolerance levels.
As per RBI guidelines, commercial banks are to distribute the outflows/inflows in different residual maturity period known as time buckets. The Assets and Liabilities were earlier divided into 8 maturity buckets (1-14 days; 15-28 days; 29-90 days; 91-180 days; 181-365 days, 1-3 years and 3-5 years and above 5 years), based on the remaining period to their maturity (also called residual maturity). All the liability figures are outflows while the asset figures are inflows. In September, 2007, having regard to the international practices, the level of sophistication of banks in India, the need for a sharper assessment of the efficacy of liquidity management and with a view to providing a stimulus for development of the term-money market, RBI revised these guidelines and it was provided that
(a) the banks may adopt a more granular approach to measurement of liquidity risk by splitting the first time bucket (1-14 days at present) in the Statement of Structural Liquidity into three time buckets viz., next day , 2-7 days and 8-14 days. Thus, now we have 10 time buckets.
After such an exercise, each bucket of assets is matched with the corresponding bucket of the liabililty. When in a particular maturity bucket, the amount of maturing liabilities or assets does not match, such position is called a mismatch position, which creates liquidity surplus or liquidity crunch position and depending upon the interest rate movement, such situation may turnout to be risky for the bank. Banks are required to monitor such mismatches and take appropriate steps so that bank is not exposed to risks due to the interest rate movements during that period.
(b) The net cumulative negative mismatches during the Next day, 2-7 days, 8-14 days and 15-28 days buckets should not exceed 5 % ,10%, 15 % and 20 % of the cumulative cash outflows in the respective time buckets in order to recognise the cumulative impact on liquidity.
The Board’s of the Banks have been entrusted with the overall responsibility for the management of risks and is required to decide the risk management policy and set limits for liquidity, interest rate, foreign exchange and equity price risks.
Asset-Liability Committee (ALCO) is the top most committee to oversee the implementation of ALM system and it is to be headed by CMD or ED. ALCO considers product pricing for both deposits and advances, the desired maturity profile of the incremental assets and liabilities in addition to monitoring the risk levels of the bank. It will have to articulate current interest rates view of the bank and base its decisions for future business strategy on this view.
Rate Sensitive Assets & Liabilities : An asset or liability is termed as rate sensitive when
(a) Within the time interval under consideration, there is a cash flow,
(b) The interest rate resets/reprices contractually during the interval,
(c) RBI changes interest rates where rates are administered and,
(d) It is contractually pre-payable or withdrawal before the stated maturities.
Assets and liabilities which receive / pay interest that vary with a benchmark rate are re-priced at pre-determined intervals and are rate sensitive at the time of re-pricing.
INTEREST RISK :
The phased deregulation of interest rates and the operational flexibility given to banks in pricing most of the assets and liabilities imply the need for the banking system to hedge the Interest-Rate Risk. Interest Rate Risk is the risk where changes in market interest rates might adversely affect the Bank’s Net Interest Income. The gap report should be generated by grouping interest rate sensitive liabilities, assets and off balance sheet positions into time buckets according to residual maturity or next repricing period, whichever is earlier. Interest rates on term deposits are fixed during their currency while the advance interest rates are floating rates. The gaps on the assets and liabilities are to be identified on different time buckets from 1–28 days, 29 days upto 3 months and so on. The interest changes should be studied vis-a-vis the impact on profitability on different time buckets to assess the interest rate risk.
GAP ANALYSIS :
The various items of rate sensitive assets and liabilities and off-balance sheet items are classified into time buckets such as 1-28 days, 29 days and upto 3 months etc. and items non-sensitive to interest based on the probable date for change in interest.
The gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) in various time buckets. The positive gap indicates that it has more RSAS than RSLS whereas the negative gap indicates that it has more RSLS. The gap reports indicate whether the institution is in a position to benefit from rising interest rates by having a Positive Gap (RSA > RSL) or whether it is a position to benefit from declining interest rate by a negative Gap (RSL > RSA).
REPORTS :
The following reports are used for ALM:
Structual Liquidity Profile (SLP);
Interest Rate Sensitivity
Maturity and Position (MAP)
Statement of Interest Rae Sensitivity (SIR)
ALM is a comprehensive and dynamic framework for measuring, monitoring and managing the market risk of a bank. It is the management of structure of balance sheet (liabilities and assets) in such a way that the net earning from interest is maximised within the overall risk-preference (present and future) of the institutions. The ALM functions extend to liquidly risk management, management of market risk, trading risk management, funding and capital planning and profit planning and growth projection.
Benefits of ALM - It is a tool that enables bank managements to take business decisions in a more informed framework with an eye on the risks that bank is exposed to. It is an integrated approach to financial management, requiring simultaneous decisions about the types of amounts of financial assets and liabilities - both mix and volume - with the complexities of the financial markets in which the institution operates
The concept of ALM is of recent origin in India. It has been introduced in Indian Banking industry w.e.f. 1st April, 1999. ALM is concerned with risk management and provides a comprehensive and dynamic framework for measuring, monitoring and managing liquidity, interest rate, foreign exchange and equity and commodity price risks of a bank that needs to be closely integrated with the banks’ business strategy.
Therefore, ALM is considered as an important tool for monitoring, measuring and managing the market risk of a bank. With the deregulation of interest regime in India, the Banking industry has been exposed to the market risks. To manage such risks, ALM is used so that the management is able to assess the risks and cover some of these by taking appropriate decisions.
The assets and liabilities of the bank’s balance sheet are nothing but future cash inflows or outflows. With a view to measure the liquidity and interest rate risk, banks use of maturity ladder and then calculate cumulative surplus or deficit of funds in different time slots on the basis of statutory reserve cycle, which are termed as time buckets.
As a measure of liquidity management, banks are required to monitor their cumulative mismatches across all time buckets in their Statement of Structural Liquidity by establishing internal prudential limits with the approval of the Board / Management Committee.
The ALM process rests on three pillars:
ALM Information Systems
Management Information Systems
Information availability, accuracy, adequacy and expediency
ALM Organisation
Structure and responsibilities
Level of top management involvement
ALM Process
Risk parameters
Risk identification
Risk measurement
Risk management
Risk policies and tolerance levels.
As per RBI guidelines, commercial banks are to distribute the outflows/inflows in different residual maturity period known as time buckets. The Assets and Liabilities were earlier divided into 8 maturity buckets (1-14 days; 15-28 days; 29-90 days; 91-180 days; 181-365 days, 1-3 years and 3-5 years and above 5 years), based on the remaining period to their maturity (also called residual maturity). All the liability figures are outflows while the asset figures are inflows. In September, 2007, having regard to the international practices, the level of sophistication of banks in India, the need for a sharper assessment of the efficacy of liquidity management and with a view to providing a stimulus for development of the term-money market, RBI revised these guidelines and it was provided that
(a) the banks may adopt a more granular approach to measurement of liquidity risk by splitting the first time bucket (1-14 days at present) in the Statement of Structural Liquidity into three time buckets viz., next day , 2-7 days and 8-14 days. Thus, now we have 10 time buckets.
After such an exercise, each bucket of assets is matched with the corresponding bucket of the liabililty. When in a particular maturity bucket, the amount of maturing liabilities or assets does not match, such position is called a mismatch position, which creates liquidity surplus or liquidity crunch position and depending upon the interest rate movement, such situation may turnout to be risky for the bank. Banks are required to monitor such mismatches and take appropriate steps so that bank is not exposed to risks due to the interest rate movements during that period.
(b) The net cumulative negative mismatches during the Next day, 2-7 days, 8-14 days and 15-28 days buckets should not exceed 5 % ,10%, 15 % and 20 % of the cumulative cash outflows in the respective time buckets in order to recognise the cumulative impact on liquidity.
The Board’s of the Banks have been entrusted with the overall responsibility for the management of risks and is required to decide the risk management policy and set limits for liquidity, interest rate, foreign exchange and equity price risks.
Asset-Liability Committee (ALCO) is the top most committee to oversee the implementation of ALM system and it is to be headed by CMD or ED. ALCO considers product pricing for both deposits and advances, the desired maturity profile of the incremental assets and liabilities in addition to monitoring the risk levels of the bank. It will have to articulate current interest rates view of the bank and base its decisions for future business strategy on this view.
Rate Sensitive Assets & Liabilities : An asset or liability is termed as rate sensitive when
(a) Within the time interval under consideration, there is a cash flow,
(b) The interest rate resets/reprices contractually during the interval,
(c) RBI changes interest rates where rates are administered and,
(d) It is contractually pre-payable or withdrawal before the stated maturities.
Assets and liabilities which receive / pay interest that vary with a benchmark rate are re-priced at pre-determined intervals and are rate sensitive at the time of re-pricing.
INTEREST RISK :
The phased deregulation of interest rates and the operational flexibility given to banks in pricing most of the assets and liabilities imply the need for the banking system to hedge the Interest-Rate Risk. Interest Rate Risk is the risk where changes in market interest rates might adversely affect the Bank’s Net Interest Income. The gap report should be generated by grouping interest rate sensitive liabilities, assets and off balance sheet positions into time buckets according to residual maturity or next repricing period, whichever is earlier. Interest rates on term deposits are fixed during their currency while the advance interest rates are floating rates. The gaps on the assets and liabilities are to be identified on different time buckets from 1–28 days, 29 days upto 3 months and so on. The interest changes should be studied vis-a-vis the impact on profitability on different time buckets to assess the interest rate risk.
GAP ANALYSIS :
The various items of rate sensitive assets and liabilities and off-balance sheet items are classified into time buckets such as 1-28 days, 29 days and upto 3 months etc. and items non-sensitive to interest based on the probable date for change in interest.
The gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) in various time buckets. The positive gap indicates that it has more RSAS than RSLS whereas the negative gap indicates that it has more RSLS. The gap reports indicate whether the institution is in a position to benefit from rising interest rates by having a Positive Gap (RSA > RSL) or whether it is a position to benefit from declining interest rate by a negative Gap (RSL > RSA).
REPORTS :
The following reports are used for ALM:
Structual Liquidity Profile (SLP);
Interest Rate Sensitivity
Maturity and Position (MAP)
Statement of Interest Rae Sensitivity (SIR)
What is a Balanced budget ?
A government budget surplus that is zero, thus with net tax revenue equaling expenditure. A balanced budget change in policy or behavior is one in which a component of the government budget, usually taxes, is adjusted as necessary to maintain a balanced budget.
What is balanced growth of an Economy?
Growth of an economy in which all aspects of it, especially factors of production, grow at the same rate.
A government budget surplus that is zero, thus with net tax revenue equaling expenditure. A balanced budget change in policy or behavior is one in which a component of the government budget, usually taxes, is adjusted as necessary to maintain a balanced budget.
What is balanced growth of an Economy?
Growth of an economy in which all aspects of it, especially factors of production, grow at the same rate.
Capital Adequacy vs. Risk Management under Basel Accords
Capital Adequacy Under Basel I :
Under Basel Accords - I and II, capital is considered as the key component to ensure health of banking system . Capital adequacy ratios prescribed under these Accords are mainly intended to ensure that banks maintain a minimum amount of own funds in relation to the risks they face so that in times of crisis these Banks can absorb the unexpected losses.
However, from the Supervisor’s perspective (i.e. RBI in India), , capital is the last line of defense in a bank. The risk weighted capital adequacy framework (Basel 1) requires banks to hold different categories of capital against both on balance sheet assets and off balance sheet items with different risk weights. The 1988 Basel Capital Accord is considered as a watershed in this regard. Under this Accord, supervisors in the major banking markets for the first time agreed on a definition of capital and the minimum requirement. Under Basel I, it was very simple approach and was easy to apply. Thus, it was widely accepted and slowly adopted by more than 100 countries. The scope of the Accord was widened in 1996 to incorporate market risks.
However, soon it was felt that with advances in technology and telecommunications, innovation in banking products and services, and the increasing globalisation of financial markets have changed the way banks used to measure and manage risks. The Banks were taking much bigger risks in derivatives and new innovative products. The explosive growth in the markets for securitised assets and for credit derivatives has offered banks new ways to manage and transfer credit risk . Operational risk was considered as another threat to the banking, due to failures in internal processes or systems or from damage caused by an external disruption.
Thus it was felt that 1988 Accord no longer provides the internationally active banks - and their supervisors - with reliable measures of the actual risks they face. The 1988 Accord was considered as too broad brush and not enough sensitive to the risks which the banks are exposed to. The 1988 Accord was considered to be too simple an approach to capital regulation.
BASEL II :
Thus, the new Accord (popularly known as Basel II) was released by Basel Committee. The new accord seeks to capture the relationship between capital adequacy and risk management . This new Accord includes not only quantitative measures of risk but also incorporates supervisory review and public disclosure (market discipline).
Basel II framework is popular discussed under three pillars.
Under Pillar One : Minimum capital : The definition of risk weighted assets in the New Accord have two primary elements:
(i) substantial changes to the treatment of credit risk relative to the current accord; and
(ii) the introduction of an explicit treatment of operational risk.
In both cases a major innovation of the new Accord is the introduction of three distinct options for the calculation of credit risk and three for operational risk. The Committee believes that it is not feasible or desirable to adopt a one-size-fits all approach to the measurement of either risk. Instead for both credit and operational risk there are three approaches of increasing risk sensitivity to allow banks and supervisors to select the approach or approaches that they believe are most appropriate to the stage of development of banks operations and of the financial market infrastructure.
The standardized approach allows use of external credit assessments to enhance risk sensitivity compared to the current accord. The risk weights for sovereign inter-bank and corporate exposures are differentiated based on external credit assessments. Where no external rating is applied to an exposure a risk weight of 100% can be used. Loans considered past due will be risk weighted at 150% unless a threshold amount of specific provisions has already been set aside by the bank against that loan. Certain types of mainly financial collateral are allowed as credit risk mitigants.
Retail exposures are given a specific treatment. The risk weights for residential mortgage exposures are at 35% and other retail exposures including SME’s can be risk weighted at 75 percent subject to meeting certain criteria.
The IRB approach to credit risk includes two variants; a foundation approach and an advanced approach. The approach differs substantially from the standardized approach in that banks’ internal assessments of key risk drivers serve as primary inputs to the capital calculation. They are based on modern risk management techniques that involve a statistical and thus quantitative assessment of risk. Under Basel II banks are required to hold capital against operational risk – this is not an option but a fundamental part of Basel II.
Operational Risk is defined as the risk of losses resulting from inadequate or failed internal processes, people and systems or external events. There are two simple approaches to Operational risk; the basic indicator and the standardized approach which are targeted to banks with less significant operational risk exposures. In general terms the basic indicator and standardized approaches require banks to hold capital for operational risk equal to a fixed percentage of a specified risk measure. The advanced approach allows banks to use their own method for assessing their exposure to operational risk so long as it is sufficiently comprehensive and systematic
Under PILLAR Two : An important dimension of Basel II is the supervisory review The supervisory review contains a set of four principles all of which point to the need for banks to assess their capital adequacy positions relative to their overall risks and for supervisors to review and take appropriate actions in response to those assessments. Pillar 2 recogniises that banks face risks not included in pillar 1 and that banks choose to operate at capital levels above those implied by pillar 1 minimum. Supervisors should seek to intervene at an early stage to prevent capital falling below minimum levels
Under PILLAR THREE : Market discipline is sought to be encouraged by developing a set of disclosure requirements that allow market participants to assess key information about a bank’s risk profile and level of capitalization. Market discipline reinforces efforts to promote safety and soundness in banks
Subscribe to:
Comments (Atom)
