0506 banking operations 1

1,655 views

Published on

0 Comments
2 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
1,655
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
101
Comments
0
Likes
2
Embeds 0
No embeds

No notes for slide

0506 banking operations 1

  1. 1. Banking Operations
  2. 2. Session Objectives • • • • Banking Scenario in India Challenges the banking sector is facing Basics of banking Banking activities February 22, 2014 Session - Banking 2
  3. 3. Definition of Banks • Banking Regulation Act, (BR Act), 1949 Section 5(c) defines a bank as 'a banking company is a company which transacts the business of banking in India.' • Section 5(b) of the BR Act defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable, by cheque, draft, order or otherwise.’ February 22, 2014 Session - Banking 3
  4. 4. Distinguishing features of Commercial Banks from other financial Institutions • maintaining deposit accounts including current accounts, • issue and pay cheques, and • collect cheques for the bank customers February 22, 2014 Session - Banking 4
  5. 5. GOAL Bank Goals and Constraints Amount of cash flows Maximise share holders wealth Timing of cash flow Risk of cash flow • • • • • • Constraints Credit risk Interest rate risk Liquidity risk Operational risk Capital risk Fraud risk etc. • Market competition • Social constraints • Legal constraints Source: Gup and Kolari (2005), Commercial Banking – Management of Risk, Wiley, 3 rd Ed. February 22, 2014 Session - Banking 5
  6. 6. Bank Risks • • • • • • • • • credit risk interest rate risk foreign exchange risk equity/commodity price risk liquidity risk operational risks compliance risk strategic risk reputation risk February 22, 2014 Session - Banking 6
  7. 7. Table: Indicators of financial soundness, 2012 Sr. No. Country Gross NPAs as % of gross advances CRAR (%) Select advanced countries 1 Germany 3.0* 17.9 2 Japan 2.4 14.2 3 UK 4.0 15.7 4 USA 3.9 15.3 BRICS 5 Brazil 3.5 16.7 6 Russia 6.0 13.7 7 India 3.6 13.6 8 China 1.0 12.9 9 South Africa 4.0 15.8 EMEs 10 Indonesia 1.8 17.3 11 Korea 1.6 14.1 12 Mexico 2.4 16.0 13 Turkey 2.7 17.9 CRAR: Capital to2014 February 22, risk-weighted assets ratio. *: Data pertains to 2011. Session - Banking 7
  8. 8. Table : Indicators of banking access Item 2001 2011 2012 Households availing banking services (in per cent) 35.2 58.7 - Population per bank branch (‘000) 15.6 13.3 12.5 51 100 106 No. of accounts per 1000 population (all deposits) 416 669 734 No. of accounts per 1000 population (savings deposits) 272 516 571 Per capita credit outstanding (` ‘000) 5.2 33.7 39.1 Per capita total deposits (` ‘000) 9.2 44.5 49.4 No. of accounts per 1000 Population (credit) Source:RBI (for number of deposits accounts, credit accounts, credit outstanding, and deposits outstanding); Office of the Registrar General and Census Commissioner of India for population and households’ data. February 22, 2014 Session - Banking 8
  9. 9. Table : Select parameters of banking sector efficiency Year-ended Return on assets March (%) Net Interest Margin (%) Cost-income ratio (%) Business per employee (` lakh)* Business per branch (` lakh)* 2001 0.54 3.1 25.9 2.1 34.7 2002 0.82 2.8 22.3 2.5 39.5 2003 1.05 2.9 22.1 2.8 43.0 2004 1.21 3.1 23.7 3.1 47.7 2005 0.97 3.1 26.1 3.5 53.6 2006 0.96 3.0 26.8 4.1 62.6 2007 1.00 2.9 24.0 4.6 68.6 2008 1.10 2.6 21.0 5.6 79.8 2009 1.10 2.6 19.2 6.5 90.1 2010 1.01 2.5 20.2 7.1 92.1 2011 1.06 2.9 21.6 7.7 99.5 2012 1.05 2.9 18.5 8.3 99.3 * At 2004-05 prices Note: NIM refers to net interest income as per cent of average total assets. RoA refers to net profits as per cent of average total assets. Cost to income 22, 2014 9 February ratio is worked out as operating costs as per cent of total income. Session - Banking Source: Statistical Tables relating to Banks in India, various issues; Basic Statistical Returns of Scheduled Commercial Banks in India, RBI.
  10. 10. CAMEL for assessing banks • • • • • C – Capital Adequacy A – Assets M – Management Capability E – Earnings L – Liquidity also called asset liability management • S – Sensitivity to market risk, especially interest rate risk. February 22, 2014 Session - Banking 10
  11. 11. Bank Operations Performance • Effective planning to allocate personnel and equipment for better utilization of limited resources • Tighter control procedures to evaluate where improvements are possible – eg. Reduction in errors and rework • Redesign of service/processes systems configuration to improve operations by reducing tasks/operations in providing financial services February 22, 2014 Session - Banking 11
  12. 12. Challenges for the Banking Sector • Asset quality – improve asset quality • Efficiency parameters – reduce NPAs, enhance productivity, reduce intermediation cost • Additional capital requirements to comply with Basel III – To maintain a minimum leverage of 4.5 per cent of Tier I capital • New entrants and increased competition February 22, 2014 Session - Banking 12
  13. 13. Structure of Banking in India • Regulator – RBI • Scheduled Banks – those included in the second schedule of the RBI Act, 1934. • Non-scheduled Banks http://www.allbankingsolutions.com/Links/List-of-Bank-in-India.shtml February 22, 2014 Session - Banking 13
  14. 14. Functions of RBI • • • • • Acts as the currency authority Controls money supply and credit Manages foreign exchange Serves as a banker to the government Builds up and strengthens the country's financial infrastructure • Acts as the banker of banks • Supervises banks February 22, 2014 Session - Banking 14
  15. 15. February 22, 2014 Session - Banking 15
  16. 16. Break-up of Bank Branches February 22, 2014 Source: Economic SurveySession - Banking Government of India 2010-2011, 16
  17. 17. Functions of Commercial Banks • Payment System • Financial Intermediation • Financial Services February 22, 2014 Session - Banking 17
  18. 18. Payment System A payment refers to the means by which financial transactions are settled. • issuing and paying cheques issued on behalf of customers. • Modern banking, also involves electronic banking, wire transfers, settlement of credit card transactions February 22, 2014 Session - Banking 18
  19. 19. Financial Intermediation Banks take different types of deposits from customers and then lend these funds to borrowers •bank deposits represent the banks' liabilities •loans disbursed, and investments made by banks are their assets February 22, 2014 Session - Banking 19
  20. 20. Financial Services Banks provide •investment banking, •insurance-related services, •government-related business, •foreign exchange businesses, •wealth management services etc. February 22, 2014 Session - Banking 20
  21. 21. Banking Processes • Account opening – Deposit and Loan • Income Services – Travellers Cheques and Forex – Mutual Funds – Bancassurance • Payments • Service – Tellers – Customer service – lobby management • • • • Complaints and requests Phone banking, internet banking, mobile banking Monitoring and reporting February 22, 2014 Insurance Back-office reconciliations - Session 3 21
  22. 22. Front office operations • Sales • Operations – Cash • Receipt and Payment • Cash sorting (soiled and fit) • ATM handling – Clearing • • • • • • Collection of cheques Entries made Sent to service branch Sent to clearing house Sent to the concerned branch Accounts debited or credited – Fund transfer (NEFT, RTGS) • RTGS – Settlements of Rs. 2 lakhs and above – Settled in 2-3 hours • NEFT – Settlement of less than 2 lakhs – Settled in 48 hours February 22, 2014 Session - Banking 22
  23. 23. Basic Relationship between Banker and Customer • The general relationship between the banker and the customer is that of a debtor and a creditor, i.e., borrower and lender. • The respective positions being determined by the existing state of account. – On opening the account a banker assumes the position of a debtor. – A depositor remains a creditor as long as his account carries a credit balance. He does not get any charge over the assets of his debtor (bank) and remains an unsecured creditor of the bank. • Banker’s relation with the customer is reversed as soon as the customer’s account is overdrawn. – Bankers are secured creditor of his customers. February 22, 2014 Session - Banking 23
  24. 24. Legal relationships of banker and customer • Agent and Principal – “Agent” a person employed to do any act for another or to represent another in dealings with third persons “Principal”. – Collection of cheques, Bills of Exchange, promisory notes, payment of insurance premiums, bills etc. • Trustee and beneficiary – trustee is one to whom property is entrusted to be administered for the benefit of another called the beneficiary. – When a customer deposits securities or other valuables with the banker for safe custody February 22, 2014 24 Session - Banking
  25. 25. Legal relationships of banker and customer • Pawnee and Pawner: – pawn is a sort of bailment in which the goods are delivered to another as a pawn, to be a security for money borrowed. – The banker can retain the goods pledged till the debt is paid. • Mortgagee and Mortgagor – Home loans, loans on other immovable property • Lessee and Lessor – Safe deposit locker • Guarantor and guarantee – February 22, 2014 Session - Banking 25
  26. 26. Bank Deposits • Demand deposits are defined as deposits payable on demand through cheque or otherwise. Demand deposits serve as a medium of exchange, for their ownership can be transferred from one person to another through cheques and clearing arrangements provided by banks. They have no fixed term to maturity. • Time deposits are defined as those deposits which are not payable on demand and on which cheques cannot be drawn. They have a fixed term to maturity February 22, 2014 Session - Banking 26
  27. 27. Categories of Accounts • Current Account • Savings Bank Account • Term Deposit Account February 22, 2014 Session - Banking 27
  28. 28. Current Deposits • A current account is a form of demand-deposit, as the banker is obliged to repay these liabilities on demand from the customer. • Withdrawals from current accounts are allowed any number of times depending upon the balance in the account or up to a particular agreed amount. • Current deposits are non-interest bearing. • A current account is a running and actively operated account with very little restriction on the number and amount of drawings. • Major objective of the a/c is to provide convenient operation facility via continuous liquidity. February 22, 2014 28 Session - Banking
  29. 29. Savings Bank Deposits • A form of demand deposits, which is subject to restrictions on the number of withdrawals as well as on the amounts of withdrawals during any specified period. • Minimum balances may be prescribed in order to offset the cost of maintaining and servicing such deposits. February 22, 2014 Session - Banking 29
  30. 30. Current a/c and Savings a/c (CASA) Deposits • CASA are low cost savings deposits compared to other deposits. CA is non-interest bearing while SA is low interest bearing. • Banks mobilise CASA by offering – Salary accounts, encouraging companies to open CA, use cash management facilities etc. • CASA deposits to total deposits is showing a gradual decline across all banks. February 22, 2014 Session - Banking 30
  31. 31. Term Deposits • A deposit received by the Bank for a fixed period, after which it can be withdrawn. • Deposits include – Fixed Deposits – Reinvestment deposits – Recurring Deposits February 22, 2014 Session - Banking 31
  32. 32. Guidelines for opening and operating Deposit Account • • • • • • • • • Due Diligence Process - KYC guidelines Minimum Balance Transparency Eligibility Requirement of PAN Operation of joint account Power of attorney Closure/renewal of deposits Nomination February 22, 2014 Session - Banking 32
  33. 33. Deposit related services • Customer Information • Interest Payments – Savings Bank Accounts – Term deposits – Tax deducted at source (TDS) • • • • • Premature withdrawal of term deposit Premature renewal of term deposit Advances against deposits Stop payment facility Safe deposit lockers February 22, 2014 Session - Banking 33
  34. 34. Definition of NRI • As per the Foreign Exchange Management Act (FEMA), 1999, an NRI means: • Non-Resident Indian National (i.e. Nonresident Indian holding Indian passport), and • Persons of Indian Origin (i.e., Non-residents holding foreign passports) February 22, 2014 Session - Banking 34
  35. 35. Services offered to Non-resident Indians • Non-resident Ordinary Accounts (NRO) • Non-resident (External) Rupee Accounts • Foreign Currency Non-resident Account (Banks) FCNR(B) February 22, 2014 Session - Banking 35
  36. 36. Comparison of Deposit Schemes available to NRIs February 22, 2014 Session - Banking 36
  37. 37. Deposit Insurance • Bank deposits are covered under the insurance scheme offered by Deposit Insurance and Credit Guarantee Corporation of India (DICGC). • DICGC is a subsidiary of RBI and is funded by RBI • All banks, including branches of foreign banks functioning in India are insured by DICGC. • DICGC is liable if – A bank goes into liquidation – A bank is amalgamated/merged with another bank February 22, 2014 Session - Banking 37
  38. 38. Methods of Protecting Depositor Interest There are two methods of protection when an insured bank fails • By transferring business of the failed bank to another sound bank • DICGC pays insurance proceeds to depositors. February 22, 2014 Session - Banking 38
  39. 39. Principles of Lending and Loan Policy • Principles of Lending – Safety – Liquidity – Profitability – Risk Diversification • Loan Policy – lays down guidelines in these areas – Level of Credit-deposit ratio – Targeted portfolio mix – Hurdle ratings – Loan pricing – Collateral security Session - Banking February 22, 2014 39
  40. 40. Loan Policy Credit Policy Committee (CPC) approved by the Board of Directors of the Bank • Loan policy outlines the lending guidelines and establishes operating procedures for – – – – – – – – – – – – credit management standards for presentation of credit proposals, financial covenants, rating standards and benchmarks, delegation of credit approving powers, prudential limits on large credit exposures, asset concentrations, portfolio management, loan review mechanism, risk monitoring and evaluation, pricing of loans, provisioning for bad debts, regulatory/ legal compliance etc. February 22, 2014 Session - Banking 40
  41. 41. Credit Deposit Ratio: Quantum of credit that can be granted by the bank as a percentage of deposits available. Targeted Portfolio Mix: Portfolio mix of different sectors based on the forecasts for growth and profitability for each sector. Hurdle Rating: Risk rating system for the borrowers is prepared by the banks. For new borrowers, a bank lays down guidelines regarding the minimum rating to be achieved by the borrower to be eligible for loan. This is known as the ‘hurdle rating’ criterion for the borrower. February 22, 2014 Session - Banking 41
  42. 42. Pricing of loans • Pricing of a loan is dependent on the following – Credit risk of the borrower – cost of raising resources, – cost of administration and overheads, – cost of reserve assets like CRR and SLR, – cost of maintaining capital, – percentage of bad debt, etc. – Competition Collateral Security – Working capital loans - physical and financial assets – Clear loans – personal guarantee of the borrower 42 February 22, 2014 Session - Banking
  43. 43. Activities of Commercial Banks • Other basic banking activities – Foreign Exchange services – Provision of remittance facilities including issuance of drafts, mail transfers and telegraphic transfers, – issuance of travellers cheques & gift cheques, – locker facility etc. • Para-banking activities – Investment banking – selling mutual funds, insurance products – depository services, – wealth management services, brokerage, etc. February 22, 2014 Session - Banking 43
  44. 44. Other Basic Banking Activities • Foreign Exchange Services • Services to Government • Payment and Settlement Systems – Paper based clearing system - cheque, clearing house, clearing operations – Electronic Payment System • RTGS, EFT, NEFT, Electronic Clearing Service (ECS), February 22, 2014 Session - Banking 44
  45. 45. Prevention of Money Laundering Act (PMLA), 2002 The act requires the maintenance and reporting of the following transactions a) all cash transactions of the value of more than Rs 10 lakh or its equivalent in foreign currency; b) all series of cash transactions integrally connected to each other which have been valued below Rs 10 Lakh or its equivalent in foreign currency where such series of transactions have taken place within a month and the aggregate value of such transactions exceeds Rs 10 Lakh; c) all cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security or a document has taken place facilitating the transaction; and d) all suspicious transactions whether or not made in cash February 22, 2014 Session - Banking 45
  46. 46. Asset Liability Management Asset Liability Management is defined as the process of adjusting bank liabilities to meet loan demands, liquidity needs and safety requirements. February 22, 2014 Session - Banking 46
  47. 47. Reasons for growing significance of ALM -Volatility -Product Innovation -Regulatory Framework -Management Recognition An effective Asset Liability Management technique aims to manage the volume mix, maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ratio.
  48. 48. Liabilities of Bank Sources of funds for lending and investing for the bank – Capital – Reserves and Surplus – Deposits – Borrowings – Other liabilities and provisions February 22, 2014 Session - Banking 48
  49. 49. Assets of Bank • Cash and bank balances with RBI • Balances with banks and money at call and short notice • Investments • Advances • Fixed assets • Other assets February 22, 2014 Session - Banking 49
  50. 50. Pillars for ALM process • ALM information systems – Management Information System – Information availability, accuracy, adequacy and expediency • ALM organisation – Structure and responsibilities – Level of top management involvement · ALM process – Risk parameters – Risk identification – Risk measurement – Risk management – Risk February 22, 2014 policies and tolerance- Banking Session levels. 50
  51. 51. ALM Information System • Information system which provides accurate and adequate information • Extensive computerisation February 22, 2014 Session - Banking 51
  52. 52. ALM Organisation • The Board of Directors would have the overall responsibility for the ALM & risk management and should lay down the tolerance limits for liquidity and interest rate risk in line with the organization’s philosophy • Asset Liability Committee (ALCO) is responsible for deciding on the business strategies consistent with the laid down policies and for operatinalising them. – Typically, ALCO consists of the senior management, including the Chief Executive. February 22, 2014 Session - Banking 52
  53. 53. ALM Process • Focuses on – liquidity and interest rate risk • Guidelines specify the use of a maturity ladder upto 8 time buckets and calculation of cumulative surplus or deficit of funds at selected maturity dates February 22, 2014 Session - Banking 53
  54. 54. Gap Analysis • Gap is the difference between the rate sensitive assets and the rate sensitive liabilities • Time buckets February 22, 2014 Session - Banking 54
  55. 55. Trends in Modern Banking • Technology – Internet Banking – Point of Sale (POS) Terminals • Outsourcing of Services – – – – – – Managing data centres, Managing ATM networks Call support services Help desk support Credit card processing Cheque processing • Financial Inclusion – No-frills account February 22, 2014 Session - Banking – Adoption of technonology 55
  56. 56. Thank you

×