Introduction• Corporate Banking is responsible for the overall relationship management of major corporate and institutional clients. This involves working closely with a variety of product specialists to deliver a comprehensive range of services, such as treasury and capital markets, transaction banking, and strategic advisory and investment management. Additionally, Corporate Banking is responsible for the origination and ongoing management of the credit and lending product• Corporate Banking delivers a comprehensive range of financial products and services to many of the world’s top-tier corporate and institutional clients
Scope and Functions of BanksCreating Money• This is accomplished by the lending and investing activities of commercial banks in co-operation with the central bank. This results in elastic credit system which is necessary for economic growth. It helps in expansion of productive facilities and operations
Scope and Functions of Banks(contd…)Creating an optimum money supply• Banks play an important role in the implementation of policies of the Central Bank regarding money supply. If RBI wants to include money supply, banks will be encouraged to lend more as the objective of the Central bank is to provide a money supply commensurate with the national objectives of stable prices, sound economic growth and employment. If the money supply is excessive, it will result in inflation
Scope and Functions of Banks(contd…)Transfer of funds• Banks help in financial transactions by transferring funds by means of cash, cheque, demand deposits, bearer’s order, Electronic transfer of funds, ATM’s etc.
Scope and Functions of Banks(contd…)Pooling of Savings• Banks help in transfer of savings to profitable investments. The savers are paid interest on savings which are diverted to business that may use them for expansion of their productive capacity and to consumers for such items as housing and consumer goals.
Scope and Functions of Banks(contd…)Extension of Credit• Banks lend for agricultural, commercial and industrial activities of a country. This helps in increasing production, capital investments and in the standard of living.
Scope and Functions of Banks(contd…)Financing of foreign trade• They help in making payments in the currency the foreign country example in Francs, Marks, Lira or Pounds by selling foreign exchange. They also issue letter of credit when the importer is not paid immediately by exporter which is more often the case. They also issue Travellers Cheque to international tourists.
Scope and Functions of Banks(contd…)Trust Services• Banks help in distribution of assets/property before death. They may act a executors of wills after the person dies. They acts as trustees under which the trust department has the responsibility of investing and caring for the funds and distribution of proceeds as per the trust agreement. They may act as administrators of pension and profit sharing plans. Banks act as registrar for corporates. They can also redeem and issue stocks and bonds on behalf of corporates.
Scope and Functions of Banks(contd…)Safekeeping of Valuables• They provide a vault for safekeeping of valuables/securities.
Scope and Functions of Banks(contd…)Merchant-banking services• Banks are engaged in issue management through their subsidiaries
Scope and Functions of Banks(contd…)Brokerage Services• They deal in buying and selling of securities for customers. They also provide portfolio management services to handle large investments of institutional investors.• They finance the government through the purchase of government securities.• They finance the priority sector, sick units and agriculturists.• They also provide advisory and information based roles for all types of clients.• As part of their overseas trade related banking services such as negotiation and collection of bills, opening of LC, channelizing foreign inward remittances and mobilization of savings of Indians abroad.
Credit Functions of Banks Forms of Bank Finance• Overdraft• Cash Credit• Purchase or discounting bills• Working Capital Loan• Letters of Credit
Overdraft• The banks lend funds in excess of balance in his current account upto a certain specified limit during a stipulated period. The interest rate charged is higher because the credit is not purpose oriented and the securities may not tangible.
Cash Credit• The bank lends upto a sanctioned credit limit. It opens a CC account for the borrower who borrows and deposits funds in this account by way of sales. The credit limit is backed by security and collaterals. The bank also levies a commitment charge on the unutilized portion of the CC limit. As per the new system, for borrowers having credit limit greater than 20 crores, the assessed working capital requirement of the borrower will be delivered as two- components-loan component called the working capital demand loan (WCDL) upto 80% of credit limit an CC component forming remaining 20%.
Purchase or Discounting of Bills• This is obtaining credit against bills. Bill financing occurs when bills of exchange drawn by the borrower are discounted by the bank. Bills can be clean bill, documentary bills or supply bills.• Clean bills are not backed by any documents of title to goods.• Documentary bills are backed by documents of title to goods like lorry receipts, railway receipts, airway bills and bill of lading. Documentary bills can be documents against payment and documents against acceptance.• Supply bills are like debt and raised only when the buyer is the govt. or a large corporation. The bank finances the supplier on the basis of invoice and the buyer’s certification of acceptance of goods.
Working Capital Loan• This is a temporary loan in excess of sanctioned credit limit to meet unforeseen contingencies. The rate of interest is above the normal rate of interest
Letters of Credit• Through LC, the supplier insures that the buyer’ bank makes the payment in case the buyer fails to do Sales Officer.
Security Required by Banks• Hypothecation-Possession remains with the borrower.• Pledge- Possession is transferred to the bank.• Mortgage- The charge is against immovable property. Possession remains with the borrower and the lender gets full legal title.• Lien- The right to retain property belonging to the borrower until the debt is repaid.
Most Banks India deal with the following products as a part of their corporate banking function:• Working Capital Finance• Project Finance• Exports Credit• Foreign Currency Loans• Deferred Payment Guarantees• Corporate Term Loans• Structured Finance• Equipment Leasing• Loan Syndication• Financing Indian Firms Overseas Subsidiaries or JVs
Working Capital Finance• This is given as cash credit facility, working capital demand loan, overdraft, overdraft facility, purchasing and discounting of bills, and commercial paper.
Project Finance• This is asst based financing. Banks finance the project in the form of debt, syndicate loans or through subscription to issues of project companies.
Export Credits• These are given as packing credits or post shipment credit. The rates are market determined and linked to LIBOR.
Foreign Currency Loans• These are given as external Commercial Borrowings(ECBs) which include syndicated loans, stand-alone loans, buyers credit and sellers Credit, bilateral loans in all major currencies, FRNs/Euro bonds, Pre-bid and post bid facilities for project exports and FCNR(B) Loans. They are also LIBOR linked.
Deferred Payment Guarentees• This is non-fund based lending by the bank. The bank is called upon to pay the counterparty or beneficiary if the borrower fails to pay.
Corporate Term Loans• Are generally used to finance projects or asset purchases. The maturity of these loans is more than one year, the average ranging between 3 and 5 years and they are structured on the basis of future cash flows. The amount and structure of these loans will closely match the transaction being financed.
Structured Finance• These can be short term loans with maturity of 1 year or less.
Equipment Leasing• This is asset based financing and bank collects lease rentals
Loan Syndication• Arranging a syndicate loan allows the lead bank to meet its borrower’s demand for loan commitments without having to bear the market and credit risk alone. Two or more banks agree jointly to make a loan to a borrower. The lead bank also earns an arrangement fee.
• Financing Indian Firms Overseas Subsidiaries or JVs
The Credit Process• Credit Analysis• Credit Delivery and Administration
Credit Analysis• The first step is to collect all pertinent information on the borrower including call report summaries, past and present financial statements, cash flow projections and plans for the future, relevant credit reports, details of insurance coverage, fixed and other assets, collateral values, and security documents.• The second steep is project and financial appraisal.• The third step is to assess the quality of the management team.• The fourth step is dong due-diligence to check the borrower’s address, inspection of his work place and interviewing his suppliers, customers and employees.• The fifth step is assessing the risk associated with the proposed credit.• The final step is making the recommendation based on a thorough analysis of the project. The credit officer recommends the credit terms including the loan amount, maturity, pricing, repayment schedule, security to be provided and other terms ad conditions.
Credit Delivery and Administration• Once a loan is approved the loan agreement is signed by borrowers and guarantors. The documentation is completed. The credit is then monitored continuously and credit audit periodically by external or internal auditors
Assets and Liabilities of Banking System• Bank’s Assets are the funds mobilised by bank through various sources.• -Cash and Bank balances with Reserve Bank of India.• -Balances with banks and money at call and short notice.• -Investments (securities)• -Loans• -Fixed Assets• -Other Assets
Assets and Liabilities of Banking System• Bank’s Liabilities• -The sources of funds for the lending and investment activities constitute liabilities side of balance sheet.• Capital• Reserves and Surplus• Demand Deposits• Savings deposits• Time deposits• Inter-bank deposits• Money market deposits• Borrowings (short term and long term)• Other Liabilities and Provisions• Contingent Liabilities.
Financial Analysis of Banking Organizations• Banking industry is like trading company, where banks trade on capital or funds.• Unlike manufacturing industry, there is not much of processing. While some of the ratios are not relevant, there are ratios which require some modification. For instance, we compute profit margin without considering interest expenses. For SBI, the ratio works out to 68% for 2003. Is it possible for a firm to report such a huge profit margin? The ratio is high because the principal expense namely interest expense is omitted for computing the ratio. Interest expenses are minor for a manufacturing industry whereas for banking industry, it is a major expense item. Considering the special nature of banking industry, following ratios are relevant for the banking industry.
• a) Return on Equity• b) Return on Investments• c) Leverage or Debt to Equity or Debt to Capital• d) Interest Income to Average Assets• e) Interest Expenses to Average Assets• f) Net Interest Income to Average Assets [(d) ñ (e)]• g) Non-interest income to Average Assets• h) Non-interest income to Total income• i) Income from Treasury activities/Investments• j) Operating Expenses to Average Assets• k) Provision for Loans and losses to Average Assets• l) Growth Rate of Assets• m) Growth Rate of Net Worth• n) Cash dividends to PAT• o) Provision for NPA to Total Loan
• The analysis of Bank’s financial statements consists of a mixture of steps and pieces that interrelate and affect each other. It would lead to wrong conclusion and strategy if the analysis is done on a piecemeal basis. For instance higher interest spread does not mean that the bank is in good position. It could be simply due to aggressive lending leading to higher NPA or simply on account of higher asset-liability mismatch. We need to look for five important things when we analyze the financial positions of the bank.
• a) Whether the bank is growing or not? We use trend analysis to answer this question.• b) Whether the bank is able to get leverage that is equal to industry average? Since profitability of bank is primarily on account of ability to use leverage, this ratio assumes importance.• c) Whether the bank is able to increase non-fund based income (i.e. fee based income)? This shows the capability of offering services and leveraging customer base for such services.• d) Whether the bank is able to contain the cost of its operations?• e) Whether the risk of the bank is within limits? Though not discussed here, measures like Value-at-Risk (VAR) are used.• The net profit made by banks as a percentage of working capital has always been low in India.
Profitability of banks is affected by:• External Factors• Internal Factors
External Factors• Credit targets given by the government- Higher targets for the priority sector can affect profitability adversely.• Cash reserve ratio and statutory liquidity ratio- Higher these ratios lower the banks’ profits as CRR earns no interest.• Norms relating to credit to deposit ratio- banks overextending loans in terms of their credit portfolios relative to their source of funds affect the systemic stability.
Internal Factors• Management of working capital- Better management of funds leads to profitability.• Administration and operational efficiency- Better efficency will lower expenses and improve profitability• Geographical factors- better the geographical diversification, lower the risks and better the profitability.• Changes in the pattern of deposits and credit - Different types of loans & credit and to different segments impact the profitability of banks differently.• Level of overdues, bad debts and defaults- These result in losses for the banks.
CAMELS• Since 1995, banks have to undergo on-site inspection and off-site monitoring and surveillance. On-site inspections are based on CAMELS model which stands for:• C- capital adequacy- to maintain capital commensurate with the nature and extent of risks.• A- asset quality in order to minimize risks.• M- Management quality• E- earnings (not only amount of current earnings but also expected earnings in future).• L- liquidity• S- sensitivity to market risk (sensitivity to interest rates,exchange rates and prices etc).
Foreign banks are rated on CACS mode:• C- capital adequacy• A- asset quality• C- compliance• S- systems
Capital Adequacy of Banks• As important players, involved in helping of the capital formation in this era of intensive• infrastructural investment, banks need to possess adequate capital funds to discharge this responsibility. At the same time, a saver who is depositing his money in a bank assumes that the risks associated with the investment of the funds will be borne by this intermediary. Therefore need for possessing healthy capital adequacy requirement is essential for boosting the confidence of the savers. If the saver gives money to the bank in the form of a deposit and if it is insured, it would be the insurer who should be• concerned in the level of equity in the bank.
The following criteria should be used in determining the capital adequacy of the bank:• Ratio of the Paid-up Capital to Reserve• Equity Ratio• Capital-Deposit Ratio• Capital to Risk-Weighted Assets Ratio• BIS Standards
Indian Standards: Narasimham Committee• Narasimham committee constituted by the Government of India, to examine all aspects of banking procedures submitted its reports in the early 90s. The committee observed that the capital ratios of Indian banks are generally low and some banks are seriously undercapitalized. The banks in India should conform to the standards laid in the Basle Committee on Banking Regulations and Supervisory Practices appointed by the BIS in a phased manner. Previously, various groups of banks were subject to different minimum capital requirements as prescribed in the statutes under which they were set up and operate. In addition, it has been prescribed that the foreign banks operating in India should have foreign funds deployed in Indian business equivalent to 3.5 percent of their deposits as at the end of each year. The framework of risk weighted assets ratio approach to capital adequacy measurement is more equitable as it requires those institutions with a higher risk profile to maintain a higher level of capital funds.