What is Capital Adequacy Ratio?

Capital Adequacy Ratio (CAR) is a bank’s capital ratio in relation to its risk-weighted assets and current liabilities. Central banks and bank regulators decide to prevent commercial banks from taking excess leverage and becoming insolvent in the process.

In other words, it measures how much capital a bank has with it as a percentage of its total credit exposure. Bank regulators enforce this ratio to ensure credit discipline in order to protect depositors and promo.

In order to understand CAR thoroughly let us understand some common terminologies which will make your understanding much better.

CAPITAL

The basic approach of the capital adequacy framework is that a bank should have sufficient capital to provide a stable resource to absorb any losses arising from the risks in its business. Capital is divided into tiers according to the characteristics/qualities of each qualifying instrument. For supervisory purposes capital is split into two categories: Tier I and Tier II. These categories represent different instruments’ quality as capital. Tier I capital consists mainly of share capital and disclosed reserves and it is a bank’s highest quality capital because it is fully available to cover losses. Tier II capital, on the other hand, consists of certain reserves and certain types of subordinated debt. The loss absorption capacity of Tier II capital is lower than that of Tier I capital. When returns of the investors of the capital issues are counter-guaranteed by the bank, such investments will not be considered Tier I/II regulatory capital for the purpose of capital adequacy.

CREDIT RISK 

Credit risk is most simply defined as the potential that a bank’s borrower or counterparty may fail to meet its obligations in accordance with agreed terms. It is the possibility of losses associated with a diminution in the credit quality of borrowers or counterparties. In a bank’s portfolio, losses stem from outright default due to the inability or unwillingness of a customer or a counterparty to meet commitments in relation to lending, trading, settlement, and other financial transactions. Alternatively, losses result from a reduction in portfolio arising from actual or perceived deterioration in credit quality.

For most banks, loans are the largest and the most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off-balance sheet. Banks increasingly face credit risk (or counterparty risk) in various financial instruments other than loans, including acceptances, inter-bank transactions, trade financing, foreign exchange transactions, financial futures, swaps, bonds, equities, options, and in guarantees and settlement of transactions.

The goal of credit risk management is to maximize a bank’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio, as well as, the risk in the individual credits or transactions. Banks should have a keen awareness of the need to identify, measure, monitor, and control credit risk, as well as, to determine that they hold adequate capital against these risks and they are adequately compensated for risks incurred.

MARKET RISK 

Market risk refers to the risk to a bank resulting from movements in market prices in particular changes in interest rates, foreign exchange rates, and equity and commodity prices. In simpler terms, it may be defined as the possibility of loss to a bank caused by changes in the market variables. The Bank for International Settlements (BIS) defines market risk as “the risk that the value of ‘on’ or ‘off-balance sheet positions will be adversely affected by movements in equity and interest rate markets, currency exchange rates and commodity prices”. Thus, Market Risk is the risk to the bank’s earnings and capital due to changes in the market level of interest rates or prices of securities, foreign exchange, and equities, as well as, the volatilities of those changes.

CAPITAL FUNDS 

The capital funds would include the components of Tier I capital and Tier II capital.

Elements of Tier I Capital: 

Paid-up capital (ordinary shares), statutory reserves, and other disclosed free reserves if any; Perpetual Non-cumulative Preference Shares (PNCPS) eligible for inclusion as Tier I capital – subject to laws in force from time to time; Innovative Perpetual Debt Instruments (IPDI) eligible for inclusion as Tier I capital; and Capital reserves representing surplus arising out of sale proceeds of assets.

Elements of Tier II Capital: 

The elements of Tier II capital include undisclosed reserves, revaluation reserves, general provisions and loss reserves, hybrid capital instruments, subordinated debt, and investment reserve accounts.

Elements of Tier III Capital:

Tier 3 capital debt may include a greater number of subordinated issues when compared with tier 2 capital. As defined by the Basel II Accords, to qualify as tier 3 capital, assets must be limited to no more than 2.5 times a bank’s tier 1 capital, be unsecured, subordinated, and whose original maturity no less than two years.

Risk-Weighted Assets: 

Risk-weighted assets are used to determine the minimum amount of capital a bank must hold in relation to the risk profile of its lending activities and other assets. This is done in order to reduce the risk of insolvency and protect depositors. The more risk a bank has, the more capital it needs on hand. The capital requirement is based on a risk assessment for each type of bank asset.

For example, a loan that is secured by a letter of credit is considered to be riskier than a mortgage loan that is secured with collateral and thus requires more capital.

The formula used to measure Capital Adequacy Ratio is = (Tier I + Tier II + Tier III (Capital funds)) /Risk-weighted assets)

USE OF CAR:

Capital adequacy ratio is the ratio that determines the bank’s capacity to meet the time liabilities and other risks such as credit risk, operational risk, etc. In the most simple formulation, a bank’s capital is the “cushion” for potential losses and protects the bank’s depositors and other lenders. Banking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system.

CAR is similar to leverage; in the most basic formulation, it is comparable to the inverse of debt-to-equity leverage formulations (although CAR uses equity over assets instead of debt-to-equity; since assets are by definition equal to debt plus equity, a transformation is required). Unlike traditional leverage, however, CAR recognizes that assets can have different levels of risk.

CONCLUSION:

Capital Adequacy is an important indicator of the financial health of a banking entity. It reflects the overall financial condition of the banks and also the ability of management to meet the requirement for additional capital. At the time of winding up of the company, the depositor’s assets are more important than the company’s own finances. CAR ensures that a layer of safety is present for the bank to manage its own risk-weighted assets before it can manage its depositors’ assets. Indian public sector banks must maintain a CAR of 12% while Indian scheduled commercial banks are required to maintain a CAR of 9%. Maintaining the ratios as set by RBI will help banks to mitigate any setbacks due to capital risks in the future.

To help you prepare 50% faster for competitive exams, ixamBee provides free Mock Test Series for all the Current Affairs in English and Current Affairs in Hindi in the BeePedia capsules for GA Preparation. You can also get the latest updates for Bank PO, Bank Clerk, SSC, RBI  NABARD, and Other Government Jobs.

Also, Read

RBI and Currency Management

All About Saarthi App

The post CAPITAL ADEQUACY RATIO appeared first on ixambee.

This article discusses Prospectus and types. With PFRDA GRADE A 2022 mains and SEBI GRADE A 2023 exam in line, this article will give you an overall understanding of Prospectus with a detailed explanation. Also, this article will give a layman’s understanding to someone who is unfamiliar with the term “Prospectus”.

So before learning about types of Prospectus, let us know what a Prospectus is.

The prospectus is a legal document, which outlines the company’s financial securities for sale to investors. According to the companies act 2013, there are four types of prospectus, abridged prospectus, deemed prospectus, red herring prospectus, and shelf prospectus.

The prospectus can help investors make more informed investment decisions because it contains a host of relevant information about the investment or security. In areas other than investing, a prospectus is a printed document that advertises or describes an offering such as a school, commercial enterprise, forthcoming book, etc. All forms of prospectus exist to attract or inform clients, members, buyers, or investors.

Understanding Prospectus:

As per the Companies Act, 2013, a prospectus can include information such as an advertisement, circular, or notice among other legal documents inviting the public to the offering. Also, the prospectus should be issued only for the purchase of a company’s securities.

In order for a document to be considered a prospectus, it should act as an invitation for the public to purchase stocks/shares, debentures, or other instruments. Also, the prospectus should be issued by the company or an institution on behalf of the company and made solely for the public.

In case a private company wishes to convert to a public company, it is required to either issue a prospectus or file a statement in lieu of a prospectus of which the provisions are mentioned under Section 70 of the Companies Act, 2013

Essentials for a document to be called a Prospectus:

For any document to be considered a prospectus, it should satisfy two conditions. The document should invite the subscription to public share or debentures, or it should invite deposits. Such an invitation should be made to the public. The invitation should be made by the company or on behalf company. The invitation should relate to shares, debentures, or other instruments.

The Relevance of the Prospectus

Below is a few reasons why reading a prospectus is essential before investing.

You get to know more about the company: It is always wise to know all about where you put your money. This is especially true when investing in a company’s securities. Not only this can give you a better idea about the potential of the securities and the company itself, but it can also help you measure how much investing in the company is in alignment with your investment horizon. 

You get to know more about the securities: There are various securities that a company can offer to the public. This may include stocks, bonds, or even other debt instruments. Going through the prospectus can tell you more about the securities they are trying to sell you. Understanding this can help you make better investment decisions.

For instance, if you are reading a prospectus to find out more about a bond that a company is offering, you can learn about its price, type, face value, coupon rate, etc. This information can help you do your calculations before investing, making planning much easier. 

You get to know why they are raising money: There is no business that doesn’t aspire to growth. Every business owner will keep trying to expand their clientele so as not to become stagnate in a fast-growing economy. That means there will be plenty of reasons for companies to raise capital, but it is wise to check why they are raising the money before deciding to invest. This can help you understand if the company’s growth plans align with your risk appetite. For instance, if a company is raising money for an aggressive growth move, you might be better off investing in them if your investment choices are conservative. 

Prospectus and its Contents:

The prospectus contents are specified in the Companies Act. The prospectus must touch on the following content points:

1. Details of the company, such as name, registered office address, and objects
2. Details of signatories to the Memorandum and their shareholding particulars
3. Details of the directors
4. Details of shares offered and the class of the issue as well as voting rights
5. Minimum subscription amount
6. The amount payable on application, on the allotment, and on further calls
7. Underwriters of issue
8. Auditors of the company
9. Audited reports regarded the profit and losses of the company

Different types of prospectus

As mentioned above, a prospectus is a legal document as well, and the same is submitted to the Securities and Exchanges Board of India (SEBI). There are different stages that a prospectus will go through before SEBI approves one. The first stage is often the filing of a preliminary prospectus. As the name suggests, this document may only the preliminary data related to the offering. Investors can use this to gain early information about the investment opportunity to simplify the planning part. Once that is approved, the company may file a final prospectus, which SEBI will inspect. 

Now, there are different types of a prospectus that companies file, according to what security they are planning to issue. Below are some of the kinds of prospectus filings.

Red herring prospectus

Thanks to the kind of demand that the IPO market sees these days, the red herring prospectus has become a known name among many investors. For those who don’t know, a red herring prospectus is a document filed to SEBI before an IPO. During an IPO, a private company becomes public, and a lot of information has to be then disclosed to the public. Companies use a red herring prospectus to publicize this information. The document thus will contain their financials, performance numbers, goals, risks, etc., making it an ideal record for investors to dig deep and find the potential and risk in investing in the particular company. 

Shelf Prospectus

A shelf prospectus is filed when a company intends to issue bonds. Bonds are a way for companies to borrow money to raise capital from the public. Unlike lending from a bank, issuing bonds can be a more affordable option. At the same time, as far as investors are concerned, it is an opportunity to get returns through a less risky investment option.

Reading the prospectus before investing in bonds will help you better understand the same. In addition, there are important numbers such as coupon rate, face value, tenure, etc., that you should look at before investing in a bond, and all this information is available in a shelf prospectus. In the case of a shelf prospectus though, the company will not have to file another one to reissue bonds. In fact, a company can issue bonds up to four times once they issue a prospectus. 

Abridged prospectus

It is a type of prospectus that contains the list of all the prospectus and offers that the company has completed. This is for investors like you to understand more about the company and use it for research in decisions related to investment in the company.

Deemed prospectus

Under the implication of law, any document from the company that is meant to sell shares is considered a prospectus. Deemed prospectus becomes important when a company intends to bypass the SEBI laws and issue securities through an intermediary. Here, whenever the company issues securities, even when it is done through a merchant bank or a broker, the company has to issue a document of an offer for sale. This document is called a deemed prospectus. This way, the sale of securities is marked, and investors’ rights are protected even when the company is trying to sell its stocks through intermediaries.

CONCLUSION

A prospectus is basically a formal and legal document issued by a body corporate that acts for inviting offers from the public for subscription or purchase of any securities. Every public company is entitled to issue a prospectus for its shares or debentures. But, the same is not required for a private company.

Hope this article has provided you with a thorough understanding of Prospectus and the types of Prospectus which will be helpful in your future exams.

References: Clear-Tax, Edelweiss,IPleaders and Tavagapedia

To help you prepare 50% faster for competitive exams, ixamBee provides free Mock Test Series for all the Current Affairs in English and Current Affairs in Hindi in the BeePedia capsules for GA Preparation. You can also get the latest updates for Bank PO, Bank Clerk, SSC, RBI  NABARD, and Other Government Jobs.

Also, Read

RBI and Currency Management

All About Saarthi App

The post Prospectus and Types appeared first on ixambee.

Let us first see the IBPS PO Mains 2022 section-wise analysis.

IBPS PO Mains 2022 Section-wise analysis

There were a total of 5 sections asked in the IBPS PO Mains Exam 2022 i.e, Reasoning and Computer Aptitude, Data Analysis & Interpretation, General Awareness, and English Language. Detailed exam analysis of these sections has been provided below. The pattern of IBPS PO Mains exam has been provided below.

IBPS PO Mains Exam Analysis 2022 for 26th November Shift 1

Now, let us see section-wise questions from different topics that were asked in the exam.

English:

In the English Language section, the majority of the questions were asked from Reading Comprehension followed by Cloze Test and Fillers. The overall level of this section was “Easy to Moderate”.                                                                                                           

Quantitative Aptitude:

This section mostly comprised of questions from Data Interpretation followed by Quadratic Equations and Data Sufficiency. As expected this year the level of quant was moderate to difficult.

Reasoning:

This section consisted majority of the questions from Puzzles. More than half of the questions were asked from puzzles followed by Critical Reasoning with 5 questions. Barring Coding-Decoding, which was difficult, questions from other topics were of an Easy to Moderate nature.

General Awareness/Banking Awareness:

The General Awareness section includes banking knowledge, general knowledge, current affairs, and economic knowledge. Any candidate who wants to score more in the General Awareness section must thoroughly prepare themselves as it is the most scoring subject in the bank exams.

This section consisted of a total of 40 questions. Here are a few memory-based questions on General awareness that we gathered from our students who appeared for the exam.

Some of the few questions were from topics like- Current Bank Rate, Blue Flag Certificate, US Open, NARCL, Online Game Banning Site, news on Rishi Sunak, Human Development Index Ranking, name of 12th Maharatna Company, Nobel Prize in Economics, RBI penalty related questions, etc.

Last but not least, this section is Descriptive Writing. It had 2 questions- A letter and An Essay with a time limit of 30 minutes.

Essay writing topics(word limit 250 words)

• Impact of Videogames on youngsters
• Role of Education in Economy

Letter Writing topics(word limit 150 words)

• Water Harvesting

Very soon we will be coming with an exam analysis of shift 2 as well as detailed video solutions for each topic from our expert faculty.

To help you prepare 50% faster for competitive exams, ixamBee provides free Mock Test Series all the Current Affairs in English and Current Affairs in Hindi in the BeePedia capsules for GA Preparation. You can also get the latest updates for Bank PO, Bank Clerk, SSC, RBI  NABARD and Other Government Jobs.

Also, Read

RBI and Currency Management

All About Saarthi App

The post IBPS PO MAINS 2022 EXAM ANALYSIS appeared first on ixambee.

Let us first go through the PFRDA Grade A exam pattern 2022

Phase 1: Paper 1

PAPER 2

Now let us see from which all topics questions were framed for paper 1

Paper1:

The below table gives the question distribution from different sections of Paper 2

Overall the level of the exam was easy to moderate. Regular giving of mocks would have ensured candidates easily solved the questions. The general awareness section which most of the aspirants fear due to the broad coverage turned out to be easy, a cakewalk for beepedia users. Paper 2 too was easy to moderate, again a duck soup for IXAMBEE subscribers. 

Click on the link below to get the detailed memory-based paper.

PFRDA GRADE A 2022- Memory Based Paper.

Key Takeaways

• Speed and accuracy for QRE.
• Coverage of current affairs with more emphasis on the last 3 months from the date of the exam.
• Regular giving of mock tests with proper analysis of it.
• Identify the key topic.

So, What Next?

The PFRDA Grade A 2022 mains exam is going to be held on 4th December 2022. Given the fact that there is hardly less than a month’s time for the main exam, we should gear up our preparations rather than expecting the phase 1 results. In order to ensure good marks in the main examination, paper 2 subjects need to be holistically covered with regular practice of descriptive writing. Not only will the practice be sufficient, but evaluation of your answers too is also important. So, you can enroll in any of the online platforms and start writing essays, formal business letters, and precise writing on a daily basis to develop a command as these topics are often neglected by aspirants.

CONCLUSION

As always I say, cracking an exam is not all about hard work. Its smart work and hard work put together gives you remarkable results. Out of 50 questions on paper 2, 43 are covered in our Ixambee content, which sets a benchmark of the content we provide to prepare students 50% faster. Beating around the bush with overload and irrelevant content can cost you the exam. It’s better late than never. Given that SEBI Grade A exam resembles PFRDA Grade A exam, courses offered at ixambee with mentor guidance will be paramount for your SEBI GRADE A 2023 exam preparation.

To help you prepare 50% faster for competitive exams, ixamBee provides free Mock Test Series for all the Current Affairs in English and Current Affairs in Hindi in the BeePedia capsules for GA Preparation. You can also get the latest updates for Bank PO, Bank Clerk, SSC, RBI  NABARD, and Other Government Jobs.

Also, Read

RBI and Currency Management

All About Saarthi App

The post PFRDA Grade A 2022(General) Phase1 Exam Analysis appeared first on ixambee.

.

Before discussing the Human Development Index, let us know the history behind it.

The need to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country, not economic growth alone, delivered the idea of the Human Development Report.

Amartya Sen and Mahbub Ul Haq conceptualized the human-centric approach to development in the first Human Development Report published by the United Nations Development Programme in 1990.

Indices covered under Human Development Report

Indices Covered in Human Development Report are:

● Human Development Index (HDI)

● Inequality-Adjusted HDI

● Planetary Pressures-Adjusted HDI

● Gender Development Index

● Gender Inequality Index

● Multidimensional Poverty Index

Let us first understand the Human Development Index.

The Human Development Index (HDI) is a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and having a decent standard of living. The HDI is the geometric mean of normalized indices for each of the three dimensions. It is calculated using four indicators — life expectancy at birth, mean years of schooling, expected years of schooling, and the Gross National Income (GNI) per capita. The concept of human development is more about the expansion of freedom, enhancement of capabilities, providing equal opportunities to all, and ensuring a long, healthy, and prosperous life.

Key Highlights of HDI:

● Drop in Life Expectancy: A large contributor to the Human Development Index’s recent decline is a global drop in life expectancy, down from 72.8 years in 2019 to 71.4 years in 2021.

● Top Performers:

European states were among the best overall performers, with as many as 8 in the top 10 of the list. These are Switzerland (1, 0.962), Norway (2, 0.961), Iceland (3, 0.959), Denmark (6, 0.948), Sweden (7, 0.947), Ireland (8, 0.945), Germany (9, 0.942) and Netherlands (10, 0.941).

Asian Region: At 73 and with an index value of 0.782, Sri Lanka emerged as the best performer in the Indian subcontinent. The island nation was followed by China (79 and 0.768), Bhutan (127 and 0.666), Bangladesh (129 and 0.661), India, Nepal (143 and 0.602), and Pakistan (161 and 0.544).

Indian Perspective: India’s HDI value stood at 0.633 in 2021, which was lower than the world average of 0.732. In 2020, too, India recorded a decline in its HDI value (0.642) in comparison to the pre-Covid level of 2019 (0.645).

● Life expectancy: In 2021, India’s life expectancy at birth was recorded at 67.2 years.

● Schooling: Expected years of schooling at 11.9 years, mean years of schooling at 6.7 years.

● Gross National Income: The gross national income per capita stood at USD 6,590.

● Gender Inequality Index: India has been ranked 122 on the Gender Inequality Index.

India and Human Development Index 2021-2022

The recently published HDI places India in the rank of 132 out of 191 countries, down by 1 rank from the previously published HDI 2020. It has declined for two years in a row – 2020 and 2021 – reversing five years of progress. India’s decline is in line with the global decline. For the first time in 32 years, human development has stalled. A large contributor to the Human Development Index’s recent decline is a global drop in life expectancy. Though India has seen a slip in its rank, there is something to cheer upon. The impact of inequality on human development has lowered. The Intergovernmental organization of the UN lauded India’s investment in health and education, helping it come closer to the global human development average since 1990. India has improved access to clean water, sanitation, and affordable clean energy. Recent policy decisions made by the country have increased access to social protection for vulnerable population groups. 

Major Problems of HDI

● First, it implicitly assumes trade-offs between its components. For example, the HDI measures health using life expectancy at birth and measures economic conditions using GDP per capita. So the same HDI score can be achieved with different combinations of the two. As a result, the HDI implies a value of an additional year of life in terms of economic output. This value differs according to a country’s level of GDP per capita. Dig into the HDI and you will find whether it assumes an additional year of life is worth more in the US or Canada, more in Germany or France, and more in Norway or Niger.

● The HDI also struggles with the accuracy and meaningfulness of the underlying data. Average income could be high in a country, but what if most of it goes to a small elite? The HDI does not distinguish between countries with the same GDP per capita, but different levels of income inequality or between countries based on the quality of education. By focusing on averages, the HDI can obscure important differences in human development. Incorporating inaccurate or incomplete data in an index reduces its usefulness.

● Finally, data on different domains may be highly correlated. For example, the GDP per capita and the average level of education in countries are strongly related. Including two highly correlated indicators may provide little additional information compared to just using one.

Conclusion

The Human Development Index as a measure of countries’ development consists of both strengths and weaknesses. On the one hand, this index is a great way of measuring development as it is not solely based on economic growth; it consists of an economic variable as well as life expectancy and educational attainment. But on the other hand, it does not incorporate other dimensions that are also important for a country’s development; as well as it is primarily focused on every country in the world. Keeping aside the criticism of HDI, it’s a reality check for us. Being the largest democracy in the world, we must ensure to improve our ranking.

To help you prepare 50% faster for competitive exams, ixamBee provides free Mock Test Series all the Current Affairs in English and Current Affairs in Hindi in the BeePedia capsules for GA Preparation. You can also get the latest updates for Bank PO, Bank Clerk, SSC, RBI  NABARD and Other Government Jobs.

Also, Read

RBI and Currency Management

All About Saarthi App

The post Human Development Index appeared first on ixambee.