3. Definition of Banks
• Banking Regulation Act, (BR Act), 1949 Section
5(c) defines a bank as 'a banking company is a
company which transacts the business of
banking in India.'
• Section 5(b) of the BR Act defines banking as,
'accepting, for the purpose of lending or
investment, of deposits of money from the
public, repayable on demand or otherwise, and
withdrawable, by cheque, draft, order or
otherwise.’
February 22, 2014
Session - Banking
3
4. Distinguishing features of Commercial
Banks from other financial Institutions
• maintaining deposit accounts including
current accounts,
• issue and pay cheques, and
• collect cheques for the bank customers
February 22, 2014
Session - Banking
4
5. GOAL
Bank Goals and Constraints
Amount of cash flows
Maximise share
holders wealth
Timing of cash flow
Risk of cash flow
•
•
•
•
•
•
Constraints
Credit risk
Interest rate risk
Liquidity risk
Operational risk
Capital risk
Fraud risk etc.
• Market competition
• Social constraints
• Legal constraints
Source: Gup and Kolari (2005), Commercial Banking – Management of Risk, Wiley, 3 rd Ed.
February 22, 2014
Session - Banking
5
7. Table: Indicators of financial soundness, 2012
Sr.
No.
Country
Gross NPAs as % of gross advances
CRAR (%)
Select advanced countries
1
Germany
3.0*
17.9
2
Japan
2.4
14.2
3
UK
4.0
15.7
4
USA
3.9
15.3
BRICS
5
Brazil
3.5
16.7
6
Russia
6.0
13.7
7
India
3.6
13.6
8
China
1.0
12.9
9
South Africa
4.0
15.8
EMEs
10
Indonesia
1.8
17.3
11
Korea
1.6
14.1
12
Mexico
2.4
16.0
13
Turkey
2.7
17.9
CRAR: Capital to2014
February 22, risk-weighted assets ratio.
*: Data pertains to 2011.
Session - Banking
7
8. Table : Indicators of banking access
Item
2001
2011
2012
Households availing banking services (in per cent)
35.2
58.7
-
Population per bank branch (‘000)
15.6
13.3
12.5
51
100
106
No. of accounts per 1000 population (all deposits)
416
669
734
No. of accounts per 1000 population (savings
deposits)
272
516
571
Per capita credit outstanding (` ‘000)
5.2
33.7
39.1
Per capita total deposits (` ‘000)
9.2
44.5
49.4
No. of accounts per 1000 Population (credit)
Source:RBI (for number of deposits accounts, credit accounts, credit
outstanding, and deposits outstanding); Office of the Registrar General and
Census Commissioner of India for population and households’ data.
February 22, 2014
Session - Banking
8
9. Table : Select parameters of banking sector efficiency
Year-ended Return on assets
March
(%)
Net Interest
Margin (%)
Cost-income ratio
(%)
Business per
employee
(` lakh)*
Business per
branch
(` lakh)*
2001
0.54
3.1
25.9
2.1
34.7
2002
0.82
2.8
22.3
2.5
39.5
2003
1.05
2.9
22.1
2.8
43.0
2004
1.21
3.1
23.7
3.1
47.7
2005
0.97
3.1
26.1
3.5
53.6
2006
0.96
3.0
26.8
4.1
62.6
2007
1.00
2.9
24.0
4.6
68.6
2008
1.10
2.6
21.0
5.6
79.8
2009
1.10
2.6
19.2
6.5
90.1
2010
1.01
2.5
20.2
7.1
92.1
2011
1.06
2.9
21.6
7.7
99.5
2012
1.05
2.9
18.5
8.3
99.3
* At 2004-05 prices
Note: NIM refers to net interest income as per cent of average total assets.
RoA refers to net profits as per cent of average total assets.
Cost to income 22, 2014
9
February ratio is worked out as operating costs as per cent of total income.
Session - Banking
Source: Statistical Tables relating to Banks in India, various issues; Basic Statistical Returns of Scheduled Commercial Banks in India, RBI.
10. CAMEL for assessing banks
•
•
•
•
•
C – Capital Adequacy
A – Assets
M – Management Capability
E – Earnings
L – Liquidity also called asset liability
management
• S – Sensitivity to market risk, especially interest
rate risk.
February 22, 2014
Session - Banking
10
11. Bank Operations Performance
• Effective planning to allocate personnel and
equipment for better utilization of limited
resources
• Tighter control procedures to evaluate where
improvements are possible – eg. Reduction in
errors and rework
• Redesign of service/processes systems
configuration to improve operations by reducing
tasks/operations in providing financial services
February 22, 2014
Session - Banking
11
12. Challenges for the Banking Sector
• Asset quality
– improve asset quality
• Efficiency parameters
– reduce NPAs, enhance productivity, reduce
intermediation cost
• Additional capital requirements to comply with
Basel III
– To maintain a minimum leverage of 4.5 per cent of
Tier I capital
• New entrants and increased competition
February 22, 2014
Session - Banking
12
13. Structure of Banking in India
• Regulator – RBI
• Scheduled Banks – those included in the
second schedule of the RBI Act, 1934.
• Non-scheduled Banks
http://www.allbankingsolutions.com/Links/List-of-Bank-in-India.shtml
February 22, 2014
Session - Banking
13
14. Functions of RBI
•
•
•
•
•
Acts as the currency authority
Controls money supply and credit
Manages foreign exchange
Serves as a banker to the government
Builds up and strengthens the country's financial
infrastructure
• Acts as the banker of banks
• Supervises banks
February 22, 2014
Session - Banking
14
16. Break-up of Bank Branches
February 22, 2014
Source: Economic SurveySession - Banking Government of India
2010-2011,
16
17. Functions of Commercial Banks
• Payment System
• Financial Intermediation
• Financial Services
February 22, 2014
Session - Banking
17
18. Payment System
A payment refers to the means by which financial
transactions are settled.
• issuing and paying cheques issued on behalf of
customers.
• Modern banking, also involves electronic
banking, wire transfers, settlement of credit card
transactions
February 22, 2014
Session - Banking
18
19. Financial Intermediation
Banks take different types of deposits from
customers and then lend these funds to
borrowers
•bank deposits represent the banks' liabilities
•loans disbursed, and investments made by
banks are their assets
February 22, 2014
Session - Banking
19
20. Financial Services
Banks provide
•investment banking,
•insurance-related services,
•government-related business,
•foreign exchange businesses,
•wealth management services etc.
February 22, 2014
Session - Banking
20
21. Banking Processes
• Account opening – Deposit and Loan
• Income Services
– Travellers Cheques and Forex
– Mutual Funds
– Bancassurance
• Payments
• Service
– Tellers
– Customer service – lobby management
•
•
•
•
Complaints and requests
Phone banking, internet banking, mobile banking
Monitoring and reporting
February 22, 2014
Insurance
Back-office reconciliations - Session 3
21
22. Front office operations
• Sales
• Operations
– Cash
• Receipt and Payment
• Cash sorting (soiled and fit)
• ATM handling
– Clearing
•
•
•
•
•
•
Collection of cheques
Entries made
Sent to service branch
Sent to clearing house
Sent to the concerned branch
Accounts debited or credited
– Fund transfer (NEFT, RTGS)
• RTGS – Settlements of Rs. 2 lakhs and above – Settled in 2-3 hours
• NEFT – Settlement of less than 2 lakhs – Settled in 48 hours
February 22, 2014
Session - Banking
22
23. Basic Relationship between Banker and
Customer
• The general relationship between the banker and the
customer is that of a debtor and a creditor, i.e.,
borrower and lender.
• The respective positions being determined by the
existing state of account.
– On opening the account a banker assumes the position of a
debtor.
– A depositor remains a creditor as long as his account carries a
credit balance. He does not get any charge over the assets of
his debtor (bank) and remains an unsecured creditor of the
bank.
• Banker’s relation with the customer is reversed as soon
as the customer’s account is overdrawn.
– Bankers are secured creditor of his customers.
February 22, 2014
Session - Banking
23
24. Legal relationships of banker and customer
• Agent and Principal
– “Agent” a person employed to do any act for another
or to represent another in dealings with third persons
“Principal”.
– Collection of cheques, Bills of Exchange, promisory
notes, payment of insurance premiums, bills etc.
• Trustee and beneficiary
– trustee is one to whom property is entrusted to be
administered for the benefit of another called the
beneficiary.
– When a customer deposits securities or other
valuables with the banker for safe custody
February 22, 2014
24
Session - Banking
25. Legal relationships of banker and customer
• Pawnee and Pawner:
– pawn is a sort of bailment in which the goods are
delivered to another as a pawn, to be a security for
money borrowed.
– The banker can retain the goods pledged till the debt
is paid.
• Mortgagee and Mortgagor
– Home loans, loans on other immovable property
• Lessee and Lessor
– Safe deposit locker
• Guarantor and guarantee –
February 22, 2014
Session - Banking
25
26. Bank Deposits
• Demand deposits are defined as deposits payable
on demand through cheque or otherwise.
Demand deposits serve as a medium of exchange,
for their ownership can be transferred from one
person to another through cheques and clearing
arrangements provided by banks. They have no
fixed term to maturity.
• Time deposits are defined as those deposits
which are not payable on demand and on which
cheques cannot be drawn. They have a fixed term
to maturity
February 22, 2014
Session - Banking
26
27. Categories of Accounts
• Current Account
• Savings Bank Account
• Term Deposit Account
February 22, 2014
Session - Banking
27
28. Current Deposits
• A current account is a form of demand-deposit, as the
banker is obliged to repay these liabilities on demand
from the customer.
• Withdrawals from current accounts are allowed any
number of times depending upon the balance in the
account or up to a particular agreed amount.
• Current deposits are non-interest bearing.
• A current account is a running and actively operated
account with very little restriction on the number and
amount of drawings.
• Major objective of the a/c is to provide convenient
operation facility via continuous liquidity.
February 22, 2014
28
Session - Banking
29. Savings Bank Deposits
• A form of demand deposits, which is subject to
restrictions on the number of withdrawals as well
as on the amounts of withdrawals during any
specified period.
• Minimum balances may be prescribed in order to
offset the cost of maintaining and servicing such
deposits.
February 22, 2014
Session - Banking
29
30. Current a/c and Savings a/c (CASA) Deposits
• CASA are low cost savings deposits compared to
other deposits. CA is non-interest bearing while
SA is low interest bearing.
• Banks mobilise CASA by offering
– Salary accounts, encouraging companies to open CA,
use cash management facilities etc.
• CASA deposits to total deposits is showing a
gradual decline across all banks.
February 22, 2014
Session - Banking
30
31. Term Deposits
• A deposit received by the Bank for a fixed period,
after which it can be withdrawn.
• Deposits include
– Fixed Deposits
– Reinvestment deposits
– Recurring Deposits
February 22, 2014
Session - Banking
31
32. Guidelines for opening and operating Deposit
Account
•
•
•
•
•
•
•
•
•
Due Diligence Process - KYC guidelines
Minimum Balance
Transparency
Eligibility
Requirement of PAN
Operation of joint account
Power of attorney
Closure/renewal of deposits
Nomination
February 22, 2014
Session - Banking
32
33. Deposit related services
• Customer Information
• Interest Payments
– Savings Bank Accounts
– Term deposits
– Tax deducted at source (TDS)
•
•
•
•
•
Premature withdrawal of term deposit
Premature renewal of term deposit
Advances against deposits
Stop payment facility
Safe deposit lockers
February 22, 2014
Session - Banking
33
34. Definition of NRI
• As per the Foreign Exchange Management Act
(FEMA), 1999, an NRI means:
• Non-Resident Indian National (i.e. Nonresident Indian holding Indian passport), and
• Persons of Indian Origin (i.e., Non-residents
holding foreign passports)
February 22, 2014
Session - Banking
34
36. Comparison of Deposit Schemes available to NRIs
February 22, 2014
Session - Banking
36
37. Deposit Insurance
• Bank deposits are covered under the insurance
scheme offered by Deposit Insurance and Credit
Guarantee Corporation of India (DICGC).
• DICGC is a subsidiary of RBI and is funded by RBI
• All banks, including branches of foreign banks
functioning in India are insured by DICGC.
• DICGC is liable if
– A bank goes into liquidation
– A bank is amalgamated/merged with another bank
February 22, 2014
Session - Banking
37
38. Methods of Protecting Depositor
Interest
There are two methods of protection when an
insured bank fails
• By transferring business of the failed bank to
another sound bank
• DICGC pays insurance proceeds to depositors.
February 22, 2014
Session - Banking
38
39. Principles of Lending and Loan Policy
• Principles of Lending
– Safety
– Liquidity
– Profitability
– Risk Diversification
• Loan Policy – lays down guidelines in these areas
– Level of Credit-deposit ratio
– Targeted portfolio mix
– Hurdle ratings
– Loan pricing
– Collateral security Session - Banking
February 22, 2014
39
40. Loan Policy
Credit Policy Committee (CPC) approved by the Board of Directors of the
Bank
• Loan policy outlines the lending guidelines and establishes operating
procedures for
–
–
–
–
–
–
–
–
–
–
–
–
credit management
standards for presentation of credit proposals, financial covenants,
rating standards and benchmarks,
delegation of credit approving powers,
prudential limits on large credit exposures,
asset concentrations,
portfolio management,
loan review mechanism,
risk monitoring and evaluation,
pricing of loans,
provisioning for bad debts,
regulatory/ legal compliance etc.
February 22, 2014
Session - Banking
40
41. Credit Deposit Ratio: Quantum of credit that can
be granted by the bank as a percentage of
deposits available.
Targeted Portfolio Mix: Portfolio mix of different
sectors based on the forecasts for growth and
profitability for each sector.
Hurdle Rating: Risk rating system for the
borrowers is prepared by the banks. For new
borrowers, a bank lays down guidelines
regarding the minimum rating to be achieved by
the borrower to be eligible for loan. This is
known as the ‘hurdle rating’ criterion for the
borrower.
February 22, 2014
Session - Banking
41
42. Pricing of loans
• Pricing of a loan is dependent on the following
– Credit risk of the borrower
– cost of raising resources,
– cost of administration and overheads,
– cost of reserve assets like CRR and SLR,
– cost of maintaining capital,
– percentage of bad debt, etc.
– Competition
Collateral Security
– Working capital loans - physical and financial assets
– Clear loans – personal guarantee of the borrower 42
February 22, 2014
Session - Banking
43. Activities of Commercial Banks
• Other basic banking activities
– Foreign Exchange services
– Provision of remittance facilities including issuance
of drafts, mail transfers and telegraphic transfers,
– issuance of travellers cheques & gift cheques,
– locker facility etc.
• Para-banking activities
– Investment banking
– selling mutual funds, insurance products
– depository services,
– wealth management services, brokerage, etc.
February 22, 2014
Session - Banking
43
44. Other Basic Banking Activities
• Foreign Exchange Services
• Services to Government
• Payment and Settlement Systems
– Paper based clearing system - cheque, clearing
house, clearing operations
– Electronic Payment System
• RTGS, EFT, NEFT, Electronic Clearing Service (ECS),
February 22, 2014
Session - Banking
44
45. Prevention of Money Laundering Act (PMLA), 2002
The act requires the maintenance and reporting of the following
transactions
a) all cash transactions of the value of more than Rs 10 lakh or its
equivalent in foreign currency;
b) all series of cash transactions integrally connected to each other
which have been valued below Rs 10 Lakh or its equivalent in
foreign currency where such series of transactions have taken
place within a month and the aggregate value of such
transactions exceeds Rs 10 Lakh;
c) all cash transactions where forged or counterfeit currency notes
or bank notes have been used as genuine and where any forgery
of a valuable security or a document has taken place facilitating
the transaction; and
d) all suspicious transactions whether or not made in cash
February 22, 2014
Session - Banking
45
46. Asset Liability Management
Asset Liability Management is defined
as the process of adjusting bank
liabilities to meet loan demands,
liquidity needs and safety
requirements.
February 22, 2014
Session - Banking
46
47. Reasons for growing significance of ALM
-Volatility
-Product Innovation
-Regulatory Framework
-Management Recognition
An effective Asset Liability Management
technique aims to manage the volume
mix, maturity, rate sensitivity, quality and
liquidity of assets and liabilities as a whole
so as to attain a predetermined acceptable
risk/reward ratio.
48. Liabilities of Bank
Sources of funds for lending and investing for
the bank
– Capital
– Reserves and Surplus
– Deposits
– Borrowings
– Other liabilities and provisions
February 22, 2014
Session - Banking
48
49. Assets of Bank
• Cash and bank balances with RBI
• Balances with banks and money at call and
short notice
• Investments
• Advances
• Fixed assets
• Other assets
February 22, 2014
Session - Banking
49
50. Pillars for ALM process
• ALM information systems
– Management Information System
– Information availability, accuracy, adequacy and
expediency
• ALM organisation
– Structure and responsibilities
– Level of top management involvement
· ALM process
– Risk parameters
– Risk identification
– Risk measurement
– Risk management
– Risk
February 22, 2014 policies and tolerance- Banking
Session levels.
50
51. ALM Information System
• Information system which provides accurate
and adequate information
• Extensive computerisation
February 22, 2014
Session - Banking
51
52. ALM Organisation
• The Board of Directors would have the overall
responsibility for the ALM & risk management
and should lay down the tolerance limits for
liquidity and interest rate risk in line with the
organization’s philosophy
• Asset Liability Committee (ALCO) is responsible
for deciding on the business strategies
consistent with the laid down policies and for
operatinalising them.
– Typically, ALCO consists of the senior management,
including the Chief Executive.
February 22, 2014
Session - Banking
52
53. ALM Process
• Focuses on – liquidity and interest rate risk
• Guidelines specify the use of a maturity ladder
upto 8 time buckets and calculation of
cumulative surplus or deficit of funds at
selected maturity dates
February 22, 2014
Session - Banking
53
54. Gap Analysis
• Gap is the difference between the rate
sensitive assets and the rate sensitive
liabilities
• Time buckets
February 22, 2014
Session - Banking
54
55. Trends in Modern Banking
• Technology
– Internet Banking
– Point of Sale (POS) Terminals
• Outsourcing of Services
–
–
–
–
–
–
Managing data centres,
Managing ATM networks
Call support services
Help desk support
Credit card processing
Cheque processing
• Financial Inclusion
– No-frills account
February 22, 2014
Session - Banking
– Adoption of technonology
55
