Banking Diploma Examination 2014

Banking Diploma Examination 2014

01)	Basic Knowledge in General Banking
	i)	a)	Banker-Customer Relationship
			Relationship between Banks and Customer starts with the opening of account by the customer with the Bank which in other wards is a legal relationship by establishing contract under contract Act.1872. The customer must have legal status to give offer for opening an account which is to be supported by consideration i.e. initial deposit and the offer for opening account is to be accepted by the Banker with some conditions written down in the account opening form. Some conditions remain implied conditions of the contract since these are beneficial both for the Banker and customer.
		b)	Customer has got some legal rights over the Banker:
			Rights of a Customer	Duties & Obligations of a Banker
			I) Right to deposit money in his Account on time.	(I) Must credit the deposited amount to the customer Account.
			II) Right to demand repayment by issuing cheque or written order properly in proper time & place.	(II) Must honour cheque if otherwise in order as it is the statutory obligation.
			III) Right to get pass Book/ Statement of Account.	(III) Must supply pass Book/ Statement of account as demanded.
			IV) Rigt to stop payment of his cheque.	(IV) Must abide by the stop payment order.
			V) Right to give standing instruction.	(V) Must abide by the instruction.
			VI) Right to claim Profit of his deposit balance in the profit bearing account.	(VI) Must pay/credit profit as per rule.
			VII) Right to have secrecy of his account.	(VII) Must maintain secrecy of customer account.

		c)	Banker has got some legal obligations towards his customer:
			Banker’s right	Customer’s duties & obligation
			I) Right to return deposit if not in proper manner & time.	(I) Must deposit the amount properly and in time.
			II) Right to return the cheque if not drawn properly or in time or for some other lawful reason.	(II) Must demand payment by issuing cheque or written order properly.
			III) Right to debit customer’s account for any charges, profit & commission if recoverable.	(III) Must pay the Banker’s charges, profit & commission if payable.
			IV) Right of lien, Right of set off ect.	(IV) Must abide by the laws.

	ii)	Legal aspects of opening and operation of different Types of Customer’s Account:
		***	Contract is the basis of establishing legal relationship between banker and customer. So Banker before opening any account must be careful about the legal status of the customer who are completed to establish contract as per contract Act. The prospective customer is first of all asked to sign an application form prescribed for that purpose after furnishing all particulars. They also very with classes of customers and for kind of deposits. These application forms which are documents treated for establishing contract contain the rules and regulations of the Bank account operating along with terms and conditions of the deposits etc. The Bank is using of AOF.
			Some of the Important points/conditions of the application forms and requirements for opening accounts are:
			a)	Title of the Accounts
			b)	Operational instruction i.e. Mandate
			c)	Special instruction if any for operation.
			d)	Name, Father’s name, Mother’s name, present and permanent address, profession etc.
			e)	Specimen Signature
			f)	Introduction
			g)	Initial Deposit
			h)	Nominee
			i)	Acceptance terms and conditions
			j)	KYC
			k)	Transaction Profile.
			l)	Instruction for CTR and STR.

		***	KYC “Know Your Customer”: At the time of opening of new accounts, it is always advisable to have an interview with the prospective customer so as to obviate the chances of any fraud at a later stage. In keeping with the worldwide anti-money laundering drive Bangladesh Bank has laid down special emphasis on “Know Your Customer” or simply KYC. It has asked the Banks that the customer’s correct identify shall have to be carefully collected in respect of each transaction. In applicable cases in this regard, importance may be given on personal interview with the customer. In order to ensure full satisfaction in respect of establishing correct identification profile of the customer, additional relevant information shall have to be collected.
		***	Information to be collected and preserved in relation to KYC:
			a)	Name of the customer
			b)	Father’s/Husband’s name of the customer.
			c)	Mother’s name of the customer.
			d)	Present & permanent address with Telephone & Mobile No.
			e)	ID Card
			f)	Passport size photograph
			g)	Profession of the customer
			h)	If the profession is business then the nature of business to be stated.
			i)	Will have to mail thanks letter to the customer in his/her present and permanent address along with acknowledgement receipt and will have to collect and preserve the same.
			j)	Address and identify of the person who have identified the customer will have to be preserved.
			k)	Picture of the Nominee
			l)	Valid Trade License
			m)	Valid Passport.
			n)	TIN Certificate
			o)	For Registered partnership firm registered partnership deed will have to be collected and preserved.
			p)	For opening of accounts in the name of Club, Society etc; the copy of resolution of the Executive Committee, Bye Laws will have to be received and preserved.
			q)	Incase of limited Company:-Certificate of Incorporation, Memorandum & Articles of Association and Certificate of Commencement in case of Public Ltd. Company and also Board Resolution will have to be received an preserved.

		***	Information/particulars relating to account transaction Profile:
			a)	Sources of Fund/Income
			b)	Amount of Deposit/Transaction (in every month/every three months Deposit).
			c)	After how many days (Frequency) money is being deposited in the account (How many times in a month).
			d)	In case the fund is deposited by the Individuals other than the account holder, the information about them be collected and preserved.
			e)	Whether money remitted from abroad are deposited or not, if so information/declaration about those remittance must be collected and preserved.
		***	State the procedure for opening accounts of Clubs and Societies:
			Procedure for opening accounts of Clubs and Societies are follows:
			a)	Before opening an account in the name of Clubs or other such societies the Banker must verify that a resolutions was passed by the Managing Committee appointing the Bank concerned as the Banker of the question. Also information regarding the name of persons set incharge of operating the account be noted.
			b)	In case of borrowing by the Club, the banker should consult their charter or Memorandum of the Club to fine out whether it has the power to borrow and if “yes” whether there are any limitation in exercise of such a power.
			c)	In case of death or resignation of the person incharge of operating the account, the banker should stop operations on the account till another person is nominated by the Club.
			d)	The Banker should exercise due care to see that proper inquiries are effected in case it is suspected that the money of the Club has been transferred to the personal account of the person incharge of the operation.

		***	Show the procedure for opening accounts of Trustee:
			According to the Trust Act. of 1882, a trust is a obligation annexed to the ownership of properly and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him for the benefit of another, or of another and the owner. The person who reposes the confidence is called the settlor or author of the Trust and the person in whom this confidence is reposed is called the Trustee. The person for shoes benefit the trust is formed is called the beneficiary. A Trust is usually formed by means of a document called the Trust deed. Where an account is opened in the name of person as a trustee, the banker has a duty to the real owner to see that no trust funds are fraudulently transferred by the trustee to his personal accounts. Besides,  a banker should take the following precautions in opening an account of a trustee.
			a)	The Banker should thoroughly examine the trust deed appointing the applicants as trustees, so as to as certain their powers and functions.
			b)	In case of two or more trustees, clear instructions as to the person/persons who shall operate the account must be sought. In the absence of such instruction, the trustees are honoured.
			c)	While granting loans to trustees, the Banker should thoroughly examine their borrowing powers as per the trust deed. Where Mortgage or pledge is created, provision in this regard should again be inspected in the trust-deed, because without such a provision on the trust deed trustees are not allowed to pledge or mortgage the trust properties.

	iii)	Banking Laws: Contract Act. 1872 (Guarantee and Indemnity).
	***	Guarantee:
			Defn: The contract of Guarantee has been defined under section 126 of the contract Act which reads:           A contract of Guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.
	***	Kinds of Guarantee: A Guarantee may be either:                                   a) Specific Guarantee                                   b) Continuing Guarantee
		a)	Specific Guarantee: Specific guarantee is given in respect of a single transaction or promise undertaken by the principal debtor, It comes to an end when the specific promise or transaction is fulfilled or undertaken.
		b)	Continuing Guarantee: When a Guarantee is given in respect of a series of promises or transactions. It is called a continuing guarantee. It is not confirmed to single transaction.
	***	Different Types of Guarantee:
		a)	Financial Guarantee (Bid Bond):
			Under a financial Guarantee the Bank undertakes to discharge the financial liability of the third party in case of default. These are usually given on behalf of Contractors in lieu of earnest money. Financial Guarantees in relation to tenders are called Bid Bonds. Bank undertakes to pay as demand the guaranteed amount if the Tenders has failed to enter into contract despite success in the Bid/Tender.
		b)	Performance Guarantee:
			Guarantees, which are extended in consideration of specific performance of contract are called performance Guarantee. These are given to Government Departments or Public Bodies on behalf of contractors undertaking the payment of guaranteed amount in the event of non-fulfillment of contracts such as completing Tumkey projects, Clearing of goods at port, Sale of goods within the Country etc. provided. The Guarantee in question is involved according to terms and conditions agreed upon before the date specified in the Guarantee.

		c)	Advance payment Guarantee (APG)
			After awarding any work order to any Contractor by work order giving agency, the contractor has to start the work, just to start work smoothly, work order giving agency provides some portion of fund to the contractor as advance payment. For that advance payment, work order giving agency requires a guarantee from any Bank so that the contractor does not breach or misappropriation of fund.
		d)	Customs Guarantee:
			This guarantee is issued infavour of customs authority on account of customs duties or excise duties on Imported goods and machinery or export commodities on behalf clients. Our Bank retains 100& margin against customs guarantee.
		e)	Container delivery guarantee:
			Bank issues guarantee infavour of shipping agents in case of delivery of the containers (with cargo) for un stuffing (from port to Importers factory premises or offices) and to return the container as imply without any damage to the container yard of the shipping agent. Beneficiary may  encase the same in case of damage or non-return of the container.
		f)	Shipping guarantee: Bank issues guarantee infavour of shipping companies for release of goods in the absence of shipping documents, in case goods arrive before receipt of such documents by the Bank and are incurring demurrage of original shipping documents have been lost after retirement from Bank. These guarantees are limited to bill amount or letter of credit value and for period till receipt of original bill of lading. The guarantee is actually signed by the Importer infavour of shipping company and counter signed by the Banker. Normally, full value of Invoice or letter of credit must be retaimed as margin  for issue of guarantee. Alternatively, the goods may be cleared by Bank and kept in its custody. As soon as the original shipping documents are received these shall be sent to clearing agents to facilities return of original guarantee.

	***	Indemnity:
			Defn: A contract of Indemnity is defined under section 124.           A contract by which is party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. If the consignee of goods sent by rail has lost railways receipt, he may take delivery of the goods from the railway authority by furnishing an indemnity bond. He promises to reimburse the railways any loss that may be caused to it by giving delivery of the goods without the receipt. Contract of General Insurance, i.e. fire and marine Insurance are contracts of indemnity. The insurance Company promises to reimburse the losses caused to the insured by the conduct of any third party.
	***	Banks and letter of Indemnity:
		Bankers may obtain letter of indemnity in the following situation:
		a)	Loss of Term deposit Receipt:
			The Bank is not entitled to withhold payment of the money if a deposit receipt is lost or destroyed by the depositor, in that case the depositor is asked to sign a letter of indemnity duly stamped when the payment is made or duplicate instrument is issued.
		b)	Issuance of Duplicate Demand Draft:
			In case of issuing of Duplicate demand draft in lieu of original reported lost, the Banker should immediately notify the Office on which the draft is drawn and enquire whether it has been paid or outstanding. A stamped letter of indemnity should be taken on receipt of non-payment advice from the drawee Branch duly signed by the purchaser.
		c)	Loss of Travelers Cheque:
			In case the purchaser of a travelers cheques claims refund of the value of the cheqe reported lost, the request should be entertained by the selling Branch of the Bank only when the cheque had not been endorsed before it was lost and a letter of indemnity is obtained from the purchaser. The letter contains special stipulation that the cheque was unendorsed at the time of lost.
		d)	Loss of safe Custody receipt:
			In case of a customer loss a safe custody receipt he has to gibe a stamped indemnity letter before he is giving delivery of a Duplicate receipt of Articles kept with the Bank for safe custody.

	***	Distinction between a Contract of Guarantee and a Contract of Indemnity:
		Sl, No.		Contract of Guarantee	Contract of Indemnity
		01	Name of Party	In case of Guarantee there are three parties viz-the principal debtor, the creditor and surely. A contract of the guarantee requires the concurrence of the three parties.	In case of Indemnity there are only two parties viz Indemnified and Indemnifier.
		02	Number of contracts	In case of Guarantee there are two contracts. One between the principal debtor and the creditor and second between the surety and the creditor.	On the other hand, in a contract of Indemnity, there is only one contract between the beneficiary.
		03	Request	In a contract of Guarantee the Guarantor undertakes his obligation at the request, express or Implied of the principal debtor.	No such request is necessary in request an indemnity.
		04	Nature of liability	In a contract of Guarantee the liability of the principal debtor is primary and that of surely is secondary.	The person giving an Indemnity is primary and Independently liable.
		05	Purpose of contract	A contract of guarantee is to provide necessary security to the creditor against the loan.	A contract of Indemnity is made for reimbursement of loss.
		06	Right of parties	The surety has the right to recover from the principal debtor the amount paid by him under the contract of guarantee.	The Indemnifier can not claim reimbursement from any body else.
		07	Nature of Risk	The surety agrees to discharge the existing liability of the principal debtor. So it is a subsisting Risk.	The Indemnifier promise to save the indemnified against Risk of loss happening in future, So it contingent Risk.

	iv)	N.I. Act. 1881:
		a)	Cheque: As per section 6 of N.I. Act. 1881 A cheque is an unconditional written order, bearing date, to the Banker from the drawer, where maintaining his account, to pay on demand, a certain specified sun of money, expressed in both figures and words, to a named person, his order or bearer.
		b)	What is crossing of cheques ? Discuss the Types of crossing.
			Crossing Cheques: Crossing is an Instruction given to the paying banker to pay the amount of the cheque through a banker only and not directly to the person presenting it at the counter, A cheque bearing such an instruction is called a Crossed Cheques.
			Crossing on Cheques are of two types: i)             General Crossing Cheques ii)           Special Crossing Cheques.
			(i) General Crossing Cheques: Section 123 of the negotiable instrument Act.1881 defines a general crossing as follows:-
			“Where a cheque bears across its face an addition of the words & company or any abbreviation thereof, between two parallel transverse lines , or two parallel transverse lines simply either with or without the words,  ‘Not negotiable’ that addition shall be deemed a crossing and the cheques shall be deemed to be crossed generally.
			(ii) Special crossing cheques: Section 124 of the negotiable instrument Act.1881 defines a special crossing as follows:
			Where a cheque bears across the face an addition of the name of a Banker with or without the word ‘Not negotiable’ that addition shall be deemed to be crossing and the cheque shall be deemed to be crossed specially and to be crossed to that banker. A special crossing warns a paying banker that the amount should be paid only to the banker whose name is mentioned in the crossing. It is not necessary that there should be two parallel transverse lines in the case of a specially thus becomes more safe than the generally crossed cheque. The Bankers to whom a cheque is specially crossed may appoint another banker as his agent for the collection of such cheques.

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		c)	Endorsement:
			When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face there of or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the same and is called the endorser.
		d)	Material Alteration:
			It means the alteration of Important parts of negotiable instruments i.e. Promissory Note, Bill of Exchange and Cheque. The material parts which include date, the sum payable, the time of payment and the place of payment etc.
			(i) Promissory Note: A promissory Note is an instrument in writing (Not being a Bank Note or a Currency Note) containing an unconditional undertaking, signed by the maker, to pay on demand or at a fixed or determinable future time a certain sum of money only to, or to the order of, certain person, or to the bearer of the instrument.
			(ii) Bill of Exchange: A bill of Exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay on demand or at a fixed determinable future time a certain sun of money only to or to the order of a certain person or to the bearer of the instrument.
		g)	Payment in due Course:
			Payment in due course means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned.
		h)	Holder in due course:
			Holder in due course means any person who for consideration becomes the possessor of a promissory Note, bill of Exchange or cheque if payable to bearer or the payee or endorsee thereof, if payable to order, before ot became overdue, without notice that the title of the person from whom he derived his own title was defective.

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	vii)	Principal of accepting Deposit and deposit products under Islamic framework:
		a)	Al-Wadiaj Current Deposit:
			Al-Wadiah means Amanat, Al-Wadiah principal implied that the bank receives funds with undertaking to refund the deposit on demand and also with authorization from the depositors to use the funds for benefit of and at the Risk of the Bank. Islamic Bank’s Current Account Deposits are managed on this principal. By opening such account, a depositor does not acquire any Management (voting) right on the Bank or on the funds deposited. Al-Wadiah Account holders are provided with a cheque Book for withdrawing any amount at any time retaining a minimum balance in the account.
		b)	Mudaraba Saving Account:
			Mudaraba Savings Account of Islamic Banks is conducted under Mudaraba principles of Islamic Shariah under this principal, the account holders i.e. Depositors are called Shahib A,-Mal and Bank is Mudarib. The Bank will manage and deploy the fund without any intervention of the Depositors. The profit earned by the bank by deploying such deposits is shared by the bank and the depositors as per agreed ratio say bank 35% and the depositors 65% or like this. If any loss is incurred, it is to be borne by the depositors as per Shariah. This account may be opened in sigle or joint name of any organization. The depositors are generally allowed to deposit several times are they require but in case of withdrawal of money there is some restriction as per rules and practices of the concerned Bank.
		c)	Mudrabaha Term Deposit Account:
			Like Mudaraba Savings Account, Mudaraba Term Deposit Account is also conducted under Mudaraba Principles of Islamic Shariah. Generally, deposit is accepted in different from 03 months to 36 months. While allocating profit, higher rate of profit is given to this account. No withdrawal facility is allowed here. However, the depositor may enjoy premature encashment facility on he can avail quard against lien of his account as per norms of the Bank.

		d)	Mudaraba Special Notice Deposit Account:
			The account is also operated under Mudaraba Principles. The very special character of this account is seven days prior notice for any withdrawal.
		e)	Mudaraba Hajj Savings Account:
			Hajj is one of the basic pillars of Islam. Islamic Bank are accepted deposits on Installment basis or in piecemeal from the intending pilgrims under Mudaraba principles. Considering the religious aspects of this account and to inspire the Individual to perform Hajj, a better rate of profit comparing to other Mudaraba Account is given to this Hajj Account. The aim of this deposit is only to perform Hajj. The different terms from 01(one) to 25 years as per his capacity and age.
		f)	Mudaraba Special Savings (pension) Account:
			This is an alternative deposit scheme of Islamic Banks. It is governed by Mudaraba principles also. All categories of people particularly the small income group can able to make savings of monthly Installment basis at a very higher rate. Generally, the terms is for 5 to 10 years and size of Installment is minimum Tk.100/- to maximum Tk.20,000/-
		g)	Mudaraba Monthly Profit Deposit Account.
			For the benefit of the retired service holder and wage earners residing abroad who want to help their dependants/relatives by contributing a certain amount of money on monthly basis from the profit of their one-time deposit, Islamic Banks, Particularly SIBL has introduced this Mudaraba Monthly Profit Deposit Scheme in accordance with the Mudaraba principles of Islamic Shariah. Any Individual may open account under this scheme by depositing a minimum amount say 1.00 lac and multiples thereof at a time for a specified term. Monthly provisional profit, subject to adjustment after declaration of final rate of profit, is given to the account just after completion of 30 days from the date of opening of the account.

		h)	Mudaraba Cash Waqf Deposit Account:
			Social Islami Bank Ltd. Has introduced a new deposit scheme/product in the name of Mudaraba Cash Waqf Deposit account through which fund is pooled for the purpose of Waqf by the well-off and the Rich people of the society. The income to be generated there from may be spent for different benevolent purposes. It can work as supplement of the financing of various Social Investment project. Under this scheme one may undertake cash waqf at a time or may start with a minimum deposit as per norms of the Bank and the subsequent shall be made by Installment of a certain amount or in multiple of this amount. Higher profit is given to this account. Profit from this account is utilized for social and human welfare as per instruction of the account holders.
		i)	Mudaraba Muhorana Savings Account
			Muhor even it is very small, is compulsory to pay to the wife by his husband as per Shariah. But some husbands are reluctant to pay Muhor to their wives due to inability. Considering this and to product the rights of the women ensured by Islam, Islamic Banks has introduced ‘Mudaraba Muhar Savings Schem giving higher weightage of profit to encourage the husbands to save by monthly Installments according to their capacity for building up sufficient fund in order to meet the obligation of Muhor to their wives. The scheme has different terms, say 5-10 years. Accounts under this scheme may be opened for monthly deposit of different amount, say Tk.500/- to 5,000/- and like this.

	ix)	Liquidity Management including CRR & SLR
			Liquidity Management
			Liquidity is the ability to raise funds easily by selling assets. It is measure of how easily an asset can be turned into cash. Generally, liquid assets are measured by deducting the value of inventory from current assets. An increase in cash assets enhances liquidity and reduces liquidity risk, which in turn affects the level of profitability. There fore, liquidity Management involves a trade-off between risk and return. It involves forecasting a company’s cash needs and providing for these needs in the most cost-effective way. In a nutshell, liquidity Management is the Management of Risk and return of Investment, For Bank’s liquidity Management involves the estimation of the demand for funds  by the public and provision of sufficient reserve to meet these needs.
		Bank Company Act 1991 provides the provision for maintenance of liquid assets for each Bank in two ways:
		a)	Cash Reserve Ratio (CRR)-Section 25:
			As a prudential policy the central bank requires the bank to maintain a certain percentage of its deposits as such reserve under what it calls Cash Reserve requirement (CRR). Every deposit money Bank is required to place on deposit with the central Bank a prescribed percentage of the Bank’s deposits in Bangladesh, the current ratio is 5% of total demand and time liabilities. Bank should maintain CRR @5% daily on bi-weekly average basis, which should is no way be less than 4% in any day. By varying this reserve, the central bank can either broader the monetary base or sterilize part of the commercial bank’s money creating powers

		b)	Statutory Liquidity Reserve (SLR)-Section-33:
			Every deposit money Bank is required to, deposit a prescribed percentage of eligible securities with the central Bank. This requirement is in addition to the cash reserve ratio in Bangladesh, the SLR is 18% CRR. By varying this reserve the central bank can adjusts the capacity of the Bank to expand their lending operation. CRR:CRR is the portion of deposits and other liabilities which is to be held in the central bank or in a commercial bank against of the Bangladesh Bank or in FC Account with Bangladesh Bank. SLR:SLR is the portion of the depositors and liabilities which is to be held in the form of near cash assets, cash and FC account with Central bank.
		***	Failing to maintain CRR:
			Failure to maintain the appropriate reserve balance may result in the Bank paying penal interest at the increased rate of 5% above the normal Bank rate. In addition the Bangladesh Bank may prohibit the Bank from receiving any new deposits, violations of this nature could result in penalties in the amount of Tk.5,000/- per day for each day the Bank is an default.
		***	Failing to maintain SLR:
			In the event a Bank fails to meet its reserve requirements, the bank must borrow the funds from the Bangladesh Bank at the maximum rate of interest charged to cover the shortfall amount. Thus from the above discussion it is clear to see that the day to day Management of the money position requirement of a deposit Bank is highly influenced by the CRR and SLR which are determined by the Bangladesh Bank. The Bangladesh Bank can change these ratios from time to time. Hence, the day to day Management of the money position of deposit Banks may also be changed.

		***	Rational of Fixing 10% SLR for the Islamic Bank.
			Islamic Banks have been allowed to maintain their Statutory Liquidity Requirement (SLR) at 10% of their total deposit liabilities while it is presently fixed at 16% for the conventional banks. This discriminating provision had facilitated the Islamic Banks to hold more liquid funds for more Investment and thereby generate more profit. However, this discrimination is allowed because of the lack of central bank or Government Islamic Investment Bond (Islamic Bond) in October’2004, this discriminating provision may be waived. This Shariah based financial Investment is being used by the Islamic Banks as an approved security for the purpose of maintaining the SLR as well as providing an outlet for Investment or procurement of funds from central bank. This Bond is also open for Investment by the private individuals Companies or Corporations.
	x)	What is Basel II ?
		***	Basel II : Basel II is recommendatory framework for Banking supervision, issued by the Basel Committee on Banking supervision in June’204. The objective of Basel II is to bring about International convergence of capital measurement and standards in the Banking system. Financial Innovations and growing complexity of financial transaction have necessitated review of the original framework for capital requirement by banks. The revised framework of Basel II captures whole lot of risks, not fully captured by Basel I framework. It provides for broader range of approaches of measuring risk. The Basel Committee emphasizes that the objectives of safety and soundness cannot be achieved solely through capital adequacy requirements and hence the capital Accord II comprises sophisticated approach consisting three Pillars approaches namely: I)             Minimum Capital requirement II)           Supervisory Review of Capital Adequacy III)          Market Discipline /Public Disclosures.
		***	Objectives of Basel II :
			# To keep sufficient Capital for financial Institutions # To minimize Risk in operation # To Earn Decent Profit without Capital erosion.

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		***	The Components of the three Pillars are presented below:
			Pillars-I: Minimum Capital Requirement
			A)	Capital for Credit Risk
				a)	Standardized Approach
				b)	Internal Rating Based (IRB) Approaches
					i)	Foundation Approach
					ii)	Advanced Approach
			B)	Capital for Market Risk
				a)	Standardized Method
					i)	Maturity Method
					ii)	Duration Method
				b)	Internal Models Method
			C)	Capital for operational Risk
				a)	Basic Indicator Approach (BIA)
				b)	Standardized Approach
				c)	Advanced Measurement Approach
			Pillars II: Supervisory Review of Capital Adequacy:
				a)	Evaluate Risk Assessment
				b)	Ensure soundness and integrity of Bank’s internal process to assess the adequacy of capital.
				c)	Ensure maintenance of minimum capital with PCA for shortfall.
				d)	Prescribe differential capital, where necessary i.e. where the Internal processes are slack.
			Pillar III : Market Discipline/Public:
				a)	Enhance disclosure
				b)	Core disclosures and supplementary disclosures.
				c)	Timely at least semiannual disclosure.

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		***	Describe the three Pillars of Basel II.
			Pillars-I: Minimum Capital Requirement:
			The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk, and market risk. Other risks are not considered fully quantifiable at this stage. The credit risk component can be calculated in three different ways of varying degree of sophistication, namely standardized approach, Foundation IRB, Advanced IRB and General IB2 Restriction. IRB stands for "Internal Rating-Based Approach". For operational risk, there are three different approaches – basic indicator approach or BIA, standardized approach or STA, and the internal measurement approach (an advanced form of which is the advanced measurement approach or AMA). For market risk the preferred approach is VaR (value at risk). As the Basel II recommendations are phased in by the banking industry it will move from standardised requirements to more refined and specific requirements that have been developed for each risk category by each individual bank. The upside for banks that do develop their own bespoke risk measurement systems is that they will be rewarded with potentially lower risk capital requirements. In the future there will be closer links between the concepts of economic and regulatory capital.
			Pillars II: Supervisory Review of Capital Adequacy:
			This is a regulatory response to the first pillar, giving regulators better 'tools' over those previously available. It also provides a framework for dealing with systemic risk, pension risk, concentration risk, strategic risk, reputational risk, liquidity risk and legal risk, which the accord combines under the title of residual risk. Banks can review their risk management system. It is the Internal Capital Adequacy Assessment Process (ICAAP) that is the result of Pillar II of Basel II accords.

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			Pillar III : Market Discipline/Public:
			This pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution. Market discipline supplements regulation as sharing of information facilitates assessment of the bank by others, including investors, analysts, customers, other banks, and rating agencies, which leads to good corporate governance. The aim of Pillar 3 is to allow market discipline to operate by requiring institutions to disclose details on the scope of application, capital, risk exposures, risk assessment processes, and the capital adequacy of the institution. It must be consistent with how the senior management, including the board, assess and manage the risks of the institution. When market participants have a sufficient understanding of a bank's activities and the controls it has in place to manage its exposures, they are better able to distinguish between banking organizations so that they can reward those that manage their risks prudently and penalize those that do not. These disclosures are required to be made at least twice a year, except qualitative disclosures providing a summary of the general risk management objectives and policies which can be made annually. Institutions are also required to create a formal policy on what will be disclosed and controls around them along with the validation and frequency of these disclosures. In general, the disclosures under Pillar 3 apply to the top consolidated level of the banking group to which the Basel II framework applies.