Banking financial markets

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Overview of Banks, Financial Products and basics of Bond and stock markets for GD and Interview preparation

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  • Source: http://en.wikipedia.org/wiki/Stock_broker
  • http://www.mysmp.com/mutual-funds/custodian-bank.html http://www.sebi.gov.in/investor/fii15.html
  • Red added from: http://www.investorwords.com/878/clearing_firm.html http://www.marketswiki.com/mwiki/Clearing_firm Did you know from http://www.rbi.org.in/scripts/PublicationsView.aspx?id=157
  • Banking financial markets

    1. 1. We care for your Career
    2. 2. We care for your Career
    3. 3. State Bank of India Chairman: O. P. Bhatt Size of balance sheet: Rs 10,53,414 crore Bank of Baroda CMD: M. D. Malya Size of balance sheet: Rs 2,78,317 crore Punjab National Bank CMD: K.R. Kamath Size of balance sheet: Rs 2,96,633 crore HDFC Bank Managing Director: Aditya Puri Size of balance sheet: Rs 2,22,459 crore Net profit (FY 09-10): Rs 2,949 crore AXIS Bank MD & CEO: Shikha Sharma Size of balance sheet: Rs 1,80,648 crore We care for your Career
    4. 4. LOANS/ OVERDRAFTS ACCOUNTS/ DEPOSITS <ul><li>SAVINGS ACCOUNT </li></ul><ul><li>CURRENT ACCOUNT </li></ul><ul><li>FIXED DEPOSIT </li></ul><ul><li>PERSONAL LOANS, </li></ul><ul><li>AUTO LOANS, </li></ul><ul><li>CASH CREDIT, </li></ul><ul><li>OVERDRAFT </li></ul>We care for your Career
    5. 5. RETAIL SME CORPORATE <ul><li>INDIVIDUAL CUSTOMERS  SALARIED </li></ul><ul><li>HIGH RISK </li></ul><ul><li>HIGH INTEREST </li></ul><ul><li>SMALL TICKET SIZE </li></ul><ul><li>BIG ORGANIZATIONS  LOAN PERFORMANCE DEPENDS ON PROFIT </li></ul><ul><li>MORE TRACK RECORD & OTHER INFO  EASIER TO CHECK CREDIBILITY </li></ul><ul><li>LOWER INTEREST; LARGER TICKET SIZE </li></ul><ul><li>LESS INFO </li></ul><ul><li>BOTH TYPE OF RISKS </li></ul><ul><li>MOSTLY CASH TRANSACTIONS </li></ul><ul><li>UNAUDITED BALANCE SHEETS </li></ul>We care for your Career
    6. 6. We care for your Career
    7. 7. We care for your Career
    8. 8. ACCESS COST We care for your Career
    9. 9. We care for your Career
    10. 10. STRATEGY, BUSINESS DEVELOPMENT, PROFITABILITY QUALITY OF CUSTOMER PORTFOLIO, ASSET/LIABILITY BASE, CROSS-SELL OPPORTUNITIES, RECRUITMENT QUALITY OF A/C’S, LOANS, MANAGING SM’S, CROSS-SELL, ON-FIELD TRAINING SOURCING VALUE CUSTOMERS, RECRUITING/NURTURING RE’S, COMPLIANCE COLD CALLING, PITCHING, DOCUMENTATION GRADUATE, 20-28 YRS MBA, 24-30 YRS MBA, WITH APPX 2 YRS OF BANKING EXP, 26-32 YRS MBA, WITH APPX 3 YRS OF BANKING EXP, 28-35 YRS 5-7 YRS OF BANKING EXP, 28-35 YRS No of branches: 120+; Package: 20-30lacs per anum. No of branches: 30+; Package: 10-15lacs per anum. No of branches: 5-10; Package: 7/8lacs per anum. No of branches: 1-5; Package: 5-8lacs per anum. No of branches: 1/2; Package: 1.20-2lacs per anum. We care for your Career
    11. 11. <ul><li>YOU’RE A SUCESSFUL BANKER IF YOU… </li></ul><ul><li>KNOW YOUR PRODUCT… </li></ul><ul><ul><li>USP, SALIENT FEATURES </li></ul></ul><ul><li>SCAN YOUR COMPETITION… </li></ul><ul><ul><li>REPORT, RESPOND </li></ul></ul><ul><li>KNOW YOUR CUSTOMERS… </li></ul><ul><ul><li>FIND THE “RIGHT” CUSTOMER </li></ul></ul><ul><li>MANAGE YOUR TEAM… </li></ul><ul><ul><li>MOTIVATE, TRAIN, HANDHOLD </li></ul></ul><ul><li>INNOVATE… </li></ul><ul><ul><li>NEW CHANNELS, NEW PRACTICES </li></ul></ul>We care for your Career
    12. 12. <ul><li>QUALITY OF ASSETS </li></ul><ul><ul><li>CREDIT ASSESSMENT - HOW? </li></ul></ul><ul><ul><li>MONEY LAUNDERING/FORGED DOCS </li></ul></ul><ul><ul><li>RECRUITMENT/TRAINING [SALES FORCE] - WHO? </li></ul></ul><ul><li>NEW PRODUCTS - WHAT? </li></ul><ul><li>EXPANSION/REACH – RURAL INDIA - HOW? </li></ul>AS A CUSTOMER , AND A FUTURE BANKER , HOW DO YOU WANT TO SHAPE BANKING IN INDIA ? We care for your Career
    13. 13. We care for your Career
    14. 14. BUYER SELLER
    15. 15. RISKS QUALITY QUANTITY TIME RISKS PAYMENT/AGREEMENT FOR PAYMENT IMPORTER EXPORTER
    16. 16. BANK BANK PROMISE TO PAY IF QUALITY/QUANTITY TERMS SATISFY IMPORTER EXPORTER
    17. 17. BANK BANK LETTER OF CREDIT [SIGHT/TENURE] IMPORTER EXPORTER
    18. 18. BANK BANK DOCUMENTS [Bill s of Exchange, Bill of Lading, Airway/Shipment Challan etc.] Physical Delivery of Goods IMPORTER EXPORTER
    19. 19. BANK BANK Match Documents with LC  If Yes, ask Importer to PAY [now, for Sight LC or by maturity of tenure, for Tenure LC  If No, Inform exporter’s Bank IMPORTER EXPORTER
    20. 20. BANK BANK Outward Remittance Domestic currency (X) Inward Remittance Domestic currency (Y) Foreign Currency (Y) Foreign Currency (X) IMPORTER EXPORTER
    21. 26. <ul><li>LC Discounting </li></ul><ul><ul><li>Modus operandi – loans against receivables </li></ul></ul><ul><li>Packing Credit </li></ul><ul><ul><li>Exporters credit – based on work orders </li></ul></ul>
    22. 27. TENDER AUCTION BID BOND B.G. WORK-ORDER In many countries LC is replaced by Financial B.G. PERFORMANCE B.G.
    23. 28. <ul><li>Bond Markets are huge </li></ul><ul><ul><li>International bonds $18 Trillion </li></ul></ul><ul><li>Certificates issued against loans </li></ul><ul><li>Governments are biggest issuers </li></ul><ul><ul><li>Ex: T Bills issued by RBI (behalf of GOI) </li></ul></ul><ul><li>Face value and interest rate </li></ul><ul><li>Most Bonds are traded in the market </li></ul><ul><li>Deep Discount bonds </li></ul>
    24. 29. <ul><li>Bond rates & Interest rates are linked </li></ul><ul><li>Ex: Face Value 1000, Int rate 6.5% </li></ul><ul><li>Market value of 900 --> Yield of 7.22% </li></ul><ul><li>Market value of 1100 --> Yield of 5.9% </li></ul><ul><li>Int Rates up --> Bond prices fall </li></ul><ul><li>Int Rates down --> Bond prices rise </li></ul>
    25. 30. <ul><li>Government issues bonds </li></ul><ul><ul><li>Finance deficits (overspending) </li></ul></ul><ul><ul><li>Finance wars </li></ul></ul><ul><li>Sell Bonds better win wars </li></ul><ul><ul><li>Confederate bonds (US Civil War) </li></ul></ul>
    26. 31. Bond Markets A bond is an instrument that typically carries a specific rate of interest (coupon) that the issuer agrees to pay the bond holder; as well as a promise to repay the principal on maturity. Unlike the stock market, the bond market is largely an institutional market, with limited retail (individual) participation. If I were to ask you where the Bombay Stock exchange index is today, you will probably have an answer. However, if I were to ask you the 10 year interest rate on an Indian Govt. bond, you will not know it. Government bonds constitute the major bulk of the bonds issued and traded in these markets. You also have state government bonds and bonds issued by companies called corporate bonds. Bonds are traded primarily OTC, though there are some corporate bonds traded on the exchange as well. Stocks Stocks Stocks Stocks Stocks Stocks Stocks BOND If you look at any financial newspaper, four pages will be spent on stocks, with just a small box on bonds.
    27. 32. Participants in the Bond Market RBI Government They are the issuers of bonds; to raise money . Corporations They also issue bonds; to raise money. Commercial Banks They are the main subscribers to the bond issues for their own books(trading) or on behalf of clients. Investment Managers/ Mutual Funds They manage wealth of corporations and individuals and are also subscribers to these bond issues. Depository Agency & Clearing Corporation They perform a role similar to that in stock markets; though the specific institutions are different. For example, Government Bonds are settled in demat form through Clearing Corporation India Ltd (CCIL) and the Depository Agent is the RBI. For stock markets, equivalent entities are National Securities Clearing Corporation Ltd. (NSCCL) & NSDL or CDSL . Regulators RBI regulates the bond market in India.
    28. 33. New issues of Govt. bonds are made by RBI, through auctions, in the primary market. RBI Dealers bid for the bonds and the price is fixed based on the bids received. Dealers then sell these bonds in the secondary market or directly to third parties. Dealers buy from primary market Like in the stock markets, one needs to be a member, an authorized dealer in the bond markets to trade in them. Banks and institutions play the role of authorized dealers in these markets. Dealers sell in secondary market Mutual funds, insurance companies Banks and institutions The role of various market participants
    29. 34. <ul><li>Joint Stock Companies </li></ul><ul><ul><li>Raising of capital </li></ul></ul><ul><ul><ul><li>Risky long term ventures </li></ul></ul></ul><ul><li>Key Features of Joint Stock Co </li></ul><ul><ul><li>Limited Liability </li></ul></ul><ul><ul><li>Distributed ownership </li></ul></ul><ul><li>Shares are traded on Stock Exchanges </li></ul>
    30. 35. <ul><li>IPO </li></ul><ul><li>Face Value </li></ul><ul><li>Premium/Discount </li></ul><ul><li>EPS & P/E </li></ul>
    31. 36. Stock markets Stock markets are the most commonly known among all financial markets because of the large participation of ‘retail investors’, that is common people who invest from their own savings. Stocks are traded on exchanges, such as the Bombay Stock Exchange (BSE), the National Stock Exchange of India (NSE), the London Stock Exchange (LSE), and the New York Stock Exchange (NYSE) etc. NSE BSE NYSE LSE
    32. 37. Working of a Stock Market Stock Exchanges provide a system that accepts orders from both buyers and sellers in all shares that are traded on that particular exchange. As mentioned earlier, exchanges then follow a mechanism to automatically match these trades based on certain parameters. Thus the market information is transparent and available real-time to all, making the trading efficient and reliable. Click to continue Sell at 10 Sell at 10.05 Sell at 10.10 Buy at 9.90 Buy at 10
    33. 38. BSE Exchanges then follow a mechanism resulting in trades between the buyer and seller Click to continue Working of a Stock Market Sell at 10 Sell at 10.05 Sell at 10.10 Buy at 9.90 Buy at 10
    34. 39. Stock Market Participants Apart from the parties to the trade and the stock exchange, the other key participants in the stock markets include brokers, custodian banks, depository and clearing firms. Other key participants Custodian banks Depository Clearing firms Broker
    35. 40. One needs membership of a stock exchange to access the exchange trading system. Investors who are not members of the exchanges have to open trading accounts with a member firm. Member firms accept and route orders on the account, send notifications and take care of settlement of the trade in exchange for a fee. Member Firms or Brokers
    36. 41. These are banks/agencies where the clients hold their stock and bank accounts. They help in processing securities, and facilitate clearing and settlement for the client by interacting with the broker members, depositories and clearing corporations. Custodian Banks/Agencies Few examples of custodian banks in India are: ABN Amro Bank N.V. , HDFC Bank Ltd., ICICI Bank Limited , Stock Holding Corporation of India (SHCIL), Karvy and (IL&FS) IL&FS Securities Services Ltd.
    37. 42. Most of the securities are held in electronic (also called ‘dematerialized’) form (that is as a record similar to bank balance) in the ‘demat’ (short for dematerialized) accounts at firms providing ‘depository’ services. There are two depositories in India – the National Securities Depositories Ltd(NSDL) and Central Depository Services (India) Limited(CDSL). Investors hold their demat accounts at these depositories through their custodian banks. The physical shares are held at the depository. For example, Amit holds his ‘demat’ account with his custodian bank HDFC but the shares are physically kept at NSDL or CDSL Do you know where the term “demat” came from ? The physical material(certificate) has now vanished, hence dematerialized, hence demat for short. Understanding the term ‘Demat’
    38. 43. Clearing Firms Clearing firm is an organization that works with the exchanges to handle confirmation, delivery and settlement of transactions. They are also called as clearing corporation or clearing house. Clearing Corporations play a major role in ensuring that executed trades are settled within a specified time and in a well-organized manner Did you know? The National Securities Clearing Corporation Ltd. (NSCCL) , carries out the clearing and settlement of the trades executed in the NSE in India.
    39. 44. What determines the stock price and how does it change? The stock price is determined by market forces, that is the demand and supply of stocks at each price. The demand and supply vary primarily as the perceived value of the stock for different investors varies. Let me elaborate through an example. BSE Investor An investor will consider buying the stock because the market price (Rs.1450) is less than his perceived value (Rs.1490) of the stock. And the investor will consider selling, if the market price is greater than his perceived value of the stock. Rs.1450 Rs.1490 According to me the stock price of Infosys should be at Rs 1490 The stock of Infosys is trading at Rs.1450 The investor will consider buying the stock
    40. 45. A large number of factors have a bearing on the perceived value. <ul><li>Some of them are: </li></ul><ul><li>Performance of the company </li></ul><ul><li>Performance of the industry to which it belongs </li></ul><ul><li>State of the country’s economy where it operates as well as the global economy </li></ul><ul><li>Market sentiment or mood relating to the stock and the market as a whole </li></ul>Do you know what happens in practice?
    41. 46. Ram-Investor Ram-Investor Ram-Investor Ram-Investor Current market price is Rs.1500 Market price moves to Rs.1550 Market price moves to Rs.1700 Market price moves to Rs.1600 So he waits. All these guys who are buying at Rs.1550 are foolish. Now he starts getting worried. Do they know something that I don’t? And now he panics, and starts buying at Rs.1700 According to Ram the share price of Infosys should be at Rs.1490. So he should buy below this price. So he waits. That is called ‘ Market sentiment’ , and that is what prevails most of the time in the market.
    42. 47. <ul><li>Many people do not Inv in Stock Markets directly </li></ul><ul><li>MFs offer a convenient Inv Route </li></ul><ul><li>Money Pooled from No of investors </li></ul><ul><li>Fund is managed by Experts </li></ul><ul><li>NAV = Fund Market Value/Tot Units </li></ul><ul><li>Open ended MFs Sale & Purchase at NAV </li></ul><ul><li>Closed Ended MFs Purchase and Sale fixed dates </li></ul>
    43. 48. <ul><li>Advantages of Mutual Funds </li></ul><ul><ul><li>Diversification reduces risk </li></ul></ul><ul><ul><li>Expertise in investing </li></ul></ul><ul><ul><li>Simplicity in operation </li></ul></ul><ul><ul><li>Range of funds available </li></ul></ul>
    44. 49. <ul><li>Funds are also classified as per their investment objective . </li></ul><ul><li>Based on which instruments they invest in, they are classified as : </li></ul>Categorization of Mutual funds The important thing to note is that each of the above could be open-ended or closed-ended . Equity Funds Income Funds Balanced Funds Money Market Fund Sectoral Funds Invest primarily in equities. Invest primarily in debt instruments. Investing in both debt and equity, typically in equal amounts Investing in money market instruments such as CPs, CDs, T-bills. IT sector fund is one example, which invests only in IT companies. Fund Type Attributes
    45. 50. <ul><li>The funds may charge fees in the form of what is known as “ load ”. </li></ul><ul><li>This could be ‘ front-end ’ or ‘ entry ’ load meaning, the fee charged when you are entering or purchasing units from the fund. </li></ul><ul><li>There could also be a ‘ back-end ’ or ’ exit ’ load meaning, the fee charged when you are exiting or selling units to the fund. </li></ul>Entry load and Exit load Entry load For example, you want to invest Rs.1,00,000 in ABC fund @ Rs.10 per unit with an entry load of 1%. You are actually investing 99990 and will get 9999 units, instead of 10000. In the above example, you want to sell the 9999 units of ABC fund at a market price of Rs.12 with an exit load of 1%. In this transaction you will get Rs.1,18,788. as follows: 9999*(12-.12) = Rs.11762.376 Exit load Currently in India, funds do not charge any load if you buy direct from the fund and not through a broker/intermediary.
    46. 51. <ul><li>Underwriting, raising capital for companies by issuing equity or debt securities and facilitating mergers. </li></ul><ul><ul><li>When raising capital for a firm, an investment bank is acting as an intermediary between investors and the issuer. Capital raised can come from private investors (who often have a high net worth), or from pools of capital obtained within the public markets. Capital obtained from public markets is normally through an initial public offering (IPO); however, special purpose acquisition companies (SPACs) are another alternative. </li></ul></ul><ul><li>Merger and acquisition (M&A) services, both on the buy and sell side of a deal. </li></ul><ul><ul><li>The buy side involves identifying and facilitating the acquisition of a target company, while the sell side involves taking a client company to market at auction and identifying and facilitating the sale to a high bidder or acquirer with a strong strategic fit. </li></ul></ul><ul><li>Alternatively, investment bankers may also help a company restructure its equity or debt, often to ease financial distress. </li></ul>
    47. 52. <ul><li>Form new companies with necessary Govt. approvals </li></ul><ul><li>Preparation of detailed business plan right for idea stage </li></ul><ul><li>Assess financial requirement for growth </li></ul><ul><li>Assist in presentation to Venture Capitalists, Bankers, Angel Investors, Financial Institutions </li></ul><ul><li>Plan promoters' capital </li></ul><ul><li>Assist in Valuation of your company </li></ul><ul><li>Structure the deal, use very innovative financial engineering methods </li></ul><ul><li>Advice on shareholders rights </li></ul><ul><li>Financial closure </li></ul><ul><li>Documentation </li></ul><ul><li>Release of funds </li></ul>
    48. 53. <ul><li>C ore skills: </li></ul><ul><ul><li>The ability to provide valuation estimations (and logically back up those calculations) </li></ul></ul><ul><ul><li>Work stamina </li></ul></ul><ul><ul><li>Mental and emotional horsepower </li></ul></ul><ul><ul><li>Personal interaction skills </li></ul></ul>
    49. 54. <ul><li>Critical Review of existing lines of business to identify core technology strengths </li></ul><ul><li>Strategic planning for the future </li></ul><ul><li>Business development especially US, Japan and Far East markets </li></ul><ul><li>Identify talent gaps in the Organisation structure and help hire right talent for your organisation </li></ul><ul><li>Help set up and administer Equity Stock Ownership Plan (ESOP) </li></ul><ul><li>Merger & amalgamation </li></ul><ul><li>Knowledge management system </li></ul><ul><ul><li>To support field consultants. The system includes generalist researchers, industry- and function-specific experts and librarians, and access to journals and databases. </li></ul></ul>
    50. 55. Overwhelming majority of Management consultants are bright, intellectually curious, and communicative . Management Consulting firms have very competitive selection process. They tend to hire analysts from only the top undergraduate programs, and hire associates from only the top business/law/graduate programs. So, almost all of the consultants are &quot;academically smart“ . Over the year I have also developed a very health respect for the professionalism of management consulting professionals. When I was working at management consulting firms, whenever I called a colleague, he or she would always return my call. Whenever I asked a question in the firm’s knowledge base, I could always expect someone answering my question. Whenever I set up a meeting, my colleagues would show up on time. I’ve never experienced this kind of professionalism since I left management consulting. I joined a management consulting firm fresh out college. I was a computer science major in college. I was not as &quot;polished&quot; and &quot;business ready&quot; as some of my classmates. Management Consulting provided me great training. I learned how to interact with clients. I was exposed to several industries, which really helped me figure out what industries I wanted to work in the future. I also travelled a little bit since I had to work for different clients at different locations. I was young and single, so I really enjoyed the travelling experience.
    51. 56. A mentor of mine once told me that &quot;management consulting firms exist largely for political reasons&quot; . When large companies need to make controversial decisions such as cost cutting, layoffs, or strategic changes&quot;, instead of taking on all of the responsibilities (and potentially blames), it’s &quot;wise&quot; for the senior management team to bring in outside &quot;expert management consultant&quot; to provide 3rd-party opinions/recommendations. It makes the decision more &quot;legitimate&quot;, and help reduce senior management team’s risk . How did I know my recommendation was correct? It was my first job out of college. Many of my seniors in the project team had been in consulting for their whole career. They didn’t have the from-the-trenches operational experience. They were all very smart and quick-study . They could learn a lot about a company in a very short period of time. But, sometime I felt that we were like a group of medical school students who had studied medicine for two years but had never operated on any patient. But, we were making recommendation about how to do surgeries. There were a lot of assumptions, modeling, and intellectual thought experiments.
    52. 57. Similar to investment banking, management consulting firms have a reverse pyramid organization structure. Analysts and associates are at the bottom of the pyramids. They’re asked to work long hours. In term of career progression, you’re either &quot;up or out&quot; . Certain number of people will become managers, principals, partners, etc. If your time is up and you don’t make to the next level, you’re out. Also, I’ve found that some management consulting professionals have developed an &quot;elitist mentality&quot; over the years. They tend to be really good student throughout their lives. They attended really good universities. They then went through a very competitive process to get into McKinsey, Bain, BCG, etc. After working in those firms for a year or two, although they might not like the intensity and pressure of management consulting, they felt that their employers were the most prestigious companies in the worlds. They simply felt that there wasn’t much option outside of the management consulting firms. Basically, they stuck. They didn’t like their jobs, but they felt that it’d be &quot;a step down&quot; to switch to a non management-consulting company.
    53. 58. Inverted organizational structure defies the conventional pyramid structure. In this design, the members occupy the topmost portion, going down to the departmental leaders and down to the president . Since the leader takes the bottommost portion of the structure, his/her sole responsibility would be to support the members for the benefit of the organization as a whole. More so, in this type of organizational structure, the wants, needs and talents of the members are taken into great consideration. However, abuse of democratic authority of members, should be taken into account in this type of organizational structure.

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