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- 2. OBJECTIVE ⚫ Providean overviewofBanking Domain ⚫ Enable Technologypeople understand Financial Terms ⚫ Explain Operations in specific lines of banking ⚫ CoverGlobal Banking Practices ⚫ Introducesomeof the recentdevelopments in banking
- 3. KEYWORDS 3 ⚫ Conceptof money ⚫Financial Instruments ⚫ Financial Statements ⚫ Introduction toBanking ⚫ Retail Banking ⚫ ConsumerLending ⚫ Cardsand Payments ⚫ Commercialand Wholesale Banking ⚫ Investmentbanking ⚫ InvestmentManagement ⚫ Settlement ⚫ Corporate Services ⚫ Insurance
- 4. MONEY 4 ⚫ Standard unitofExchange- advancement over bartersystem ⚫ Currencies-based upon development level of countries ⚫ Exchange Rates- Whodecides, Pegged currencies ⚫ Facevalueof currency ⚫ Standard Valuecurrency ⚫ Interestcharged on loan amount- Simpleand Compound ⚫ Simple- On Rs.100 by 10 percent, amount paid everyyear is Rs. 10 ⚫ Compound- On Rs.100 by 10 percent, amount paid everyyearvaries
- 5. INFLATION 5 ⚫ Rise incost of goodsand services overa period ⚫ Real rateof interest = Nominal rateof Interest-Inflation Rate ⚫ Nominal rateof interest = 10% ⚫ Inflation rate 4% ⚫ Real rateof interest = 6% ⚫ Increase in Prices reduces thevalue of currency
- 6. COST OF CAPITAL 6 Land,Labor, CAPITAL, Enterprise(Idea) ⚫ Depends upon- Borrower, typeof financing, market timing, collateral, tenure fordebt ⚫ Costof capital include following ⚫ Interest fordebt ⚫ Dividend, expected earning forequity ⚫ WACC- Weighted Average Costof Capital- If more thanone sourceof finance is used. ⚫ WACC= Costof each*Weight
- 7. FINANCIAL INSTRUMENTS 7 ⚫ Capital-Business needs capital foroperations, fixed assets. ⚫ Methods bywhich capital can be raised ⚫ Debt ⚫ Bank Loans ⚫ Bond/Debentures: Fixed, Floating-rating, Corporate, Govt. ⚫ Equity ⚫ Ownersequity ⚫ Venture Capital ⚫ IPOs ⚫ Mutual Funds
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- 9. DEBT 9 ⚫ Moneyowed byoneentity toother ⚫ Cost is interest ⚫ Debt is considered seniortoequity i.e. the intereston debt is paid before thedividendson stock in caseof liquidationof assets ⚫ Examples- Bonds, Loan, Commercial papers ⚫ Investorschose between debtand equity based on their investment objectives
- 10. BONDS 10 ⚫ An investorloansmoney toan entityata specific interestrate. ⚫ Small deposits from multiple people ⚫ Investmentceiling ⚫ Interest is generallypaid semiannually ⚫ Factors influencing coupon rate ⚫ Prevailing economic conditions ⚫ Issuers Credit rating (risk) ⚫ In return investorgets the bond/certificatewhich contains: ⚫ Interestrate (Coupon rate) ⚫ Maturitydate (Repayment date) ⚫ Faceamount
- 11. …CONTINUED 11 ⚫ Corporate bond ⚫Secured bonds- backed byspecific assets ⚫ Unsecured bonds (Debentures) ⚫ Treasury Securities (Government agencies) ⚫ Treasury bills-Shortterm ⚫ Treasury bonds-Long term ⚫ Mostsecure bonds
- 12. EQUITY 12 ⚫ Equity (Stock)-representsownership interest ⚫ Common Stock ⚫ Voting Rights ⚫ Majorityshareholdersmanageorganization ⚫ Popular ⚫ Corporations sells it through IPO ⚫ Can be traded in secondary markets-BSE, NYSE etc. ⚫ Preferred Stock ⚫ No voting rights ⚫ Fixed rate of return
- 13. MUTUAL FUNDS 13 ⚫ Investmentcompanies ⚫Pool resources from individual investors ⚫ MF companies invest intodiversesectorof economy ⚫ Investorsareequally responsible for loss orgain ⚫ Dividendsearned aredistributed according tothe investment ⚫Hedge Fund ⚫A groupof investorswho take financial risks together in ordertotry toearn a lotof money
- 14. DERIVATIVES 14 ⚫ It isacontract between twoor more parties ⚫ Obligation on buyerand seller ⚫ Forward ⚫ Agreementto buy/sell an asset in futureata specified price ⚫ Ex. MCX ⚫ Future ⚫ Agreementto buy/sell an asset in futureata futureprice
- 15. FINANCIAL MARKETS 15 Placewhere financialinstrumentsare traded ⚫ Primary Financial Markets ⚫ New financial instrumentsare issued ⚫ Initial Public Offering ⚫ Secondary Financial Markets ⚫ Primary instruments (Shares) are traded ⚫ Investorscan monetize theirshares ⚫ Ex. BSE, NYSE
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- 17. BANKING 17 ⚫ Any financialinstitution licensed toacceptdepositsand issue credit through loans ⚫ Functions ⚫ Channelizesavings ⚫ Credit facilities to borrower ⚫ Investment avenues o investors ⚫ Facilitate the trade and commercedealings ⚫ Financial Inclusion ⚫ Minimize cash transactions ⚫ Provide financial services ⚫ Creationof money in theeconomy ⚫ Restrictsexpansion of black money
- 18. STRUCTURE OF BANKINGSECTOR IN INDIA 18
- 19. CENTRAL BANK 19 ⚫ Banker’sbank ⚫ Regulatortoother banks ⚫ Governments bank ⚫ Providestable monetaryand financial policy ⚫ Decides policy rates-Impacts money in the market ⚫ Protects rightsof theconsumerby supervising banking institution ⚫ Monitors inf lowand outf lowof foreigncurrencies ⚫ Clearing house facility ⚫ Bankerof last resort ⚫ Ex. RBI
- 20. HOW DO BANKEARN PROFITS? 20 ⚫ Difference in the rateof interest between depositorsand lenders ⚫ Numberof products ⚫ Through investmentof its resources ⚫ Fee based services ⚫ Net banking ⚫ Mobile banking ⚫ Demand Draft ⚫ Universal Banking ⚫ Commercial as well as investment banking services underone roof
- 21. BASEL FRAMEWORK 21 ⚫ BIS-Bank of International Settlement ⚫ Located in Basel, Switzerland ⚫ Fostersco-operationamong central banks and otheragencies in pursuitof monetaryand financial stability. ⚫ A forum topromotediscussionand policyanalysis among central banks and within the international financial community ⚫ Itsets standards for best practices in banking which areensured by all banks
- 22. SERVICES OFFERED BYBANK 22 1. Corporate banking 1. Trade Finance 2. Cash Management 2. Retail Banking 1. Deposits 2. Branch & Electronic Banking 3. Creditcard services 4. Retail Lending- Home, Personal, Car 5. Private banking & wealth Management 6. Business banking for SMEs 3. InvestmentBanking
- 23. RETAIL BANKING 23 ⚫ Servesfinancial needs of individuals (Consumers) and SMEs ⚫ Largevolume lowvalue transactions ⚫ Productsand services ⚫ Deposits ⚫ Loans ⚫ Creditcards ⚫ Debitcards ⚫ Investment products ⚫ Local branches, ATMs ⚫ Net Banking ⚫ Mobile Banking
- 24. ASSETS AND LIABILITIESIN BANKING 24 ⚫ Liabilities- Money received by bank from depositors ⚫ Asset- Loans extended by bank ⚫ Revenue- Money that is maid byan organization in year ⚫ Liquidate- To sell a business/propertyespecially to pay off debt ⚫ Asset-Reconstruction-Here, the right or interest of any bank or financial institution in any financial asset is acquired by the asset re-construction company for the purpose of realization of dues. ⚫ NPA-Non-Performing Asset (bad loans) ⚫ An asset of a bank (such as a loan given by the bank) turns into NPAwhen it ceases to generate regular income such as interest etc for the bank ⚫ Biggest challenge faced by Indian Public sector banks ⚫ Ex. Kingfisher owes 7000 crore to PSBs
- 25. DEPOSIT PRODUCTS 25 ⚫ DemandDeposits ⚫ Deposited and withdrawn on demand ⚫ Saving and Current ⚫ Term Deposit ⚫ Money kept with the bank fora specified period ⚫ Fixed Deposit ⚫ Attractivereturns ⚫ Ensurecapital availability for banks ⚫ D-MAT Account ⚫ Fortrading and of shares ⚫ No-Frill Accounts ⚫ Limited servicesata lowcost ⚫ Zero balanceaccounts ⚫ Jan-Dhanaccounts
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- 27. BRANCH BANKING 27 ⚫ TellerOperations ⚫ Teller- Dealsdirectlywith consumers ⚫ Servesas front line in banking ⚫ Relationship Manager ⚫ Banks POC to thecustomer ⚫ Develops tailored banking solutions foreach client
- 28. CORE BANKING/MULTI-BRANCH BANKING 28 ⚫Networkof bank which allowscustomerof a bank toperform transactionatany branch of the same bank ⚫ Geographical constraintsare removed ⚫ Branch customerbecomes bank’scustomer ⚫ This is achieved througha set of softwarecalled banking applications ⚫ Ex. Finacle(Infosys)
- 29. ATM 29 ⚫ Computerized TelecommunicationDevice ⚫ Typical ATM Services ⚫ Cash withdrawal – Limit perday restricted by respective bank guidelines ⚫ MoneyTransfer between accounts ⚫ Cash/ Check Deposits ⚫ Utility Bill Payments ⚫ Balance enquiry /Account Statements ⚫ Mobile Top Ups ⚫ VISA & Master networks are large global networks that serviceATMs. ⚫ Interbank operations aresettled in clearing house
- 30. TELEPHONE BANKING 30 ⚫ Transactionsoverphone ⚫ Automated phoneanswering systems(IVR/VRU) with keypad response ⚫ Voice recognitioncapability ⚫ VRU- Voice Response Unit-A Programmed computerresponds tocaller ⚫ IVR- InteractiveVoice Response-Computerphone application which accepts keypad selection and responds
- 31. ONLINE BANKING 31 ⚫ Financialtransactionson a securewebsiteoperated by respective bank ⚫ Batch transactions – operations arecarried outwith least human intervention ⚫ Bill Pay and Recurring payments ⚫ E-Tax ⚫ Statements : Monthlyorquarterly bank statements ⚫ Transaction history ⚫ Fund transfer ⚫ NEFT ⚫ RTGS ⚫ IMPS ⚫ IFSC- Indian Financial System Code ⚫ is an alpha-numericcode thatuniquely identifies a bank-branch participating in the NEFT system.
- 32. FUND TRANSFER 32 NEFT ⚫ NationalElectronic Fund Transfer ⚫ No transaction limit ⚫ Nota immediate modeof transfer during banksworking hoursonly. RTGS ⚫ Real Time Gross Settlement ⚫ There is minimumamount limit ⚫ Immediate modeof transfer thoughduring working hoursof bank
- 33. IMPS 33 ⚫ Immediate PaymentService ⚫ Instant money transferthrough mobile phone oronline ⚫ Mobile numberof remitterand beneficiary should be linked to their respective bank accounts ⚫ Bestway fortransferring remittances ⚫ MMID- Mobile money identifier is generated ⚫ There is a limiton amountof transaction ⚫ SWIFT- Society forWorldwide Interbank Financial Telecommunications ⚫ SWIFT transports messages between two financial institutions. This activity involves the secureexchange of proprietarydatawhileensuring its confidentiality and integrity ⚫ BIC- Uses Bank Identifier Code
- 34. INTERNATIONAL BANKING 34 ⚫ Facilitateimportsand exportsof theirclients – trade financing ⚫ Arrangeforforeignexchange – cross-bordertransactionsand foreign investments ⚫ Participate in international loan syndicate – lending to MNCs- project financing and tosovereigngovernments – economicdevelopment ⚫ Trade foreignexchangeproducts fortheirownaccount ⚫ Gateway forthe transferof remittances byexpatriates
- 35. INVESTMENT BANKING 35 ⚫Functions ⚫ PrivateEquity ⚫ Buying/Selling ⚫ CorporateAdvisory ⚫ Managing company assets ⚫ Capital Raising ⚫ Underwriter ⚫ Security middlemen ⚫ Long term financing ⚫ Emerging Markets ⚫ Merger & Acquisitions ⚫ Ex. TechMahindra-Satyam, IGate-Patni, Facebook-Whatsapp
- 36. CARDS AND PAYMENTS 36 ⚫Cards- Fastestgrowing means of non-cash payments ⚫ Non-cash payment instruments ⚫ Cheque ⚫ Debit card ⚫ Creditcard ⚫ C0-Branded cards- like creditcards associated with a particular firm ⚫ Affinitycard-Tie-up between a bank and an organization ⚫ Corporate/ Commercial card ⚫ Prepaid card- giftcard, mall cards
- 37. EMERGING PAYMENTS 37 ⚫ InternetCurrencies/Digital cash/E-wallets ⚫ Preload accountwith money ⚫ Transfer moneyor make payments ⚫ Notime barrier ⚫ No need toentercard credentials ⚫ Ex. Paytm wallet ⚫ Contactless Payments ⚫ Radio Frequency ID ⚫ NearField Communication(NFC) ⚫ Eliminateswiping card, signing slipat the POS ⚫ Targeted ateliminating cash transactionsat retail counters
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- 40. MORTGAGE 40 ⚫ A customerspersonalguaranteewith the lender ⚫ Commonlyused toreferto loan forthe purposeof purchasing property. ⚫ Commercial Mortgage ⚫ Commercial building as acollateral ⚫ Loan taken by businesses ⚫ Residential Mortgage ⚫ Residential propertyas acollateral tosecurerepayment. ⚫ Loan taken by individual borrowers
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- 42. ROLE OF INFORMATIONTECHNOLOGY (IT) IN THE BANKING 42 ⚫ Competitivenesscompel toadapt to latest technologies ⚫ Instrumentof cost reduction ⚫ Effectivecommunicationwith people and institutionsassociated with the banking business. ⚫ Bettermarket infrastructure ⚫ helps the financial intermediaries to reach geographicallydistantand diversified markets in acosteffective manner
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- 44. ⚫ Definition: Insuranceis defined as theequitable transferof the risk of a loss fromoneentity toanother in exchange forpayment ⚫ Terminologies: ⚫ Insurer: Insurancecompany selling the policy ⚫Insured: Policy holderortheentityavailing the policy ⚫ Re-Insurance: Insurance byanother insurerof all ora partof a risk previouslyassumed by a insurancecompany 44
- 45. CONTINUED… 45 ⚫ Premium: Anamountcharged by insurerin ordertocoverinsured againsta risk ⚫ Factorsdetermining premium amount: ⚫ The Frequencyof Claims (how many) ⚫ The Severity (Costof each Claim) ⚫ Condition of insurer, kind of policy, probabilityof risk, etc. ⚫ Underwriter: Person whoapproves thepolicy and determines the premium to becharged againstacoverage. ⚫ Claim: Request by insured in ordertoseek policy benefits from insurer ⚫ Adjudicator: One who processes orsettles theclaims.
- 46. TYPES OF INSURANCE 46 ⚫Life Insurance (Long Term) ⚫ Non-Life Insurance (Short Term) ⚫ ⚫ ⚫
- 47. CATEGORY OF INSURANCE 47 ⚫Dental ⚫ Health ⚫ Life ⚫ Business ⚫ Residential ⚫ Transport/Communication ⚫ Other
- 48. INSURANCE PROCESSES 48 Branchesof Insurancecompany 1) 2) 3) 4) 5) 6) 7) PolicyAdministration Systems Claim Management System Investment Management System Third PartyAdministration Systems Risk Management Solutions Regulatory & Compliance Actuarial System (Valuation & Pricing)
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