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The risk that a foreign central bank will alter its foreign-exchange regulations thereby significantly reducing or completely nulling the value of foreign-exchange contracts.
• Various credit rating agencies are rating countries based on various parameters. • It is necessary that bank restricts exposure on countries based on a country risk exposure policy. • RBI has issued instructions to banks to formulate and adopt an internal country rating model and fix exposure limits on countries. • Guidelines on country risk management are approved by the Board on an annual basis. • We have adopted the country risk classification followed by ECGC. • Funded and non funded exposures taken on individuals, banks and financial institutions in and outside India directly or indirectly will recon for ascertaining the total exposure to a country.
Funded exposures will include bank balances, investments loans and advances, trade credits, overdrafts in vostro accounts, remittances under drawing arrangements
• Non funded exposures will include confirmation of LCs issued by foreign banks, commitments undertaken against counter guarantees of foreign banks and others.
Indirect country risk exposure; e.g packing credit to domestic exporter with large dependence on a particular country. Exposures also classified as short term (up to 6 mts and less) and long term exposure
Countries classified into following risk categories;
1. Insignificant 2. Low 3. Moderate. 4. High 5. Very high 6. Restricted 7. Off credit. • Limits are given to each country based on the risk category, as a certain percentage of our capital funds.
No ceiling on exposure to insignificant risk countries whereas exposures to Off category countries cannot be taken except under certain circumstances. Limits are also placed on the total exposure to all countries in a particular risk categories.
• Counterparty limits for exposure on Foreign Banks are fixed after making adjustments for country risk • Exposures to countries under “High Risk” and beyond to be of short-term nature only. • Exposure under project / deferred exports and services to be within the subceiling of 50% of the country-wise/category wise limits. • Location of the risk will be the criteria disregarding the location of the principal office of counterparty concerned. • Exposures will be computed on net basis i.e. gross exposure minus collaterals, guarantees, credit insurance available from countries in a lower risk category. MONITORING OF EXPOSURE; • All “A” and “B” category branches to forward statement of country wise exposure on the given format to IBD on a weekly basis.
• IBD monitors the exposure and ensures that the same are within the limits fixed. • In case of breach of limits IBD will issue instruction to restrict exposure on the particular country. • Details of the country wise exposures are placed before the Board of Directors on a quarterly basis. PROVISIONING AS PER RBI NORMS; • Bank will make provision for country risk exposure only in respect of country where the net funded exposure is 1% or more of its total assets.
• Amount of provision as a percentage will depend on the risk category of the country. • Lower provision of 25% of the requirement will be made in respect of shortterm exposures. • Provision to be made in addition to the provisions made according the asset classification. However total provision need not exceed 100% DEFINITION
Multinational financial firms operating in the host country needs to acknowledge, identify, measure, manage and monitor the risks arising from adverse events: political, economic, financial and social within the country. Country risk is the risk that a firm’s financial performance and interests are adversely affected by events and uncertainities in political climate, economic situation, financial condition and social institution within the host country. Sovereign risk is the risk that the host government may default or repudiate its foreign payment obligations or may prevent local firms from honouring their foreign obligations.
• Mostly the sovereign risk analysis is a subset of country risk analysis.
Both analysis requires substantial judgement based on rating agency’s knowledge and experience of the host country.
IMPORTANT FACTORS OF COUNTRY RISK • Factors affecting CR can be classified into four broad groups: 1. Political climate 1. Stability, maturity, and functioning of the political system 2. Representativeness and collectiveness of the government
The scale of domestic conflict: racial relations; civil war or insurgence; conditions of international relations-sanctions imposed due to political reasons, border disputes or military conflict with neighbouring countries.
2. Economic environment
Economic development stages: GDP growth; GDP per capita;
2. Economic stability: inflation, Unemployment and provision of social security.
Infrastructure: Functioning of communication system; skills of labour force; competetiveness of the industry; maturity of the service sector and efficiency of governmwent departments and agencies.
4. Taxation: consistency in tax charges; tax levels; tax incentives for foreign investment and industries
Macroeconomic Management: Formulation, implementation and efficiency of monetary policy and fiscal policy.
6. International Economic relations: International trade; Balance of payments; Exchange rate arrangements; and level of foreign exchange reserves.
3. Financial conditions 1. Stability, Regulation and supervision of the financial system
2. Capital market functioning: efficiency, liquidity, resiliency and transparency of the capital market 3. Operation of Foreign exchange market: Stability, resilience and central bank intervention.
Corporate sector: Maturity, information disclosure and Corporate governance
4. Social Institution 1. Legal system: independence, Transparency and enforcement; crime and security in the society 2. Legislations and Regulations: Consistency, fairness and Effectiveness
Work organization and corporate governance: Functioning, compatibility and harmony
4. Influence of Interest groups- professional groups, trade unions and employers organizations 5. Emergencies and Rescues: Occurrences of natural disasters and major accidents and the ability to these and emergency rescues
Social attitude towards work, social life, wealth distribution, foreign investment and national interests.
ANNR 30.06.0 9
Funded Exposures Amount in Rs. Bank Balance s Depos it Place ments Inves tment s Loan s And adv . Trade Credits / Receivabl es 2362494 .3 11,723,3 04 6,580,6
Tota l 14, 085, 798. 35 6, 580, 644. 00 330, 221. 00 300, 472. 30 3, 604, 000. 00 47, 252, 000. 00 -
0 0 14,08 0 5,798.35 6,58 0 0,644.00 33 0 0,221.00 30 0 0,472.30 3,60 0 4,000.00 47,25 0 2,000.00 0 0 0 0 1,16 4,737.00
A1 300,472. 30
3,604,0 Mexico Singapor e Slovakia Slovenia Solomon Islands South Africa A2 00 47,252,0 00
A1 B1 B1 C1 A2
1,789,0 Turkey United Kingdom B1 1,363,44 7 30,883,5 72 2,937,4 64 00
United States of America A1 Zimbabw e C1
737. 00 1, 789, 000. 00 1, 363, 447. 83 33, 821, 036. 65 -
1,78 0 9,000.00 1,36 0 3,447.83 33,82 0 1,036.65 0 -
Country Risk Analysis:
Country Risk Limits have been assigned to each country and group of risk category country. As on June 30, 2009, the highest exposure of the Bank was on the Singapore at Rs.4.73 crores. Singapore falls in the insignificant risk category. The list of country exposures is enclosed in Annexure for ready reference. It can be ascertained from the country exposures that neither the Individual Country wise exposures nor Exposure to a Country Risk Category limits have been breached. Further, the net funded exposure to Singapore (country with highest exposure), does not exceed 1% of the total assets i.e. Rs. 52.86 crores, as on 31-03-2009 hence no provisioning is required.
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