Expalnation of Father Returning Home Essay

ldad return home! My father travels on the late evening train Standing among silent commuters in the yellow light Suburbs slide past his unseeing eyes His shirt and pants are soggy and his black raincoat Stained with mud and his bag stuffed with books Is falling apart. His eyes dimmed by age fade homeward through the humid monsoon night. Now I can see him getting off the train Like a word dropped from a long sentence. He hurries across the length of the grey platform, Crosses the railway line, enters the lane, His chappals are sticky with mud, but he hurries onward. Home again, I see him drinking weak tea, Eating a stale chapati, reading a book. He goes into the toilet to contemplate Man’s estrangement from a man-made world. Coming out he trembles at the sink, The cold water running over his brown hands, A few droplets cling to the greying hairs on his wrists. His sullen children have often refused to share Jokes and secrets with him. He will now go to sleep Listening to the static on the radio, dreaming Of his ancestors and grandchildren, thinking Of nomads entering a subcontinent through a narrow pass. The poem speaks about the inner loneliness of the poet’s father, the utter alienation he is experiencing in the twilight years (man’s estrangement from a man-made world) as he ceases to matter to his children who no longer share anything with him. All the while he is trying to evoke, through the racial conscious, the invisible connection with his ancestors who had entered the sub-continent through the Khyber Pass in the Himalayas in some distant past (the allusion is perhaps to the migration of the Aryans to the Indian subcontinent from Central Asia). The poet uses some fine imagery to describe the pain and misery lurking in the old man’s soul as he travels in the local train . His bag stuffed with books is falling apart refers to the state of the old man’s mind which has turned senile after all that knowledge it has acquired through years of dedicated study. A wonderful image is used to describe his getting down from the train: Like a word dropped from a long sentence . The uniqueness of the image lies in the highly evocative visual picture of an old man dropping off from the train as though he is no longer relevant to the train which will now move forward with other people to their destinations. The old man is just a word in the syntax of life. The sentence that is long enough to carry several words forward each contributing to its overall meaning now drops off one stray word, which is no longer required. The other interesting image is the eyes and vision, which occurs in the poem again and again. The suburbs slide past his unseeing eyes is a pretty image. The second one is his eyes dimmed by age fade homeward. Above all we may look at the dexterous use of words to convey the â€Å"twilight† atmosphere in the poem : evening train, yellow light, unseeing eyes , his eyes dimmed by age fade homeward ,gray platform. Meaning of the poem is also a part of â€Å"to know, how to live in the society†. Other meaning is It’s all about the severe problem of generation gap. The widening crisis due to the explosion of rational. Father Returning Home is a poem written by Dilip Chitre. The main idea of this poem is ‘Man’s estrangement from a man-made world’. Here the father comes home late tired with his pants are soggy and his black raincoat is stained with mud and his bag is falling apart-He never cares the scenes of the outer world when he travels. Because he is always musing about his family. He is so true about his family, yet no one in his family realizes his care for them. He gets only the weak tea and stale chapati. (Look, he is the only one who works hard for his family yet he does not get even good food.   Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚  Ã‚   The lines like ‘The cold water running over his brown hands, A few droplets cling to the greying hairs on his wrists’ are used to add to the effect of the life and the world of poor father. His children are not ready to share jokes with him-their sullenness shows the unspoken resentment. And finally, even when he goes to bed the story is not different. There he receives only noi sed receiving, not even a good program from the radio. In short the father has no joy in his life; there is no closeness between the father and the children. The only thing that changes the mood of the poem is when he thinks about his dead yesterdays (ancestors) and unborn tomorrows (grand-children and nomads) -Here one thing must be noted that he dreams about these people not about his own children. Patel wanted to convey the idea of unseen sincerity of millions of fathers who strive hard for their family and their people. Dilip Chitre’s poem â€Å"Father Returning Home† is selected from â€Å"Travelling in A Cage†. It speaks about the dull and exhausting daily routine of a commuter. Delinked from his family he is left with himself to talk. Dreaming about his ancestors and grand children he communicates with the dead ‘yesterdays and unborn tomorrows. ‘ His alienation is complete and irreversible. Sleep and dream come as sweet relief from a world that is alien to him. The theme of the poem is â€Å"Man’s estrangement from a man-made world. † Dilip Purushottam Chitre (Marathi: ) was one of the foremost Indian writers and critics to emerge in the post Independence India. Apart from being a very important bilingual writer, writing in Marathi and English, he was also a painter and filmmaker. Biography He was born in Baroda on 17 September 1938. His father Purushottam Chitre used to publish a periodical named Abhiruchi which was highly treasured for its high, uncompromising quality. Dilip Chitre’s family moved to Mumbai in 1951 and he published his first collection of poems in 1960. He was one of the earliest and the most important influences behind the famous â€Å"little magazine movement† of the sixties in Marathi. He started Shabda with Arun Kolatkar and Ramesh Samarth. In 1975, he was awarded a visiting fellowship by the International Writing Programme of the University of Iowa in Iowa City, Iowa in the United States. He has also worked as a director of the Indian Poetry Library, archive, and translation centre at Bharat Bhavan, a multi arts foundation, Bhopal. He also convened a world poetry festival in New Delhi followed by an international symposium of poets in Bhopal. His Ekun Kavita or Collected Poems were published in the nineteen nineties in three volumes. As Is,Where Is selected English poems (1964-2007) and â€Å"Shesha† English translation of selected Marathi poems both published by Poetrywala are among his last books published in 2007. He has also edited An Anthology of Marathi Poetry (1945–1965). He is also an accomplished translator and has prolifically translated prose and poetry. His most famous translation is of the celebrated 17th century Marathi bhakti poet Tukaram (published as Says Tuka). He has also translated Anubhavamrut by the twelfth century bhakti poet Dnyaneshwar. Film Career He started his professional film career in 1969 and has since made one feature film, about a dozen documentary films, several short films in the cinema format, and about twenty video documentary features. He wrote the scripts of most of his films as well as directed or co-directed them. He also scored the music for some of them. Awards and Honors He worked as an honorary editor of the quarterly New Quest, a journal of participative inquiry, Mumbai. Among Chitre’s honours and awards are several l Maharashtra State Awards, the Prix Special du Jury for his film Godam at the Festival des Trois Continents at Nantes in France in 1984, the Ministry of Human Resource Development’s Emeritua Fellowship, the University of Iowa’s International Writing Program Fellowship, the Indira Gandhi Fellowship, the Villa Waldberta Fellowship for residence given by the city of Munich, Bavaria, Germany and so forth. He was D. A. A. D. German Academic Exchange) Fellow and Writer-in-Residence at the Universities of Heidelberg and Bamberg in Germany in 1991–92. He was Director of Vagarth, Bharat Bhavan Bhopal and the convenor-director of Valmiki World Poetry Festival ( New Delhi,1985) and International Symposium of Poets ( Bhopal, 1985), a Keynote Speaker at the World Poetry Congress in Maebashi, Japan (1996 ) and at the Ninth International Conference on Maharashtra at Saint Paul, Minnesota, USA in 2001 and Member of the International Jury at the recent Literature festival Berlin, 2001. He was member of a three-writer delegation ( along with Nirmal Verma and U. R. Ananthamurthy) to the Soviet Union (Russia, Ukraine, and Georgia), Hungary, the Federal Republic of Germany and France in the spring and summer of 1980 and to the Frankfurter Buchmesse in Frankfurt, Germany in 1986; he has given readings, lectures, talks, participated in seminars and symposia, and conducted workshops in creative writing and literary translation in Iowa City, Chicago, Tempe, Paris, London, Weimar, Saint Petersburg, Berlin, Frankfurt, Konstanz, Heidelberg, Bamberg, Tubingen, Northfield, Saint-Paul/Minneapolis, New Delhi, Bhopal, Mumbai, Kochi, Vadodara, Kolhapur, Aurangabad, Pune, Maebashi, and Dhule among other places. He travelled widely in Asia, Africa, Europe, and North America as well as in the interiors of India; been on the visiting faculty of many universities and institutions, a consultant to projects. He was the Honorary President of the Sonthhheimer Cultural Association, of which he was also a Founder-Trustee. Death After a long bout with cancer, Dilip Chitre died at his residence in Pune on 10 December 2009. Dilip Chitre: Portrait of an artist At the ripe young age of 16, Dilip Purushottam Chitre made a decision that would change his life forever. He decided he wanted to live as a poet and artist. It could not have been an easy choice. He admits to vague premonitions of it being difficult, and admits it proved hard at times. And yet, after over fifty years of living that life of poet and artist, he stands by it, refusing to have it any other way. One can’t blame him either. After all, his has been a life gifted with all sorts of revelations. It has been a colourful life, one spent whole-heartedly in the service of art and literature. His achievements, when strung together casually, boggle the mind. Chitre has — since publishing his first collection of poems, Kavita, in Marathi in 1960 — published a lot in English (Travelling in the Cage, 1980), has had his work translated into Hindi (Pisati ka Burz, 1987), Gujarati (Milton-na Mahaakaavyo, 1970), German (Worte des Tukaram) and Spanish. He has exhibited his own paintings (First One Man Show of Oil Paintings, 1969); written and directed an award-winning film (Godam, 1984); made a dozen documentary films and scored music for some of them; taken on the mantle of editor for literary magazines (Shabda, 1954-1960); written for India’s most respected publications; influenced a literary movement (the little magazine of the sixties in Marathi); convened poetry festivals; won all kinds of honours; travelled widely across India and abroad; and taught at universities worldwide. So, when he describes his interests on his blog thus — ‘I am a poet and a writer. I paint. I make films. I travel. I make friends. I read. I listen to music. I reflect. I contemplate. ‘ — it’s hard not to believe him. Born in Baroda in 1938, Chitre soon moved with his family to Mumbai, where he published his first collection of poems. Possibly the most famous of his translations is Says Tuka, a rendition of the work of seventeenth century Marathi bhakti poet Tukaram. It is a translation of abhangs, a form of devotional poetry sung in praise of Vitthal. Chitre’s translation continues to find new readers, surprising and moving them with its simplicity: ‘There is a whole tree within a seed/ And a seed at the end of each tree/ That is how it is between you and me/ One contains the Other. I envy Dilip Chitre for the life he has lead, for his unwavering faith in all he holds dear. He now lives in Pune with his wife, Viju, to whom he has been married for over 45 years. ‘Even in the most civilized societies of the world, poets receive ambivalent treatment,’ he writes. ‘The economic value of what poets do is considered extremely dubious†¦ The most they can hope for during a lifetime is niche audiences scattered far and wide and small publishers crazy enough to publish poetry without any regard to sales. ‘

Feast of the dead by Cevdet Kudret Essay

It was January when the world seemed grimmer, streets empty, people went out only for work. A boy who had been to the fountain told to the man he saw that Dursun Agha is dead. Dursun Agha is the one who calls at the street asking if someone needs water, one trip, two trips, three trips and someone would call back, one trip means two cans of water that costs three Kurush. Dursun is asturdy man with a round black beard, has 2 children and a wife named Gulnaz, she help Dursan when someone would call her to wash clothes that only happens twice or thrice a week and earn few more three kurush. The caused of Dursun’s death was he had hit his head on the stone bowl under the tap when he slipped. No one ever thought that a tough and durable man could die just like that all of a sudden. Gulnaz heard the news and didn’t know what to do with her children, she didn’t know how she can feed two mouths by washing clothes. It wasn’t enough. No one eat for 36-48 hours until someone feel the hunger inside their stomach. As a Moslem tradition, when someone died the neighbor will give food to the family who’s in grief for a day or two. The first who gave food was from a wealthy man who lived in the white house the tray of food was brought by the maid it was covered in a cloth. No one actually thought of eating that day but when they saw the food it gives them relaxation of feelings. The foods came and it lasted for three of four days. The food stopped coming but they were still hoping until suppertime and they realize that no one will give them food anymore. They cook food and they found it hard to readjust because they get used to the foods that was given by the neighbors until the day came that they have nothing to eat at all.The children and Gulnaz slept with empty stomach. The next day the young boy told to Gulnaz that it hurts inside, but she can’t do anything, they all felt dizzy and hungry. Days passed by until a horse full of bread on its side. Instead of asking for a loaf of bread, Gulnaz froze and didn’t say anything, she just let God’s blessing pass by. She went back to her room empty handed. When her son told her that she can’t stand anymore, he ask his eldest son to go to the grocery store and asked if he could asked some food to the grocery store and tell them they would pay it in a few days. But the trick didn’t work to Bodos so the child left the with empty handed.

Cause and effect of smoking during pregnancy Essay

Cause and effect of smoking during pregnancy - Essay Example Research studies carried out recently show that the child of a smoking mother is almost doubly at risk in contacting very serious respiratory tract diseases in its early stages of life and usually leads to hospitalization. Another major cause for this is that many societies are well known for their high rate of smoking and even since the 1800’s, people are quite aware of the fatal effects it has on health. But in the 19th century, the correlation between maternal smoking and the rate of LRI (Lower Respiratory Infection) was determined. A clinical research was carried out to determine the effect or impact that parental smoking had on children who were constantly exposed to it, and the Odds Ratio was calculated, based on the LRI, for hospitalization. The risk calculated was age related and the OR’s of prevalence of serious LRI were 1.71 (95% CI, 1.33-2.20) and 1.25 (95% CI, 0.88- 1.78) for children aged 0.2 years and 3 to 6 years respectively. (Li JS, Peat JK, Xuan W, Berry G, 1999) Other studies have shown a link between maternal smoking and a high incidence of respiratory problems including impaired lung infections. Some studies have shown harmful effects of placenta - borne exposure at the time of pregnancy including breast milk, as well as air- borne exposure right after delivery. More recent evidence, of the effect of smoking mothers on their off spring, shows that immunity plays a major role in determining this, proving to be an important mechanism. Another cause for children inflicted with wheezing and other respiratory problems was due to dust mites found in the homes of smoking mothers. According to a study undertaken by Noakes, he suggests that â€Å"Maternal smoking is associated with impaired neo-natal toll- like- receptor mediated immune responses†. (P.S Noakes, Eur. Respir. Journal, 2006) Another major factor that contributed to an adverse effect on pregnant smoking mothers was the lack of social support render during

Making Sense of American Popular Songs Research Paper

Making Sense of American Popular Songs - Research Paper Example The American Popular Ballad of the Golden Era, 1924-1950. Princeton: Princeton University Press, 1995. In this work, much emphasis has been put on specific individuals that perform and work on popular music. In addition, the work has focused on a specific eras in which popular music were at its best in America. The book reveals what propelled people to start singing and performing popular music. These factors taken into consideration, the work is good enough to address the issues of American identity through popular music. Fuld, James J. The Book of World-Famous Music: Classical, Popular and Folk. Foreward by William Lichtenwanger. New York: Crown Publishers: 1966. This book looks at a wide range of music in America and their artists. The important information given about such music and their artists is imperative in the tracing of American identity through music. Among the cultures explored in this work are classic, popular and folk. As such, I found this book imperative in the writ ing of this paper. Grove Dictionary of American Music. Restricted database available online at through some schools and colleges. This source has a lot of information on the artists of popular music from the composers of songs to the performers. The information included is the bibliographic works for the artists. This makes the book significant in researching on the American identity through analysis of bibliographies of the composer and performers of pop music. Hamm, Charles. Yesterdays: Popular Song in America. New York and London: W.W. Norton & Company, 1983. Of significance about Charles’ work is that it concentrates on major works. Through the information found in this book, it is easy to establish the wave movement of Americans to the initiation of popular music. As... The paper tells that popular music in America took on a transformation in the second half of the 19th century to emphasize commercial expansion. This overlapped into the twentieth century and traces can still be seen in today’s popular music. As a result, the expansion of the music industry meant that more songs had to be composed, staged, produced and listened to in the entire country of the United States of America. In the first place, popular music was restricted to ethnic minorities or immigrant people to express their dissatisfaction in the manner in which the government was running social and economic matters in the country. However, commercialization expanded the market for such songs as well as thematic implications attached to the songs. On the other hand, Jewish artists incorporated segments from their tradition into the American music. This is well illustrated when Sophie Tucker performed her pop song â€Å"My Yiddishe Momme† which was staged in 12925. The so ng was performed in both Yiddish and English. Additionally, the Afro-American values resulted into a sequence of characteristic song style. This made most of the African American performers to be enthusiastic and confident with the themes central to pop culture. Nevertheless, there was a change in issues that were held true to popular music by 1950. These changes were in the contradictions over the period in which such songs were performed. In the first place, some songs remained stable from one period to another. The rise of other genres in music performed and composed in America like rock and roll, blues and soul music has an overriding impact on popular music.

Cross culture communication and negotiation Essay

Cross culture communication and negotiation - Essay Example It is important to understand the culture of the host country in order to operate effectively in a foreign country. InterNations, ND, Cross cultural training for business, Viewed December 5, 2012 from: . The above mentioned article states the essence of cross cultural training for business people who are likely to make presentations in foreign countries. There are many issues that should be considered such as the culture of the targeted audience since it impacts on their attitude towards something. InterNations, ND, Intercultural communication, Viewed December 5, 2012 from: . This article emphasises the fact that intercultural communication is not only about learning a foreign language spoken in the host country by expatriates. It also looks at other issues such as cultural exchange where people involved learn new things about the culture in the host country. Internations, ND, International business issues, Viewed December 5, 2012 from: . ... This article mainly focuses on what expatriates must know about the cultures of people in the host country. Each country has a unique culture. For instance, foreigners should familiarise themselves with the ‘dos’ and ‘don’ts’ in a foreign country if they are to enjoy their stay in that country. InterNations, ND, Intercultural competence, Viewed December 5, 2012 from: . The article mainly focuses on the aspect of competence among the expatriates in terms of grasping the cultural contexts of other host nations. This helps them to operate within the standard expectations that do not violate the norms and values of the people in their country. Kwintessential, ND, An introduction to intercultural communication, Viewed December 5, 2012, from: ,. The article highlights the importance of intercultural communication to expatriate workers. The articles examines how people from different religions and cultures come to work together and communicate with each othe r in harmony. Demand of intercultural communication skills are increasing as many companies go global. Kwintessential, ND, Cross cultural advertising, Viewed December 5, 2012 from: . This article states that culture affects everything we do in our lives. Culture also affects all facets of business and it can be seen that cross cultural advertising is influenced by the norms and values of different people. Adverts that violate the norms of other people are likely to receive negative attention by

Gender biases in the United States Essay Example | Topics and Well Written Essays - 1000 words

Gender biases in the United States - Essay Example The female victims suffer from low self- esteem. Other female victims lack the confidence to perform their daily tasks. Other female victims suffer from a feeling of helplessness. Additionally, society had impressed on women that their gender role is lesser in value to the male gender. Being informed that the female job applicant was not hired because the company needed a male sales representative is tainted with gender bias. Society had impressed on the female gender that the male masculinity is higher in value over the female gender’s less masculine physical built (Chin 125). Further, Robert Kail’s research emphasized that only ten percent of the top 500 corporation 2006 officers were women. Further, it was only in 1981 when Sandra Day O’ Connor was appointed Supreme Court Judge. The next female Supreme Court Judge was twelve years later, Ruth Bader Ginsburg. Likewise, most of the faculty members of universities and colleges were male professors (Kail 443). Moreover, Robert Kail shows in the above table that gender bias had improved (Kail 441). The population of women had increased from 76 million in 1950 to 152 million in 2006. The same table shows that there were only 21 percent of women enrolled in high schools during 1950. However, the percentage had increased significantly to 86 percent in 2006. Because of the modern era where gender bias had been significantly reduced, 66 percent of women were married in 1950. The married women figure dropped to 47 percent. One possible explanation was that more women preferred to work outside the home instead of taking care of the family as plain housewife. The above table clearly shows that 29 percent of the women were working outside the home during 1950. However, the women working outside the home figure influentially rose to 60 percent in 2006. Historically, women were relegated to the home chores. Prior to the 1970s, women were characterized as mentally and morally lesser in

The Time Value of Money Essay Example | Topics and Well Written Essays - 1000 words

The Time Value of Money - Essay Example However, this is not the case with the $10000 received 3 years from now. Its value will be $10000 only since no interest will be earned as illustrated in the figure below: In short, we can say that "a dollar today is worth more than a dollar one year from now" because the time value of money decreases over time. Why it decreases is the actual question. Interest rate, as we saw above is one apparent reason why money is related to time. Investing the money today would enable you to earn interest, causing it to grow to a larger amount over time. Let us now examine some of the other reasons and their impact on the time value of money. Present value refers to a value that is equal to a value or values in future that have been discounted at relevant interest rate. For example, if you are expected to receive $10000 three years from now, the value of this 10000 today would be $9497 if the interest rate is 5% (PV= FV/ (1 + i )N) ) but if you were to receive $10000 five years from now, the present value would only be $7836.This $9497 at the beginning of the period is equal to $10000 at the end of the three years , showing that the value of money is related to time and therefore, causing the present value of an amount in the future to be less and less, the more you have to wait for it. When you had to wait for 3 years, the present value of $10000 was $9497 but when you had to wait for 5 years, the value of the same $10000 fell to $7836. This process of finding present values from future values is called discounting. The opposite is applicable for compounding. Compounding causes the future value to be larger and larger t han the value today, the longer you have to wait for it because the value of money is related to time as illustrated by the numerical above. 2. Opportunity Cost: The time value of money also includes the concept of opportunity cost or the cost of foregoing the next best alternative. For example, if you decide to get $10000 in three years rather than now, you are foregoing the enjoyment, interest and other benefits you could have acquired by taking it now. How much you will have to forego depends on the interest rate. The higher the interest rate, the greater the interest that you will have to forego and hence, higher your opportunity cost. 3. Annuities: Annuities are a series of payments at regular intervals for a specified number of periods. If for example, you expect to receive the amount $10000 in 4 equal installments of $2500 each for the next 4 years, the present value of this stream of cash flows would amount to $8865 if the interest rate is 5% (PV = PMT [(1 - (1 / (1 + i)n)) / i]) while the future value would amount to $10775 (FV = PMT [((1 + i)n - 1) / i]). However, if the same $10000 was to be paid in 5 equal installments of $2000 each in the next 5 years, the present value would be $8659 and the future value would be $11051.Clearly, the same rules are applicable here and affect the time value of money in the same way. The longer it takes for you to receive your sum of $10000, the lower will be the present value of the annuity and the higher will be the future value. When you had to wa

Musical Jersey Boys Assignment Example | Topics and Well Written Essays - 750 words

Musical Jersey Boys - Assignment Example The performance had its share of light and dark moments, where if on the one side these boys manage to carve out a space for themselves as astute and talented performers, yet, they are unable to get rid of the dark shadow of the mafia linkage and poverty that defined their urban background. The play encapsulates the life and times of the group, packaging and presenting it as a nostalgic remembrance of something moving and enrapturing. The show happened to be crisply fast paced, punctuated by more than ample moments of urban humor and laughter, which indeed imparted a tinge of lightness to an otherwise moving plot having its share of dark and grim moments. They much liberal exploitation of music made the play a much lighter and invigorating experience and the fast pace combined with a comparatively lighter tonality added to its overall appeal. The play allowed for an assemblage of perspectives, as it is narrated from the point of view of varied members of the Four Seasons group. This multiplicity of viewpoints is immaculately used in the play to weave the story of the ascendance of a group of four boys born and brought up amidst urban squalor and crime to the dizzying heights of fame, as they moved the hearts of millions of fans and music lovers. The struggle of these four boys justified by the success they achieved is movingly presented to the accompaniment of soundtracks from Frankie Valli and his band the Four Seasons. The hits like â€Å"Big Boys don’t cry†, ‘Dawn† and â€Å"Walk like a Man† imbued the theatre with a stimulating and palpitating sense of harmony, showcasing the golden hits that made these boys a rage amongst the music lovers of all ages and times. All the actors did do a remarkable job, bringing an emphatic and earnest charm to all the four characters that signified their appeal and immense following. One also does need to praise the musical abilities of most of the

Industrialization After the Civil War Thesis and Outline Assignment

Industrialization After the Civil War Thesis and Outline - Assignment Example In this regard, industrialization was high in the North America region than the South America region (Boyer, 2011). In the North, growth in industrialization accompanied growth of many cities. The growth in the cities encouraged rural-urban migration of many American citizens. Entrepreneurship enabled many American to utilize the opportunities that arose from industrialization. For instance, the massive production of consumer goods was an opportunity for people to devise ways of differentiating products in order to gain returns. According to Dubofsky (2006), Americans indulged in the establishment of retail business to supply the products produced in bulk. The product supply chain enhanced the value of products. Legislative representation changed during the industrial revolution period. The restructuring led to the control of many American corporations by the business class rather than the political class. The move led to liberalism in the product markets because there was a creation of a free market economy. The business class lobbied for many members in the House of Representatives to advocate for bills that could improve the economy of the nation. The industrialization era affected the group because of racial prejudices. The Native Americans discriminated the American Indians. The group settled in the American soil in search of resources such as land. Intermarriages between the Native Americans and the Indians did not guarantee the parties the right to the use of American resources. The industrialization process negatively affected the middle class group. According to Scranton (2010), the middle class people lost lucrative business of consumer goods because the era led to flooding of the markets with consumer products. The monopolistic advantage for the group was lost. As a result, there was a loss of revenue and source of livelihood for the group. Industrialization

Abortion Essay Example | Topics and Well Written Essays - 1500 words

Abortion - Essay Example These untruths have been widely perceived as facts. In addition, the Founding Fathers of this nation intended to shape not only the legal but the moral direction of American society as well when they drafted the Constitution, the document that defines the laws of the nation. If they were alive today, the Founders clearly would be against the killing of innocent victims for reasons of convenience. There is little freedom of choice for women who are experiencing an unwanted pregnancy. The women themselves usually wish to bring their baby to full term. Other powerful influences in her life such as husbands/boyfriends, parents and friends are generally the forces that exact pressures on her to terminate the pregnancy. â€Å"Eight out of 10 women surveyed after abortion said they would have given birth if they’d had support and encouragement from family and friends† (Reardon, 2002). It’s the abortion that, in many cases, is unwanted by the woman, not the baby. Most often, the father of the child, not wishing to accept responsibility, may beg or even threaten a woman until she agrees to the abortion. â€Å"In 95 percent of all cases the male partner played a central role in the decision† (Zimmerman, 1977). This and other studies have illustrated clearly that most women decide against their own conscience. Legal abortion enables fathers to force their will on mothers. Some women resort to abortion in desperation because they fear continued abuse. That fear is substantiated as women who refuse to abort have been subjected to serious abuses which have escalated to murder if the women still persists in her refusal. Murder is the leading cause of death for pregnant women and for what other motive could there be? â€Å"Sixty-four percent of women surveyed report being pressured by others into unwanted abortions† (Reardon, 1992).   Ã‚  Immediately following an abortion, the one(s)

College Goals Essay Example for Free

College Goals Essay Attending college is the first step to a better future. Throughout life there will be many goals to accomplish but some of the most important goals to accomplish will be during the time you are in college. My first goal is to pass every class this semester. After completing this goal my next goal to complete will be to graduate from Hudson County Community College with an Associate’s Degree in Liberal Arts. Finally my last goal to complete is to further my education and get the job I want. Passing every class this semester will help me feel positive and confident about my future and future goals. In order to complete this goal I will have to attend every class and be on time. By missing one class I will miss out on a lot of work and may not be able to catch up. I will have to finish every assignment on time because if I write the best essay I could possibly write but hand it in late, my grade will drop dramatically. Finally I will have to ask for help if I need it. Even though it is my first semester of college and I do not know what to expect, asking for help is easy and can help improve my college experience. To be able to obtain my Associate’s Degree in Liberal Arts by August 2015 I will have to work harder than I ever have. I will have to be sure to complete all my assignments and be sure to attend all my classes. I will have to put school first in life and avoid activities that will have a negative impact on my education. Prior to achieving this goal I also want to choose the career I want so I can know what direction my life is going. My final long-term college goal is to go on to obtain my Bachelor’s Degree and possibly my Master’s Degree, depending on the career I choose. I have not chosen the career I want yet but I want to have the best education possible to qualify me for the job. To be able to obtain the best education possible I want to keep my grade point average high and be able to attend a good university. I have not really thought about all the details since I have not chosen a career yet but I am going to better my education as much as I possibly can. After completing all my education I will have the job I want and be happy and financially stable. In conclusion, my college goals are some of the most important in my life because they greatly help shape my future. By passing all my classes this semester I will have the confidence to continue my education and do well. By obtaining my Associate’s Degree I will be able to go on and obtain my Bachelor’s and possibly Master’s Degrees. And finally when I finish completing all my education I will be able to get the career I want and be happy with my life. My entire future depends on the choices I make in college.

Training for improving service quality at Honda Essay Example for Free

Training for improving service quality at Honda Essay This case is about Honda American Motor Company which tries to improve quality due to blended learning approach. They split it in three different phase. 1. Phase one: The first phase takes place online. For two to three weeks, learners access a series of online modules that introduce the logical processes for effective problem solving and decision making. Learner progress is essentially self-paced, but since the content is driven from a Web server, the instructor can follow the progress of each learner and provide on-going encouragement and support. During phase one, learners are also asked to identify situations to which they intend to apply the techniques so they can focus on these situations when they attend the workshop. This powerful combination of initial learning and preparation for applying the concepts to real-life issues ensures the following phase will not only be efficient but also build deep understanding and significant motivation to use the ideas on the job after training. 2. Phase two: The second phase takes place at the workshop. Guided by the instructor, learners spend two days deepening their understanding of the concepts, discussing best practices and additional techniques for problem solving and decision making, and practicing on detailed case scenarios. Since skill transfer and results occur most rapidly when starting with the learner’s on-the-job issues, a significant portion of the session is spent working on the problems, decisions and plans identified in phase one. Simultaneously, learners receive coaching and feedback from the instructor and one another. Learners leave the session ready to fully apply the concepts and with a plan in hand to move successfully from the workshop to consistent use of the concepts back on the job. 3. Phase three: The final phase takes place back online. In the three weeks following the session, learners resolve the on-the-job issues they began to work on during the workshop. They document for instructor review, feedback and approval the specific techniques they used to resolve the issues. During phase three, learners have access to a host of online support tools and information. They can contact the instructor with questions at any time. The goal of this phase is to ensure use of the learned concepts and build  confidence. Advantages of Honda’s blended learning approach Quality of individual output is improved. Employees have the same way of thinking and working - Makes it easier to work with manager and all the co-workers. Deep understanding and strong motivation from the employees Personalized support Reduce their time away from the job Take advantages of expanding technology capabilities and infrastructure Assure tangible transfer of skills Format which best support the overall emphasis on growth and quality Questions After the presentation of our case some questions have been asked by the students of the class. We have discussed about them and tried to bring some explanations. There were different kinds of questions. The first kind was about the learning model itself. The main questions were the followings: 1. How can you measure the quality improvements? Overall and in figures? 2. Is the learning time too short? 3. Can you find in the library some video clips? 4. Is it not to theoretical this learning system? For the first one we think that it is really difficult to measure in term of figure this kind of program. Indeed it is not a small part of Honda’s employees that are training but the whole company. In addition it is not a program for the short term but for the long term. The global quality of Hondo production will increase due to the learning program that means that the customers will be more satisfy. In the long run they will come back to the company to buy their next car. It will take years to quantify the real impact on the turnover. However it is possible to conduct some survey to the customer to know if they think that the quality has improved. The company  can also check if the time to make a car decrease or if there are less failure with the production. For the second one we do not think that the learning time is too short. 6 weeks is enough for this time of training. Moreover it is not because you have done it one time that you cannot do it anymore in the future. With a short training you can be focused on the main point and do not lose time on secondary information that the employee will never use. For the third one we do not know if it is already available on the intranet of Honda. But it can be a really good idea if it does not exist yet. People prefer to watch somebody explaining something (and see how it is working) than only read it in a book. The last one if one of the most important question for this kind of program where you mix theoretical and manual learning. Where is the border between too much of one or the other? At the first view it seems that two days of practice is not enough. However when the employee start is manual formation he has already learned lots of information. So the trainer will not lose lots of time to explain easy and obvious things but can be directly focus on the main important information that the trainee must learn. The second kind of question was more about the employees and their interaction with the learning program. The following questions have been asked to us: 1. How can you motivate the employees, with which kinds of incentives? 2. What about the learners who are not ready after phase 2? 3. What are the interactions among the employees? By participating into an important process in order to improve the quality of their company, the worker feels involved and useful. Indeed, its not sufficient for the most part. Regarding to the low wages that the workers can perceived, a money incentive can be a real motivation to make them want to learn. Moreover, they can motivate them by establishing in the company policy, a rule that explain that if the worker is efficient and provides good work quickly, he can whether be promoted or get bonus in the end of each month. The answer of the second question is quite simple. Indeed, the instructors  can easily evaluate the learners by watching him doing the job. If the learner applies the method perfectly, the instructor will give him the permission to go to the next phase. Otherwise, according to his level of difficulties, the instructor will send him either in the first phase or remake the second phase. Employees interact each other every time (within the company, lunch breaks), but also on the intranet through forums or instant messages. Thus, they can talk easily about working problems, or for instance, share tips and solutions about technical problems. Every single solution is directly saved into the database. Lot of communication channels allows workers to interact easily each other. How does Honda doing compare to its competitors? First of all it is a really complex process to compare sales and figures with quality management. As we learned during the lecture there is no guaranteed effect between sales of products, Stock price progress and quality. Therefore it is even challenging for Managers to analyze the effects of quality improvements. In ours point of view there is one obvious point how to compare it. The annual recalls of Cars. Toyota US 2013 (Toyota US, 2014 Reuters, 2014) Cars Sold: 182’152 Cars Recall â€Å"Nearly 19 million vehicles globally from late 2009 to early 2011 due to unintended acceleration claims.† Honda US 2013 (IBT, 2014 Reuters, 2014) Cars Sold: 135’255 Cars Recall â€Å"Between 2008 and 2011, Honda was forced to recall about 2.8 million vehicles after finding a defect with driver-side airbags supplied by Takata.†  « Honda (2.8 million), Hyundai-Kia (2.2 million) and Ford Motor Co. (1.2 million) rounded out the top five in terms of vehicles recalled in 2013.  » Conclusion To conclude, this system of training in three phases has many advantages. It permits to all employees to feel involved in it because it is not only a theoretical learning system, to have a personalized support and a control at each phase permit to really evaluate their progression. Furthermore this system of training allows them to reduce their time away from their job. We have analysed some questions about this system such as the measurement of the quality improvement because we can’t really quantify the real impact on the turnover now. The project is on the long term and it will take some few years to measure the satisfaction of the customer, if they will buy another car of this brand or not. The other questions were about employees and their interaction with the program. The money is not the only motivation for employees; they are also motivated by the self-satisfaction (increase their knowledge, promotion, or belong to a company of quality). This program permits the skills transfer also, to discuss of problems on the intranet (forums) Despite some â€Å"issues† such as measuring the efficiency right now of this system or the non-guarantee of effect between sales of product, stock price progress and quality; Honda is the company with the lowest annual recalls of cars. Bibliography IBT http://www.ibtimes.com/here-are-december-2013-big-eight-us-auto-sales-numbers-gm-ford-chrysler-toyota-honda-nissan-1525492, 16.04.2014 Reuters http://www.reuters.com/article/2013/04/11/us-toyota-recall-idUSBRE93A04D20130411, 16.04.2014 Toyota US http://toyotanews.pressroom.toyota.com/releases/tms+march+2014+sales+chart.htm, 16.04.2014

Credit Risk Dissertation

Credit Risk Dissertation CREDIT RISK EXECUTIVE SUMMARY The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The major cause of serious banking problems over the years continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to deterioration in the credit standing of a banks counterparties. Credit risk is the oldest and biggest risk that bank, by virtue of its very nature of business, inherits. This has however, acquired a greater significance in the recent past for various reasons. There have been many traditional approaches to measure credit risk like logit, linear probability model but with passage of time new approaches have been developed like the Credit+, KMV Model. Basel I Accord was introduced in 1988 to have a framework for regulatory capital for banks but the â€Å"one size fit all† approach led to a shift, to a new and comprehensive approach -Basel II which adopts a three pillar approach to risk management. Banks use a number of techniques to mitigate the credit risks to which they are exposed. RBI has prescribed adoption of comprehensive approach for the purpose of CRM which allows fuller offset of security of collateral against exposures by effectively reducing the exposure amount by the value ascribed to the collateral. In this study, a leading nationalized bank is taken to study the steps taken by the bank to implement the Basel- II Accord and the entire framework developed for credit risk management. The bank under the study uses the credit scoring method to evaluate the credit risk involved in various loans/advances. The bank has set up special software to evaluate each case under various parameters and a monitoring system to continuously track each assets performance in accordance with the evaluation parameters. CHAPTER 1 INTRODUCTION 1.1 Rationale Credit Risk Management in todays deregulated market is a big challenge. Increased market volatility has brought with it the need for smart analysis and specialized applications in managing credit risk. A well defined policy framework is needed to help the operating staff identify the risk-event, assign a probability to each, quantify the likely loss, assess the acceptability of the exposure, price the risk and monitor them right to the point where they are paid off. Generally, Banks in India evaluate a proposal through the traditional tools of project financing, computing maximum permissible limits, assessing management capabilities and prescribing a ceiling for an industry exposure. As banks move in to a new high powered world of financial operations and trading, with new risks, the need is felt for more sophisticated and versatile instruments for risk assessment, monitoring and controlling risk exposures. It is, therefore, time that banks managements equip them fully to grapple with the demands of creating tools and systems capable of assessing, monitoring and controlling risk exposures in a more scientific manner. According to an estimate, Credit Risk takes about 70% and 30% remaining is shared between the other two primary risks, namely Market risk (change in the market price and operational risk i.e., failure of internal controls, etc.). Quality borrowers (Tier-I borrowers) were able to access the capital market directly without going through the debt route. Hence, the credit route is now more open to lesser mortals (Tier-II borrowers). With margin levels going down, banks are unable to absorb the level of loan losses. Even in banks which regularly fine-tune credit policies and streamline credit processes, it is a real challenge for credit risk managers to correctly identify pockets of risk concentration, quantify extent of risk carried, identify opportunities for diversification and balance the risk-return trade-off in their credit portfolio. The management of banks should strive to embrace the notion of ‘uncertainty and risk in their balance sheet and instill the need for approaching credit administration from a ‘risk-perspective across the system by placing well drafted strategies in the hands of the operating staff with due material support for its successful implementation. There is a need for Strategic approach to Credit Risk Management (CRM) in Indian Commercial Banks, particularly in view of; (1) Higher NPAs level in comparison with global benchmark (2) RBI s stipulation about dividend distribution by the banks (3) Revised NPAs level and CAR norms (4) New Basel Capital Accord (Basel -II) revolution 1.2 OBJECTIVES To understand the conceptual framework for credit risk. To understand credit risk under the Basel II Accord. To analyze the credit risk management practices in a Leading Nationalised Bank 1.3 RESEARCH METHODOLOGY Research Design: In order to have more comprehensive definition of the problem and to become familiar with the problems, an extensive literature survey was done to collect secondary data for the location of the various variables, probably contemporary issues and the clarity of concepts. Data Collection Techniques: The data collection technique used is interviewing. Data has been collected from both primary and secondary sources. Primary Data: is collected by making personal visits to the bank. Secondary Data: The details have been collected from research papers, working papers, white papers published by various agencies like ICRA, FICCI, IBA etc; articles from the internet and various journals. 1.4 LITERATURE REVIEW * Merton (1974) has applied options pricing model as a technology to evaluate the credit risk of enterprise, it has been drawn a lot of attention from western academic and business circles.Mertons Model is the theoretical foundation of structural models. Mertons model is not only based on a strict and comprehensive theory but also used market information stock price as an important variance toevaluate the credit risk.This makes credit risk to be a real-time monitored at a much higher frequency.This advantage has made it widely applied by the academic and business circle for a long time. Other Structural Models try to refine the original Merton Framework by removing one or more of unrealistic assumptions. * Black and Cox (1976) postulate that defaults occur as soon as firms asset value falls below a certain threshold. In contrast to the Merton approach, default can occur at any time. The paper by Black and Cox (1976) is the first of the so-called First Passage Models (FPM). First passage models specify default as the first time the firms asset value hits a lower barrier, allowing default to take place at any time. When the default barrier is exogenously fixed, as in Black and Cox (1976) and Longstaff and Schwartz (1995), it acts as a safety covenant to protect bondholders. Black and Cox introduce the possibility of more complex capital structures, with subordinated debt. * Geske (1977) introduces interest-paying debt to the Merton model. * Vasicek (1984) introduces the distinction between short and long term liabilities which now represents a distinctive feature of the KMV model. Under these models, all the relevant credit risk elements, including default and recovery at default, are a function of the structural characteristics of the firm: asset levels, asset volatility (business risk) and leverage (financial risk). * Kim, Ramaswamy and Sundaresan (1993) have suggested an alternative approach which still adopts the original Merton framework as far as the default process is concerned but, at the same time, removes one of the unrealistic assumptions of the Merton model; namely, that default can occur only at maturity of the debt when the firms assets are no longer sufficient to cover debt obligations. Instead, it is assumed that default may occur anytime between the issuance and maturity of the debt and that default is triggered when the value of the firms assets reaches a lower threshold level. In this model, the RR in the event of default is exogenous and independent from the firms asset value. It is generally defined as a fixed ratio of the outstanding debt value and is therefore independent from the PD. The attempt to overcome the shortcomings of structural-form models gave rise to reduced-form models. Unlike structural-form models, reduced-form models do not condition default on the value of the firm, and parameters related to the firms value need not be estimated to implement them. * Jarrow and Turnbull (1995) assumed that, at default, a bond would have a market value equal to an exogenously specified fraction of an otherwise equivalent default-free bond. * Duffie and Singleton (1999) followed with a model that, when market value at default (i.e. RR) is exogenously specified, allows for closed-form solutions for the term-structure of credit spreads. * Zhou (2001) attempt to combine the advantages of structural-form models a clear economic mechanism behind the default process, and the ones of reduced- form models unpredictability of default. This model links RRs to the firm value at default so that the variation in RRs is endogenously generated and the correlation between RRs and credit ratings reported first in Altman (1989) and Gupton, Gates and Carty (2000) is justified. Lately portfolio view on credit losses has emerged by recognising that changes in credit quality tend to comove over the business cycle and that one can diversify part of the credit risk by a clever composition of the loan portfolio across regions, industries and countries. Thus in order to assess the credit risk of a loan portfolio, a bank must not only investigate the creditworthiness of its customers, but also identify the concentration risks and possible comovements of risk factors in the portfolio. * CreditMetrics by Gupton et al (1997) was publicized in 1997 by JP Morgan. Its methodology is based on probability of moving from one credit quality to another within a given time horizon (credit migration analysis). The estimation of the portfolio Value-at-Risk due to Credit (Credit-VaR) through CreditMetrics A rating system with probabilities of migrating from one credit quality to another over a given time horizon (transition matrix) is the key component of the credit-VaR proposed by JP Morgan. The specified credit risk horizon is usually one year. A rating system with probabilities of migrating from one credit quality to another over a given time horizon (transition matrix) is the key component of the credit-VaR proposed by JP Morgan. The specified credit risk horizon is usually one year. * (Sy, 2007), states that the primary cause of credit default is loan delinquency due to insufficient liquidity or cash flow to service debt obligations. In the case of unsecured loans, we assume delinquency is a necessary and sufficient condition. In the case of collateralized loans, delinquency is a necessary, but not sufficient condition, because the borrower may be able to refinance the loan from positive equity or net assets to prevent default. In general, for secured loans, both delinquency and insolvency are assumed necessary and sufficient for credit default. CHAPTER 2 THEORECTICAL FRAMEWORK 2.1 CREDIT RISK: Credit risk is risk due to uncertainty in a counterpartys (also called an obligors or credits) ability to meet its obligations. Because there are many types of counterparties—from individuals to sovereign governments—and many different types of obligations—from auto loans to derivatives transactions—credit risk takes many forms. Institutions manage it in different ways. Although credit losses naturally fluctuate over time and with economic conditions, there is (ceteris paribus) a statistically measured, long-run average loss level. The losses can be divided into two categories i.e. expected losses (EL) and unexpected losses (UL). EL is based on three parameters:  ·Ã¢â€š ¬Ã‚   The likelihood that default will take place over a specified time horizon (probability of default or PD)  · â‚ ¬Ã‚  The amount owned by the counterparty at the moment of default (exposure at default or EAD)  ·Ã¢â€š ¬Ã‚   The fraction of the exposure, net of any recoveries, which will be lost following a default event (loss given default or LGD). EL = PD x EAD x LGD EL can be aggregated at various different levels (e.g. individual loan or entire credit portfolio), although it is typically calculated at the transaction level; it is normally mentioned either as an absolute amount or as a percentage of transaction size. It is also both customer- and facility-specific, since two different loans to the same customer can have a very different EL due to differences in EAD and/or LGD. It is important to note that EL (or, for that matter, credit quality) does not by itself constitute risk; if losses always equaled their expected levels, then there would be no uncertainty. Instead, EL should be viewed as an anticipated â€Å"cost of doing business† and should therefore be incorporated in loan pricing and ex ante provisioning. Credit risk, in fact, arises from variations in the actual loss levels, which give rise to the so-called unexpected loss (UL). Statistically speaking, UL is simply the standard deviation of EL. UL= ÏÆ' (EL) = ÏÆ' (PD*EAD*LGD) Once the bank- level credit loss distribution is constructed, credit economic capital is simply determined by the banks tolerance for credit risk, i.e. the bank needs to decide how much capital it wants to hold in order to avoid insolvency because of unexpected credit losses over the next year. A safer bank must have sufficient capital to withstand losses that are larger and rarer, i.e. they extend further out in the loss distribution tail. In practice, therefore, the choice of confidence interval in the loss distribution corresponds to the banks target credit rating (and related default probability) for its own debt. As Figure below shows, economic capital is the difference between EL and the selected confidence interval at the tail of the loss distribution; it is equal to a multiple K (often referred to as the capital multiplier) of the standard deviation of EL (i.e. UL). The shape of the loss distribution can vary considerably depending on product type and borrower credit quality. For example, high quality (low PD) borrowers tend to have proportionally less EL per unit of capital charged, meaning that K is higher and the shape of their loss distribution is more skewed (and vice versa). Credit risk may be in the following forms: * In case of the direct lending * In case of the guarantees and the letter of the credit * In case of the treasury operations * In case of the securities trading businesses * In case of the cross border exposure 2.2 The need for Credit Risk Rating: The need for Credit Risk Rating has arisen due to the following: 1. With dismantling of State control, deregulation, globalisation and allowing things to shape on the basis of market conditions, Indian Industry and Indian Banking face new risks and challenges. Competition results in the survival of the fittest. It is therefore necessary to identify these risks, measure them, monitor and control them. 2. It provides a basis for Credit Risk Pricing i.e. fixation of rate of interest on lending to different borrowers based on their credit risk rating thereby balancing Risk Reward for the Bank. 3. The Basel Accord and consequent Reserve Bank of India guidelines requires that the level of capital required to be maintained by the Bank will be in proportion to the risk of the loan in Banks Books for measurement of which proper Credit Risk Rating system is necessary. 4. The credit risk rating can be a Risk Management tool for prospecting fresh borrowers in addition to monitoring the weaker parameters and taking remedial action. The types of Risks Captured in the Banks Credit Risk Rating Model The Credit Risk Rating Model provides a framework to evaluate the risk emanating from following main risk categorizes/risk areas: * Industry risk * Business risk * Financial risk * Management risk * Facility risk * Project risk 2.3 WHY CREDIT RISK MEASUREMENT? In recent years, a revolution is brewing in risk as it is both managed and measured. There are seven reasons as to why certain surge in interest: 1. Structural increase in bankruptcies: Although the most recent recession hit at different time in different countries, most statistics show a significant increase in bankruptcies, compared to prior recession. To the extent that there has been a permanent or structural increase in bankruptcies worldwide- due to increase in the global competition- accurate credit analysis become even more important today than in past. 2. Disintermediation: As capital markets have expanded and become accessible to small and mid sized firms, the firms or borrowers â€Å"left behind† to raise funds from banks and other traditional financial institutions (FIs) are likely to be smaller and to have weaker credit ratings. Capital market growth has produced â€Å"a winners† curse effect on the portfolios of traditional FIs. 3. More Competitive Margins: Almost paradoxically, despite the decline in the average quality of loans, interest margins or spreads, especially in wholesale loan markets have become very thin. In short, the risk-return trade off from lending has gotten worse. A number of reasons can be cited, but an important factor has been the enhanced competition for low quality borrowers especially from finance companies, much of whose lending activity has been concentrated at the higher risk/lower quality end of the market. 4. Declining and Volatile Values of Collateral: Concurrent with the recent Asian and Russian debt crisis in well developed countries such as Switzerland and Japan have shown that property and real assets value are very hard to predict, and to realize through liquidation. The weaker (and more uncertain) collateral values are, the riskier the lending is likely to be. Indeed the current concerns about deflation worldwide have been accentuated the concerns about the value of real assets such as property and other physical assets. 5. The Growth Of Off- Balance Sheet Derivatives: In many of the very large U.S. banks, the notional value of the off-balance-sheet exposure to instruments such as over-the-counter (OTC) swaps and forwards is more than 10 times the size of their loan books. Indeed the growth in credit risk off the balance sheet was one of the main reasons for the introduction, by the Bank for International Settlements (BIS), of risk based capital requirements in 1993. Under the BIS system, the banks have to hold a capital requirement based on the mark- to- market current values of each OTC Derivative contract plus an add on for potential future exposure. 6. Technology Advances in computer systems and related advances in information technology have given banks and FIs the opportunity to test high powered modeling techniques. A survey conducted by International Swaps and Derivatives Association and the Institute of International Finance in 2000 found that survey participants (consisting of 25 commercial banks from 10 countries, with varying size and specialties) used commercial and internal databases to assess the credit risk on rated and unrated commercial, retail and mortgage loans. 7. The BIS Risk-Based Capital Requirements Despite the importance of above six reasons, probably the greatest incentive for banks to develop new credit risk models has been dissatisfaction with the BIS and central banks post-1992 imposition of capital requirements on loans. The current BIS approach has been described as a ‘one size fits all policy, irrespective of the size of loan, its maturity, and most importantly, the credit quality of the borrowing party. Much of the current interest in fine tuning credit risk measurement models has been fueled by the proposed BIS New Capital Accord (or so Called BIS II) which would more closely link capital charges to the credit risk exposure to retail, commercial, sovereign and interbank credits. Chapter- 3 Credit Risk Approaches and Pricing 3.1 CREDIT RISK MEASUREMENT APPROACHES: 1. CREDIT SCORING MODELS Credit Scoring Models use data on observed borrower characteristics to calculate the probability of default or to sort borrowers into different default risk classes. By selecting and combining different economic and financial borrower characteristics, a bank manager may be able to numerically establish which factors are important in explaining default risk, evaluate the relative degree or importance of these factors, improve the pricing of default risk, be better able to screen out bad loan applicants and be in a better position to calculate any reserve needed to meet expected future loan losses. To employ credit scoring model in this manner, the manager must identify objective economic and financial measures of risk for any particular class of borrower. For consumer debt, the objective characteristics in a credit -scoring model might include income, assets, age occupation and location. For corporate debt, financial ratios such as debt-equity ratio are usually key factors. After data are identified, a statistical technique quantifies or scores the default risk probability or default risk classification. Credit scoring models include three broad types: (1) linear probability models, (2) logit model and (3) linear discriminant model. LINEAR PROBABILITY MODEL: The linear probability model uses past data, such as accounting ratios, as inputs into a model to explain repayment experience on old loans. The relative importance of the factors used in explaining the past repayment performance then forecasts repayment probabilities on new loans; that is can be used for assessing the probability of repayment. Briefly we divide old loans (i) into two observational groups; those that defaulted (Zi = 1) and those that did not default (Zi = 0). Then we relate these observations by linear regression to s set of j casual variables (Xij) that reflects quantative information about the ith borrower, such as leverage or earnings. We estimate the model by linear regression of: Zi = ÃŽ £ÃŽ ²jXij + error Where ÃŽ ²j is the estimated importance of the jth variable in explaining past repayment experience. If we then take these estimated ÃŽ ²js and multiply them by the observed Xij for a prospective borrower, we can derive an expected value of Zi for the probability of repayment on the loan. LOGIT MODEL: The objective of the typical credit or loan review model is to replicate judgments made by loan officers, credit managers or bank examiners. If an accurate model could be developed, then it could be used as a tool for reviewing and classifying future credit risks. Chesser (1974) developed a model to predict noncompliance with the customers original loan arrangement, where non-compliance is defined to include not only default but any workout that may have been arranged resulting in a settlement of the loan less favorable to the tender than the original agreement. Chessers model, which was based on a technique called logit analysis, consisted of the following six variables. X1 = (Cash + Marketable Securities)/Total Assets X2 = Net Sales/(Cash + Marketable Securities) X3 = EBIT/Total Assets X4 = Total Debt/Total Assets X5 = Total Assets/ Net Worth X6 = Working Capital/Net Sales The estimated coefficients, including an intercept term, are Y = -2.0434 -5.24X1 + 0.0053X2 6.6507X3 + 4.4009X4 0.0791X5 0.1020X6 Chessers classification rule for above equation is If P> 50, assign to the non compliance group and If P≠¤50, assign to the compliance group. LINEAR DISCRIMINANT MODEL: While linear probability and logit models project a value foe the expected probability of default if a loan is made, discriminant models divide borrowers into high or default risk classes contingent on their observed characteristic (X). Altmans Z-score model is an application of multivariate Discriminant analysis in credit risk modeling. Financial ratios measuring probability, liquidity and solvency appeared to have significant discriminating power to separate the firm that fails to service its debt from the firms that do not. These ratios are weighted to produce a measure (credit risk score) that can be used as a metric to differentiate the bad firms from the set of good ones. Discriminant analysis is a multivariate statistical technique that analyzes a set of variables in order to differentiate two or more groups by minimizing the within-group variance and maximizing the between group variance simultaneously. Variables taken were: X1::Working Capital/ Total Asset X2: Retained Earning/ Total Asset X3: Earning before interest and taxes/ Total Asset X4: Market value of equity/ Book value of total Liabilities X5: Sales/Total Asset The original Z-score model was revised and modified several times in order to find the scoring model more specific to a particular class of firm. These resulted in the private firms Z-score model, non manufacturers Z-score model and Emerging Market Scoring (EMS) model. 3.2 New Approaches TERM STRUCTURE DERIVATION OF CREDIT RISK: One market based method of assessing credit risk exposure and default probabilities is to analyze the risk premium inherent in the current structure of yields on corporate debt or loans to similar risk-rated borrowers. Rating agencies categorize corporate bond issuers into at least seven major classes according to perceived credit quality. The first four ratings AAA, AA, A and BBB indicate investment quality borrowers. MORTALITY RATE APPROACH: Rather than extracting expected default rates from the current term structure of interest rates, the FI manager may analyze the historic or past default experience the mortality rates, of bonds and loans of a similar quality. Here p1is the probability of a grade B bond surviving the first year of its issue; thus 1 p1 is the marginal mortality rate, or the probability of the bond or loan dying or defaulting in the first year while p2 is the probability of the loan surviving in the second year and that it has not defaulted in the first year, 1-p2 is the marginal mortality rate for the second year. Thus, for each grade of corporate buyer quality, a marginal mortality rate (MMR) curve can show the historical default rate in any specific quality class in each year after issue. RAROC MODELS: Based on a banks risk-bearing capacity and its risk strategy, it is thus necessary — bearing in mind the banks strategic orientation — to find a method for the efficient allocation of capital to the banks individual siness areas, i.e. to define indicators that are suitable for balancing risk and return in a sensible manner. Indicators fulfilling this requirement are often referred to as risk adjusted performance measures (RAPM). RARORAC (risk adjusted return on risk adjusted capital, usually abbreviated as the most commonly found forms are RORAC (return on risk adjusted capital), Net income is taken to mean income minus refinancing cost, operating cost, and expected losses. It should now be the banks goal to maximize a RAPM indicator for the bank as a whole, e.g. RORAC, taking into account the correlation between individual transactions. Certain constraints such as volume restrictions due to a potential lack of liquidity and the maintenance of solvency based on economic and regulatory capital have to be observed in reaching this goal. From an organizational point of view, value and risk management should therefore be linked as closely as possible at all organizational levels. OPTION MODELS OF DEFAULT RISK (kmv model): KMV Corporation has developed a credit risk model that uses information on the stock prices and the capital structure of the firm to estimate its default probability. The starting point of the model is the proposition that a firm will default only if its asset value falls below a certain level, which is function of its liability. It estimates the asset value of the firm and its asset volatility from the market value of equity and the debt structure in the option theoretic framework. The resultant probability is called Expected default Frequency (EDF). In summary, EDF is calculated in the following three steps: i) Estimation of asset value and volatility from the equity value and volatility of equity return. ii) Calculation of distance from default iii) Calculation of expected default frequency Credit METRICS: It provides a method for estimating the distribution of the value of the assets n a portfolio subject to change in the credit quality of individual borrower. A portfolio consists of different stand-alone assets, defined by a stream of future cash flows. Each asset has a distribution over the possible range of future rating class. Starting from its initial rating, an asset may end up in ay one of the possible rating categories. Each rating category has a different credit spread, which will be used to discount the future cash flows. Moreover, the assets are correlated among themselves depending on the industry they belong to. It is assumed that the asset returns are normally distributed and change in the asset returns causes the change in the rating category in future. Finally, the simulation technique is used to estimate the value distribution of the assets. A number of scenario are generated from a multivariate normal distribution, which is defined by the appropriate credit spread, t he future value of asset is estimated. CREDIT Risk+: CreditRisk+, introduced by Credit Suisse Financial Products (CSFP), is a model of default risk. Each asset has only two possible end-of-period states: default and non-default. In the event of default, the lender recovers a fixed proportion of the total expense. The default rate is considered as a continuous random variable. It does not try to estimate default correlation directly. Here, the default correlation is assumed to be determined by a set of risk factors. Conditional on these risk factors, default of each obligator follows a Bernoulli distribution. To get unconditional probability generating function for the number of defaults, it assumes that the risk factors are independently gamma distributed random variables. The final step in Creditrisk+ is to obtain the probability generating function for losses. Conditional on the number of default events, the losses are entirely determined by the exposure and recovery rate. Thus, the distribution of asset can be estimated from the fol lowing input data: i) Exposure of individual asset ii) Expected default rate iii) Default ate volatilities iv) Recovery rate given default 3.3 CREDIT PRICING Pricing of the credit is essential for the survival of enterprises relying on credit assets, because the benefits derived from extending credit should surpass the cost. With the introduction of capital adequacy norms, the credit risk is linked to the capital-minimum 8% capital adequacy. Consequently, higher capital is required to be deployed if more credit risks are underwritten. The decision (a) whether to maximize the returns on possible credit assets with the existing capital or (b) raise more capital to do more business invariably depends upon p Credit Risk Dissertation Credit Risk Dissertation CREDIT RISK EXECUTIVE SUMMARY The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The major cause of serious banking problems over the years continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to deterioration in the credit standing of a banks counterparties. Credit risk is the oldest and biggest risk that bank, by virtue of its very nature of business, inherits. This has however, acquired a greater significance in the recent past for various reasons. There have been many traditional approaches to measure credit risk like logit, linear probability model but with passage of time new approaches have been developed like the Credit+, KMV Model. Basel I Accord was introduced in 1988 to have a framework for regulatory capital for banks but the â€Å"one size fit all† approach led to a shift, to a new and comprehensive approach -Basel II which adopts a three pillar approach to risk management. Banks use a number of techniques to mitigate the credit risks to which they are exposed. RBI has prescribed adoption of comprehensive approach for the purpose of CRM which allows fuller offset of security of collateral against exposures by effectively reducing the exposure amount by the value ascribed to the collateral. In this study, a leading nationalized bank is taken to study the steps taken by the bank to implement the Basel- II Accord and the entire framework developed for credit risk management. The bank under the study uses the credit scoring method to evaluate the credit risk involved in various loans/advances. The bank has set up special software to evaluate each case under various parameters and a monitoring system to continuously track each assets performance in accordance with the evaluation parameters. CHAPTER 1 INTRODUCTION 1.1 Rationale Credit Risk Management in todays deregulated market is a big challenge. Increased market volatility has brought with it the need for smart analysis and specialized applications in managing credit risk. A well defined policy framework is needed to help the operating staff identify the risk-event, assign a probability to each, quantify the likely loss, assess the acceptability of the exposure, price the risk and monitor them right to the point where they are paid off. Generally, Banks in India evaluate a proposal through the traditional tools of project financing, computing maximum permissible limits, assessing management capabilities and prescribing a ceiling for an industry exposure. As banks move in to a new high powered world of financial operations and trading, with new risks, the need is felt for more sophisticated and versatile instruments for risk assessment, monitoring and controlling risk exposures. It is, therefore, time that banks managements equip them fully to grapple with the demands of creating tools and systems capable of assessing, monitoring and controlling risk exposures in a more scientific manner. According to an estimate, Credit Risk takes about 70% and 30% remaining is shared between the other two primary risks, namely Market risk (change in the market price and operational risk i.e., failure of internal controls, etc.). Quality borrowers (Tier-I borrowers) were able to access the capital market directly without going through the debt route. Hence, the credit route is now more open to lesser mortals (Tier-II borrowers). With margin levels going down, banks are unable to absorb the level of loan losses. Even in banks which regularly fine-tune credit policies and streamline credit processes, it is a real challenge for credit risk managers to correctly identify pockets of risk concentration, quantify extent of risk carried, identify opportunities for diversification and balance the risk-return trade-off in their credit portfolio. The management of banks should strive to embrace the notion of ‘uncertainty and risk in their balance sheet and instill the need for approaching credit administration from a ‘risk-perspective across the system by placing well drafted strategies in the hands of the operating staff with due material support for its successful implementation. There is a need for Strategic approach to Credit Risk Management (CRM) in Indian Commercial Banks, particularly in view of; (1) Higher NPAs level in comparison with global benchmark (2) RBI s stipulation about dividend distribution by the banks (3) Revised NPAs level and CAR norms (4) New Basel Capital Accord (Basel -II) revolution 1.2 OBJECTIVES To understand the conceptual framework for credit risk. To understand credit risk under the Basel II Accord. To analyze the credit risk management practices in a Leading Nationalised Bank 1.3 RESEARCH METHODOLOGY Research Design: In order to have more comprehensive definition of the problem and to become familiar with the problems, an extensive literature survey was done to collect secondary data for the location of the various variables, probably contemporary issues and the clarity of concepts. Data Collection Techniques: The data collection technique used is interviewing. Data has been collected from both primary and secondary sources. Primary Data: is collected by making personal visits to the bank. Secondary Data: The details have been collected from research papers, working papers, white papers published by various agencies like ICRA, FICCI, IBA etc; articles from the internet and various journals. 1.4 LITERATURE REVIEW * Merton (1974) has applied options pricing model as a technology to evaluate the credit risk of enterprise, it has been drawn a lot of attention from western academic and business circles.Mertons Model is the theoretical foundation of structural models. Mertons model is not only based on a strict and comprehensive theory but also used market information stock price as an important variance toevaluate the credit risk.This makes credit risk to be a real-time monitored at a much higher frequency.This advantage has made it widely applied by the academic and business circle for a long time. Other Structural Models try to refine the original Merton Framework by removing one or more of unrealistic assumptions. * Black and Cox (1976) postulate that defaults occur as soon as firms asset value falls below a certain threshold. In contrast to the Merton approach, default can occur at any time. The paper by Black and Cox (1976) is the first of the so-called First Passage Models (FPM). First passage models specify default as the first time the firms asset value hits a lower barrier, allowing default to take place at any time. When the default barrier is exogenously fixed, as in Black and Cox (1976) and Longstaff and Schwartz (1995), it acts as a safety covenant to protect bondholders. Black and Cox introduce the possibility of more complex capital structures, with subordinated debt. * Geske (1977) introduces interest-paying debt to the Merton model. * Vasicek (1984) introduces the distinction between short and long term liabilities which now represents a distinctive feature of the KMV model. Under these models, all the relevant credit risk elements, including default and recovery at default, are a function of the structural characteristics of the firm: asset levels, asset volatility (business risk) and leverage (financial risk). * Kim, Ramaswamy and Sundaresan (1993) have suggested an alternative approach which still adopts the original Merton framework as far as the default process is concerned but, at the same time, removes one of the unrealistic assumptions of the Merton model; namely, that default can occur only at maturity of the debt when the firms assets are no longer sufficient to cover debt obligations. Instead, it is assumed that default may occur anytime between the issuance and maturity of the debt and that default is triggered when the value of the firms assets reaches a lower threshold level. In this model, the RR in the event of default is exogenous and independent from the firms asset value. It is generally defined as a fixed ratio of the outstanding debt value and is therefore independent from the PD. The attempt to overcome the shortcomings of structural-form models gave rise to reduced-form models. Unlike structural-form models, reduced-form models do not condition default on the value of the firm, and parameters related to the firms value need not be estimated to implement them. * Jarrow and Turnbull (1995) assumed that, at default, a bond would have a market value equal to an exogenously specified fraction of an otherwise equivalent default-free bond. * Duffie and Singleton (1999) followed with a model that, when market value at default (i.e. RR) is exogenously specified, allows for closed-form solutions for the term-structure of credit spreads. * Zhou (2001) attempt to combine the advantages of structural-form models a clear economic mechanism behind the default process, and the ones of reduced- form models unpredictability of default. This model links RRs to the firm value at default so that the variation in RRs is endogenously generated and the correlation between RRs and credit ratings reported first in Altman (1989) and Gupton, Gates and Carty (2000) is justified. Lately portfolio view on credit losses has emerged by recognising that changes in credit quality tend to comove over the business cycle and that one can diversify part of the credit risk by a clever composition of the loan portfolio across regions, industries and countries. Thus in order to assess the credit risk of a loan portfolio, a bank must not only investigate the creditworthiness of its customers, but also identify the concentration risks and possible comovements of risk factors in the portfolio. * CreditMetrics by Gupton et al (1997) was publicized in 1997 by JP Morgan. Its methodology is based on probability of moving from one credit quality to another within a given time horizon (credit migration analysis). The estimation of the portfolio Value-at-Risk due to Credit (Credit-VaR) through CreditMetrics A rating system with probabilities of migrating from one credit quality to another over a given time horizon (transition matrix) is the key component of the credit-VaR proposed by JP Morgan. The specified credit risk horizon is usually one year. A rating system with probabilities of migrating from one credit quality to another over a given time horizon (transition matrix) is the key component of the credit-VaR proposed by JP Morgan. The specified credit risk horizon is usually one year. * (Sy, 2007), states that the primary cause of credit default is loan delinquency due to insufficient liquidity or cash flow to service debt obligations. In the case of unsecured loans, we assume delinquency is a necessary and sufficient condition. In the case of collateralized loans, delinquency is a necessary, but not sufficient condition, because the borrower may be able to refinance the loan from positive equity or net assets to prevent default. In general, for secured loans, both delinquency and insolvency are assumed necessary and sufficient for credit default. CHAPTER 2 THEORECTICAL FRAMEWORK 2.1 CREDIT RISK: Credit risk is risk due to uncertainty in a counterpartys (also called an obligors or credits) ability to meet its obligations. Because there are many types of counterparties—from individuals to sovereign governments—and many different types of obligations—from auto loans to derivatives transactions—credit risk takes many forms. Institutions manage it in different ways. Although credit losses naturally fluctuate over time and with economic conditions, there is (ceteris paribus) a statistically measured, long-run average loss level. The losses can be divided into two categories i.e. expected losses (EL) and unexpected losses (UL). EL is based on three parameters:  ·Ã¢â€š ¬Ã‚   The likelihood that default will take place over a specified time horizon (probability of default or PD)  · â‚ ¬Ã‚  The amount owned by the counterparty at the moment of default (exposure at default or EAD)  ·Ã¢â€š ¬Ã‚   The fraction of the exposure, net of any recoveries, which will be lost following a default event (loss given default or LGD). EL = PD x EAD x LGD EL can be aggregated at various different levels (e.g. individual loan or entire credit portfolio), although it is typically calculated at the transaction level; it is normally mentioned either as an absolute amount or as a percentage of transaction size. It is also both customer- and facility-specific, since two different loans to the same customer can have a very different EL due to differences in EAD and/or LGD. It is important to note that EL (or, for that matter, credit quality) does not by itself constitute risk; if losses always equaled their expected levels, then there would be no uncertainty. Instead, EL should be viewed as an anticipated â€Å"cost of doing business† and should therefore be incorporated in loan pricing and ex ante provisioning. Credit risk, in fact, arises from variations in the actual loss levels, which give rise to the so-called unexpected loss (UL). Statistically speaking, UL is simply the standard deviation of EL. UL= ÏÆ' (EL) = ÏÆ' (PD*EAD*LGD) Once the bank- level credit loss distribution is constructed, credit economic capital is simply determined by the banks tolerance for credit risk, i.e. the bank needs to decide how much capital it wants to hold in order to avoid insolvency because of unexpected credit losses over the next year. A safer bank must have sufficient capital to withstand losses that are larger and rarer, i.e. they extend further out in the loss distribution tail. In practice, therefore, the choice of confidence interval in the loss distribution corresponds to the banks target credit rating (and related default probability) for its own debt. As Figure below shows, economic capital is the difference between EL and the selected confidence interval at the tail of the loss distribution; it is equal to a multiple K (often referred to as the capital multiplier) of the standard deviation of EL (i.e. UL). The shape of the loss distribution can vary considerably depending on product type and borrower credit quality. For example, high quality (low PD) borrowers tend to have proportionally less EL per unit of capital charged, meaning that K is higher and the shape of their loss distribution is more skewed (and vice versa). Credit risk may be in the following forms: * In case of the direct lending * In case of the guarantees and the letter of the credit * In case of the treasury operations * In case of the securities trading businesses * In case of the cross border exposure 2.2 The need for Credit Risk Rating: The need for Credit Risk Rating has arisen due to the following: 1. With dismantling of State control, deregulation, globalisation and allowing things to shape on the basis of market conditions, Indian Industry and Indian Banking face new risks and challenges. Competition results in the survival of the fittest. It is therefore necessary to identify these risks, measure them, monitor and control them. 2. It provides a basis for Credit Risk Pricing i.e. fixation of rate of interest on lending to different borrowers based on their credit risk rating thereby balancing Risk Reward for the Bank. 3. The Basel Accord and consequent Reserve Bank of India guidelines requires that the level of capital required to be maintained by the Bank will be in proportion to the risk of the loan in Banks Books for measurement of which proper Credit Risk Rating system is necessary. 4. The credit risk rating can be a Risk Management tool for prospecting fresh borrowers in addition to monitoring the weaker parameters and taking remedial action. The types of Risks Captured in the Banks Credit Risk Rating Model The Credit Risk Rating Model provides a framework to evaluate the risk emanating from following main risk categorizes/risk areas: * Industry risk * Business risk * Financial risk * Management risk * Facility risk * Project risk 2.3 WHY CREDIT RISK MEASUREMENT? In recent years, a revolution is brewing in risk as it is both managed and measured. There are seven reasons as to why certain surge in interest: 1. Structural increase in bankruptcies: Although the most recent recession hit at different time in different countries, most statistics show a significant increase in bankruptcies, compared to prior recession. To the extent that there has been a permanent or structural increase in bankruptcies worldwide- due to increase in the global competition- accurate credit analysis become even more important today than in past. 2. Disintermediation: As capital markets have expanded and become accessible to small and mid sized firms, the firms or borrowers â€Å"left behind† to raise funds from banks and other traditional financial institutions (FIs) are likely to be smaller and to have weaker credit ratings. Capital market growth has produced â€Å"a winners† curse effect on the portfolios of traditional FIs. 3. More Competitive Margins: Almost paradoxically, despite the decline in the average quality of loans, interest margins or spreads, especially in wholesale loan markets have become very thin. In short, the risk-return trade off from lending has gotten worse. A number of reasons can be cited, but an important factor has been the enhanced competition for low quality borrowers especially from finance companies, much of whose lending activity has been concentrated at the higher risk/lower quality end of the market. 4. Declining and Volatile Values of Collateral: Concurrent with the recent Asian and Russian debt crisis in well developed countries such as Switzerland and Japan have shown that property and real assets value are very hard to predict, and to realize through liquidation. The weaker (and more uncertain) collateral values are, the riskier the lending is likely to be. Indeed the current concerns about deflation worldwide have been accentuated the concerns about the value of real assets such as property and other physical assets. 5. The Growth Of Off- Balance Sheet Derivatives: In many of the very large U.S. banks, the notional value of the off-balance-sheet exposure to instruments such as over-the-counter (OTC) swaps and forwards is more than 10 times the size of their loan books. Indeed the growth in credit risk off the balance sheet was one of the main reasons for the introduction, by the Bank for International Settlements (BIS), of risk based capital requirements in 1993. Under the BIS system, the banks have to hold a capital requirement based on the mark- to- market current values of each OTC Derivative contract plus an add on for potential future exposure. 6. Technology Advances in computer systems and related advances in information technology have given banks and FIs the opportunity to test high powered modeling techniques. A survey conducted by International Swaps and Derivatives Association and the Institute of International Finance in 2000 found that survey participants (consisting of 25 commercial banks from 10 countries, with varying size and specialties) used commercial and internal databases to assess the credit risk on rated and unrated commercial, retail and mortgage loans. 7. The BIS Risk-Based Capital Requirements Despite the importance of above six reasons, probably the greatest incentive for banks to develop new credit risk models has been dissatisfaction with the BIS and central banks post-1992 imposition of capital requirements on loans. The current BIS approach has been described as a ‘one size fits all policy, irrespective of the size of loan, its maturity, and most importantly, the credit quality of the borrowing party. Much of the current interest in fine tuning credit risk measurement models has been fueled by the proposed BIS New Capital Accord (or so Called BIS II) which would more closely link capital charges to the credit risk exposure to retail, commercial, sovereign and interbank credits. Chapter- 3 Credit Risk Approaches and Pricing 3.1 CREDIT RISK MEASUREMENT APPROACHES: 1. CREDIT SCORING MODELS Credit Scoring Models use data on observed borrower characteristics to calculate the probability of default or to sort borrowers into different default risk classes. By selecting and combining different economic and financial borrower characteristics, a bank manager may be able to numerically establish which factors are important in explaining default risk, evaluate the relative degree or importance of these factors, improve the pricing of default risk, be better able to screen out bad loan applicants and be in a better position to calculate any reserve needed to meet expected future loan losses. To employ credit scoring model in this manner, the manager must identify objective economic and financial measures of risk for any particular class of borrower. For consumer debt, the objective characteristics in a credit -scoring model might include income, assets, age occupation and location. For corporate debt, financial ratios such as debt-equity ratio are usually key factors. After data are identified, a statistical technique quantifies or scores the default risk probability or default risk classification. Credit scoring models include three broad types: (1) linear probability models, (2) logit model and (3) linear discriminant model. LINEAR PROBABILITY MODEL: The linear probability model uses past data, such as accounting ratios, as inputs into a model to explain repayment experience on old loans. The relative importance of the factors used in explaining the past repayment performance then forecasts repayment probabilities on new loans; that is can be used for assessing the probability of repayment. Briefly we divide old loans (i) into two observational groups; those that defaulted (Zi = 1) and those that did not default (Zi = 0). Then we relate these observations by linear regression to s set of j casual variables (Xij) that reflects quantative information about the ith borrower, such as leverage or earnings. We estimate the model by linear regression of: Zi = ÃŽ £ÃŽ ²jXij + error Where ÃŽ ²j is the estimated importance of the jth variable in explaining past repayment experience. If we then take these estimated ÃŽ ²js and multiply them by the observed Xij for a prospective borrower, we can derive an expected value of Zi for the probability of repayment on the loan. LOGIT MODEL: The objective of the typical credit or loan review model is to replicate judgments made by loan officers, credit managers or bank examiners. If an accurate model could be developed, then it could be used as a tool for reviewing and classifying future credit risks. Chesser (1974) developed a model to predict noncompliance with the customers original loan arrangement, where non-compliance is defined to include not only default but any workout that may have been arranged resulting in a settlement of the loan less favorable to the tender than the original agreement. Chessers model, which was based on a technique called logit analysis, consisted of the following six variables. X1 = (Cash + Marketable Securities)/Total Assets X2 = Net Sales/(Cash + Marketable Securities) X3 = EBIT/Total Assets X4 = Total Debt/Total Assets X5 = Total Assets/ Net Worth X6 = Working Capital/Net Sales The estimated coefficients, including an intercept term, are Y = -2.0434 -5.24X1 + 0.0053X2 6.6507X3 + 4.4009X4 0.0791X5 0.1020X6 Chessers classification rule for above equation is If P> 50, assign to the non compliance group and If P≠¤50, assign to the compliance group. LINEAR DISCRIMINANT MODEL: While linear probability and logit models project a value foe the expected probability of default if a loan is made, discriminant models divide borrowers into high or default risk classes contingent on their observed characteristic (X). Altmans Z-score model is an application of multivariate Discriminant analysis in credit risk modeling. Financial ratios measuring probability, liquidity and solvency appeared to have significant discriminating power to separate the firm that fails to service its debt from the firms that do not. These ratios are weighted to produce a measure (credit risk score) that can be used as a metric to differentiate the bad firms from the set of good ones. Discriminant analysis is a multivariate statistical technique that analyzes a set of variables in order to differentiate two or more groups by minimizing the within-group variance and maximizing the between group variance simultaneously. Variables taken were: X1::Working Capital/ Total Asset X2: Retained Earning/ Total Asset X3: Earning before interest and taxes/ Total Asset X4: Market value of equity/ Book value of total Liabilities X5: Sales/Total Asset The original Z-score model was revised and modified several times in order to find the scoring model more specific to a particular class of firm. These resulted in the private firms Z-score model, non manufacturers Z-score model and Emerging Market Scoring (EMS) model. 3.2 New Approaches TERM STRUCTURE DERIVATION OF CREDIT RISK: One market based method of assessing credit risk exposure and default probabilities is to analyze the risk premium inherent in the current structure of yields on corporate debt or loans to similar risk-rated borrowers. Rating agencies categorize corporate bond issuers into at least seven major classes according to perceived credit quality. The first four ratings AAA, AA, A and BBB indicate investment quality borrowers. MORTALITY RATE APPROACH: Rather than extracting expected default rates from the current term structure of interest rates, the FI manager may analyze the historic or past default experience the mortality rates, of bonds and loans of a similar quality. Here p1is the probability of a grade B bond surviving the first year of its issue; thus 1 p1 is the marginal mortality rate, or the probability of the bond or loan dying or defaulting in the first year while p2 is the probability of the loan surviving in the second year and that it has not defaulted in the first year, 1-p2 is the marginal mortality rate for the second year. Thus, for each grade of corporate buyer quality, a marginal mortality rate (MMR) curve can show the historical default rate in any specific quality class in each year after issue. RAROC MODELS: Based on a banks risk-bearing capacity and its risk strategy, it is thus necessary — bearing in mind the banks strategic orientation — to find a method for the efficient allocation of capital to the banks individual siness areas, i.e. to define indicators that are suitable for balancing risk and return in a sensible manner. Indicators fulfilling this requirement are often referred to as risk adjusted performance measures (RAPM). RARORAC (risk adjusted return on risk adjusted capital, usually abbreviated as the most commonly found forms are RORAC (return on risk adjusted capital), Net income is taken to mean income minus refinancing cost, operating cost, and expected losses. It should now be the banks goal to maximize a RAPM indicator for the bank as a whole, e.g. RORAC, taking into account the correlation between individual transactions. Certain constraints such as volume restrictions due to a potential lack of liquidity and the maintenance of solvency based on economic and regulatory capital have to be observed in reaching this goal. From an organizational point of view, value and risk management should therefore be linked as closely as possible at all organizational levels. OPTION MODELS OF DEFAULT RISK (kmv model): KMV Corporation has developed a credit risk model that uses information on the stock prices and the capital structure of the firm to estimate its default probability. The starting point of the model is the proposition that a firm will default only if its asset value falls below a certain level, which is function of its liability. It estimates the asset value of the firm and its asset volatility from the market value of equity and the debt structure in the option theoretic framework. The resultant probability is called Expected default Frequency (EDF). In summary, EDF is calculated in the following three steps: i) Estimation of asset value and volatility from the equity value and volatility of equity return. ii) Calculation of distance from default iii) Calculation of expected default frequency Credit METRICS: It provides a method for estimating the distribution of the value of the assets n a portfolio subject to change in the credit quality of individual borrower. A portfolio consists of different stand-alone assets, defined by a stream of future cash flows. Each asset has a distribution over the possible range of future rating class. Starting from its initial rating, an asset may end up in ay one of the possible rating categories. Each rating category has a different credit spread, which will be used to discount the future cash flows. Moreover, the assets are correlated among themselves depending on the industry they belong to. It is assumed that the asset returns are normally distributed and change in the asset returns causes the change in the rating category in future. Finally, the simulation technique is used to estimate the value distribution of the assets. A number of scenario are generated from a multivariate normal distribution, which is defined by the appropriate credit spread, t he future value of asset is estimated. CREDIT Risk+: CreditRisk+, introduced by Credit Suisse Financial Products (CSFP), is a model of default risk. Each asset has only two possible end-of-period states: default and non-default. In the event of default, the lender recovers a fixed proportion of the total expense. The default rate is considered as a continuous random variable. It does not try to estimate default correlation directly. Here, the default correlation is assumed to be determined by a set of risk factors. Conditional on these risk factors, default of each obligator follows a Bernoulli distribution. To get unconditional probability generating function for the number of defaults, it assumes that the risk factors are independently gamma distributed random variables. The final step in Creditrisk+ is to obtain the probability generating function for losses. Conditional on the number of default events, the losses are entirely determined by the exposure and recovery rate. Thus, the distribution of asset can be estimated from the fol lowing input data: i) Exposure of individual asset ii) Expected default rate iii) Default ate volatilities iv) Recovery rate given default 3.3 CREDIT PRICING Pricing of the credit is essential for the survival of enterprises relying on credit assets, because the benefits derived from extending credit should surpass the cost. With the introduction of capital adequacy norms, the credit risk is linked to the capital-minimum 8% capital adequacy. Consequently, higher capital is required to be deployed if more credit risks are underwritten. The decision (a) whether to maximize the returns on possible credit assets with the existing capital or (b) raise more capital to do more business invariably depends upon p