IntroductionA financial system plays a vital role in the economic growth of a country. It intermediates with the flow of funds b/w those who save a part of their income to those who invest in productive assets.It mobilizes & usefully allocates scarce resources of a country.A financial system is a complex, well-integrated set of sub-systems of financial institutions, markets, instruments, and services which facilitates the transfer & allocation of funds, efficiently & effectively.
Development Financial Inst. All-India FinancialInst.: IFCI, IDBI, IIBI, State-level Other SIDBI, IDFC, Inst.: Inst.: NABARD SFCs, SIDCs ECGC, DICGC EXIM Bank, NHB
Financial Mkt. Capital Money Mkt. Mkt. Treasury Bills, Call Money mkt. Equity Debt Commercial Bills, Mkt. Mkt. Commercial papers, Certificates of Deposit Term Money Secondary Primary Mkt. Mkt. Private Corporate debt -Public issues NSE,BSE PSU Bond Market -Private OTCEI,ISE Government Securities placement Regional Market Stock ExchangesDomestic International Mkt. Mkt.
Types of Money⇒ Broad Money⇒ Narrow Money⇒ Fiat MoneyOthers:a) Gold & Silver Coins (Ginni)b) Metal Moneyc) Paper Moneyd) Plastic Moneye) Virtual Money
Capital Formation The "capital stock" is one of the basic determinants of an economys ability to produce income for its members. Composed of equipment, buildings and intermediate goods not themselves directly consumed,"Capital formation" is simply the enlargement of the capital stock. The higher the rate of capital formation, the more rapid is the growth of the economys productive capacity and, hence, the more rapid the growth of aggregate income.
PoolIn capital budgeting, the concept that investment projects are financed out of a pool of bonds, preferred stock, and common stock, and a weighted-average cost of capital must be used to calculate investment returns.In insurance, a group of insurers who share premiums and losses in order to spread risk.In investments, the combination of funds for the benefit of a common project, or a group of investors who use their combined influence to manipulate prices. Cont…
A temporary affiliation of two or more people in an attempt to manipulate a securitys price and/or volume.The pool is necessary in order to acquire the capital needed to manipulate a stock having a large market value.Pools were especially popular in the 1920s and early 1930s but now have been regulated out of existence
NettingReducing transfers of funds between subsidiaries or separate companies to a net amount.Netting is a process the National Securities Clearing Corporation (NSCC) uses to streamline securities transactions.To net, the NSCC compares all the buy and sell orders for each individual security and matches purchases by clients of one brokerage firm with corresponding sales by other clients of the firm.
Cash flows before netting £100m £60m U.K. £40m parent £200m £100m German U.S. £100msubsidiary subsidiary
Cash flows after netting £60m £140m U.K. parent German U.S.subsidiary subsidiary
Leading and lagging• Refers to altering the timing of cash flows within the corporation to offset foreign exchange exposures – Leading - If a parent firm is short euros, it can accelerate euro payments from its subsidiaries – Lagging - If a parent firm is long euros, it can accelerate euro payments to its subsidiaries
Banking InstitutionsThe mobilization of deposits &disbursement of credit to varioussectors of the economy
Functions of Banking Inst.• Transfer of funds• Collection• Foreign Exchange• Safe deposit locker• Gift Cheques &• Merchant Banking.
Public Sector BanksMajor Govt. holding• SBI and its associates• Nationalized Bank
Objective of nationalization• banking facilities on a large scale.• Rural and sub-urban areas.• To promote agricultural finance and to remedy the defects in the system of agricultural finance.• To help the reserve banks in its credit policies.• To help the govt. to pursue the broad economic policies.
Nationalised BankThe nationalisation was effected by an ordinance which was later replaced by an Act of Parliament, known as the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970.
Private Sector BankNew entry of banks in the Pvt. Sector were revised in Jan 2001. The guidelines prescribed an increase in initial minimum paid-up capital from Rs.100 crore to Rs. 200 crore.Moreover, the initial minimum paid up capital shall be increased to Rs.300 crore in subsequent 3yrs. After commencement of business.
Foreign Banks in IndiaForeign banks are now allowed to set up subsidiaries in India. Such Subsidiaries will have to adhere to all banking regulations, including priority sector lending norms applicable to other domestic banks.
BANKING What you allunderstand from the term Banking???
The Banking Regulation Act,1949, known till1965 as the Banking Companies Act 1949,defines Banking as:-“ accepting for the purposes of lending orinvestment, deposits of money from thepublic, repayable on demand or otherwiseand withdrawable by cheque, draft, orderor otherwise”
Origin of Banking in India1683 – East India Company ( By – Madras based officers)banking of western type only.1779 – The Hindustan Bank1786 – General Bank of IndiaThen came 3 presidency banks, in the early part of the nineteenth century, namely:-1806 – Bank of Bengal1840 – Bank of Bombay1846 – Bank of MadrasIn the second half of the nineteenth century :-1) More Exchange banks2) Indian joint stock banks.
Continued ….In 1900 –1) 9 joint stock banks2) 8 exchange banks3) 3 Presidency BanksIn 1921 –Three Presidency banks were amalgamated to form “Imperial Bank of India (IBI)”In 1935 – Reserve Bank of India was established.Till this time IBI functioned as a “Quasi – Central Bank”.
Origin of Commercial Banking1000 B.C. – Originated from Temples and Royal Palaces inBabylon, as they attract peoples faith.Then Goldsmiths came – when coins made of preciousmetals like gold and silver as commonly accepted forms ofwealth in 1640.
Structure of Present Indian Banking System Reserve Bank of India1) Scheduled Bank a) State Co –operative Banks b) Commercial Banks Foreign Indian Public Sector Banks State Bank of India & its Subsidiaries Nationalised Banks Regional Rural Banks (In 1975) Private Sector Banks
2) Non – Scheduled Banks –a) Central Co - operative Banks & Primary Credit Societies.b) Commercial BanksConditions to be in category of Scheduled banks –1) Must have a paid up capital and reserves of not less than Rs.5 lacs.2) It must also satisfy the RBI that its affairs are not conducted in a manner detrimental to the interests of depositors.
Functions of Commercial BanksDivided into three parts –1) Primary Functions – a) Accepting Deposits Fixed or Time Deposits Current or Demand Deposit Saving Deposit Recurring Deposit b) Advancing Loans Cash Credit Overdraft Short term loans Demand Loans c) Credit Creation – i.e. giving more loans than their cash reserves
Continued… 2) Secondary Functions – a) Agency Functions – Collection & Payment of Various Items Purchase & Sale of Securities Trustee Purchase & Sale of Foreign Exchange Underwriting b) General Utility Services – Locker Facilities Travelers Cheque Business Information & Statistics Help in Transportation of Goods
Continued…Social Functions or Role of Banks in Economic Development1) Capital Formation2) Inducement to Innovation3) Investment – friendly Interest Rate Structure4) Development of Rural Sector5) Implementation of Monetary Policy6) Employment Opportunities
Money MarketIt is the market of instruments which are for• Very short Period• Low Return• Normally safe & SecureMoney market instruments are traded in Discount and Finance House of India (DFHI) Instruments of Money Market• Call Money• Treasury Bill• Commercial Paper• Certificate of Deposit• Money Market Mutual Fund
Call Money• It is the market where day to day surplus funds of banks are traded• The call money loans are of very short term in nature ranging from 1 to 15 days• If any bank is having requirement of funds for meeting statutory obligations of RBI or for any other purpose and other bank is having surplus money for that period, the loan can be taken by the bank from other bank• The call money rate are 1%-2% generally
Treasury Bill• Treasury bills are issued by the reserve bank of India• Treasury bills are raised to meet the short- term funds required by the government of India• T-bills also enables the RBI to perform open market operations for regulating money supply in the economy• T- bills are normally 91 days T-bills, 182 days T-bills, 364 days T-bills• They are highly secured instruments, so interest rate is very low in case of T-Bill.
Commercial Paper• They can be issued by the companies having minimum net worth of 4 crores and minimum working capital of 4 crores• They are issued in multiples of 5 Lakhs• Their maturity varies from 15 days to one year• They are unsecured in nature• They are transferable by endorsement & delivery• They normally have buy back facility
Certificate of deposit• These can be issued by all scheduled Bank except cooperative banks & regional rural bank• The Maturity period for a certificate of deposit is not less than 15 days and not more than 12 months• They are issued in multiples of 1 lakh but subject to minimum size of 5 lakhs• They are always issued at a discount to face value• They can be issued to individuals also
Money Market Mutual Fund• MMMF are mutual funds that Invest Primarily in money market instruments• Can be open ended or close ended• Minimum lock in period 15 years• Minimum size 50 crores• Should not exceed 2% of last years deposits in case of bank and 2% of domestic borrowings in case of financial institutions•
Forex Market• The forex market is the market where foreign exchange are traded like Dollar, Pound, Euro et.• The exchange rate are determined by the forex market on the basis of demand and supply for the particular currency.• It is controlled by FEMA
Bullion Market• Bullion Market is the market where metals are traded Like Gold, Silver, Aluminum etc• The rates for bullions depends upon the demand & supply for that particular metal.
Government Securities Market• They are issued by the Government• They are also known as gilt edged securities as the repayment of principal and interest are highly secure.• The interest rate is very low• The short term govt. securities ranges from 1 – 5 years, medium term govt. securities ranges from 5 – 10 year and long term govt. securities are having maturity period exceeding 10 years
Financial Institutions• Development Institutions• Investment Institutions• Regulatory Institutions• Banking Institutions• Non Banking Finance Institutions /Companies (NBFC)
Explain the reasons forimposing the social controlover the commercial banks of India. How far has itsucceeded in achieving the GOAL?
What are excess reserves with the banks? What is their Utility?If banks happen to keep cash reserves beyond the ReserveBank’s requirement of cash reserve ratio, they are havingexcess reserves.Example : -CRR – 10%, Demand Deposits = Rs. 10,000.Actual Cash Reserves = Rs. 1500Required cash Reserves = 10 % of Rs. 10,000 i.e. Rs.1,000Excess Reserves = Rs.(1500 – 1000) = Rs. 500Banks can utilize these excess reserves whenever itdesires to make more loans. It can make more loans 10times of its excess reserves, assuming CRR = 10% andCredit Multiplier = 1 / 10% = 10.
“Real utility of excess reserves isrealized by the banks when thecentral bank tries to squeeze theirliquidity through higher Bank Rateor through the sale of securitiesduring inflation”.
StartingThe U.S. banking industry can be categorized into five eras.1st Era => 1791 to 1832In most states of early federal union, banks organizers needed special permission from the government to open and operate banks, A central bank founded in 1791 and second bank in 1816 and operated until 1832.2nd Era => 1832 to 1864In 1832 state government took over the job of supervising banks. In those days, banks made loans by issuing their own currency. These bank notes were supposed to convertible, on demand, to cash i.e. to gold or silver. By 1860, more than 10000 different bank notes circulated throughout the country. Then congress passed the National Currency Act in 1863. Cont…
Cont…3rd Era => 1865 to 1914National bank notes were the mainstay of the nations money supply until Federal Reserve notes appeared in 1914.The 1907 crisis, also called the Wall Street Panic, was severe. The panic caused what was at that time the worst economic depression in the US’s history. The unemployment rate reached 20% in the fall of 1907.4th Era => 1929 to 1933.⇒ The onset of the worldwide depression⇒ In end 1931, more than 1000 U.S. banks failed.⇒ In June 1933, Federal Deposit Insurance act was enacted.
5th Era => 1970s to Today⇒ Banking has undergone a revolution.⇒ Technology has revolutionized the industry.⇒ E-Banking, ATMs, plastic cards and many more.Types of banks in US.In 1863, with the enactment of the National Banking Act, a dual banking system was created, which gave rise to two types of banks.a) National banks – can issue currencyb) State Banks – can not issue currencyCommercial bank includes trust companies, stock savings banks, and industrial banks.Savings banks, savings and loans, cooperative banks and credit unions are actually classified as thrift institutions.Each originally concentrated on meeting specific needs of people who were not covered by commercial banks.
Savings and loan associations and cooperative banks were established during the 1800s to make it possible for factory workers and other lower – income workers to buy homes.Credit unions were started by people who shared a common bond, like working at the same company, whose main function was to provide emergency loans for people who could not get loans from traditional lenders.Commercial banks can offer car loans, thrift institutions can make commercial loans, and credit unions offer mortgages.
The case of Lehman’s Bank, where they have not much reserves, and resulted into Bankruptcy
Wholesale BankingIt is the provision of services by banks to the like of :a) Large corporate clientsb) Mid-sized companiesc) Real estate developers and investorsd) International trade finance businessese) Institutional customers (such as pension funds and government entities/agencies), and services offered to other banks or other financial institutions.In essence, wholesale banking services usually involve high value transactions.
Cont…⇒ Wholesale banking contrasts with Retail Banking, which is the provision of banking services to individuals.⇒ (Wholesale finance means financial services, which are conducted between financial services companies and institutions such as banks, insurers, fund managers, and stockbrokers.)⇒ Modern wholesale banks are engaged in: a) Underwriting b) Market making c) Consultancy, d) Mergers and acquisitions e) Fund management.Well-known banks offering wholesale banking services - ING & Standard Chartered
Retail Banking includes:- Loans against Equity shares Debit & Consumer Durable credit cards Loans Personal insurance Mutual Funds loans Financial Products Such as: Bill Payment Auto Finance services Loans for Subscribing Brokerage to IPO Residential Mortgage Deposit Products Loans
IntroductionBanks across the country are tripping over themselves to enter new segments like –a) Car Loansb) Consumer Loansc) Housing Financed) Education loane) Credit CardsThe big bonus for banks came in the form of the Securitization Bill, which gave banks and institutions muscle to recover bad debts.“Retail Banking is new Mantra for all the banks”
Continued… These products provide an opportunity for banks to diversify the asset portfolio with high profitability and relatively low NPA’s. Banks have identified Retail Banking as a “Principle Growth Driver” The growth in retail banking has been facilitated by the growth in banking technology and automation of banking processes that enable extension of reach and rationalization of cost as introduction of ATM facility. It also has the advantage of reducing the branch traffic.
Major forces that are driving and shaping consumer lending. Competition Major ForcesSecuritization Automation Are Regulation
New facilities that banks are using not only to lure customers but also to help them reduce their total operating costs. Mobile Banking Net Banking Bill Payment New facilities Phone Banking ATM ‘ s
Critical Success factors of banks which are moving towards retail banking Wider Distribution• Factors are : Good recovery network Cross - selling Mechanism Strong brand Fast loan presence processingLow cost of Multi distribution Success Factors funding channels Low intermediation Flexible Or operating cost technology Proper credit Marketing Appraisal capabilities Large product Mechanism portfolio
These success factors would ultimately transform into how well banks understand their customers and how effective they are in meeting their new definition of ‘access’, ‘convenience’ and ‘value’.
Retail Banking StrategiesRetail banking covers both asset – side and liability side products.The liabilities side include – a) ATMs b) E – banking c) tele – bankingThe assets side of the bank has various types of loans made by a retail bank.Banking services can be divided into three categories from the dimensions of retail banking. a) Core services – it is the reason for being in the market. b) Facilitating services – they are needed so that core services can be used. c) Supporting services – it exactly discriminate the service package from the services of competitors.
StrategiesMarket Segmentation Banks have to focus on it to identify differences between groups of potential customers and decide what kind of products can be served for such groups. Swadhan – it is a shared payments network system. The future of retail banking lies in mobile banking.Price Bundling It is a selling arrangement where several different products are explicitly marketed together at a price that is dependent on the offer. It offers economies of scale, utilization of existing capacities and reaching wider population of customers. It can be used in order to lengthen the relationship with a customer.Customer Relationship Management.
BankAssurance: Marriage of Banking and Insurance• With the insurance sector opening up, there is great interest in knowing how far the expansion of the insurance market will alter the contours of the existing financial structure. The expansion of banking into the insurance industry is inevitable.• In April 2000, the Reserve Bank of India permitted banks to enter the insurance market.• In terms of the existing guidelines, commercial banks can take any of the three routes to enter the insurance business, namely 1. Undertake distribution of insurance products as an agent of insurance companies on a fee basis; 2. Make investments in an insurance company for providing infrastructure and services support; 3. Set up a joint venture company for undertaking insurance business with risk participation.• It has been well recognised by the RBI that there could be a competitive as well as complementary relationship between banks and insurance companies.• For instance, in the life insurance business where the insurance contract (policy) is for a long period, the premium can be split up into two parts: (a) for risk coverage and (b) towards savings. The latter obviously is something that banks target as part of their core business.
Cont…• Banks are the chief purveyors of the financial services to a large number of individuals and small borrowers. On account of their geographical reach and access to customers, banks could logically be a channel for the distribution of insurance products.• On the other hand, bank services (as they are understood today), insurance selling and fund management are all inter-related activities having inherent synergies. Therefore, selling of insurance by banks could be beneficial for both banks and insurance companies.• In Europe, this synergy between banking and insurance has given rise to a novel concept called ``BankAssurance.• Simply stated, bankassurance means that a package of financial services that fulfil both banking and insurance can be offered at the same time and at the same place.
Cont…• This concept in turn impacts on the ongoing debate over ``Universal Banking. In an extended sense, universal banking will include not only a combination of commercial and investment banking but insurance as well.• In the evolving nature of RBI guidelines, regulatory concerns will be of paramount importance. As of now the RBI has said the banks can neither take up insurance business departmentally nor set up a separate subsidiary. There has to be an ``arms length relationship between the bank and the insurance entity so that risks inherent in the insurance business do not enter the banks balance sheets.• Second, the guidelines make a distinction between banks that can set up a joint venture and hence share in the risks and those which merely distribute insurance products.• The authority to grant case-by-case permission to banks to enter insurance business is vested with the RBI.
Universal BankingIt is opposite of Narrow Banking.Narrow Banking:Its legislation would require banks to back their liabilities with safe assets, such as government securities.The benefits of narrow banking are:1) By locking bank assets in high-quality instruments, narrow banking regulation would minimize bank liquidity and credit risk.2) Confidence in the value of their liabilities.3) With payment system access restricted to narrow banks, payments would be fully secure.
Non Banking Financial Company (NBFC)“A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property”.
NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ?NBFCs are doing functions akin to that of banks, however there are a few differences:(i) NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.)(ii) It is not a part of the payment and settlement system and as such cannot issue cheques to its customers;
What are the different types of NBFCs registered with RBI?The NBFCs that are registered with RBI are:(i) equipment leasing company;(ii) hire-purchase company;(iii) loan company;(iv) investment company.With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as(i) Asset Finance Company (AFC)(ii) Investment Company (IC)(iii) Loan Company (LC)
PRINCIPLES OF LENDINGPrinciples of Safety of Funds.Principles of Profitability.Principles of Liquidity.Principles of Purpose.Principles of Risk Spread.Principles of Security.
PRINCIPLES OF LENDINGPrinciples of Safety ofFunds: Willingness. Honesty. Integrity. Character.
PRINCIPLES OF LENDING Principles of ProfitabilityMust Cover Cost of Funds. Cost of its Administration. Risk Cost.
PRINCIPLES OF LENDINGPrinciples of LiquidityProblem may include: Liquidity Crises. ALM mismatch. Bank’s inability to meet its obligations. Account turning NPA.
PRINCIPLES OF LENDINGPrinciples of PurposeProductive Purpose: Helps generate additional income. It works like incentive for pursuingthe activity. Generate cash and builds capacityto repay. Unproductive purpose acts like a burden.
PRINCIPLES OF LENDINGPrinciples of Risk Spread: Sector wise. Industry wise. Geographical Area wise. Borrower wise.
PRINCIPLES OF LENDINGPrinciples of SecurityTo fall back upon in case of: Unwillingness of the borrower. Absence of capacity of the borrower.
PRINCIPLES OF LENDINGFeatures of GoodSecurity: Marketability. Ascertainability. Stability.
PRINCIPLES OF LENDINGMarketability: Ready Market. Regular Transactions. Locally available.
PRINCIPLES OF LENDINGAscertainability: Physicallyidentifiable. Monetarily Valuable.
PRINCIPLES OF LENDINGStability: Physically notperishable. Monetarily not
PRINCIPLES OF LENDINGTransferability: Legally. Physically to prospective buyers.
Components of a Bank Balance sheetLiabilities Assets1. Capital 1. Cash & Balances with2. Reserve & Surplus RBI3. Deposits 2. Bal. With Banks & Money at Call and4. Borrowings Short Notices5. Other Liabilities 3. Investments 4. Advances 5. Fixed Assets 6. Other Assets Contingent Liabilities
Components of Liabilities1.Capital:Capital represents owner’s contribution/stake in the bank.- It serves as a cushion for depositors and creditors.- It is considered to be a long term sources for the bank.
Components of Liabilities2. Reserves & SurplusComponents under this head includes:I. Statutory ReservesII. Capital ReservesIII. Investment Fluctuation ReserveIV. Revenue and Other ReservesV. Balance in Profit and Loss Account
Components of Liabilities3. Deposits This is the main source of bank’s funds. The deposits are classified as deposits payable on ‘demand’ and ‘time’. They are reflected in balance sheet as under:I. Demand DepositsII. Savings Bank DepositsIII. Term Deposits
Components of Liabilities4. Borrowings (Borrowings include Refinance / Borrowings from RBI, Inter-bank & other institutions)I. Borrowings in India i) Reserve Bank of India ii) Other Banks iii) Other Institutions & AgenciesII. Borrowings outside India
Components of Liabilities5. Other Liabilities & Provisions It is grouped as under:I. Bills PayableII. Inter Office Adjustments (Net)III. Interest AccruedIV. Unsecured Redeemable Bonds (Subordinated Debt for Tier-II Capital)V. Others(including provisions)
Components of Assets1. Cash & Bank Balances with RBII. Cash in hand (including foreign currency notes)II. Balances with Reserve Bank of India In Current Accounts In Other Accounts
Components of Assets2. BALANCES WITH BANKS AND MONEY AT CALL & SHORT NOTICEI. In India i) Balances with Banks a) In Current Accounts b) In Other Deposit Accounts ii) Money at Call and Short Notice a) With Banks b) With Other InstitutionsII. Outside India a) In Current Accounts b) In Other Deposit Accounts c) Money at Call & Short Notice
Components of Assets3. Investments A major asset item in the bank’s balance sheet. Reflected under 6 buckets as under:I. Investments in India in : * i) Government Securities ii) Other approved Securities iii) Shares iv) Debentures and Bonds v) Subsidiaries and Sponsored Institutions vi) Others (UTI Shares , Commercial Papers, COD & Mutual Fund Units etc.)II. Investments outside India in ** Subsidiaries and/or Associates abroad
Components of Assets4. AdvancesThe most important assets for a bank.A. i) Bills Purchased and Discounted ii) Cash Credits, Overdrafts & Loans repayable on demand iii) Term LoansB. Particulars of Advances : i) Secured by tangible assets (including advances against Book Debts) ii) Covered by Bank/ Government Guarantees iii) Unsecured
Components of Assets5. Fixed Asset I. Premises II. Other Fixed Assets (Including furniture and fixtures)6. Other Assets I. Interest accrued II. Tax paid in advance/tax deducted at source (Net of Provisions) III. Stationery and Stamps IV. Non-banking assets acquired in satisfaction of claims V. Deferred Tax Asset (Net) VI. Others
Contingent LiabilityBank’s obligations under LCs,Guarantees, Acceptances on behalf ofconstituents and Bills accepted by thebank are reflected under this heads.
COMPONENTS OF APPRAISALTechnical feasibility: Quantity, quality, timely implementation of project and timely delivery of products. Suitability of machinery and equipment. Availability of inputs - power, skills: Whether locally available. Whether scares. Whether dependent on foreign suppliers. Whether depended on a few suppliers. Whether dependent up on vagaries of nature.
COMPONENTS OF APPRAISALTechnical feasibility - as to Technology employed - whether latest or proven in medium/long term Whether advantageously located. Pollution/Environment risk if any. Whether dependent up on job work, unbranded items. Whether in sensitive sector. Product range and product mix. Present economic scenario whether favourable
COMPONENTS OF APPRAISALEconomic viability: Profitability & cash generation: Interest Coverage ratio - (PBDIT)/Interest) Return on Capital employed. (PBDIT/Capital Employed) (Capital employed = capital + reserve & surpluses + long term debt - investment in subsidiaries or associated firms) Profitability - Net Profit/Sales.
COMPONENTS OF APPRAISALManagerial viability: Adequacy and suitability ofmanagement structure. Whether technically/ professionally qualified. Reputation in the market andexperience Ability to withstand competition. Financial standing. Bargaining power with suppliers.
COMPONENTS OF APPRAISALManagerial viability: Parameters to be considered are: Whether management is broad based and controlled by professionals/ experienced persons. Whether it is run by a few family members. Whether controlled by two or one key person Conduct of Account - whether irregular, cause of irregularity. Compliance of terms and conditions of Sanction.
COMPONENTS OF APPRAISALManagerial viability: Parameters to be considered are: Past Track record. Composition of Management. Quality of Management. Relationship with the Bank - whether satisfactory - for how much period. Experience - how much, in which business.
COMPONENTS OF APPRAISALMarket Appraisal: Availability or creation of market- whether diversified. Demand forecasting based onoverall demand and supplyposition including globalscenario. Product promotion measures
COMPONENTS OF APPRAISALMarket Appraisal: Fluctuations Expected indemand & supply position in nearfuture. Future Growth Potential. Government Policies in Pricing. Pollution. Custom and excise duties.
COMPONENTS OF APPRAISALMarket Appraisal: Competition - how much & with whom. Export potential. Product range and Product mix. Life cycle of products. Distribution set - up - whether any tie-up arrangement for long term/ assured off take.
COMPONENTS OF APPRAISALMarket Appraisal: Quality of Product whether consistent. Multi locational advantage -whether available. Import threat - if any. Product - whether perishable. Demand of product: Whether adequate. Whether increasing.
COMPONENTS OF APPRAISALFinancial Appraisal: Consideration of various costs: Cost of land, its development. Construction of building/sheds. Acquisition of plant and machinery and other fixed assets. Preliminary and pre - operative expenses. Technical fee. Contingencies. Margin for working capital.
COMPONENTS OF APPRAISALFinancial Appraisal: Means of Finance: Promoters contribution. Equity Subordinated loans. Secured loans raised from financial institutions or banks. Lease finance or equipment acquired on hire purchase basis. Debentures. Supplier’s credit. Internal cash accrual in case of existing firm
COMPONENTS OF APPRAISALFinancial Parameters to be considered: Current Ratio Interest Coverage ratio - (PBDIT/Interest) Return on Capital Employed (PBDIT/Capital Employed) (Capital employed = capital+reserve &surpluses+long tern debt - investment insubsidiaries or associated firms).
COMPONENTS OF APPRAISALFinancial Parameters to be considered: Past commitment with respect to net sales. Past commitment with respect to net profit. Development of LC/ Invocation of Bank Guarantees/ Payment of Bills.
COMPONENTS OF APPRAISALFinancial Parameters to be considered: Trend Analysis: Net Current Assets. Tangible Net Worth. Profitability - Net Profit/Sales. Cost are reasonable.
COMPONENTS OF APPRAISALFinancial Parameters to be considered: For new units only: Repayment Period. Return on Project Tangible Net worth Asset Coverage Ratio. (Primary + Collateral)/ Aggregate Secured Loans.
The Narasimham Committee1990s India had traumatic moments1) Banks were burdened with large percentage of non-performing loans2) Customer service had suffered and out- mode practices were in vogue3) Overall re-hauling was needed for entire financial systems in general and banking sector in particularThe Narasimham Committee was set up to recommend changes in financial system
Committee Recommends– Overall emphasis upon ‘de-regulation’– No further nationalization to be adhered to– No distinction between ‘public’ and ‘private’ sector banks– Control of banking sector to be centralized (and not to be divided between RBI and Dept. of Banking)– SLR and CRR should be reduced to prudent levels– Concessional lending to be phased out– The capital base of banks should meet international standards– The appointment of Chief Executive of the banks to be de-politicized
ALM – Asset-Liability ManagementDefinition – It is associated with strategic balance sheet management that takes into account risks caused by changes in the interest rates, exchange rates & the liquidity position of the banks.It is a tool to manage:- Interest rate risk The price risk. Exchange rate risks Commodity price risk Share price risk.
Gap Analysis=> It is the basic technique used for analyzing the interest risk.⇒ This technique helps to find out the gap between banks assets & liabilities, maturing after certain time periods.⇒ RSG(Rate sensitive gap) = ⇒Rate sensitive Assets(RSA) – Rate sensitive Liabilities(RSL) IF RSA > RSL then there is a positive gap, which indicates that institution is in a position to benefit from rising interest rates. IF RSA < RSL then there is a negative gap, which indicates that institution is in a position to benefit from declining interest rates. Therefore the gap is used to measure interest rate sensitivity.
Purpose & Objective of ALMAn effective Asset Liability ManagementTechnique aims to manage the volume,mix, maturity, rate sensitivity, quality andliquidity of assets and liabilities as awhole so as to attain a predeterminedacceptable risk/reward ration.It is aimed to stabilize short-term profits,long-term earnings and long-termsubstance of the bank.
RBI DIRECTIVES• Issued draft guidelines on 10th Sept’98.• Final guidelines issued on 10th Feb’99 for implementation of ALM w.e.f. 01.04.99.• To begin with 60% of asset & liabilities were covered; 100% from 01.04.2000.• Gap Analysis to be applied in the first stage of implementation.
Liquidity ManagementBank’s liquidity management is theprocess of generating funds to meetcontractual or relationship obligations atreasonable prices at all times.New loan demands, existingcommitments, and deposit withdrawals arethe basic contractual or relationshipobligations that a bank must meet.
Adequacy of liquidity position for a bank Analysis of following factors throw light on a bank’s adequacy of liquidity position:a. Historical Funding requirementb. Current liquidity positionc. Anticipated future funding needsd. Sources of fundse. Options for reducing funding needsf. Present and anticipated asset qualityg. Present and future earning capacity andh. Present and planned capital position
Funding Avenues To satisfy funding needs, a bank must perform one or a combination of the following:a. Dispose off liquid assetsb. Increase short term borrowingsc. Decrease holding of less liquid assetsd. Increase liability of a term naturee. Increase Capital funds
Statement of Structural LiquidityAll Assets & Liabilities to be reported as pertheir maturity profile into 8 maturity Buckets: i. 1 to 14 days ii. 15 to 28 days iii. 29 days and up to 3 months iv. Over 3 months and up to 6 months v. Over 6 months and up to 1 year vi. Over 1 year and up to 3 years vii. Over 3 years and up to 5 years viii. Over 5 years
STATEMENT OF STRUCTURAL LIQUIDITY• Places all cash inflows and outflows in the maturity ladder as per residual maturity• Maturing Liability : Cash outflow• Maturing Assets : Cash Inflow• Classified in to 8 time buckets• Mismatches in the first two buckets not to exceed 20% of outflows• Shows the structure as of a particular date• Banks can fix higher tolerance level for other maturity buckets.
CAMELS – Ratings for BanksFor evaluation and rating of Indian Banks Six parameters were used.C – Capital AdequacyA – Asset QualityM – ManagementE – Earning PerformanceL – Liquidity & Systemsemployed by the Supervisory Authorities in U.S.A. considering the growing supervisory concerns on the need for adequate systems of risk management and operational controls in banks operating in India.
Component RatingsEach of the six components in CAMELS( for Indian Banks)Or 4 components in CACS (for foreign banks operating in India) are assigned a rating on a scale of 1 to 5 in order of performance.C = Capital AdequacyA – Asset QualityC – ComplianceS – Systems Composite RatingsIt is used by the supervisors as the Prime indicator of bank condition, assigned on a scale of A to E.
Corporate BankingCorporate banks or wholesale banks normally supply capitalfor business ventures and construction activities on a long –term basis.Wholesale banking is an umbrella term encompassing theproducts and services that a commercial bank provides to itscorporate customers.In todays technological, competitive and pressure packedenvironment, wholesale bankers have two basic choices-: 1) either ensure their current operation at peakefficiency so as to effectively meet its customer need’s. 2) or develop alternative strategies outside their currentoperations requirement.
Long Term Commercial Loans.⇒ Corporate banking mainly deals with these loans⇒ A loan that is structured and supported specifically by the operation and performance of a specific business or enterprise is called a commercial loan.⇒ The lender requires a record of 2 yrs of profitability and a plan that can demonstrate the continued performance of the loan.⇒ The purpose for longer commercial loans vary greatly, from purchases of major equipment and plant facilities to business expansion or acquisition costs.⇒ Such long term and big league financing is usually done through consortium financing or loan syndication.
Consortium FinanceEvery advance however safe it may be suffers from undefined risks. These risks may be business or economy risks.Consortium banks are specialist banks that are jointly owned by other banks and operate in the wholesale financial market. This practice is also known as participation financing or joint financing.Consortium is entered into for project financing (long term and working capital requirement), deferred payment guarantees.
IntroductionLending is an indispensable aspect of banking, and a banker earns bulk of his income through lending.It adds value to Bank.The lending decisions of a bank are guided by its loan policy or credit policy.Credit policy outlines the crucial lending decisions of a bank.
Credit policy Lays down Exposure Levels Credit Risk Credit appraisal assessment standards Policy Lays down DelegationDocumentation Of standards Powers Takeover Of Pricing Advances
Need for Credit PolicyThe credit policy document is a document that carefully specifies the do’s and dont’s while sanctioning the loan proposals.1) To screen out loans2) Which can be outrightly rejected3) Loans that can be sanctioned without any reference.AnalyzingSelectingSanctioningMonitoring
Components of Credit Policy Miscellaneous Loan policies Other General Specific Policies issues Components Specific Quality Loan Control Categories
Significant issues that are to be incorporated in the policy1) Objectives:- Formulation of objectives of the proposed policy.With diverse objectives, we have to prioritize them: like:- a) profitability b) liquidity c) volume of business d) risk factorsEssentially, the credit policy should fit within the framework of regulatory norms.2) Volume and Mix loans:- The policy should specify the targeted composition of the loan.
3) Geographical spread – There will be various locations from where a bank conducts its operation.Some may be weak credit demand areas with a considerably high deposit potential.4) Loan Evaluation ProcedureBanks need to consider the following variables while evaluating a loan proposal. a) Industry Prospects Industry cycles Threat from substitutes Shifts in consumer demands Regulatory environment
Continued… b) Operational Efficiency Operating margins Stability & growth of market shares Benefit from economies of scale Access to key raw materials. c) Financial Efficiency Working capital management Ability to raise funds Cost of capital Financial Leverage5) Management Evaluation6) Fundamental Analysis. a) Capital structure b) Asset / liability position c) Profitability d) Sensitivity to interest rate structures, tax policies
Rating Criteria for BanksThe criteria for rating the bank are normally based on:- a) Assets b) Equity c) ProfitsIf the criteria for rating a bank were return on equity then the bank would easily compromise profitability for safety.If the criteria is total assets then it is of less significance as it tells very little about either profitability or creditworthiness.If the criteria is equity, then only the well – capitalized banks may be safe, but they may not be profitable.Drawback with these ratings are – that they do not take into consideration the environment in which the bank operate.
Credit RatingIt is the main tool, which helps in measuring the credit risk and facilitates pricing of a loan.It gives vital indications of weakness in a borrower’s profile.It involves evaluating and assessing an institution’s risk management, capital adequacy and asset quality.
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