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Banking deliberations

Banking deliberations






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    Banking deliberations Banking deliberations Presentation Transcript

    • WHAT IS KYC? Strategic Difference between selling FMCG and banking products. Relationship of Endurance in Finance. (Repaying excess credits in account requires Integrity!) Recent lessons. (CHEQUE DROPPING IN BOXES, OMBUDSMAN, ACCOUNT NUMBER, MASS ACCOUNTS) Importance of Introduction. (NO COPIES --- ORIGINAL PROOF NEEDS TO BE VERIFIED) Soliciting ---- Changing Trends. CODE OF COMMITMENT.
    • CODE OF COMMITMENT Key Commitments Information Advertisements marketing & sales Privacy and Confidentiality Collection of Dues Complaints Grievances & feedback Products & services Protecting accounts
    • STARTING A NEW BANK1.Your friends and you mobilize some capital and you want to start a bank. Can you open a Cooperative bank, or a schedule bank or a private bank? If not why not; if yes how?2. You are NEW PRIVATE sector scheduled bank. You select a person above 65 and recommend for CHAIRMAN post. In another case you select banker with shady past but now very good. In another case you select a non banker but MBA professional. Will these selections be approved?
    • CENTRAL BANKER & BANKING. Why a Regulator? Central Office/Corporate Office/Head Office functions and setups. Control by onsite & offsite supervision by RBI. CAMELS Model. Audits and inspection & Central Vigilance. Detection and prevention of frauds.
    • INVESTMENTS & BRANCH.1.You have fulfilled CRR and SLR criteria promptly. Since you have a chain of customers who provide large interest free current account funds, you do not wish to go for high risk lending at all. Therefore you want to invest everything in Gilt Edged Securities. Can you do it?2. You want to open a branch in Foreign or locally. Can you do it at your will?
    • ORGANIZATIONAL MANAGEMENT: Organizational setups of older Commercial banks Technology based setups - Reduction in tiers. Branch functions and managerial role. Regional and Zonal setups and functioning. Customer Loyalty & Bank viability. (VERMA COMMITTEE inadequacy)
    • BRANCH & HO. Your branch is highly deposit oriented. How your branch’s performance will be evaluated as it will definitely incur loss? Your branch is inadequately staffed. When asked, HO says you are having non-remunerative business. How will you identify and eliminate? Your branch is highly loans oriented. But a lot of them are previously granted NPA loans. Though your branch is making profits HO says it is inadequate. How do you justify your performance? Your insurance pay outs are not quite consistent with the entire bank’s claims ---- what are the solutions.
    • TECHNICAL ASPECTS. Asset Liability management (ALCO) and matching. Treasury Management, Credit Deployment and Interest spread, Non-fund based income, Portfolio Management. NPA management. Mergers and acquisitions --- recent cases. IT and ATM accounts and inter-branch reconciliation. CBS ---- what it does?
    • MANAGING HR. HR functions – Practical knowledge Personal touch in service. Motivation through placement – constraints. Unions and their roles.
    • INCENTIVES.1. To motivate staff can you pay commission for opening deposit or loan account to your staff members?2. Can you give gift schemes for attracting deposits/ loans?3. Can you do picking lottery prizes for depositors?4. Can you run a CHIT scheme in a bank?5. Can you build a hotel, as a banker? If not your bank’s training college has lodging and boarding facilities. Can you let it out and account income?
    • GOVERNMENT SCHEMATIC LENDING: Agricultural credits, Priority sector products, Micro Credit and Self help Groups. Risk mitigation through DICGC or self – insurance concepts.
    • CERTAIN SCHEMES 1. Integrated Rural Development Program (IRDP) The Scheme was launched in 1978‑79 in 2300 selected blocks of the country and was extended to the whole of country with effect from 2.10.1980. It envisaged number of financing schemes for village industries, small business, transport and agro ‑based avocations. 2. Service Area Approach (SAA) The Lead Bank Schemes introduced in December 1969 emphasized on Regional Credit Plan. However, the modified version of the same came into effect from 1.4.1989, wherein each Bank had to take up specified area for looking after the credit needs and thus serving the area in its entirety.
    • SCHEMES CONTINUED 3.Model Village Project (MVP)Commercial Banks adopted villages for all its credit requirements.4. Small Scale Industries Finance (SSI ‑ Finance)Commercial Banks were compulsorily required to achieve the targets fixed for small scale industry financing for each Bank as a whole. 5. Tiny Sector Finance (TSF) Financing very small business by the Commercial Banks.6. Differential Rate of Interest Scheme (DRI)Government would pay the subsidized portion of the interest for certain very small/weak business loans.
    • Schemes ---- 7. 20 Point Economic Programs A detailed Economic Program worked out by the Government for helping small business and other priority sectors. 8. Scheme for Providing Self‑ employment to Educated Unemployed Youths (SEUY) Promotion of self‑employment among educated young people – thus improving small businesses and industries.
    • SCHEMES CONTINUED9. Self-employment Program for the Urban Poor (SEPUP) Similar to (SEUY) but liberalized towards urban poor youth. 10. Scheme of Urban Macro Enterprise Very small business enterprises promotion.11. Transport Operators Priority LendingSmall transport operators running independent business being helped in lending.Apart from the above centrally conceived schemes there are schemes which have been specifically conceptualized and implemented at certain Bank levels like NEDA scheme (New Entrepreneur Development Agency) of Indian Bank wherein the entrepreneur of a small business is not required to bring even the margin money.
    • PROJECT AND PLANTATION LOANS: Rubber Coffee. Tea. Coca. Cardamom. Farm & Diary Projects. Etc.DEVELOPMENT & SCHEMES. Many such schemes were formed by NABARD with exclusive financial modeling.
    • MANAGING SECURITIES AND DOCUMENTATION Insurance and safe keeping. Attrition in the value of securities. Principles of Dual control. Prevention from time barring. Practical tips. Risks in Blank Documents.
    • NPA & BAD ASSETSSTRATEGIC MANAGEMENT. Persuasion. Trade-offs (Time value of Money) Securitization law. Re-phasing. Window dressing? ARC. Legal and other measures. Debt Recovery tribunal.
    • ALLIED ACTIVITIES Insurance and bank-assurance, Mutual Funds, Factoring, Merchant banking outfits. Credit Cards Venture Funds.
    • OTHER INSTITUTIONS. Specialized and Term Lending and Development Banks (IDBI, SIDBI, IFCI, EXIM BANK, NABARD, NHB) RRB, SFC, SIDC IBA, IIB. Scope of the Institutions International position in respect of Development Banking.
    • Banking Products --- Deposits Deposit ---- Demand & Time! Time Deposit --- Cumulative & Non Recurring. Annuity Type. Demand: SB & Current Hybrid. CD (& CP)
    • Lending --- Working Capital Products. ---- OD & Bills. Term Loans ----- Project Loans Export & Import Loans. Agricultural & Allied Loans. Small Loans. Cards & Structured Loans.
    • BILLS OPERATIONS What is a bill? USANCE & DEMAND! Bills discounting. Bills purchase. Bills collection1. Inward Bills.2. Outward Bills.
    • Bills Finance vs. Simple OverdraftPoint of comparison. Bills Finance. Simple Overdraft.Nature It is Self-diluting. It is a Continuing liability.Flexibility to borrowers Not much. There is flexibility as the borrower can withdraw at any time and repay within the stipulated period.Security Only credit worthiness is checked. Accorded against approved securities like shares, NSC’s, Life Insurance Policies etc.Charges Only discounting at the initial stage Interest charged on running itself. balance of utilized amount. And commitment charges are payable against unutilized balancePurpose Specified in bill Not specified.Chance of misuse Goods covered may not be It is inconvenient to the banks and resalable at times & Chances of hampers credit planning &High by kite-bills. getting credit in excess and double financing.
    • Definition Of Bill DiscountingWhile discounting a bill, the Bank buys the bill(i.e. Bill of Exchange or Promissory Note) beforeit is due and credits the value of the bill after adiscount charge to the customers account. Thetransaction is practically an advance against thesecurity of the bill and the discount represents theinterest on the advance from the date of purchaseof the bill until it is due for payment.
    • Why Bill Discounting? Bills discounting is a tool of funding working capital requirements in any firm or company. Any firm or company requires two types of capital for smooth functioning of business viz fixed capital and working capital. Example…….
    • Bill Discounting 1 2 Drawer Drawee 3 4 5 6 Banker1. Drawer sells the goods to the drawee (2) Drawer draws the bill on the drawee3. Drawee accepts the bill (4) Drawer presents it to banker5. Banker credits the amount to drawer (6) At maturity, payment is made by Payee.
    • Condition’s For BillUsually, the BankDiscounting may want some conditions to be fulfilled to be able to discount a bill: A bill must be a usance bill It must have been accepted and bears at least two good signatures (e.g. of reputable individuals, companies or banks etc.) The Bank will normally only discount trade bills Where a usance bill is drawn at a fixed period after sight the bill must be accepted to establish the maturity
    • FeaturesFollowing are the salient features of bill Discounting: Discount Charge Maturity Ready Finance
    • Bill of Exchange Itis a negotiable instrument and one of the means of Bill discounting. Definition: A bill of exchange “is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.” (Sec 5 Negotiable Instrument Act)
    • Bill of Exchange Payable to order on demand Mumbai September 17, 2xxx On demand please pay Mr. Abhishek or order the sum of Rupees Twenty Five Thousand only. Rs. 25000 Mr. Menon Atul Jadhav Pune
    • Types of Bill Types of Bill Nature of Geographic Time Based Red Bill Other Bills Liability Based •supply Bill •Documentary With Without Accommoda BillUsance Bill Demand Bill Inland Foreign Bill •TradeBill Recourse Recourse tion or Kite •Ambiguous Bill •Escrow Bill
    • Letter of CreditA document, issued by a bank perinstructions by a buyer of goods,authorizing the seller to draw a specifiedsum of money under specified terms,usually the receipt by the bank of certaindocuments within a given time.
    • Letter of Credit Red Clause Letter of Credit: Red Clause Letters of Credit provide the seller with cash prior to shipment to finance production of the goods. The buyers issuing bank may advance some or all of the funds. The buyer, in essence, extends financing to the seller and incurs the risk for all advanced credits.
    • Letter of Credit Standby Letter of Credit This credit is a payment or performance guarantee used primarily in the United States. They are often called non-performing letters of credit because they are only used as a backup should the buyer fail to pay as agreed. Thus, a stand-by letter of credit allows the customer to establish a rapport with the seller by showing that it can fulfill its payment commitments.
    • Legal AspectsBanks are the financial institution which are protected by law ,by Securitization act and Debt Recovery Tribunal (DRT). In case of a default banker needs to serve a notice and then they can seize the necessary assets which as been kept as security.
    • Difference b/w Bill discounting Factoring It is also called invoiceIt is also called invoice discounting. Factoring.In this parties are drawer, In this the parties aredrawee and payee. Client, factor and debtor.It is narrow in scope. It is broad in scope.It is sort of borrowing from It is management of bookCommercial bank. debts.Maximum time is 3 months. Maximum time is 6 monthsGrace time is 3 days. Grace time not given.Negotiable instrument act There is no specific actapplies. Provision of advanceNo such provision is available. Payment of book debt is available.
    • Accounting TreatmentIn Respect of Bill of Exchange:• Separately treated in Books of DrawerBills receivable Account Dr To Acceptor Account(with face value of the bill drawn and accepted)• Books of AcceptorDrawer’s Account Dr To Bills payable Account(with the face value of bill accepted) Separately treated in – Books of Drawer – Books of Acceptor
    • Books of Drawer Cash (or Bank) Account Dr (with the net amount of the bill, i.e., the face value of the bill . less the Amount of discount) Discount Account Dr (with the amount of discount) To Bills receivable Account Cr (With the face value of the bill)Books of Acceptor No entry will be passed in the books of the acceptor for the discounting of the bill, because he is not at all affected by the discounting of the bill.
    • RISK MANAGEMENT Formation of Committee. Effective MIS & Specialized Staff. MIS should be Organization Specific. Asset Liability Matching. (ALCO) Market Variables. Credit Risk.
    • MANAGING CREDIT RISK Counter party risk. Measurement of risk through credit rating/scoring; Quantifying the risk through estimating expected loan losses i.e. the amount of loan losses that company would experience over a chosen time horizon (through tracking portfolio behavior over 5 or more years) and unexpected loan losses i.e. the amount by which actual losses exceed the expected loss. (Standard Deviation)
    • Credit Risk Managing• Risk pricing on a scientific basis;and• Controlling the risk through effective Loan Review Mechanism and portfolio management.
    • TOOLS OF CREDIT RISK MANAGEMENT Credit Approving Authority. PRUDENTIAL LIMITS Stipulate benchmark like current/debt equity,. Single/group borrower limits Substantial exposure limit Maximum exposure limits to industry, sector etc. Companies may consider maturity profile of the loan book
    • COMPREHENSIVE RISK RATING POLICY Based on MIS Identifying risk elements Give them scores in point scales. Weighted Averaging depending on risk ranked parameters Based on track record of self and others. Periodic revision necessary.
    • UN-HEDGED FOREX EXPOSURE RISK When Foreign exchange exposure is exposed it should be either hedged or the un-hedged portion must be considered for quantification of probable loss. Hedging Instruments when used as trading items, they should also be considered for risk evaluation.
    • RISK PRICING. Itis fundamental tenet in Management. Expected probability and default should decide the price. However collaterals also need be considered while pricing. Risk Return Tangle is fundamental to any management decision.
    • OTHER RISKS Investment Risk. Off Balance Sheet Exposure Risk. Inter-corporate Exposure risk.
    • RISKS MARKET RISK( Liquidity, Interest Rate, Exchange Rate, Commodity Price, Equity Index) LIQUIDITY RISK (Funding, Time, Call , Risks) Basis Risk (Volatile Markets) Option Risk. Yield Curve Risk. Price Risk. Reinvestment & Resale Risk.
    • RISKS InterestRate Risk. Trading RISK & VAR. Transfer Pricing (Including Funds –FTP) VAR approach to Foreign Exchange Risk. Capital Market Risk. Operational Risk its Control. Risk Aggregation and Capital allocation
    • PRACTICAL BANKER1. When you pay a CHEQUE, where the signature is forged but could not be detected while verifying, can you get a legal protection?2. A CHEQUE when bounced without funds, can a holder of the same, who is not the direct payee, but an endorsee sue the original signatory/drawer of the CHEQUE?3. You bounce a CHEQUE by mistake though the customer had funds in the account. The customer sues YOUR bank for very large amount of damages, though the CHEQUE amount is very small. Can the customer succeed in the case?4. In a loan account there are dues both of interest and installments. When a customer remits some part amount, does not mention as to whether it is for the interest or for the installment. You have appropriated the same for interest and intimated the customer, the customer does not raise objection but at the time of closing the final account raises dispute and says that it was meant for interest, will the customer succeed?
    • PRACTICAL BANKER5. A Brigadier of Army asks for cash payment of open DD without identification stating that it is on Demand? How ill you convince?6. A CHEQUE is endorsed in favor of three persons in succession. All have apparently signed and it is bearer. Can you pay cash?7. A CHEQUE or DD crossed plain, account payee and Not Negotiable. Discuss Significance. A customer brings a DD crossed NOT negotiable endorsed in his/her favor. Can you collect the DD on behalf of the Customer?8. A CHEQUE drawn in favor of a Ltd. company is bearer. Can you pay cash? Will the position change if the amount is above 20000/=
    • PRACTICAL BANKER9. A CHEQUE is six months old dated. Can you pay cash, if the customer is well known?10. From Reliance Mobile Co., a bank obtained PDC and discounted the same ---- is it in order?11. A customer has sufficient balance in account. Wants his CHEQUE to be marked as good for payment. Can you do?12. A CHEQUE is not in the appropriate stationery. But properly drawn and you know that your customer has drawn it. Can you pay, can the customer later on sue you for negligence?
    • COUNTERFEIT NOTES & FRAUDS13.Your cashier tracks a Counterfeit note. The customer says “let us burn it – I will give another one” --- what will you do?14.Your safe kept cash bundle has a counterfeit note— detected while paying --- what will you do?15.PWD engineer invokes your Bank’s Guarantee. When you verify the register, the BG is not in the records. But clearly bears the previous manager’s signature--- what will you do?16.A leading personality says that the previous manager has been holding the FD receipts; but while leaving, when verified was found deficient. The VIP feels that the previous man has taken undue advantage of the fact that the money was number 2. What will you do?
    • PRACTICAL BANKER17. A DD is presented for payment; but you have not received the issue advice for the same form the issuing branch. The DD is for very high value. To verify when you ring up the branch it is found that the particular STATE has declared holiday under NI act. The payment is demanded urgently. Even the signature of the drawing officer is new. The new signatures are yet to be FASCIMILATED. What will you do?18. Pro-notes are time-barred in three years. But your loan to a customer exceeds three years and you know that if the loan is not renewed within three years the pro-note would be time-barred. Your customer suggests that you can enter into an agreement with him stating that the pro-note executed by him in bank’s favor would not be time barred as he is agreeing to it. Would you bite it?19. Your customer has borrowed and the surety has co-obliged the pro- note. The original borrower loses his assets and you are filing suit against the surety only. In court the surety alleges that he is only surety and the main borrower is let off. What will court do?
    • PRACTICAL BANKER 20. In a paying in slip the customer fills his account number wrongly and the name is not quite legible. You have accepted the same without seeing it properly. Based on the wrong account number you pass credit to the account and the other fellow draws the amount and closes the account. After sometime, your customer your customer comes with the counterfoil, which is easily readable and demand payment/ proper credit to his account. You argue that he should have written the account number correctly and since he has erred he should suffer the loss. He goes to court. Who will succeed?
    • MODEREN BANKER!!A CHEQUE drawn on your bank has been received at another far off place in a totally different bank --- they are sending a fax giving the scanned image of the CHEQUE and ask you to pay the amount through electronic exchange kept in place by the CENTRAL BANKER ---- Discuss the implications! Is there a law to Govern this?
    • CORE BANKING SOLUTION Banking Earlier Changing face of Banking Manual ledger environment Delay in MIS / Data Many legacy systems Customer Service Compilation of financial information as a Bank
    • Core Banking Remove various legacy systems End to end financial solutions Better customer service Easy compilation of financial data Access of data / financials from any point Scalability – better solutions Single Vendor
    • Advantages More structured products New Delivery Channels Customer Relationship management Risk Management
    • Players INFOSYS - FINACLE I-Flex - Universal Banking Solution THEMINOS People soft Technologies
    • UBS – System StructureDatabaseAtCentral Point Branch
    • UBS FCR – Supports Retail Application FCC – Supports Wholesale Banking Access through telecom lines from any place with centralized database Branch level user and customer information - Database Online updating of debits / credits – Centralized database Information availability online through other channels like E-net / ATM / Mobile etc.
    • Information Exchange Branch functions are performed by accessing centralized database through workstation connected to Branch server, which in turn speaks to Centralized Database. Branch server has both FCR application and local branch database, which stores local branch transactions. Branch server communicates with UBS production servers at Centralized location on an online basis and ensures both local branch database and production database are in sync. To communicate with production servers, branch server is configured with production server IP Addresses and ports. Users from the branch connect through browser based application or CITRIX FCR branch application connects to the production database using ODBC and Application server using COM server of the branch.
    • Information Exchange Non branch functions which are regular operations oriented are done through Host which is directly connected to the centralized database. To communicate with production servers CITRIX application is used
    • WORKING CAPITAL GAP TANDON COMMITTEE1. Working Capital gap = Current Assets – (Current Liabilities- Bank limit for Working Capital) Maximum 75% of the identified gap can be financed. Rest of the gap to be financed by own funds or on long- term basis as a term loan. 15 industries were basically identified, which covers cotton, jute, rubber, pharmaceuticals, cement, engineering, automobile industries etc. The norms cover limits of Raw materials, Semi-finished products, finished products & receivables.
    • METHODOLOGY OF FINANCINGI Method is financing for WC up to 75% of the gap identified as above. Excess was converted as TL. II Method envisages financing up to 75% of the net current assets only. III Method envisages financing of core current assets up to the full extent and rest of the 25% needs to be financed through own resourcesMIS statements were considered mandatory and defaults would attract penalty interest over and above of the contracted rate.
    • CHORE COMMITTEE RECOMMENDATIONS As per this, all banks were directed in December 1980 that Method 2 should be applied for all accounts where the working capital limit is Rs50lakhs and above. Different types of advances, cash credit, loan and bills types to continue. Bifurcation of cash credit limit into demand loan and fluctuating cash credit portions - not favored. Seasonal Credits studied in detail analyzed.
    • NAYAK COMMITTEE Preference to village industries, tiny industries and other small-scale units in that order. TANDON Committee will not apply for working capital credit limits up to Rs50lacs from the banking system for the above category. 25% of the output value should be computed as WC requirement, of which at 4/5th should be provided by Banking Sector, the remaining 1/5th, representing borrowers contribution towards margin money for the WC
    • VAZ COMMITTEE VAZ committee has extended the concept of NAYAK committee to all business enterprises This is deviation to previous committees!
    • WORKING CAPITAL MANAGEMENT It is complicated at the international level because: a. Some countries do not have the concept of working capital. b. Receivables and payables are in multi- currencies. c. Credit terms vary internationally.
    • Methods to manage working capital – 1 Inventory Mgt i. 1 A good inventory management system- some of the techniques of inventory control are: a) Just-In-Time (JIT): Its applicability depends upon the country. b) ABC Analysis c) EOQ- Balancing inventory carrying cost against unit order cost. d) Reorder Level.
    • 2 Managing Receivables Credit scoring model can be devised (for internal transactions) Only rated clients (for big transactions of MNC’s) Taking security (when risky) Debt period analysis i.e. within 3 months, between 3 and 6 months, above 6 months etc. Offer a discount for immediate settlement. For a depreciating currency, calculate a discount and offer it immediately. Forfaiting is a technique to manage receivables as the rights of an unpaid seller may not be applicable in every country.
    • 3 Cash ManagementTools for cash management: EOQ for cash = 2AO CWhere A= Annual requirement;O= Opportunity cost; C= Carrying cost.
    • Bills Finance and Simple overdrafts. CC OD Bills Goods Loan Acceptance Bills Export & Import Bills etc.
    • Current Current AssetsRatio ----------------------- Current Liabilities + ProvisionsQuick CA - InventoriesRatio --------------------- CL – OD
    • Newer Ratio? Compare Average Current Liability To Monthly Cash Flows Going Concern Approach & Gone Concern Approach