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  • 2 min. Address.
  • BFS Level 0

    1. 1. Foundation Program on Banking & Capital Markets v-3.0 December 07, 2005 BFS Domain Competency Team
    2. 2. Program Objectives <ul><li>Provide an overview of Banking domain </li></ul><ul><li>Enable technology people understand financial terms </li></ul><ul><li>Explain operations in specific lines of Banking </li></ul><ul><li>Covers global banking practices especially US </li></ul><ul><li>Introduce some of the recent developments in banking </li></ul>
    3. 3. Exclusions <ul><li>Program does not aim at creating business experts. You won’t become an expert banker after the course! </li></ul><ul><li>Does not cover India specific practices </li></ul>
    4. 4. Agenda <ul><li>Concept of Money </li></ul><ul><li>Financial Instruments </li></ul><ul><li>Financial Markets </li></ul><ul><li>Financial Statements </li></ul><ul><li>Introduction to Banking </li></ul><ul><li>Retail Banking </li></ul><ul><li>Consumer Lending </li></ul><ul><li>Cards and Payments </li></ul><ul><li>Commercial and Wholesale Banking </li></ul><ul><li>Investment Management </li></ul><ul><li>Investment Banking and Brokerage </li></ul><ul><li>Risk Management </li></ul><ul><li>Custody & Clearing </li></ul><ul><li>Settlement </li></ul><ul><li>Corporate Services </li></ul><ul><li>Recent Developments </li></ul>
    5. 5. CONCEPT OF MONEY
    6. 6. What is money? <ul><li>Standardized unit of exchange </li></ul><ul><li>Measured in various currencies – INR, USD etc </li></ul><ul><li>Exchange rate for various currencies </li></ul><ul><li>‘Rent’ paid for money used is called Interest </li></ul><ul><li>Simple Interest: Interest calculated on beginning principal only </li></ul><ul><li>Compound interest: Interest calculated on (beginning principal + accumulated interest in each period) </li></ul>
    7. 7. Simple & Compound interest <ul><li>Consider the following case: </li></ul><ul><ul><li>Amount invested: $100 </li></ul></ul><ul><ul><li>Interest: 5% p.a. </li></ul></ul><ul><ul><li>Years: 5 years </li></ul></ul><ul><li>What is the simple interest applicable? </li></ul><ul><ul><li>$100*5%*5 = $25 </li></ul></ul><ul><li>What is the compound interest applicable? </li></ul><ul><ul><li>100*(1+5%)^5 = $27.63 </li></ul></ul>
    8. 8. Inflation <ul><li>Rise in cost of goods and services over a period </li></ul><ul><li>Real rate of interest = Nominal rate of interest – Inflation rate </li></ul><ul><ul><li>Published home mortgage rate = 6.0% </li></ul></ul><ul><ul><li>Inflation rate = 1.5% </li></ul></ul><ul><li>What is the real rate of interest for home loans? </li></ul><ul><ul><li>6.0% </li></ul></ul><ul><ul><li>6.0 – 1.5 = 4.5% </li></ul></ul>
    9. 9. Time Value concept <ul><li>Consider the two cases: </li></ul><ul><ul><li>$100 available to you now Vs $100 available after 1 year </li></ul></ul><ul><ul><li>Which is more valuable? </li></ul></ul><ul><li>Money available now! – since money available now can be invested to earn interest over 1 year </li></ul><ul><li>Future Value of money: $100 available now will become (after n years at a compound interest of r%) </li></ul><ul><ul><li>$100*(1+r)n </li></ul></ul><ul><li>Present Value of money: $100 available after n years (compound interest r%) is worth today </li></ul><ul><ul><li>$100/(1+r)n </li></ul></ul>
    10. 10. Discounted Cash Flow <ul><li>Discounting future cash flows by interest rate to arrive at present value </li></ul><ul><ul><li>Net Present Value </li></ul></ul><ul><ul><li>Internal Rate of Return </li></ul></ul><ul><li>Power of compounding </li></ul><ul><ul><li>Berkshire Hathaway sold at $ 1000 in 1970 </li></ul></ul><ul><ul><li>Sells at $ 90000 now! </li></ul></ul><ul><ul><li>Corresponds to 23% compounded annual return </li></ul></ul>
    11. 11. Cost of capital <ul><li>Costs of raising money vary and depends on </li></ul><ul><ul><li>Borrower, type of financing, market timing </li></ul></ul><ul><ul><li>Additionally Collateral and tenure for debt </li></ul></ul><ul><li>Cost of capital includes </li></ul><ul><ul><li>Interest for debt </li></ul></ul><ul><ul><li>Dividend, expected earning for equity </li></ul></ul><ul><ul><li>Impact of tax on cost of capital </li></ul></ul><ul><li>Weighted average cost (WACC) applied if more than one source of finance is used </li></ul>
    12. 12. Cost of capital - WACC <ul><li>An Example: The Goodworks Company Inc. has raised Rs. 300 million at different times through different means. </li></ul><ul><li>Significance of Cost of Capital </li></ul><ul><ul><li>Importance of low interest rates (Real or Nominal?) </li></ul></ul>
    13. 13. Quiz <ul><li>Over a 1 year term, 5% p.a., compounded rate payable annually is preferable to 5% p.a. simple interest payable quarterly. Is this correct? </li></ul><ul><li>The savings bank interest rate is 9% and inflation rate is 4%. An investor deposits $100 in his savings account for 1 year. How much would the bank return after the end of 1 year? </li></ul><ul><li>When would one use the present value of money concept? </li></ul><ul><li>Which time value concept is linked to hurdle (minimum return) rates for investments? </li></ul>
    14. 14. FINANCIAL INSTRUMENTS
    15. 15. Capital <ul><li>Business needs capital for operations, fixed assets </li></ul><ul><li>Capital can be raised by issuing securities </li></ul><ul><li>Security is a financial instrument that </li></ul><ul><ul><li>Signifies ownership in a company (Stock) </li></ul></ul><ul><ul><li>Creditor relationship with a corporation or government agency (Bond) </li></ul></ul><ul><ul><li>Rights to ownership (Option) </li></ul></ul>
    16. 16. Raising Capital: Methods <ul><li>Debt </li></ul><ul><ul><li>Bank Loans </li></ul></ul><ul><ul><li>Bonds/Debentures </li></ul></ul><ul><li>Equity </li></ul><ul><ul><li>Owners Equity </li></ul></ul><ul><ul><li>Venture Capital </li></ul></ul><ul><ul><li>IPOs </li></ul></ul><ul><ul><li>Rights Offering </li></ul></ul><ul><li>Internal accruals </li></ul><ul><ul><li>Sell business unit </li></ul></ul><ul><ul><li>Retained earnings </li></ul></ul>
    17. 17. Financial Instruments <ul><li>Debt </li></ul><ul><ul><li>Loans </li></ul></ul><ul><ul><li>Bonds: Fixed, Floating-rate </li></ul></ul><ul><ul><li>Bonds : Corporate & Government </li></ul></ul><ul><li>Equity </li></ul><ul><ul><li>Common stock </li></ul></ul><ul><ul><li>Preferred stock </li></ul></ul><ul><li>Mutual Funds </li></ul><ul><li>Annuities </li></ul><ul><li>Derivatives </li></ul><ul><ul><li>Forwards </li></ul></ul><ul><ul><li>Futures </li></ul></ul><ul><ul><li>Options </li></ul></ul><ul><ul><li>Swaps </li></ul></ul><ul><li>Hybrids </li></ul><ul><ul><li>Convertible Bonds </li></ul></ul><ul><ul><li>Convertible Preferred Shares </li></ul></ul><ul><ul><li>Bonds with Warrants </li></ul></ul>
    18. 18. Equity <ul><li>Equity represents ownership of the company </li></ul><ul><li>Represents risk capital </li></ul><ul><li>Refers to the value of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses) </li></ul><ul><li>Equity holders receive dividend and capital appreciation </li></ul><ul><li>Have limited liability </li></ul><ul><li>Have residual claims on all assets </li></ul><ul><li>Two Types </li></ul><ul><ul><li>Common Stock - Carry no fixed dividend and have voting rights </li></ul></ul><ul><ul><li>Preference Stock - Carry a stated dividend and they do not usually have voting rights </li></ul></ul>
    19. 19. Debt <ul><li>Debt is money owed by one person or firm to another </li></ul><ul><li>Interest is paid out to lenders </li></ul><ul><li>Debt is considered senior to equity (i.e.) the interest on debt is paid before dividends on stock </li></ul><ul><li>Examples - Bonds, loans, and commercial paper </li></ul><ul><li>Investors choose between debt and equity securities based on their investment objectives </li></ul>
    20. 20. Common Stock <ul><li>About Common Stock </li></ul><ul><ul><li>Ownership in Company </li></ul></ul><ul><ul><li>Voting Rights in Corporate Decisions </li></ul></ul><ul><ul><li>Limited Liability </li></ul></ul><ul><ul><li>Junior of all Financial Instruments </li></ul></ul><ul><ul><li>Dividend or Capital Gains </li></ul></ul><ul><li>Pricing </li></ul><ul><ul><li>Number of Shares Outstanding </li></ul></ul><ul><ul><li>Earnings Per Share </li></ul></ul><ul><ul><li>Price/Earnings Ratio </li></ul></ul><ul><ul><li>Market capitalization </li></ul></ul><ul><ul><li>Break up value </li></ul></ul>
    21. 21. Data <ul><li>Stock </li></ul><ul><ul><li>Symbol </li></ul></ul><ul><ul><li>Name </li></ul></ul><ul><ul><li>High (Day/52 week) </li></ul></ul><ul><ul><li>Low (Day/52 week) </li></ul></ul><ul><ul><li>Open/Close </li></ul></ul><ul><ul><li>Bid/Ask </li></ul></ul><ul><ul><li>Volume (in 1000’s) </li></ul></ul><ul><ul><li>P/E Ratio </li></ul></ul><ul><ul><li>Change </li></ul></ul>(500002) ABB (700) 715, 712.5, 720 (1778, 558, 59) 13.3 720/213
    22. 22. Stock Terminology <ul><li>Par Value - Face value placed on common stock at the time of its authorization for accounting purposes </li></ul><ul><li>Authorized Capital - shares authorized for issuance by a company's charter, including both common stock and preferred stock </li></ul><ul><li>Issued Capital - The portion of authorized stock that is actually sold to investors </li></ul><ul><li>Market Capitalization- Market value of the company’s stock = Share Price * Number of shares outstanding </li></ul><ul><li>American Depository Receipts (ADR) - Investors can purchase stocks of foreign corporations thru ADRs. Actual stock certificates are deposited in a bank overseas which issues ADR </li></ul>
    23. 23. <ul><li>About </li></ul><ul><ul><li>Senior to Common Stocks, junior to all others </li></ul></ul><ul><ul><li>Holder has certain preferences over common stocks </li></ul></ul><ul><ul><li>Fixed Annual Dividends </li></ul></ul><ul><ul><li>More returns and greater risk than bonds </li></ul></ul><ul><ul><li>Yield </li></ul></ul><ul><li>Types </li></ul><ul><ul><li>Callable </li></ul></ul><ul><ul><li>Variable rate </li></ul></ul><ul><ul><li>Straight </li></ul></ul><ul><ul><li>Cumulative </li></ul></ul><ul><ul><li>Prior Preferred </li></ul></ul>Preferred Stock
    24. 24. Bonds <ul><li>Overview </li></ul><ul><ul><li>Loan from Investor </li></ul></ul><ul><ul><li>Pay Interest on Loans </li></ul></ul><ul><ul><li>Issued by corporations, municipalities and government </li></ul></ul><ul><li>Bond Quote </li></ul><ul><ul><li>Maturity </li></ul></ul><ul><ul><li>Par value </li></ul></ul><ul><ul><li>Coupon </li></ul></ul><ul><ul><li>Current Yield </li></ul></ul><ul><ul><li>Yield to Maturity </li></ul></ul><ul><ul><li>Volume </li></ul></ul><ul><ul><li>Close </li></ul></ul><ul><ul><li>Net Change </li></ul></ul>
    25. 25. Bonds <ul><li>Credit rating </li></ul><ul><ul><li>Based on detailed financial analysis by a credit bureau to evaluate one's ability to meet debt obligations </li></ul></ul><ul><ul><li>Moody’s (Aaa, Aa (1,2,3), A, …… Cc, C) </li></ul></ul><ul><ul><li>Standard & Poor’s (AAA, AA (+ or -),A, BBB…..DD, D) </li></ul></ul><ul><li>Valuation of a Bond </li></ul><ul><ul><li>Credit rating </li></ul></ul><ul><ul><li>Interest rate </li></ul></ul><ul><ul><li>Supply vs. Demand </li></ul></ul>
    26. 26. Bonds…Types <ul><li>Corporate Bonds </li></ul><ul><ul><li>Secured Bonds </li></ul></ul><ul><ul><li>Unsecured Bonds (Debentures) </li></ul></ul><ul><ul><li>Subordinated Debentures </li></ul></ul><ul><li>Muni’s </li></ul><ul><li>Treasuries </li></ul><ul><ul><li>T-Bills </li></ul></ul><ul><ul><li>T-Bonds </li></ul></ul><ul><ul><li>Savings Bonds </li></ul></ul><ul><li>Zero Coupon Bonds </li></ul><ul><li>Commercial Paper </li></ul>
    27. 27. Government Securities <ul><li>Treasury Bills </li></ul><ul><ul><li>Short term instruments issued by Government </li></ul></ul><ul><ul><li>3, 6 or 12 month maturity </li></ul></ul><ul><ul><li>Lowest Risk Investments </li></ul></ul><ul><ul><li>Sold at Discount on face value </li></ul></ul><ul><li>Savings Bonds </li></ul><ul><ul><li>Longer term than Treasury Bills - 5 years or more </li></ul></ul><ul><ul><li>Sold at a discount </li></ul></ul><ul><ul><li>May or may not pay periodically </li></ul></ul><ul><ul><li>Adjusted quarterly to 85% of Treasury Note or Fixed </li></ul></ul>
    28. 28. Government Securities <ul><li>Treasury Notes and Bonds </li></ul><ul><li>Government Long Term Borrowing </li></ul><ul><li>Notes mature in 1 to 10 years </li></ul><ul><li>Bonds maturity is greater than 10 years </li></ul><ul><li>Sold at government auctions to primary dealers </li></ul><ul><li>Typically Par value is $ 1000 </li></ul><ul><li>Zero Coupon Bonds </li></ul>
    29. 29. Derivatives <ul><li>A product whose value is derived from the value of an underlying asset, index or reference rate </li></ul><ul><li>Forward contract - an agreement to buy or sell an asset (of a specified quantity) at a certain future time for a certain price </li></ul><ul><li>Futures contract - an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. </li></ul><ul><li>Options - a contract, which gives the buyer the right, but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date </li></ul>
    30. 30. Options <ul><li>Insurance to partially insulate the investor from price fluctuations </li></ul><ul><li>Leverage to control securities with a limited capital than what would be required to buy the shares outright </li></ul><ul><li>Risky investment vehicle </li></ul><ul><li>Basic Option types </li></ul><ul><ul><li>Call Option- Gives the holder the right to Buy the underlying stock at a specified price before a specified date </li></ul></ul><ul><ul><li>Put Option- Gives the holder the right to Sell the underlying stock at a specified price before a specified date </li></ul></ul><ul><ul><li>LEAPS (Long-Term Equity AnticiPation Securities) </li></ul></ul><ul><ul><li>Exotics- Non standard options </li></ul></ul>
    31. 31. Option Terminologies <ul><li>Expiration Date - the date (month) in which the option expires. Most options are available on 30-, 60- or 90-day cycles </li></ul><ul><li>Strike Price - the fixed per-share price at which the underlying stock will be bought or sold upon exercising of the option </li></ul><ul><li>Option Premium - Price of the option </li></ul><ul><li>American & European option </li></ul>
    32. 32. Option Terminologies <ul><li>Infosys stock price as of Dec 6th, 2003 - Rs.5062 </li></ul><ul><li>Price of the Dec 24th, 2003 expiring Call option with Strike Price of Rs.5200 on the Infosys Stock was Rs.90. </li></ul><ul><li>Break-even for the buyer - Stock price has to cross Rs.5290 as of Dec 24th, 2003 </li></ul>
    33. 33. Swaps <ul><li>Exchange of cash flows or one security for another to change the maturity (bonds) or quality of issues </li></ul><ul><li>Currency Swap involves the exchange of principal and interest in one currency for the same in another currency. </li></ul><ul><li>Interest Rate Swap </li></ul><ul><li>Forward Swap agreements - synthesis of two different swaps, differing in duration </li></ul><ul><li>Swaptions - An option to enter into an interest rate swap </li></ul>
    34. 34. Swaps…Case Study <ul><li>World Bank borrows funds internationally at the lowest cost </li></ul><ul><li>World Bank had borrowed its allowed limit in Switzerland and West Germany </li></ul><ul><li>World Bank, with an AAA rating could get a lower financing rate (compared to IBM) in the US Dollar bond market </li></ul><ul><li>IBM had large amounts of Swiss franc and German DEM debt </li></ul><ul><li>World Bank borrowed dollars in U.S. and swapped the repayment obligation with IBM for SFR and DEM loans </li></ul><ul><li>It became very advantageous for IBM and the World Bank to borrow in the market in which their comparative advantage was the greatest! </li></ul>
    35. 35. Rights & Warrants <ul><li>Rights - Right to subscribe for shares at a discount to market price within the issue period </li></ul><ul><li>Warrants - Option to subscribe for a given number of shares at a predetermined exercise price within a certain time period </li></ul><ul><li>Warrants are also known as Transferable Subscription Rights. The maximum period of a warrant is five years and upon expiry, it is worthless </li></ul>
    36. 36. Mutual Funds <ul><li>Pool of Investors Money </li></ul><ul><li>Investor buys units in the fund </li></ul><ul><li>Fund money invested in a portfolio of securities (Stocks, bonds etc) by the fund manager </li></ul><ul><li>Investor gets share of capital gains as well as dividends </li></ul><ul><li>Categorization </li></ul><ul><ul><li>Open end funds- issue new units continuously as investors buy them. Investors redeem their shares directly to the fund, which in turn must buy them back </li></ul></ul><ul><ul><li>Closed end funds- issue a fixed number of units that the fund may redeem only upon termination. However, shareholders may sell their units through stock exchanges </li></ul></ul>
    37. 37. Mutual Fund Types <ul><li>Based on Sales Charges </li></ul><ul><ul><li>Front end load Funds- Charges levied when shares in the fund are purchased </li></ul></ul><ul><ul><li>Back end load Funds- Charges levied when shares in the fund are redeemed </li></ul></ul><ul><ul><li>No load Funds- No sales charge </li></ul></ul><ul><li>Based on Investment objectives </li></ul><ul><ul><li>Growth Fund- Stock fund structured to appreciate over time; Investment primarily in common stock of corporations that show high growth potential </li></ul></ul><ul><ul><li>Income Fund- Fund structured to provide investors with regular income dividends; Investments mainly in preferred stocks & bonds yielding relatively stable current income </li></ul></ul><ul><ul><li>Balanced Fund- Investment in equities and bonds in different proportions </li></ul></ul>
    38. 38. Mutual Fund Types <ul><li>Based on market/instruments in which funds are invested </li></ul><ul><ul><li>Sector Funds- Holdings limited to securities of one particular industry </li></ul></ul><ul><ul><li>Bond Funds - Investments in debt securities to provide current income </li></ul></ul><ul><ul><li>Index Funds - Investments in the securities that comprise major market indices </li></ul></ul><ul><ul><li>International Funds- Investments in foreign markets </li></ul></ul><ul><ul><li>Money Market Funds- Investments in short term debt securities of corporations/govt </li></ul></ul><ul><li>Mutual Fund terminology </li></ul><ul><ul><li>Net Asset Value - The value of a single unit of the fund </li></ul></ul><ul><ul><li>Management fee - % of NAV charged to manage the fund </li></ul></ul>
    39. 39. Annuities <ul><li>A contract between investor and an insurance company for a guaranteed interest bearing policy with guaranteed income options </li></ul><ul><li>The insurance company credits interest </li></ul><ul><li>No taxes due on the earnings till withdrawal or annuity disbursal </li></ul><ul><li>Fixed Annuities </li></ul><ul><ul><li>Money invested in general account </li></ul></ul><ul><ul><li>Pays a fixed monthly income at retirement </li></ul></ul><ul><li>Variable Annuities </li></ul><ul><ul><li>Pays variable monthly payment at retirement </li></ul></ul><ul><ul><li>Investment risk </li></ul></ul>
    40. 40. Quiz <ul><li>Why did Infosys issue ADRs? </li></ul><ul><li>What is the difference between a Right and a Warrant? </li></ul><ul><li>I hold 1000 shares of IBM. CMP is $ 80. I expect it to go up in the next 2 months…At the same time, I would like to cap any possible fall. How do I manage? </li></ul><ul><li>Gilt Funds are risk free. Is this true? </li></ul>
    41. 41. FINANCIAL MARKETS
    42. 42. Financial Markets <ul><li>A place where buyers and sellers for the financial instruments come together and financial transactions take place </li></ul><ul><li>Capital Market </li></ul><ul><ul><li>Stock market </li></ul></ul><ul><ul><li>Bond (or fixed income) market </li></ul></ul><ul><li>Money market </li></ul><ul><li>Foreign exchange (Currency market). </li></ul>
    43. 43. Types of Securities Market <ul><ul><li>Primary Market </li></ul></ul><ul><ul><ul><li>Market for new security issues </li></ul></ul></ul><ul><ul><ul><li>Eg – IPO of Goldman Sachs, iFlex Solutions </li></ul></ul></ul><ul><ul><li>Secondary Market </li></ul></ul><ul><ul><ul><li>Market for outstanding issues </li></ul></ul></ul><ul><ul><ul><li>Eg – Buying & selling in stock exchanges </li></ul></ul></ul>
    44. 44. Capital Market <ul><li>Businesses need capital, to invest money upfront to produce and deliver the goods and services </li></ul><ul><li>Functions </li></ul><ul><ul><li>Channeling funds from “savings pool” to “investment pool” </li></ul></ul><ul><ul><li>Providing liquidity to investors </li></ul></ul><ul><ul><li>Providing multitude of investment options to investors </li></ul></ul><ul><ul><li>Providing efficient price discovery mechanism </li></ul></ul>
    45. 45. Stock Market <ul><li>The share price is determined by the market forces, i.e. the demand and supply of shares at each price </li></ul><ul><li>Market place for buying & selling securities already issued </li></ul><ul><li>Major exchanges </li></ul><ul><ul><li>New York Stock Exchange (NYSE) </li></ul></ul><ul><ul><li>National Association of Securities Dealers Automated Quotations (NASDAQ) </li></ul></ul><ul><ul><li>London Stock Exchange (LSE) </li></ul></ul><ul><ul><li>Bombay Stock Exchange (BSE), </li></ul></ul><ul><ul><li>National Stock Exchange of India (NSE) </li></ul></ul>
    46. 46. Forex Market <ul><li>Markets are where the foreign currencies are bought and sold </li></ul><ul><li>Only authorized foreign exchange dealers can participate in the foreign exchange market </li></ul><ul><li>Major Currencies </li></ul><ul><ul><li>USD </li></ul></ul><ul><ul><li>EUR </li></ul></ul><ul><ul><li>JPY </li></ul></ul><ul><ul><li>GBP </li></ul></ul>
    47. 47. Money Market <ul><li>Market for short term financial instruments, usually a day to less than a year. </li></ul><ul><li>Most common instrument is a “repo” </li></ul><ul><li>Repo - contract in which the seller of securities, agrees to buy them back at a specified time and price </li></ul><ul><li>No formal exchanges for money market instruments </li></ul><ul><li>Most of the trading takes place using proprietary systems or shared trading platforms </li></ul>
    48. 48. Regulators <ul><li>Securities and Exchange Commission (SEC) www.sec.gov </li></ul><ul><li>National Association of Securities Dealers www.nasd.com </li></ul><ul><li>Administer and enforce the federal securities laws, and regulating brokerage firms, investment companies and advisers </li></ul><ul><li>Ensure orderly market performance and information availability to investors </li></ul><ul><li>Establish accounting norms for securities transactions </li></ul><ul><li>Aid and safeguard investors by regulating markets, formulate guidelines, facilitate dispute resolution and monitor member activities </li></ul>
    49. 49. Financial Market Systems <ul><li>Trading Systems </li></ul><ul><li>Exchange Systems </li></ul><ul><li>Portfolio Management Systems </li></ul><ul><li>Accounting Systems </li></ul>
    50. 50. FINANCIAL STATEMENTS
    51. 51. Topics <ul><li>Stakeholders of a firm </li></ul><ul><li>Financial Accounting </li></ul><ul><li>Management Accounting </li></ul><ul><li>Cost Accounting </li></ul><ul><li>Balance Sheet </li></ul><ul><li>Income Statement </li></ul><ul><li>Cash-Flow Statement </li></ul>
    52. 52. Why Accounting? <ul><li>Why do we need financial statements </li></ul><ul><li>Stakeholders of a firm </li></ul><ul><ul><li>Shareholders </li></ul></ul><ul><ul><li>Employees </li></ul></ul><ul><ul><li>Management </li></ul></ul><ul><ul><li>Customers </li></ul></ul><ul><ul><li>Government </li></ul></ul><ul><ul><li>Trade Unions and others </li></ul></ul>
    53. 53. Accounting Concepts & the US reports <ul><li>Going Concern </li></ul><ul><li>Legal Entity </li></ul><ul><li>Conservatism </li></ul><ul><li>Accrual </li></ul><ul><li>Matching concept </li></ul><ul><li>Reports companies need to file in the US: </li></ul><ul><ul><li>Annual Report : released to all stakeholders </li></ul></ul><ul><ul><li>10K : Filed with the SEC </li></ul></ul><ul><ul><li>10q : Filed quarterly </li></ul></ul>
    54. 54. Balance Sheet <ul><li>Balance Sheet </li></ul><ul><ul><li>Asset </li></ul></ul><ul><ul><ul><li>Resources owned by business </li></ul></ul></ul><ul><ul><li>Liability </li></ul></ul><ul><ul><ul><li>An economic obligation to pay cash, or provide goods and services </li></ul></ul></ul>
    55. 55. Balance Sheet (Net)
    56. 56. Some key concepts <ul><li>OE = Assets – Liabilities </li></ul><ul><li>Depreciation : </li></ul><ul><ul><li>Non cash expense </li></ul></ul><ul><ul><li>Straightline method </li></ul></ul><ul><ul><li>WDV method </li></ul></ul>
    57. 57. Income Statement
    58. 58. Cash Flow Statement <ul><li>Statement accounting for all the inflows and outflows of cash is captured in this statement. </li></ul><ul><li>Difference between profit and cash </li></ul>
    59. 59. Exercise <ul><li>Day 1: You borrow Rs. 100 from a bank for a business to produce t-shirts. How would your balance sheet look like at the end of the day? </li></ul><ul><li>Assets Liabilities </li></ul><ul><li>Cash Rs. 100 Borrowing Rs. 100 </li></ul><ul><li>Day 2: You purchase raw material for your products for Rs. 50. How would your balance sheet look like at the end of the day? </li></ul><ul><li>Assets Liabilities </li></ul><ul><li>Cash Rs. 50 Borrowing Rs. 100 </li></ul><ul><li>Raw Mtl Rs.50 </li></ul><ul><li>Days 3 to 29: Workers work with the rented machines to produce the finished goods. The product is ready to be shipped to the customer. </li></ul>
    60. 60. Exercise (Contd.) <ul><li>Day 30: You pay the workers Rs. 20 as their salary, pay Rs. 10 as the machine rent, pay other expenses such as floor rent, electricity bills etc totaling Rs. 10. At the end of the day the product is shipped to the customer. Customer has promised to pay you Rs. 120 . </li></ul><ul><li>Day 31 (1 st of next month): You get Rs. 120 from your customer. You also get admission in a Business School and so you plan to wind up the business. Prepare all the financial statements at the end of day 31. </li></ul><ul><li>Useful Information: Bank charges 12% simple interest rate. You need to pay tax @ 10%. Inflation for the period was 5%. </li></ul>
    61. 61. Income Statement (For Day 1- 31) <ul><li>Revenue Rs. 120 </li></ul><ul><li>Direct Costs Rs. 70 </li></ul><ul><li>Gross Profit Rs. 50 </li></ul><ul><li>Operating Costs Rs. 20 </li></ul><ul><li>Operating Profit Rs. 30 * (Here, same as EBIT) </li></ul><ul><li>Interest expense Rs. 1 </li></ul><ul><li>PBT Rs. 29 </li></ul><ul><li>Tax @ 10% Rs. 2.90 </li></ul><ul><li>PAT Rs. 26.10 </li></ul>
    62. 62. Balance Sheet (As on day 31) <ul><li>Assets Liabilities </li></ul><ul><li>Cash Rs. 130 Tax payable Rs. 2.90 </li></ul><ul><li>Int. Payable Rs. 1.00 </li></ul><ul><li>Borrowing Rs. 100 </li></ul><ul><li>Ret. Earnings Rs. 26.10 </li></ul><ul><li>Total Assets Rs.130 Total Liabilities +OE = Rs.130 </li></ul>
    63. 63. Questions?
    64. 64. INTRODUCTION TO BANKING
    65. 65. Banks…Functions <ul><li>Financial institution that is licensed to accept deposits and issue loans </li></ul><ul><li>Functions </li></ul><ul><ul><li>Channelize Savings </li></ul></ul><ul><ul><li>Provide credit facilities to borrower </li></ul></ul><ul><ul><li>Provide investment avenues to investors </li></ul></ul><ul><ul><li>Facilitate trade and commerce dealings </li></ul></ul><ul><ul><li>Provide financial backbone to support economic growth of the country </li></ul></ul><ul><ul><li>Minimize Cash Transactions </li></ul></ul><ul><ul><li>Provide Services </li></ul></ul>
    66. 66. Central Bank <ul><li>Banker’s bank & Government’s bank </li></ul><ul><li>Acts as a regulator for other banks </li></ul><ul><li>Federal Reserve is the central bank of the United States </li></ul><ul><li>Reserve Bank of India is the central bank in India </li></ul><ul><li>Functions </li></ul><ul><ul><li>Conducting the nation's monetary policy </li></ul></ul><ul><ul><li>Supervising and regulating banking institutions and protecting the rights of consumers </li></ul></ul><ul><ul><li>Maintaining the stability of the financial system, i.e. stability of interest rates and foreign exchange rate. </li></ul></ul><ul><ul><li>Ensuring that the interest rates remain at a viable level </li></ul></ul><ul><ul><li>Providing certain financial services to the government, the public, financial institutions, and foreign official institutions </li></ul></ul><ul><ul><li>Monitoring the foreign currency assets and liabilities and monitoring the inflow and outflow of foreign currency </li></ul></ul>
    67. 67. Money Multiplier Effect
    68. 68. Service Offerings <ul><li>Corporate Banking </li></ul><ul><li>Trade Finance </li></ul><ul><li>Treasury & Cash Management </li></ul><ul><li>Retail Banking </li></ul><ul><li>Electronic Banking </li></ul><ul><li>Credit Card services </li></ul><ul><li>Retail Lending </li></ul><ul><li>Private Banking </li></ul><ul><li>Asset Management </li></ul><ul><li>Investment Banking </li></ul><ul><li>Private Equity </li></ul><ul><li>Corporate Advisory </li></ul><ul><li>Capital Raising </li></ul><ul><li>Proprietary Trading </li></ul><ul><li>Emerging Markets </li></ul><ul><li>Sales, Trading & Research </li></ul>
    69. 69. Top 10 US Banks (as on March 2004, all figures in USD million)
    70. 70. Universal Banking <ul><li>Universal banks provide commercial banking as well as investment banking services </li></ul><ul><li>Glass-Steagall Act of 1933, created a Chinese wall between commercial banking and securities businesses in US </li></ul><ul><li>Restrictions undermined the ability of American banks to compete with the other global banks </li></ul><ul><li>Glass-Steagall provisions repealed in 1990s </li></ul>
    71. 71. RETAIL BANKING
    72. 72. Retail Banking Services <ul><li>Branch Banking </li></ul><ul><li>Customer Care </li></ul><ul><li>Teller Services </li></ul><ul><li>Deposit Products </li></ul><ul><li>Online Banking </li></ul><ul><li>Financial Advisory </li></ul>
    73. 73. Banking Channels Branches ATMs PC Banking Internet Banking Wireless Banking Low Tech High Touch High Tech Low Touch Cost Efficiency 1970s 1980s 1990s 2000+
    74. 74. Banking Channels Corporate Multiple products Deposits Loans Mortgages Insurance Securities Payments – Cards Multiple channel delivery Multiple segments Branch PC Call center ATM Sales agent Retai l Large Business Private Affluent Medium Size Business Mass Small Business
    75. 75. Branch Banking <ul><li>Banks are realizing that one of their best assets for building profitable customer relationships is the branch </li></ul><ul><li>Today 70% of customers use more than one contact channel </li></ul><ul><ul><li>However, 51% of customers still prefer branch banking – branch loyalty </li></ul></ul><ul><li>Evidence from the trends of new branch openings </li></ul><ul><ul><li>550 over three years at Bank of America </li></ul></ul><ul><ul><li>100 over five years at JPMorgan Chase </li></ul></ul><ul><ul><li>250 this year alone at Washington Mutual </li></ul></ul><ul><li>Branch networks have re-emerged as combined centers for advice-based product sales and service, as well as more traditional banking transactions </li></ul><ul><li>Customers are looking for a full-service center for all their needs -- from banking products to brokerage services </li></ul>Main Bank Branch 2 Branch 1
    76. 76. Branch Banking - Contd. <ul><li>Branches are being transformed from transaction processing centers into customer-centric, financial sales and service centers </li></ul><ul><li>This transformation is helping Banks to achieve bottom line business benefits like </li></ul><ul><ul><li>Increased customer profitability </li></ul></ul><ul><ul><li>Retention of most profitable customers </li></ul></ul><ul><ul><li>Increased branch revenue </li></ul></ul><ul><ul><li>Increased staff productivity </li></ul></ul><ul><ul><li>Reduced operational costs </li></ul></ul><ul><li>A typical Retail branch at a Bank provides two primary functions </li></ul><ul><ul><li>Teller Operations - Accept and process customer transactions at the teller window </li></ul></ul><ul><ul><li>Sales and customer service Operations - Tasks, such as new account opening, account maintenance and product sales </li></ul></ul>
    77. 77. Branch Banking – Teller Operations <ul><li>Teller functionality </li></ul><ul><ul><li>Cash advances </li></ul></ul><ul><ul><li>Consumer /mortgage loan payments </li></ul></ul><ul><ul><li>Currency and coin orders </li></ul></ul><ul><ul><li>Deposits, including commercial deposits </li></ul></ul><ul><ul><li>Fee collection </li></ul></ul><ul><ul><li>Foreign currency exchange </li></ul></ul><ul><ul><li>Payments </li></ul></ul><ul><ul><li>Stop payments </li></ul></ul><ul><ul><li>Transfers </li></ul></ul><ul><ul><li>Wire transfers </li></ul></ul><ul><ul><li>Withdrawals </li></ul></ul>Teller Customer
    78. 78. Branch Banking – Sales & Customer Service <ul><li>Sales and service platforms includes the following functions </li></ul><ul><ul><li>Account and contact histories </li></ul></ul><ul><ul><li>Bank information and fee schedules </li></ul></ul><ul><ul><li>Campaign management </li></ul></ul><ul><ul><li>Complaint reporting and tracking </li></ul></ul><ul><ul><li>Customer contact and event tracking and management </li></ul></ul><ul><ul><li>Customer profile and relationships </li></ul></ul><ul><ul><li>Decision tracking </li></ul></ul><ul><ul><li>Lead generators </li></ul></ul><ul><ul><li>Marketing and sales planners </li></ul></ul><ul><ul><li>Profiling </li></ul></ul><ul><ul><li>Referral processing </li></ul></ul>
    79. 79. Multi Branch Banking <ul><li>Banks are now looking to provide “Multi Branch Banking” service to customers through a network of the Bank’s branches </li></ul><ul><ul><li>Under this service, the customer of one branch is able to transact on her account, from any other networked branch of the Bank. </li></ul></ul><ul><ul><li>Typical services provided through “Multi Branch Banking” include </li></ul></ul><ul><ul><li>Cash Deposits </li></ul></ul><ul><ul><li>Cash Payments </li></ul></ul><ul><ul><li>Transfer of funds </li></ul></ul><ul><ul><li>Balance Inquiry </li></ul></ul><ul><ul><li>Marking Stop Payment of a Check </li></ul></ul>
    80. 80. ATM Banking <ul><li>ATM growth was 9.3 percent per year from 1983 to 1995 but increased to 15.5 percent from 1996 to 2002 </li></ul><ul><ul><li>Off-premise ATMs account for nearly 60 percent of total U.S. ATMs </li></ul></ul><ul><li>Access to ATM by means of a card, typically a dual ATM/debit card </li></ul><ul><li>Transaction directly linked to the consumer’s bank account - amount debited against the funds in that account </li></ul><ul><li>Typical Services </li></ul><ul><ul><li>Cash withdrawal – Limit per day restricted by respective bank guidelines </li></ul></ul><ul><ul><li>Money Transfer between accounts </li></ul></ul><ul><ul><li>Cash/ Check Deposits </li></ul></ul><ul><ul><li>Utility Bill Payments </li></ul></ul><ul><ul><li>Balance enquiry /Account Statements </li></ul></ul>
    81. 81. Type of ATMs <ul><li>Three types of ATM Systems </li></ul><ul><li>Proprietary System </li></ul><ul><ul><li>Operated by a financial institution that purchases or leases ATMs, </li></ul></ul><ul><ul><li>Acquires the necessary software or develops it in-house, installs the system and markets it, and issues cards of its own design </li></ul></ul><ul><li>Shared / Regional System </li></ul><ul><ul><li>A network that comes into being when customers of one or more financial institutions have access to transaction services at ATMs owned or operated by other financial institutions. </li></ul></ul><ul><li>National / International System </li></ul><ul><ul><li>A network which enables an ATM machine in New York to connect with another in Los Angeles. Through service agreements with regional and proprietary networks, national networks link ATM machines coast to coast. </li></ul></ul>ATM Systems Proprietary Systems Shared/Regional Systems National/International Systems
    82. 82. Deposit Products <ul><li>Banking Accounts </li></ul><ul><ul><li>Checking Accounts </li></ul></ul><ul><ul><li>Money Market Deposit Accounts </li></ul></ul><ul><ul><li>Savings Account </li></ul></ul><ul><ul><li>Time Deposits (Certificates of Deposit) </li></ul></ul><ul><ul><li>Basic or No Frill Banking Accounts </li></ul></ul><ul><li>Money Transfer Instruments </li></ul><ul><ul><li>Cheques/Checks </li></ul></ul><ul><ul><li>Debit Cards </li></ul></ul><ul><ul><li>Demand Drafts </li></ul></ul><ul><ul><li>ACH </li></ul></ul><ul><ul><li>Standing Instructions </li></ul></ul><ul><ul><li>Electronic Transfer </li></ul></ul>
    83. 83. Electronic Banking <ul><li>Use of computer and electronic technology as a substitute for checks and other paper transactions </li></ul><ul><li>Also known as electronic fund transfer (EFT) </li></ul><ul><li>Regulated by federal Electronic Fund Transfer Act </li></ul>
    84. 84. Electronic Fund Transfer (EFT) <ul><li>Automated Teller Machines </li></ul><ul><li>Direct Deposit </li></ul><ul><li>Pay-by-Phone systems </li></ul><ul><li>Personal Computer Banking </li></ul><ul><li>Point-of-Sale Transfers </li></ul><ul><li>Electronic Check Conversion </li></ul>
    85. 85. EFT Regulations <ul><li>Disclosures </li></ul><ul><li>Receipts and Statements </li></ul><ul><li>Errors </li></ul><ul><li>Lost/Stolen ATM or Debit Cards </li></ul><ul><li>Limited Stop Payment Privileges </li></ul>
    86. 86. Electronic Bill Presentment & Payment (EBPP): Business Framework
    87. 87. Fedwire <ul><li>Fedwire stands for Federal Reserve Wire Network.  </li></ul><ul><li>High-speed electronic communications network that links Federal Reserve Banks, banks with federal accounts and foreign banks in the US. </li></ul><ul><li>Fedwire is used for </li></ul><ul><ul><li>Large dollar time-sensitive payments </li></ul></ul><ul><ul><li>Funds transfers between reserve banks </li></ul></ul><ul><ul><li>Purchase/Sale of Funds transfer between correspondent banks </li></ul></ul><ul><ul><li>Sales of book-entry U.S. Government securities </li></ul></ul><ul><ul><li>Collection of tax and loan accounts in commercial banks </li></ul></ul><ul><ul><li>Funds disbursement </li></ul></ul>
    88. 88. How Fedwire Works? <ul><ul><li>Basic Domestic Transfers </li></ul></ul><ul><ul><li>When a Correspondent Bank Involved </li></ul></ul>YOUR BANK (CORRESPONDENT BANK) FEDERAL RESERVE RECEIVING BANK MEMBER BANK YOUR BANK FEDERAL RESERVE RECEIVING BANK <ul><ul><li>Basic Domestic Transfers </li></ul></ul>YOUR BANK (CORRESPONDENT BANK) FEDERAL RESERVE RECEIVING BANK MEMBER BANK YOUR BANK FEDERAL RESERVE RECEIVING BANK
    89. 89. How Fedwire Works? <ul><ul><li>When Overseas Bank is involved </li></ul></ul><ul><li>Clearing House Interbank Payment System (CHIPS) is a private sector funds transfer network mainly for international transactions </li></ul>YOUR BANK FEDERAL RESERVE RECEIVING BANK CORRESPONDENT BANK
    90. 90. CHIPS <ul><li>C learing H ouse I nter-bank P ayment S ystem </li></ul><ul><ul><li>Operated by the New York Clearing House </li></ul></ul><ul><ul><li>Links some 54 banks with branches in New York, to a central computer </li></ul></ul><ul><ul><li>Clears and settles about 250,000 transactions per day with an average total value in excess of $1.2 trillion/day. Avg value as of July 2003 : $ 5M </li></ul></ul><ul><ul><li>Most payments are related to the foreign exchange and Eurodollar markets </li></ul></ul><ul><ul><li>Handles 95% of all U.S. dollar payments moving among countries worldwide. </li></ul></ul><ul><ul><li>Gross, bilateral and multilateral netting & settlement system </li></ul></ul><ul><ul><li>Settlement via a ‘security deposit’ </li></ul></ul><ul><ul><li>Netting allows CHIPS to clear & settle > $1.2 trillion dollars daily, using $2.4 bn in pre-funding : multiple of > 500. </li></ul></ul><ul><ul><li>Helps increase liquidity and reduce liquidity and credit risk. </li></ul></ul><ul><ul><li>Final CHIPS settlement by Fedwire </li></ul></ul>
    91. 91. SWIFT <ul><li>Society for Worldwide Inter-bank Financial Telecommunication </li></ul><ul><ul><li>Co-operative owned by the international banking community </li></ul></ul><ul><ul><li>Over 7,500 financial institutions in 199 countries connect to one another through this </li></ul></ul><ul><ul><li>Over 3 million messages valued in trillions of dollars every business day </li></ul></ul><ul><ul><li>SWIFTnet – SWIFT’s messaging platform </li></ul></ul><ul><ul><ul><li>Exchange real-time messages </li></ul></ul></ul><ul><ul><ul><li>Store-and-forward messaging </li></ul></ul></ul><ul><ul><ul><li>Real-time query and response </li></ul></ul></ul><ul><ul><ul><li>Exchange large files </li></ul></ul></ul><ul><ul><ul><li>Browse web servers available on SWIFTnet, using secure browser-based access </li></ul></ul></ul>
    92. 92. Payment mechanism using SWIFT
    93. 93. SWIFT - Example <ul><li>HSBC in India has executed a deal with BankAM in New York, to buy GBP 10,000, for 14,150Euros. </li></ul><ul><ul><li>HSBC has no branch in New York, but has a Correspondent Bank, BNP, in New York. </li></ul></ul><ul><ul><li>BankAm has no branch in London, but has a Correspondent Bank, Barclays, in London. </li></ul></ul><ul><ul><li>HSBC sends a payment instruction (SWIFT message no. MT202) to BNP to transfer 15,000 Euros to BankAm’s account. </li></ul></ul><ul><ul><li>BNP sends a confirmation of credit advice (MT 910) to BankAm. </li></ul></ul><ul><ul><li>BankAm sends a payment instruction (MT202) for GBP 10,000 to its Correspondent in London. </li></ul></ul><ul><ul><li>Barclays puts money into HSBC’s a/c and sends HSBC a confirmation of credit (MT910). </li></ul></ul>
    94. 94. Retail Payments <ul><li>ACH </li></ul><ul><ul><li>Handles retail payments, electronically </li></ul></ul><ul><ul><li>Typical payments : standard, repeated, ‘pre-approved’ </li></ul></ul><ul><ul><li>Salaries, bill payments (corporate & indl), Social security, insurance premia, loan processors </li></ul></ul><ul><ul><li>Only member institutions’ payments are processed (> 25000) </li></ul></ul><ul><ul><li>Significant savings, by obtaining approval from payer to debit account, and debiting the concerned bank accounts electronically. </li></ul></ul><ul><ul><li>Used instead of check. </li></ul></ul><ul><ul><li>Consumer uses phone, web or written authorization, instructs bank to debit his a/c – corporate creates file and delivers this to servicing bank </li></ul></ul><ul><ul><li>Servicing bank debits all customer’s a/c and delivers electronic file of all payment instructions from all customers, to ACH. </li></ul></ul><ul><ul><li>ACH processes individual debit/credits, creates separate file for each bank. </li></ul></ul><ul><ul><li>ACH posts net amounts for each bank/depository instn, which processes file and posts individual entries to its customers’ accounts </li></ul></ul>
    95. 95. Internet Payments
    96. 96. Mobile Payments <ul><li>By 2004, there will be 60 million mobile payment users generating sales of $50 billion </li></ul><ul><li>Transport of payment details will involve a mobile network operator, and will use either </li></ul><ul><ul><li>A browser-based protocol, such as WAP or HTML, or </li></ul></ul><ul><ul><li>A messaging system, such as SMS or Unstructured Supplementary Service Data (USSD). </li></ul></ul>
    97. 97. Sample Usage of Mobile payments <ul><li>Balance inquiry and the latest transactions details </li></ul><ul><li>Electronic bill presenting and payment </li></ul><ul><li>Stock trading </li></ul><ul><li>Local payment </li></ul><ul><li>Remote purchases at a wireless site </li></ul>
    98. 98. Questions?
    99. 99. CONSUMER LENDING
    100. 100. Consumer Lending Services <ul><li>Mortgages </li></ul><ul><li>Auto Loans </li></ul><ul><li>Educational Loans </li></ul>
    101. 101. Retail Lending <ul><li>Personal loans, consumer loans </li></ul><ul><ul><li>Financer not interested in the intention of the loan </li></ul></ul><ul><ul><li>No security </li></ul></ul><ul><ul><li>Higher rate of interest </li></ul></ul><ul><li>Asset based loans - auto loans, home loans </li></ul><ul><ul><li>Hypothecation of the Asset to the financer </li></ul></ul><ul><ul><li>Interest rate is lower than Personal loans </li></ul></ul><ul><ul><li>Thumb rules for calculation of Maximum loan amount </li></ul></ul><ul><ul><ul><li>Not greater than 3 times the yearly income OR </li></ul></ul></ul><ul><ul><ul><li>EMI should be less than 60% of the net monthly income </li></ul></ul></ul>
    102. 102. Retail Lending <ul><li>Asset based loans – loan against securities </li></ul><ul><ul><li>Overdraft facility against pledge of equity Shares, Mutual Fund units </li></ul></ul><ul><ul><li>Drawing power is 60-70 % of the value of the pledged asset </li></ul></ul><ul><li>Open ended loans </li></ul><ul><ul><li>Allows the borrower to borrow additional amount subject to the maximum amount less then a set value </li></ul></ul><ul><ul><li>Interest is calculated on the daily outstanding balance </li></ul></ul><ul><ul><li>Drawing Power - Lower of Limit and (1-Margin)*Asset Value </li></ul></ul>
    103. 103. Retail Lending <ul><li>Lease </li></ul><ul><ul><li>Long term rental agreement for the asset between the lessor and the lessee </li></ul></ul><ul><ul><li>Depreciation is claimed by the financier </li></ul></ul><ul><ul><li>Tax deduction can be claimed for the full rental paid </li></ul></ul><ul><li>Hire Purchase </li></ul><ul><ul><li>The user owns the asset after all the payments have been made to the financier </li></ul></ul><ul><ul><li>Depreciation is claimed by the borrower </li></ul></ul><ul><ul><li>Tax deduction can be claimed only to the extent of the interest repayment </li></ul></ul>
    104. 104. Retail Lending <ul><li>Retail Lending Cycle </li></ul><ul><ul><li>Loan application management and processing </li></ul></ul><ul><ul><ul><li>Receipt of loan/card application </li></ul></ul></ul><ul><ul><ul><li>Application Processing </li></ul></ul></ul><ul><ul><ul><li>Disbursement </li></ul></ul></ul><ul><ul><ul><li>Formulating the repayment schedule </li></ul></ul></ul><ul><ul><li>Loan repayments and termination </li></ul></ul><ul><ul><ul><li>Post-Dated Cheques </li></ul></ul></ul><ul><ul><ul><li>Salary deductions </li></ul></ul></ul><ul><ul><ul><li>Direct receipts </li></ul></ul></ul><ul><ul><ul><li>Auto payments / Direct debits </li></ul></ul></ul>
    105. 105. Retail Lending <ul><li>Retail Lending Cycle </li></ul><ul><ul><li>Delinquencies identification and collections </li></ul></ul><ul><ul><ul><li>Case Processing – Categorization of cases </li></ul></ul></ul><ul><ul><ul><li>Standard Cases </li></ul></ul></ul><ul><ul><ul><li>Exception Cases (death/fraud etc.) </li></ul></ul></ul><ul><li>Interest Rates </li></ul><ul><ul><li>Fixed Rate of Interest </li></ul></ul><ul><ul><li>Floating Rate of Interest </li></ul></ul>
    106. 106. Mortgages <ul><li>Loans given to consumers for the purpose of purchase, construction or repair of real estate </li></ul><ul><li>Loan for purchasing a house secured by the house as collateral </li></ul><ul><li>Lower rate of interest as compared to other Asset based loans </li></ul><ul><li>Annual Percentage Rates – To be used to compare different mortgage products </li></ul><ul><li>Primary market players are banks </li></ul><ul><li>Secondary market players are lenders who buy the mortgage from the banks, thus freeing them to issue new mortgage to new customers </li></ul><ul><ul><ul><li>Federal National Mortgage Association – Fannie Mae </li></ul></ul></ul><ul><ul><ul><li>Government National Mortgage Association – Ginnie Mae </li></ul></ul></ul><ul><ul><ul><li>Federal Home Loan Mortgage Corporation – Freddie Mac </li></ul></ul></ul>
    107. 107. Mortgages – Cognizant Expertise Involvement at all levels of IT value chain System Integration Infrastructure Outsourcing Application Development & Maintenance IT Enabled Services IT Consulting New Line of Business e.g. HELOC (Home Equity Line of Credit) Enterprise Application Integration using BizTalk, Enterprise Security Integration System Management Server (2003), Empirix Monitoring, Server Upgrades New LOS Implementation, Maintenance & Support to existing LOSs IT Helpdesk
    108. 108. Mortgage <ul><li>Types of Mortgages </li></ul><ul><ul><li>Standard variable rate </li></ul></ul><ul><ul><li>Standard variable rate with cash back </li></ul></ul><ul><ul><li>Base rate tracker </li></ul></ul><ul><ul><li>Fixed interest rate </li></ul></ul><ul><ul><li>Discounted interest rate </li></ul></ul><ul><ul><li>Capped rate </li></ul></ul><ul><li>Repayment Methods </li></ul><ul><ul><li>Repayment mortgage </li></ul></ul><ul><ul><li>Interest-only mortgage </li></ul></ul><ul><ul><li>Endowment mortgage </li></ul></ul><ul><ul><li>Interest-only mortgage combined with stakeholder pension </li></ul></ul>
    109. 109. Mortgage Market Players <ul><li>Primary market players are banks </li></ul><ul><li>Secondary market players are lenders who buy the mortgage from the banks, thus freeing them to issue new mortgage to new customers </li></ul><ul><ul><ul><li>Federal National Mortgage Association – Fannie Mae </li></ul></ul></ul><ul><ul><ul><li>Government National Mortgage Association – Ginnie Mae </li></ul></ul></ul><ul><ul><ul><li>Federal Home Loan Mortgage Corporation – Freddie Mac </li></ul></ul></ul>
    110. 110. Auto Loans <ul><li>Financing vehicles for personal use </li></ul><ul><li>The financing is typically done through one of the following mechanisms: </li></ul><ul><ul><li>Direct Lending – Bank or finance company directly lends to the buyer. Increasingly consumers are using the Internet to arrange for vehicle loans. </li></ul></ul><ul><ul><li>Dealer financing – Dealer extends finance to the buyer. (Indirect Financing) </li></ul></ul><ul><ul><li>Leasing – Vehicle is hired by the customer. At the end of the lease period, the possession of the vehicle reverts to the financier. </li></ul></ul><ul><ul><li>The entities in a leasing agreement are: </li></ul></ul><ul><ul><ul><li>Lessee: The party that purchases the usage rights of the vehicle in leasing transactions against the rentals determined in advance with a contract. </li></ul></ul></ul><ul><ul><ul><li>Lessor: The party that possesses the legal ownership of the vehicle subject to leasing and that transfers the usage of the vehicle to the Lessee against the rentals determined in advance with a contract. </li></ul></ul></ul>
    111. 111. Auto Loans – Key Business Entities <ul><li>Borrower: Needs to use/own the automobile and approaches a dealer/lender for getting financing for the same </li></ul><ul><li>Dealer: Typically a franchisee of the manufacturer, involved in selling and delivery of the vehicle to the buyer </li></ul><ul><li>Lender: Provides capital to the borrower for buying the vehicle </li></ul><ul><li>Credit bureau: Tracks and maintains credit history of borrowers and forward it to lenders during new application processing </li></ul><ul><li>Appraiser: Assesses and establishes the fair market value of a collateral offered as underlying security to the credit asked for. </li></ul><ul><li>Insurer: Insures the vehicle owner against specific liabilities caused to and from the vehicle during the course of its use upon the payment of a premium and signing of a contract </li></ul><ul><li>Loan servicer: Provides various services during the life cycle of a loan starting from loan origination to loan closure. </li></ul>
    112. 112. Auto Loans – Key Processes
    113. 113. Student Loans <ul><li>Loans availed by eligible students to pursue graduate and post graduate studies in US Schools/Colleges/Universities </li></ul><ul><li>Usually provided by banks, Credit Unions and other financial institutions which are guaranteed by state sponsored Guarantors </li></ul><ul><li>Federal government disburses loans to students in specified Schools/colleges </li></ul><ul><li>Private loans are also available </li></ul>
    114. 114. Student Loans FFELP -Federal family Education Loan Program FDLP- Federal Direct Loan Program
    115. 115. Student Loans – Key Business Entities <ul><li>Federal Government authorizes funds for grant and loan programs, such as the FFELP </li></ul><ul><li>School (determines your eligibility, recommends and certifies loan amounts, monitors your enrollment status) </li></ul><ul><li>Lender (Banks, credit unions, S&L institutions, insurance companies and other institutions who can fund education loans) </li></ul><ul><li>Borrower (student or parent who signs the promissory note to repay the loan) </li></ul><ul><li>Servicer (processes loans, payments and deferments, but does not own the loan) </li></ul><ul><li>Guarantor (guarantees / insures the loan) </li></ul>
    116. 116. <ul><li>Who claims the depreciation in case of Hire Purchase? Lender or the Borrower? </li></ul><ul><li>Which of the following will have the lowest rate of interest? </li></ul><ul><ul><li>Car Loan </li></ul></ul><ul><ul><li>Home Loan </li></ul></ul><ul><ul><li>Mortgage </li></ul></ul><ul><ul><li>Personal Loan </li></ul></ul>Quiz
    117. 117. CARDS AND PAYMENTS
    118. 118. Credit cards <ul><li>Parties involved </li></ul><ul><ul><li>Acquiring Bank, Association, Cardholder, Independent Sales Organization (ISO), Issuing Bank, Merchant, Payment Gateway, Payment Processor </li></ul></ul><ul><li>Credit Card Transaction </li></ul><ul><ul><li>Purchase Authorization </li></ul></ul><ul><ul><li>Capture and Settle </li></ul></ul><ul><li>Card Issuance </li></ul><ul><ul><li>Credit Report </li></ul></ul><ul><li>Cost of a Credit card </li></ul><ul><ul><li>Annual Fees, Credit Period, Late Payment Charges </li></ul></ul>
    119. 119. Payment Cards <ul><li>Credit </li></ul><ul><li>Line of credit to make purchases and/or draw cash up to a pre-arranged amount </li></ul><ul><li>Interest charged on the amount of the unpaid credit balance </li></ul><ul><li>In the US, merchants may miss revenue opportunities to the extent of 80% by not accepting credit cards </li></ul><ul><li>Debit </li></ul><ul><li>Purchases charged directly to a current account at the bank issuing the payment card </li></ul><ul><li>Electronic Purse </li></ul><ul><li>Stored value card containing an application that stores a record of funds available, which is updated as transactions are made </li></ul>
    120. 120. Payment Cards <ul><li>Credit </li></ul><ul><ul><li>General Purpose </li></ul></ul><ul><ul><ul><li>Consumer cards (Co-Branded Credit Cards, Charge Cards, Co-Branded Charge Cards, Secured Credit Cards, Affinity Cards) </li></ul></ul></ul><ul><ul><ul><li>Corporate Cards (T&E Cards, Purchasing Cards, Business Cards, Fleet Cards) </li></ul></ul></ul><ul><ul><ul><li>630 mn General purpose (in 2003) </li></ul></ul></ul><ul><ul><li>Private Label / Store cards </li></ul></ul><ul><ul><ul><li>Issued under a contractual agreement between a bank and a retailer, such as a department store, or another commercial firm, such as an oil company </li></ul></ul></ul><ul><ul><ul><li>Typically used only for transactions at the issuing company </li></ul></ul></ul><ul><ul><ul><li>820 mn Private label (in 2003) </li></ul></ul></ul>
    121. 121. Payment Cards <ul><li>Debit & ATM </li></ul><ul><ul><li>Debit: 2 functional types - Online & Offline </li></ul></ul><ul><li>Prepaid / Stored value cards </li></ul><ul><ul><li>Payment card for which the funds are provided in advance </li></ul></ul><ul><li>Smart Cards </li></ul><ul><ul><li>Information or monetary value stored on a computer chip rather than on a magnetic stripe </li></ul></ul>
    122. 122. Credit Cards Magnetic stripe <ul><li>Magnetic Stripe Contents: </li></ul><ul><ul><li>Track 1: Account Number, Cardholder Name, Exp date </li></ul></ul><ul><ul><li>Track 2: Account Number, Exp date </li></ul></ul><ul><ul><li>Track 3: Almost never used </li></ul></ul>CVV – Card Verification Value Association Symbol Expiration Date System No. Bank No. Signature Track Account No. Check Digit
    123. 123. Card Payment Services <ul><li>Transaction Processing </li></ul><ul><li>Application Processing </li></ul><ul><li>Customer Care </li></ul><ul><li>Collections and Recovery </li></ul><ul><li>Merchant Processing </li></ul><ul><li>Back-Office and Fulfillment </li></ul>
    124. 124. Transaction Processing Overview
    125. 125. Issuer Account Acquisition Account & Portfolio Management Transaction Processing Key Activities Authorizations Financial Messages Disputes Campaign Management Pre-approved solicitations New applications Portfolio Performance Specific programs Individual accounts Collections Portfolio Acquisition
    126. 126. Acquirer
    127. 127. Acquirer <ul><li>“ Commodity” business: </li></ul><ul><ul><li>High volumes and low profit margins </li></ul></ul><ul><ul><li>Most US banks have sold their acquirer businesses to non-banks </li></ul></ul><ul><li>Income: </li></ul><ul><ul><li>Merchant discount (1–4% of transaction value) </li></ul></ul><ul><ul><li>Processing fees ($ 0.20 – $ 0.40 per transaction) </li></ul></ul><ul><ul><li>Monthly minimum fees </li></ul></ul><ul><ul><li>Customer service fees </li></ul></ul><ul><ul><li>POS Equipment sales/service </li></ul></ul><ul><li>Expense: </li></ul><ul><ul><li>Interchange fees paid to Issuer </li></ul></ul><ul><ul><li>ISO/MSP fees </li></ul></ul><ul><ul><li>Data processing & Communications expenses </li></ul></ul><ul><ul><li>Risk Management </li></ul></ul><ul><ul><li>Losses on Merchant Chargebacks & Fraud </li></ul></ul>
    128. 128. Third-party Processors <ul><li>Highly Concentrated Market </li></ul><ul><ul><li>More than half of all US Card transactions are processed by First Data and TSYS </li></ul></ul><ul><li>Issuing services </li></ul><ul><ul><li>Functions: Most activities of card Issuers </li></ul></ul><ul><ul><li>Income = Transaction Processing fees + Software Licensing & Maintenance </li></ul></ul><ul><ul><li>Expense = Data processing & Communications expense </li></ul></ul><ul><li>Acquiring services </li></ul><ul><ul><li>Functions: Most activities of card Acquirers </li></ul></ul><ul><ul><li>Income = Merchant fees + Processing fees + ISO/MSP fees </li></ul></ul><ul><ul><li>Expense = Data processing & Communications expense + Losses on Chargebacks + Depreciation </li></ul></ul>
    129. 129. Association / Scheme <ul><li>Members include commercial/retail banks, credit unions </li></ul><ul><li>License members (Issuers, Acquirers) to issue & accept payment cards </li></ul><ul><ul><li>However, associations themselves do NOT issue cards / set card fees / set credit limits / set interest rates, or solicit merchants / set discount rates </li></ul></ul><ul><li>Serve as the nerve center connecting the issuing & acquiring sides </li></ul><ul><ul><li>Provide the interchange systems to transfer data and funds between members (transaction processing – VisaNet, BankNet) </li></ul></ul><ul><li>Offer a variety of product programs and services to improve member profitability and minimize member risk </li></ul><ul><ul><li>E.g. ‘Verified by Visa’, SET </li></ul></ul><ul><li>Implement rules and regulations that govern the interchange of transactions between members </li></ul><ul><li>Undertake brand advertising and promotional campaigns </li></ul>
    130. 130. Transaction Types <ul><li>Cardholder Transactions </li></ul><ul><ul><li>Purchase </li></ul></ul><ul><ul><li>Authorization / Verification </li></ul></ul><ul><ul><li>Preauthorization </li></ul></ul><ul><ul><li>Merchandise Return </li></ul></ul><ul><li>System Generated Transactions </li></ul><ul><ul><li>Reversal </li></ul></ul><ul><li>Exception Transactions </li></ul><ul><ul><li>(Used to correct errors that occur at point of transaction or in a participant’s system) </li></ul></ul><ul><ul><li>Adjustment </li></ul></ul><ul><ul><li>Chargeback & Chargeback Reversal </li></ul></ul><ul><ul><li>Representment </li></ul></ul><ul><li>Others </li></ul><ul><ul><li>Administrative, Network, Reconciliation, File Maintenance, and Fee transactions </li></ul></ul>
    131. 131. Chargebacks & Chargeback Reversals Retrieval Request Retrieval Fulfillment Arbitration Chargeback Reversal
    132. 132. COMMERCIAL AND WHOLESALE BANKING
    133. 133. Wholesale Banking Services <ul><li>Commercial Lending </li></ul><ul><li>Cash Management </li></ul><ul><li>Trade Finance </li></ul><ul><li>Treasury Services </li></ul><ul><li>Structured Finance </li></ul><ul><li>Financial Messaging </li></ul>
    134. 134. COMMERCIAL LENDING
    135. 135. Corporate Loans <ul><li>For purposes like plant expansion, modernization, working capital requirements etc </li></ul><ul><li>Long term and short term loans </li></ul><ul><li>Secured and unsecured loans </li></ul><ul><li>Loans provided after detailed assessment of financials and business strength of corporate </li></ul>
    136. 136. Corporate Lending Process <ul><li>Provide Loan sanction letter </li></ul><ul><li>Sign loan agreement </li></ul><ul><li>Disburse loan to corporate </li></ul>Loan repayment Request for loan, submits financials and business details Analyze financials Analyze business strength Preparation of credit appraisal Credit Rating Rating enhancement structures Credit committee meeting – Loan Sanction/Reject Loan Sanctioned Corporate Bank
    137. 137. Types of Loans <ul><li>Term loans – Long term & short term </li></ul><ul><li>Corporate bonds </li></ul><ul><li>Working capital loans – Short term loans and overdraft limits </li></ul><ul><li>Lines of Credit </li></ul><ul><li>Bill discounting </li></ul><ul><li>Commercial paper </li></ul><ul><li>Leasing </li></ul><ul><li>Supplier and dealer loans </li></ul><ul><li>Asset Securitisation loans </li></ul>
    138. 138. Classification of Lending Facilities <ul><li>Classification of Drawn Loans </li></ul><ul><ul><li>Accrual Loans </li></ul></ul><ul><ul><li>Held-for-Sale </li></ul></ul><ul><ul><li>Trading </li></ul></ul><ul><li>Classification of Undrawn Loan Commitments </li></ul><ul><ul><li>Accrual </li></ul></ul><ul><ul><li>Recorded off-balance sheet </li></ul></ul>
    139. 139. Credit Derivatives <ul><li>“Financial contracts that transfer credit risk from one party to another, facilitating greater efficiency in the pricing and distribution of credit risk among market players ” </li></ul><ul><li>Financial contracts </li></ul><ul><li>Transfer credit risk </li></ul><ul><li>Greater efficiency </li></ul>
    140. 140. Credit Derivatives - Example <ul><li>Investor holds a debt security issued by XYZ Corp </li></ul><ul><li>XYZ will pay periodic interest to the investor </li></ul><ul><li>Investor enters into a contract with a derivatives dealer - Investor makes periodic payments to the dealer in exchange for a lump sum payment in the event of default by XYZ Corp. during the term of the derivatives contract </li></ul><ul><li>Result - Investor has effectively transferred the risk of default by XYZ Corp. to the dealer </li></ul><ul><li>Investor in this example is the buyer of protection, the dealer is the protection seller, and the issuer of the corporate bond is the reference entity </li></ul>
    141. 141. Credit Derivatives…. Participants
    142. 142. Credit Derivatives - Uses <ul><li>Buy Protection </li></ul><ul><li>Sell Protection </li></ul><ul><li>Create positions </li></ul><ul><li>Diversify Credit Risk </li></ul><ul><li>Manage Regulatory Capital </li></ul>Protection Buyer Protection Buyer Bonds Assets Coupon Premium Credit Default Payment
    143. 143. Types of Credit Derivatives <ul><ul><li>Single-name credit derivatives </li></ul></ul><ul><ul><li>Bilateral financial contracts that enable an investor to buy protection against the risk of default of an asset issued by a specified reference entity </li></ul></ul><ul><ul><li>Multi-name credit derivatives </li></ul></ul><ul><ul><li>Bilateral financial contracts that enable an investor to buy protection against the risk of default of an asset issued by a multiple reference entities </li></ul></ul>
    144. 144. <ul><li>A corporate wants money for expanding its manufacturing capacity. What loan would it request for – short term loan or long term loan? </li></ul><ul><li>What is the difference between loans and bonds? </li></ul><ul><li>What is the difference between disbursed amount and committed amount of a loan? </li></ul><ul><li>Credit derivatives are only used for reducing risk exposure. Is this statement true? </li></ul>Quiz
    145. 145. TREASURY SERVICES & CASH MANAGEMENT
    146. 146. The Treasury domain in context <ul><li>Fixed Income </li></ul><ul><li>Money Markets </li></ul><ul><li>Foreign Exchange </li></ul><ul><li>OTC Derivatives </li></ul><ul><ul><li>FRAs / IR Swaps </li></ul></ul><ul><ul><li>FX Options </li></ul></ul><ul><ul><li>Equity options </li></ul></ul><ul><ul><li>Credit derivatives </li></ul></ul>
    147. 147. Functions of the Treasury Manager <ul><li>Ensure availability of funds </li></ul><ul><li>Manage all foreign currency transactions for the bank </li></ul><ul><li>Manage various risks: </li></ul><ul><ul><li>Liquidity – risk of asset and liability cash flow mismatch </li></ul></ul><ul><ul><li>Interest rate – risk due to volatility of interest rates </li></ul></ul><ul><ul><li>Currency – risk due to volatility in exchange rates </li></ul></ul><ul><ul><li>Commodity – risk due to volatility in commodity prices </li></ul></ul><ul><li>Provide Cash Management Services for bank’s corporate clients: </li></ul><ul><ul><li>Streamlining clearing & settlement, collections, payments </li></ul></ul>
    148. 148. Managing Liquidity & Interest Rate risks <ul><li>Asset Liability Management </li></ul><ul><ul><li>Prevent mismatch between deposit and loan cash flows </li></ul></ul><ul><ul><li>Uses mathematical tools like Duration, Gap Analysis to find out mismatches </li></ul></ul><ul><li>Interest rate risk management </li></ul><ul><ul><li>Manage risks due to volatility of interest rates </li></ul></ul><ul><ul><ul><li>Loans and deposits contracted at historic rates while fresh funds linked to market rates </li></ul></ul></ul><ul><ul><ul><li>Value of investments in bonds and treasury notes vary with change in interest rates </li></ul></ul></ul><ul><ul><li>Repricing, yield curve, basis and optionality risks </li></ul></ul><ul><ul><li>Use of derivatives like interest rate swaps for risk management </li></ul></ul>
    149. 149. Forex management <ul><li>Treasury enters in to forex deals with corporates, covers risk through counter party deals. </li></ul><ul><li>Uses derivatives like currency swaps, forex options etc for risk management </li></ul><ul><li>Case Study </li></ul><ul><li>Importer in US has pending payment of 2 million Euros due after 90 days. Euro fluctuates wildly vis-à-vis USD, bid rate presently at 1.2714. Importer does not want to be exposed to exchange risk. </li></ul><ul><li>What does the importer do? </li></ul><ul><ul><li>Wait for 90 days, then buy 2 million Euros after paying USD at prevailing rate </li></ul></ul><ul><ul><li>Enter in to contract with a bank for buying Euro forward against USD – lock on to a 90-day forward rate </li></ul></ul>
    150. 150. Forex management…Example Need 2 million Euros after 90 days, I do not want the exchange risk. What to do Exporter Bank A Forward contract for 90 days for importer to buy Euro against USD OK, forward contract entered with importer. But what if Euro appreciates after 2 months. We need to cover the risk. Bank B Importer Forward contract for 90 days for exporter to sell Euro against USD Will receive 2 million Euros after 90 days, I do not want the exchange risk. What to do OK, forward contract entered with exporter. But what if Euro depreciates after 2 months. We need to cover the risk. Forward contract where Bank A would buy Euro 2 million from Bank B after 90 days
    151. 151. All major markets (equities, bond, FX, Derivatives) are becoming bifurcated <ul><li>Small orders </li></ul><ul><li>Highly liquid </li></ul><ul><li>Retail investors </li></ul><ul><li>Routed to multiple destinations </li></ul><ul><li>Public </li></ul><ul><ul><li>Displayed in the market </li></ul></ul><ul><li>Dispersed </li></ul><ul><li>Large orders </li></ul><ul><li>Ill-liquid securities </li></ul><ul><li>Institutional firms </li></ul><ul><li>“ Matched” (executed) internally </li></ul><ul><li>Private </li></ul><ul><ul><li>Capital commitment </li></ul></ul><ul><li>Consolidated/Centralized </li></ul>Source: Tower Group
    152. 152. Treasury applications segments & vendors <ul><li>Cross-Asset Trading and Risk </li></ul><ul><li>Sungard / Front Arena </li></ul><ul><li>Summit </li></ul><ul><li>Murex MxG 2000 </li></ul><ul><li>Calypso </li></ul><ul><li>Wall Street Systems </li></ul>Treasury Management Systems – Inter-bank <ul><li>Multi-bank platform </li></ul><ul><li>Reuters RET </li></ul><ul><li>Single-bank platform </li></ul><ul><li>Cognotec </li></ul><ul><li>Integral </li></ul>Treasury Sales – Bank to Customer
    153. 153. Cash Management <ul><li>Corporates need to manage cash well since they have: </li></ul><ul><ul><li>Payments to multiple parties at various locations </li></ul></ul><ul><ul><li>Collections from multiple parties at various locations </li></ul></ul><ul><ul><li>Multiple banking accounts at various locations </li></ul></ul><ul><ul><ul><li>Ensure local deficits and surpluses are managed </li></ul></ul></ul><ul><ul><ul><li>Ensure net surplus is invested properly </li></ul></ul></ul><ul><ul><ul><li>Reduce operational costs associated with payments & collections </li></ul></ul></ul><ul><li>Cash Management solutions help corporates: </li></ul><ul><ul><li>Devise an effective account & investment strategy to manage surpluses and deficits – Pooling, Netting, Zero-balance structures </li></ul></ul><ul><ul><li>Automate collections and payments process flows </li></ul></ul><ul><ul><li>Outsource collections and payments administration & reconciliation </li></ul></ul>
    154. 154. Cash Management Payments to vendors from payment accounts at factory locations Collections from dealers to collection accounts at sales office locations Corporate head office account Bank Pharma company Manages multiple account surpluses, deficits, provides reconciliation statements, invests surpluses in money market instruments Payments to Factory employees Payments to sales and admin staff
    155. 155. Cash Management Overview
    156. 156. Payments / Disbursement Offerings <ul><li>Payment service for corporates/retail customers </li></ul><ul><ul><li>Banks process payments on behalf of corporates </li></ul></ul><ul><ul><li>Instruments - Checks/demand drafts/EFT’s </li></ul></ul><ul><li>Payment Initiation </li></ul><ul><ul><li>Manual instruction </li></ul></ul><ul><ul><li>Floppy/Electronic media instructions </li></ul></ul><ul><ul><li>Electronic banking applications </li></ul></ul><ul><li>Bulk payments </li></ul><ul><ul><li>Payroll processing </li></ul></ul><ul><ul><li>Dividend warrants </li></ul></ul><ul><ul><li>Redemptions </li></ul></ul>
    157. 157. Collections Services <ul><li>Collect funds around the globe </li></ul><ul><li>Funds are credited to the cash management account </li></ul><ul><ul><li>Local collections </li></ul></ul><ul><ul><li>Outstation collections </li></ul></ul><ul><li>Lockbox </li></ul><ul><ul><li>Retail Lockbox </li></ul></ul><ul><ul><li>Corporate Lockbox </li></ul></ul><ul><li>New Act - Check 21 </li></ul><ul><ul><li>Electronic transmission of checks by Check imaging </li></ul></ul><ul><ul><li>Faster / efficient check realization </li></ul></ul>
    158. 158. Developments in treasury & cash management <ul><li>Asset Securitization </li></ul><ul><ul><li>‘ Selling’ existing loans to raise funds </li></ul></ul><ul><ul><li>Helps in portfolio management, capital management </li></ul></ul><ul><li>Real Time Gross Settlement </li></ul><ul><ul><li>Transaction-wise settlement instead of batch settlement </li></ul></ul><ul><ul><li>Reduces delay, eliminates systemic risk and improves liquidity </li></ul></ul><ul><li>Continuous Linked Settlement (CLS) </li></ul><ul><ul><li>Facilitates seamless cross-border payments </li></ul></ul><ul><ul><li>Eliminates temporal settlement risk from forex markets </li></ul></ul><ul><li>Automated Clearing House (ACH) </li></ul><ul><ul><li>Electronic flat file based information exchange, paperless clearing </li></ul></ul><ul><li>Electronic Bill Presentment & Payment </li></ul><ul><ul><li>Paperless bill presentment & payment, improves data integration </li></ul></ul>
    159. 159. Automated Clearing House (ACH) <ul><li>Batch oriented Electronic Fund Transfer (EFT) system for financial institutions, governed by National Automated Clearing House Association (NACHA). </li></ul><ul><li>Federal Reserve and Electronic Payments Network act as ACH Operators. </li></ul>Originator forwards transaction data to originating bank Originating bank sorts and transmits file to ACH operator ACH operator distributes ACH file to receiving bank Receiving bank makes funds available to Receiver Receiver authorizes originator for ACH transfer ORIGINATOR ORIGINATING BANK RECEIVER RECEIVING BANK ACH OPERATOR
    160. 160. Quiz <ul><li>Interest rates are on the rise. Will a treasury manager buy or sell more of long term bonds? </li></ul><ul><li>A prudent treasury manager should avoid all risks. Is this a true perspective? </li></ul><ul><li>Individual branches of a bank manage cash surpluses by investing in money market instruments. Is this statement true? </li></ul><ul><li>What is the primary role of a bank treasury in times of extreme exchange rate volatility? </li></ul>
    161. 161. TRADE FINANCE
    162. 162. International Trade Finance <ul><li>Trade Finance </li></ul><ul><li>The buying and selling of goods and technology between countries, by means of various modes of transport like aircraft, railway, truck, ship or a combination of two or more modes of transport, involving different parties across the Globe. </li></ul><ul><li>International Trade Finance Industry </li></ul><ul><li>Comprises of Importers/Exporters, Banks, Shipping Co./Agents. </li></ul><ul><li>Activities include </li></ul><ul><ul><ul><li>Pre Shipment Finance </li></ul></ul></ul><ul><ul><ul><li>Post Shipment Finance </li></ul></ul></ul><ul><ul><ul><li>Payment methods </li></ul></ul></ul>
    163. 163. Key Market Players APPLICANT BENEFICIARY ISSUING BANK The party that requests the bank for opening the LC-usually the importer or the buyer of goods. Description Examples ADVISING BANK CONFIRMING BANK The party to which the LC is favored, usually the exporter or seller of the goods. The bank that actually issues the LC. Bank that advices or informs the exporter that an LC has been received in its favor. Bank that confirms the LC which constitutes a definite undertaking of the confirming bank’s liability to make payment if the documents presented conforms to that required in the LC. Any Corporate manufacturing, wholesaler (Importer) Any Corporate manufacturing, wholesaler (Exporter) BNP Paribas ABN Amro American Express, Bank of New York REIMBURSING BANK Agency that clears trades and settles trading accounts Allied Irish Banks
    164. 164. Bank’s Role <ul><ul><li>Acceptable as an intermediary – various roles </li></ul></ul><ul><ul><li>Expertise in handling international trade transactions. </li></ul></ul><ul><ul><li>Ability to supply trade and credit information </li></ul></ul><ul><ul><li>Assurance regarding quality of goods </li></ul></ul><ul><ul><li>Guarantees payment </li></ul></ul><ul><ul><li>Financial assistance  </li></ul></ul>                                                              
    165. 165. Mode of Financing - Factors <ul><li>Costs </li></ul><ul><ul><li>Interest & Fee </li></ul></ul><ul><li>Time Frame </li></ul><ul><ul><li>Short Term </li></ul></ul><ul><ul><li>Medium Term </li></ul></ul><ul><ul><li>Long Term </li></ul></ul><ul><li>Risk Factors </li></ul><ul><ul><li>Buyers’ credit rating </li></ul></ul><ul><ul><li>Country/political risks </li></ul></ul><ul><li>Government Guarantee Programs </li></ul><ul><li>Exporters’ Funds </li></ul><ul><ul><li>Expert credit verification </li></ul></ul><ul><ul><li>Risk assessment </li></ul></ul>
    166. 166. Trade Finance Instruments <ul><li>BILL OF LADING </li></ul><ul><ul><li>Contract - carrier and a shipper </li></ul></ul><ul><ul><li>Receipt - issued by a carrier to a shipper </li></ul></ul><ul><ul><li>Evidence - title to the goods </li></ul></ul><ul><li>CREDIT CHECK </li></ul>
    167. 167. Payment Methods <ul><li>Cash in Advance </li></ul><ul><li>Commercial Letter Of Credit </li></ul><ul><li>Documentary Collection </li></ul><ul><li>Time Drafts/Bankers' acceptances </li></ul><ul><li>Hybrid Methods </li></ul><ul><li>Open Account </li></ul>
    168. 168. Other Payment Methods <ul><li>Consignment </li></ul><ul><li>Credit Card </li></ul><ul><li>Counter-trade and Barter </li></ul><ul><li>Factoring </li></ul><ul><li>Forfaiting </li></ul>
    169. 169. <ul><li>“ An arrangement by means of which a bank (Issuing Bank) acting at the request of a Customer (Importer / Applicant), undertakes to pay a third Party (Beneficiary/ Exporter) a predetermined amount by a given date according to agreed stipulations and against presentation of stipulated documents”. </li></ul><ul><li>Import LC </li></ul><ul><li>Export LC </li></ul><ul><li>Standby LC </li></ul><ul><li>Back to Back LC </li></ul>Letter of Credit
    170. 170. How does a LC work ?                                                                                                                      
    171. 171. Letter of Credit <ul><li>Salient features: </li></ul><ul><ul><li>Distribute risk </li></ul></ul><ul><ul><li>Deals with documents and not with products </li></ul></ul><ul><ul><li>Irrevocable </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Rejected shipment </li></ul></ul><ul><ul><li>Costly </li></ul></ul><ul><ul><li>Time </li></ul></ul><ul><ul><li>Credit Line tied up </li></ul></ul><ul><ul><li>Specific and binding </li></ul></ul>                                                              
    172. 172. Factoring vs Forfaiting Factoring Forfaiting Factoring work mostly with consumer goods Forfaiting usually work with capital goods, commodities, and large projects Factors work with short-term receivables (up to 180 days) Forfaiters generally work with medium and long-term receivables (180 days to 10 years), Most factors do not have strong capabilities in developing regions of the world where legal and financial frameworks are inadequate and credit information is not readily available through affiliate factors. Forfaiters usually require a bank guarantee; most factoring houses are willing to work with receivables from these higher-risk, emerging markets. Factors usually want access to a large percentage of an exporter’s business, Forfaiters will work on a one-shot basis Once the creditworthiness of the importer has been checked by the factor in the land concerned, merely the veracity of the claim has to be proven. Forfaiting takes place on the basis of certain collateral
    173. 173. <ul><li>PRE SHIPMENT LOANS </li></ul><ul><ul><li>Working capital finance </li></ul></ul><ul><li>POST SHIPMENT LOANS </li></ul><ul><ul><li>Liquidity needs </li></ul></ul><ul><ul><li>Bills Discounting </li></ul></ul>Export Finance
    174. 174. International Organizations <ul><li>FOREIGN CREDIT INSURANCE UNDERWRITERS AND BROKERS </li></ul><ul><li>THE BANKERS ASSOCIATION FOR FOREIGN TRADE (BAFT) </li></ul><ul><li>A forum for analysis, discussion and action among international financial professionals on a wide range of topics affecting international trade and finance, including legislative/regulatory issues.  </li></ul><ul><li>To insure repayment of export credit against nonpayment due to political and/or commercial causes </li></ul><ul><li>Insures commercial risks of nonpayment by importers because of insolvency or other business factors and political risks of war, expropriation, confiscation, currency inconvertibility, civil commotion, or cancellation of import permits.   </li></ul>
    175. 175. International Chamber of Commerce <ul><li>Uniform Customs and Practice for Documentary Credits (UCPDC) </li></ul><ul><ul><li>UCP500 </li></ul></ul><ul><ul><li>ICC Brochure No.525 (URR) </li></ul></ul>
    176. 176. Quiz <ul><li>Pre shipment finance is liquidated only through realizations of export bills or amounts received through export incentives - Y/N </li></ul><ul><li>Pre shipment finance should not normally remain outstanding beyond the original stipulated shipment date – Y/N </li></ul><ul><li>In case it remains outstanding, can the non-adjusted amount be then transferred as post shipment finance? </li></ul>
    177. 177. INVESTMENT MANAGEMENT
    178. 178. Investment Management Services <ul><li>Private Banking </li></ul><ul><li>Asset Management </li></ul><ul><li>Separately Managed Accounts </li></ul><ul><li>Portfolio Accounting </li></ul><ul><li>Fund Accounting </li></ul><ul><li>Order Management </li></ul>
    179. 179. PRIVATE BANKING
    180. 180. Private Banking <ul><li>Personalized services for High Net worth Individuals </li></ul><ul><li>Money Management </li></ul><ul><li>Financial Advice </li></ul><ul><li>Investment Services </li></ul>
    181. 181. Why grow private banking business ? <ul><li>High Return on equity </li></ul><ul><li>Off-balance sheet income </li></ul><ul><li>Substantial fees </li></ul>
    182. 182. Who offers Private Banking services ? <ul><li>Large European banks </li></ul><ul><li>Standalone Private Banks </li></ul><ul><li>Trust or Investment Management </li></ul><ul><li>Private Client Services </li></ul>                                       
    183. 183. Client Services <ul><li>Investment Management and Advice </li></ul><ul><ul><li>Self-directed or non-discretionary </li></ul></ul><ul><ul><li>Discretionary </li></ul></ul><ul><li>Risk Management </li></ul><ul><li>Liquidity </li></ul><ul><li>Structured Lending </li></ul><ul><li>Enhanced banking facilities </li></ul><ul><ul><li>Insurance </li></ul></ul><ul><ul><li>Foreign exchange transactions </li></ul></ul><ul><ul><li>Automatic credit entitlements etc </li></ul></ul><ul><li>Issuer Capital formation - </li></ul>
    184. 184. Common Private Banking Products <ul><li>Personal Investment Companies (PICs) </li></ul><ul><li>Confidentiality as well as tax benefits </li></ul><ul><li>Payable Through Account (PTA) </li></ul><ul><li>Offer Foreign clients - Check writing </li></ul><ul><li>Hedge Funds </li></ul><ul><li>Leverage </li></ul><ul><li>Short-selling, and </li></ul><ul><li>Use of derivatives </li></ul>
    185. 185. Quiz <ul><li>Are hedge funds not immune to risk? </li></ul><ul><li>How have average hedge fund returns performed vis-a-vis market levels? </li></ul>
    186. 186. Core Functions <ul><li>Sales and Marketing / Client Prospecting </li></ul><ul><li>Client Management, Servicing and delivery </li></ul><ul><li>Financial Planning </li></ul><ul><li>Portfolio Analysis and Optimization </li></ul><ul><li>Market Activities </li></ul><ul><li>Research </li></ul><ul><li>Compliance controls </li></ul>
    187. 187. Private banking workflow <ul><li>Client Representative </li></ul><ul><li>Servicing specialist </li></ul><ul><li>Middle office </li></ul><ul><li>Back office </li></ul>
    188. 188. Private Banking Workflow
    189. 189. Private Banking Workflow Private banking workflow
    190. 190. INVESTMENT MANAGEMENT
    191. 191. Asset Management Goals <ul><ul><li>Generate Superior investment returns </li></ul></ul><ul><ul><li>Deliver High Returns with Low Risk and capital preservation </li></ul></ul><ul><ul><li>Manage investors money efficiently and cost effectively </li></ul></ul>Asset is a property or investment, such as real estate, stock, mutual fund, or equipment that has monetary value
    192. 192. Investment Management…Principles <ul><li>Asset Mix </li></ul><ul><li>International Diversification </li></ul><ul><li>Screens/Filters </li></ul><ul><li>Capital preservation </li></ul><ul><li>Alternative Investments - Hedge funds & Derivatives </li></ul>
    193. 193. Investment Process - Research <ul><li>Data </li></ul><ul><li>Research Team </li></ul><ul><li>Computing </li></ul>
    194. 194. Investment Process - Asset Allocation <ul><li>Passive Approach </li></ul><ul><ul><li>Investor’s characteristics determine the right mix for the portfolio </li></ul></ul><ul><ul><li>Use of diversification strategies </li></ul></ul><ul><ul><li>Asset classes influenced by macro-economic events such as recessions or inflation </li></ul></ul><ul><li>Active Approach </li></ul><ul><ul><li>Market timing; Market strategists influence the asset allocation decision </li></ul></ul><ul><ul><li>Attempt at getting an informational advantage at picking assets </li></ul></ul>
    195. 195. Asset Allocation… <ul><li>Quantitative Approaches </li></ul><ul><ul><li>Top-Down Approach - Look at the “big picture” - economy or broad trends in society to identify individual countries and then sectors </li></ul></ul><ul><ul><li>Bottom-Up Approach </li></ul></ul>
    196. 196. Investment Philosophies <ul><li>Passive Diversification </li></ul><ul><li>Passive Value Investing </li></ul><ul><li>Momentum Investing </li></ul><ul><li>Market Timing </li></ul><ul><li>Contrarian Investing </li></ul>
    197. 197. Contrarian Investing <ul><li>In the middle of March 2004, </li></ul><ul><ul><li>War with Iraq was just starting </li></ul></ul><ul><ul><li>SARS epidemic was raging across Asia </li></ul></ul><ul><ul><li>Fear of terrorism – whether in the guise of chemical or biological warfare, or old fashioned high explosives </li></ul></ul><ul><li>Travellers, whether for business or pleasure, were staying at home! </li></ul><ul><li>Airline, tourism, and hotel industries were warning of the worst conditions in living memory - FTSE 100 fell to 8 year low of 3,300 </li></ul><ul><li>The contrarians, meanwhile, were rubbing their hands with glee </li></ul><ul><li>If you had invested then, at the pit of misery you would have made 27% in 3 months </li></ul>
    198. 198. Investment Management Variants <ul><li>INSTITUTIONAL ASSET MANAGEMENT </li></ul><ul><ul><li>Institutional money managers are distinguished by the fact that: </li></ul></ul><ul><ul><li>They are under greater regulatory scrutiny </li></ul></ul><ul><ul><li>They provide exclusive service to their clientele who are typically institutions having several million dollars to invest. </li></ul></ul><ul><ul><li>Do an independent analysis of that client's financial needs, goals, objectives, and risk tolerance. </li></ul></ul><ul><ul><li>They charge competitive fees due to the fact that their clients entrust millions of dollars to them for investing. </li></ul></ul><ul><ul><li>Major Players </li></ul></ul><ul><ul><li>Morgan Stanley </li></ul></ul><ul><ul><li>Bankers Trust </li></ul></ul><ul><ul><li>Boston Partners </li></ul></ul><ul><ul><li>Pacific Investment Management Co. (PIMCO) </li></ul></ul>
    199. 199. Investment Management Variants <ul><li>MUTUAL FUNDS </li></ul><ul><ul><li>A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, or other securities. </li></ul></ul>
    200. 200. Mutual Funds … <ul><li>Disadvantages </li></ul><ul><ul><li>Fees & Expenses </li></ul></ul><ul><ul><li>Returns not guaranteed </li></ul></ul><ul><ul><li>No Control </li></ul></ul><ul><ul><li>Inefficient Cash management </li></ul></ul><ul><ul><li>No tax planning </li></ul></ul><ul><li>Advantages </li></ul><ul><ul><li>Diversification </li></ul></ul><ul><ul><li>Liquidity </li></ul></ul><ul><ul><li>Low Investment Amount </li></ul></ul><ul><ul><li>Low Transaction Costs </li></ul></ul><ul><ul><li>Professional Management </li></ul></ul><ul><ul><li>Regulated </li></ul></ul><ul><li>Mutual Fund Types </li></ul><ul><ul><li>Stock Funds </li></ul></ul><ul><ul><li>Index Funds </li></ul></ul><ul><ul><li>Bond Funds </li></ul></ul><ul><ul><li>Money Market Funds </li></ul></ul><ul><li>Key Players </li></ul><ul><ul><li>Fidelity Investments </li></ul></ul><ul><ul><li>Frank Russell </li></ul></ul><ul><ul><li>ING Direct </li></ul></ul><ul><ul><li>Mellon </li></ul></ul>
    201. 201. Investment Management Variants <ul><li>SEPARATELY MANAGED ACCOUNTS </li></ul><ul><li>Key Features </li></ul><ul><ul><li>Direct Ownership </li></ul></ul><ul><ul><li>Single wrapped Fee </li></ul></ul><ul><ul><li>Customization </li></ul></ul><ul><ul><li>Tax Advantages </li></ul></ul><ul><ul><li>Professional Management </li></ul></ul><ul><li>Leading SMA Managers </li></ul><ul><ul><li>Merrill Lynch Investment Management </li></ul></ul><ul><ul><li>Brandes Investment Partners </li></ul></ul><ul><ul><li>Nuveen Investments </li></ul></ul><ul><ul><li>Alliance Capital </li></ul></ul><ul><ul><li>Morgan Stanley Investment Management </li></ul></ul>
    202. 202. Investment Management Variants <ul><li>HEDGE FUNDS </li></ul><ul><ul><li>Similar to Mutual Funds </li></ul></ul><ul><ul><li>Targeted at High Net-worth individuals, usually about 100 investors per fund </li></ul></ul><ul><ul><li>Investment minimums $250,000 – 1,000,000 </li></ul></ul><ul><ul><li>Higher returns but more risky </li></ul></ul><ul><ul><li>Manager gets fixed fee + percentage of profits </li></ul></ul><ul><li>PENSION FUNDS </li></ul><ul><ul><li>Targeted to meet retirement savings objectives </li></ul></ul><ul><ul><li>Offers tax benefits </li></ul></ul><ul><ul><li>E.g. 401(k), IRA </li></ul></ul>
    203. 203. Quiz <ul><li>Ron Weasley has $2000 for investment and desires a high return. But has no knowledge of stock market. He should invest in </li></ul><ul><ul><li>Hedge Fund </li></ul></ul><ul><ul><li>Mutual Fund </li></ul></ul><ul><ul><li>SMA </li></ul></ul><ul><ul><li>Stock Mutual Fund </li></ul></ul><ul><ul><li>Bond Mutual Fund </li></ul></ul><ul><li>Which of the following is false </li></ul><ul><ul><li>An investment manager’s objective is to generate superior returns at a relative low risk and capital preservation </li></ul></ul><ul><ul><li>An investment manager simply bets on the stock market and needs no research inputs </li></ul></ul><ul><ul><li>An investment manager offer mutual funds is regulated </li></ul></ul><ul><ul><li>An investment manager follows the principle of optimum diversification </li></ul></ul>
    204. 204. Fund Accounting <ul><li>Provides flexible and end-to-end solution for financial institutions that are looking for trustee and administrative support for their managed funds </li></ul><ul><li>These include equity and fixed income funds, hedge funds, index funds, guaranteed funds and venture capital </li></ul><ul><li>Banks offer services that provides accurate, timely, accounting valuation, compliance monitoring and reporting services for your assets </li></ul><ul><li>Allows the funds manager to focus on his core business while reducing operational risks and all related costs </li></ul>
    205. 205. Fund – Fees & Expenses <ul><li>12b-1 Fee </li></ul><ul><ul><li>Fee Levied by the fund to pay some or all of the costs of distributing its shares to the public </li></ul></ul><ul><li>Sales Charges </li></ul><ul><ul><li>Front End Load </li></ul></ul><ul><ul><li>Back end Load </li></ul></ul><ul><li>Management Fees </li></ul><ul><li>Redemption Fees </li></ul>
    206. 206. Business Processes of Fund Accounting <ul><li>Funds Establishment </li></ul><ul><ul><li>Constituting legal, tax, regulatory, compliance and administrative structure for a new fund. </li></ul></ul><ul><li>Funds Valuation </li></ul><ul><ul><li>Daily Valuation </li></ul></ul><ul><ul><li>Intra Day Valuation </li></ul></ul><ul><ul><li>Real Time Valuation </li></ul></ul><ul><li>Fund Pricing </li></ul><ul><ul><li>Client's Own Pricing Source </li></ul></ul><ul><ul><li>Multiple Pricing Sources </li></ul></ul>
    207. 207. Business Processes of Fund Accounting
    208. 208. Business Processes of Fund Accounting <ul><li>Reporting and Monitoring </li></ul><ul><ul><li>Financial Reporting </li></ul></ul><ul><ul><li>Tailored Reporting </li></ul></ul><ul><ul><li>Regulatory Reporting </li></ul></ul><ul><ul><li>Multi-currency Reporting </li></ul></ul><ul><ul><li>Compliance Monitoring </li></ul></ul><ul><ul><li>Message Compliance </li></ul></ul><ul><li>Benchmarking </li></ul><ul><ul><li>Asset allocation against a pre defined exposure limits. These limits are specified against an industry standard Benchmark index </li></ul></ul><ul><ul><li>Configuring Benchmark – The various industry standard Benchmarks are captured and maintained in the internal system </li></ul></ul><ul><ul><li>Compliance and Reporting – support running various compliance tests of any fund data against benchmark data and report the outcome </li></ul></ul>
    209. 209. INVESTMENT BANKING AND BROKERAGE
    210. 210. Securities Industry <ul><li>Securities Industry comprises of investment banks, broker-dealers and mutual funds </li></ul><ul><li>Activities include </li></ul><ul><ul><li>Originating and managing issues of securities </li></ul></ul><ul><ul><li>Underwriting </li></ul></ul><ul><ul><li>Market Making </li></ul></ul><ul><ul><li>Principal buying or selling securities on a spread basis </li></ul></ul>
    211. 211. Stakeholders
    212. 212. Key Market Players INVESTOR INVESTMENT MANAGER BROKER / DEALER Source of money that gets invested into a “fund” Description Examples EXCHANGE CUSTODIAN DEPOSITORY Person(s) who decides what securities to buy/sell with the money invested in the fund Entity that actually trades the securities on the exchanges Place where the trading occurs – Auction or Dealer market Fiduciary entity who oversees the cash and securities that a fund/corporation/entity holds Place where traded securities end-up, are safeguarded and are transferred Individuals, Mutual fund and Pension fund investors Fidelity, Prudential ICICI, Vanguard JPMorgan, Merrill Lynch, Charles Schwab NYSE, NASDAQ, NSE Mellon, Chase DTC, CREST CLEARINGHOUSE Agency that clears trades and settles trading accounts NSCC, London Clearinghouse
    213. 213. Top Investment Banks <ul><li>Goldman Sachs </li></ul><ul><li>Merrill Lynch </li></ul><ul><li>Morgan Stanley Dean Witter </li></ul><ul><li>Credit Suisse First Boston </li></ul><ul><li>UBS </li></ul><ul><li>Salomon Smith Barney </li></ul><ul><li>J.P. Morgan </li></ul><ul><li>Lehman Brothers </li></ul>
    214. 214. Divisions in an Investment Bank <ul><li>Corporate Finance </li></ul><ul><li>Sales </li></ul><ul><li>Research </li></ul><ul><li>Syndication </li></ul><ul><li>IPOs & Underwriting </li></ul><ul><li>Secondary Market Trading </li></ul><ul><li>Broking </li></ul>
    215. 215. Corporate Finance <ul><li>Mergers and acquisitions advisory </li></ul><ul><ul><li>Negotiation and structuring between two companies. </li></ul></ul><ul><ul><li>Finalize the purchase price </li></ul></ul><ul><ul><li>Ensure a smooth transaction </li></ul></ul><ul><li>Underwriting </li></ul><ul><ul><li>Guarantees that the capital issue will be subscribed to the extent of his underwritten amount </li></ul></ul><ul><ul><li>Make good of any shortfall </li></ul></ul>
    216. 216. Research <ul><li>Research analysts make recommendations on whether to buy, sell, or hold securities. </li></ul><ul><li>Some research analysts work on the fixed income side - such as high yield bonds (Junk) or U.S. Treasury bonds. </li></ul><ul><li>Corporate finance rely on research analysts to be experts in the industry in which they are working </li></ul><ul><li>Salespeople within the I-bank utilize research published by analysts to convince their clients to buy or sell securities through their firm </li></ul><ul><li>Reputed research analysts can generate substantial corporate finance business as well as trading activity </li></ul><ul><li>Chinese wall between Research & Corporate Finance! </li></ul>
    217. 217. Syndication <ul><li>Provides a vital link between Sales and Corporate Finance </li></ul><ul><li>Facilitate the placing of securities in a public offering </li></ul><ul><li>Coordinate between buyers of offerings and the investment banks managing the process </li></ul><ul><li>In a corporate or municipal debt deal, syndicate determines the allocation of bonds </li></ul>
    218. 218. Primary Market - IPOs <ul><li>Identify Investment Bank </li></ul><ul><li>Syndicate underwriters </li></ul><ul><li>SEC approval process – File registration statement </li></ul><ul><li>Cooling Off period </li></ul><ul><li>“Red herring prospectus” - all information about the company except offer price and effective date </li></ul><ul><li>Road show for big institutional investors </li></ul><ul><li>Fix issue price </li></ul><ul><li>Initial public offering </li></ul>
    219. 219. IPO…Story of Yahoo <ul><li>Yahoo founded in 1994 </li></ul><ul><li>1995 - Yahoo reported a loss of $643,000 on sales of $1.4 million </li></ul><ul><li>April 1996 - Yahoo wanted to raise $ 32.5 million (2.6 million shares at $ 13) </li></ul><ul><li>Goldman Sachs appointed as the Lead Investment Bank </li></ul><ul><li>Offer oversubscribed by 5 times </li></ul><ul><li>Stock debuts at $ 24.5 on day one and closes at $ 33 </li></ul>
    220. 220. IPO…The TCS saga <ul><li>TCS is a division of Tata Sons </li></ul><ul><li>TCS to be spun off as a company in 2003 </li></ul><ul><li>Tata Sons plan to sell 10% stake to raise $ 750 M </li></ul><ul><ul><li>Valuation - $ 7.50 billion </li></ul></ul><ul><ul><li>Net Profit - $ 250 mio </li></ul></ul><ul><ul><li>PER - 30 </li></ul></ul><ul><li>Lead Investment Bank - Morgan Stanley </li></ul><ul><ul><li>Co-Leads - JP Morgan Chase and DSP Merrill Lynch </li></ul></ul><ul><li>Likely timing – 2004 </li></ul>
    221. 221. Secondary Markets <ul><li>What is the Secondary Market? </li></ul><ul><ul><li>Auction Market </li></ul></ul><ul><ul><li>Electronic Exchanges </li></ul></ul><ul><ul><li>OTC </li></ul></ul><ul><li>The Stakeholders </li></ul><ul><ul><li>Investor </li></ul></ul><ul><ul><li>Brokerage </li></ul></ul><ul><ul><li>Exchanges </li></ul></ul><ul><ul><li>Clearing House </li></ul></ul><ul><ul><li>Market Data Services </li></ul></ul>
    222. 222. Secondary Market Players <ul><li>Broker </li></ul><ul><ul><li>Middleman in a trade </li></ul></ul><ul><ul><li>Buys and sells securities for customers </li></ul></ul><ul><ul><li>Identifies the buyers/sellers for customer </li></ul></ul><ul><ul><li>Main source of income : commission </li></ul></ul><ul><li>Specialists </li></ul><ul><ul><li>Each stock listed on the NYSE is allocated to a specialist </li></ul></ul><ul><ul><li>All buying and selling of a stock occurs at his &quot;trading post&quot; </li></ul></ul><ul><ul><li>Buyers and sellers meet at the trading post to get current bid and ask price for a security </li></ul></ul><ul><ul><li>Maintain own inventory of securities for large trades </li></ul></ul><ul><ul><li>Mediate between other buyers & sellers </li></ul></ul>
    223. 223. Secondary Market Players <ul><li>Dealer </li></ul><ul><ul><li>Principal in a securities transaction -trade for their own account </li></ul></ul><ul><ul><li>Assumes risk for the transactions </li></ul></ul><ul><ul><li>Marks securities up or down to make a profit on their transactions </li></ul></ul><ul><li>Registered Representatives </li></ul><ul><ul><li>An individual who has passed the NASD's registration process and is licensed to work in the securities industry </li></ul></ul><ul><ul><li>Usually a brokerage firm employee acting as an account executive for clients </li></ul></ul><ul><ul><li>Sell to the public; they do not work on exchange floors </li></ul></ul>
    224. 224. Stock Indices <ul><li>Index of market prices of a group of stocks </li></ul><ul><li>Types </li></ul><ul><ul><li>Market-value weighted index </li></ul></ul><ul><ul><ul><li>Each stock affects the index in proportion to its market value </li></ul></ul></ul><ul><ul><ul><li>Eg - Nasdaq Composite Index, S&P 500, Hang Seng Index </li></ul></ul></ul><ul><ul><li>Price-weighted index (DJIA) </li></ul></ul><ul><ul><ul><li>Each stock affects the index in proportion to its price per share </li></ul></ul></ul><ul><li>Key Indices </li></ul><ul><ul><li>US Technology - Nasdaq Composite Index </li></ul></ul><ul><ul><li>US Others - DJIA </li></ul></ul><ul><ul><li>UK - FTSE </li></ul></ul><ul><ul><li>France - CAC 30 </li></ul></ul><ul><ul><li>Germany - DAX </li></ul></ul><ul><ul><li>India - Bombay Stock Exchange </li></ul></ul>
    225. 225. Dow Jones Industrial Average <ul><li>30 ‘blue chip’ companies selected by The Wall Street Journal </li></ul><ul><li>Price Weighted </li></ul><ul><li>Calculation - Add the prices of 30 shares on their primary exchange and divide the sum by 30 </li></ul><ul><li>May 26, 1896 - 40.94 Dec 11, 2003 – 10009 </li></ul><ul><li>Components </li></ul><ul><ul><ul><li>Alcoa </li></ul></ul></ul><ul><ul><ul><li>Allied Signal </li></ul></ul></ul><ul><ul><ul><li>American Express </li></ul></ul></ul><ul><ul><ul><li>Chevron </li></ul></ul></ul><ul><ul><ul><li>DuPont </li></ul></ul></ul><ul><ul><ul><li>Disney </li></ul></ul></ul><ul><ul><ul><li>Kodak </li></ul></ul></ul><ul><ul><ul><li>General Electric </li></ul></ul></ul><ul><ul><ul><li>Goodyear </li></ul></ul></ul><ul><ul><ul><li>Hewlett-Packard </li></ul></ul></ul><ul><ul><ul><li>International Paper </li></ul></ul></ul><ul><ul><ul><li>J.P. Morgan </li></ul></ul></ul><ul><ul><ul><li>Coca Cola </li></ul></ul></ul><ul><ul><ul><li>McDonalds </li></ul></ul></ul><ul><ul><ul><li>Philip Morris </li></ul></ul></ul><ul><ul><ul><li>Sears </li></ul></ul></ul><ul><ul><ul><li>AT&T </li></ul></ul></ul><ul><ul><ul><li>Travelers </li></ul></ul></ul><ul><ul><ul><li>Exxon </li></ul></ul></ul><ul><ul><ul><li>WalMart </li></ul></ul></ul><ul><ul><ul><li>3M 7.2% </li></ul></ul></ul><ul><ul><ul><li>IBM 6.9% </li></ul></ul></ul><ul><ul><ul><li>P & G 5.2% </li></ul></ul></ul><ul><ul><ul><li>United Tech 4.7% </li></ul></ul></ul><ul><ul><ul><li>Merck 4.6% </li></ul></ul></ul><ul><ul><ul><li>Microsoft 4.0% </li></ul></ul></ul><ul><ul><ul><li>GM 3

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