Class 3

Class 3

Camel Rating

· Started after 2008 global financial crisis

· It is a US supervisory rating of bank’s overall credit condition

· Scale is from 1 to 5 (1 being strongest and 5 being weakest)

· Not released to public so as to avoid any bank runs when a bad rating is released

· Classifies around 8,000 banks in US

· Factors considered – Capital Adequacy, Asset Quality, Earnings, Liquidity

Organization of bank

Board of Directors

· They should have specific qualifications like experience in agriculture banking. In India, 50% directors of banks should be having professional background like in accounting, agriculture etc.)

· Other directors are elected in AGM (Annual General Body Meeting). RBI can nominate additional directors in bank.

· Elected Directors - Company law defines qualifications of a director. They are also shareholders of the bank. They should hold not less than 1% of shares in the bank. Normal tenure = 5 Years. Not more than 2 continuous tenure for a director

· Additional Directors – Nominated by RBI and not shareholders. They are officers of RBI. They do not offer themselves for elections. They have voting rights and can sign the Balance Sheet.

§ Right of Dissent – To be recorded in the minutes; which is against the resolution of the majority. Reason – BOD is not coordinating with additional directors properly.

§ Provision 35(A) – RBI can appoint independent director

· Effectiveness of working of BOD – RBI inspector (as additional director) comments on the working of BOD. But he can’t terminate the director. But regulators can supersede the decision of BOD. For that, they recommend that existing BOD requires diversification. Also, when additional director is appointed in a bank (an RBI officer), simply implies that banks’ performance is not satisfactory

Definition of Banking – Acceptance of deposit of money from public by cheque for investment purpose

Steps taken by RBI

1) Advisory (specific steps) in character (non-mandatory)

2) Directions are mandatory & can attract penalty (Guidance are advisory, directions are backed by laws)

3) Liquidation, Selling of shares, dissolving, mergers with other banks

4) Appointment of independent directors

In a bank, BOD meeting takes place once in a quarter. For operational decisions, committees are made to make fast decisions (like ALM committee, Credit Committee, Performance evaluation committee). BOD appoints these committees.

MD / CEO –

· Pivot of company, Chairs the meeting of BOD.

· Take cares of day to day affairs of the company.

· Available 24 X 7

Chairman of Bank –

· Honoree member, only attends the board meeting, no participation in day to day activities

· Most banks have same chairman & CEO (except ICICI and HDFC) as it facilitates management of the bank (They know management policy and can lead to growth path). SBI has same person as Chairman and MD – Mr. O.P.Bhatt

· Chairman is elected by Shareholders, but if he / she is not acceptable by regulator, then chairman’s election can be stopped by the regulator

· Chairman’s remuneration is decided / approved by the regulator (control’s chairman’s election)

· Rejection of a MD / Chairman can’t be challenged in a court of law

Moral suasion – Greatest power of the regulator, where regulator can take adverse action against the bank’s BOD. The directions are mandatory

Creeping Acquisition – Shares of the bank are widely held, no one person can have voting rights of more than 10%. If stake in shares increases from 5% (till 10%), the same information needs to be registered with the BOD. Such transfer of shares has to be done after approval of regulator. Holding of such shares is not legally transferred to the owner till the regulator approves it.

Capital of Bank

· Tier 1 Capital

ü Paid up Capital

ü Other Reserves

ü Any realization from sale of assets

ü Statutory Reserves

· Tier 2 Capital

ü Hybrid Instruments (convertible bonds)

ü Revaluation Reserves

ü Cumulative preference shares

ü Subordinated capital