Problems inhibited in Basel Ι

• Bank’s revenue earning tendency encourages lending to lower-quality borrowers• Higher Interest rates inhibits Credit risk within Portfolio• Cost-based pricings are not normally considered• Lead to inorganic Asset growth• While earning retention (organic capital growth) has been slow

Why Balance Sheet Management?• Limited Capital: Capital is risk adjusted, Widely Covered, Capital Raising barrier• Less Balance Sheet Expansion: Expansion needs proportional capital support

(90:10)• Rationed Portfolio Lending: Early, any where you can invest because single risk

weight fit for all• Loan/Investment pricing to profitability: Economic Profit• Allocation of capital to support business: Generally 10 times, however, through

allocation it can be up to 50 times• Credit Risk Transfer: Introduction of Innovative products, Securitized Lending

Measuring Bank Profitability Return on Equity: Post Financial Year Vs. Pre-financial year. Hence, ROE is at

targeted level

Set by board of directors for bank management Thereby derives budgeting for cost of and allocation of capital

Risk Adjusted Return on Capital (RAROC): Broadly speaking, in business enterprises, risk is traded off against

benefit. Co-relation between risk and return

Economic Profit “EP” (Economic Value Added): Return/value addition after considering its cost