Definition of NPA and Asset Classifications of irregular loans
(This article explains the definition of non-performing assets (NPAs), classification of assets, Income recognition, and provisioning requirement under prudential norms for all types of accounts including NPA norms for Agricultural loans and especially KCC) Asset classification, in the context of financial institutions like banks, involves categorizing loans and advances into different classes based on their…
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Derivative Transfer Pricing Policy Environment in Indian Banks: Regulatory Framework and Market Practices
Introduction In India, the derivative transfer pricing policy environment for banks is shaped by a combination of regulatory mandates, market practices, and institutional risk management frameworks. Banks engage in derivative transactions for purposes such as hedging, proprietary trading, and balance sheet management. These transactions must be governed by prudent transfer pricing policies to ensure regulatory…
Read article Credit Risk and Credit Derivatives: Concepts, Controls, and Developments in India
Understanding Credit Risk Credit risk refers to the potential for financial loss resulting from a counterparty’s failure to fulfill its contractual obligations. In the context of derivatives, this risk is particularly significant due to the potential cost of replacing a defaulted transaction, especially when market conditions have changed unfavorably between the time of default and…
Read article Use of Derivatives in Asset-Liability Management (ALM)
Derivatives are essential instruments in Asset-Liability Management (ALM), offering financial institutions sophisticated tools to manage and mitigate key risks—particularly interest rate risk and currency risk. By employing derivatives, banks and financial institutions can hedge balance sheet exposures, manage cash flows effectively, and address mismatches in the timing and structure of assets and liabilities. 1. Managing…
Read article The Role of Treasury in Asset-Liability Management (ALM) in Banking
Asset-Liability Management (ALM) is a critical risk management framework used by banks to maintain a balanced and stable relationship between their assets—such as loans and investments—and liabilities, which include deposits and borrowings. The primary objective of ALM is to ensure sustained profitability, financial stability, and regulatory compliance through the prudent management of liquidity, interest rate,…
Liquidity Risk and Interest Rate Risk: Key Financial Risks and Their Interrelationship
Liquidity risk and interest rate risk are two critical forms of financial risk that financial institutions, particularly banks, must manage to ensure operational continuity and financial stability. Although distinct in nature, these risks are often interconnected, requiring an integrated risk management approach. Liquidity Risk DefinitionLiquidity risk refers to the potential inability of an institution to…
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