Banking overview

Presented by
Balasubramanian
info@oystersolutio
ns.in
Oyster Solutions
BANKING OVERVIEW
4/4/2014
Copy Right Oyster Solutions, Chennai, TN, India. Not to be re-
published or used without prior Consent www.oystersolutions.in
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 A financial institution that accepts deposits and channels the money
into profitable lending activities
 What is a bank, what businesses do they perform and what facilities
they provide to their customers.
WHAT IS A BANK?
4/4/2014
published or used without prior Consent
2

 Banking Regulation Act of India, 1949 defines Banking as :
 The Banking Regulation Act 1949 defines a Banking Company as “a company which
transacts the business of banking in India”, and the word “banking” has been
defined as “accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand and otherwise and – withdrawal by
cheque, draft or orders or otherwise”. So acceptance of deposits is one of the prime
functions of a bank. Further, banks derive their income mainly by investing/lending
such funds received as deposits.
WHAT IS BANKING ?
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 Retail Banking
 Corporate/Wholesale Banking
 House Keeping
 Delivery Channels
BANKING - KEY AREAS
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 Segments
 Resident Individuals
 NRIs (Non Resident Individuals)
 HNIs (High Net Worth Individuals)
 HUFs (Hindu Undivided Family)
(Joint Hindu Family:
 In a Joint Hindu Family all members in the family acquire a right in the property by birth. A joint deed is made by the head of the
family in his capacity as ‘Karta’(or manager) and signed by all the members of the family (called co -parceners). All co-parceners
along with karta are liable for the debts incurred by karta. Joint Hindu Families are prevalent only in India.)
 Trusts/Clubs
(A person holding the property on trust for the benefit of someone else is known as ‘trustee’. A trust is formed by a document which
the person (settler) wishing to create the trust prepares, describing the property, beneficiaries and the names of trustees w ho will
deal with the property. A trust has to ensure that operations are done according to the instructions in the trust deed.)
 Proprietors/ Partnerships
RETAIL BANKING
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 Product & Services
 Deposits
 Cash Credit/Overdraft
 Remittances
 Forex
 Collections
 Retail Loans
 Cards
 Gold
 Safe Custody
 Government Business
RETAIL BANKING
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 Product & Services
 Deposits
 Current A/c
 Cash Management
 Trade Finance
 Forex
 Remittances
 Corporate Loans
 Investment Banking
 Wealth Management
 Segments
 SME (Small and Medium Enterprise)
 SBSI (Small Biz & Small Ind)
 Mid Corporates
 Large Corporates
(C&I -Corporate and Institutional)
CORPORATE/WHOLESALE BANKING
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 Treasury Management
 ALM (Asset Liability Management)
 Funding
 Trading
 Forex
 Reconciliation
 Risk Management
HOUSE KEEPING
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 Branch Banking
 ATM
 Debit/Credit Cards
 Internet Banking (Click and Portal)
 Phone Banking (Ring and Sing)
 Mobile Banking
DELIVERY CHANNELS
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 Assets
 Items of monetary value (e.g., house, land, car) owned by an individual or company. In
banking advances are called assets.
 Current Assets
 these assets can be easily liquidated in case the company goes bankrupt (cash, receivables, inventory,
etc.)
 Liability
 A financial obligation, debt, claim, or potential loss. In banking deposits are called
liabilities.
 Current Liability
 the sum of all money owed by a company and due within one year (payables , salary, etc.)
 Working Capital
 Current assets minus Current liabilities. A measure of the liquid assets held by a
company to build its business
PRODUCT & SERVICES IN BANKING ….
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 Cash Credit /Overdraft
 A loan account having a set withdrawal limit
 Cash credit is Working Capital given to traders / manufacturers for asset creation. Assets are
Hypothecated / Pledged to a Bank
 Overdraft is used by an individual and may be secured / unsecured
 Interest - Money paid for the use of money
 Simple Interest
 Compound Interest
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 Advances/Credit/Loans
 Personal Loan : For any personal use of the individual e.g. marriage, furniture, etc.
Consumption loan where no assets are created
 Consumer Loan : For purchase of any white goods e.g. refrigerator, television,
washing machine, etc. Assets are created
 Auto Loan : For purchase of any vehicle. Vehicle is hypothecated to Bank security
for loan
 Home Loan : For purchase of house. House is mortgaged to Bank as security for
loan
 Credit Card
 A card that allows you to buy goods, services and obtain cash advances on credit
with a pre-defined limit
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 Lien
 Lien means the right of the creditor to retain the goods and securities owned by the
debtor until the debt due from him is repaid. It confers upon the creditor the right to
retain the security of the debtor and not the right to sell it. Such right can be
exercised by the creditor in respect of goods and securities entrusted to him by the
debtor with the intention to be retained by him as security for a debt due by him
(debtor).
 The banker possesses the right of general lien on all the goods and securities
entrusted to him in his capacity as a banker and in the absence of a contract
inconsistent with the right of lien.
 Borrower is the owner of the property, but he has no right to sell. E.g. Bonds.
debentures, fixed deposits, and book debts.
 Hypothecation
 Hypothecation is akin to pledge of an asset except that the asset is not physically
handed over to the bank. E.g. vehicles, stock in trade, etc.
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 Pledge
 Fixed charge created on moveable assets as security for a loan. Possession of
asset is with the lender
 The bank holds the property and has the right to sell if the loan is not repaid. E.g.
Goods, stock, machinery, document of little to goods like railway receipt, bill of
lading, etc.
 Mortgage
 Charge created on immoveable property till the re-payment of the loan. Handover of
Title deeds to lender.
 Transfer of interest in specific immovable property. The borrower has no right to sell
the property. The original title documents are lodged with the bank. E.g. Land,
building, etc.
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 Time Deposit – An interest bearing deposit which has a fixed tenure
 Traditional Fixed Deposits, Cumulative Fixed Deposits, Recurring Deposits
 Tenure from 15 days to 10 years. for Fixed Deposits
 Tenure from 6 months to 10 years. for Recurring Deposits
 Demand Deposit – A deposit which can be withdrawn on demand any
time. It does not have any fixed tenure
 Savings Account, Current Account
 Savings account pays interest with restrictions on number of transactions
 Current account does not pay any interest and has no limitations on transactions
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 Remittances
 Outward Remittance : Funds going out of a Bank
 Inward Remittance : Funds coming into a Bank
 Types of Remittances
 Cash
 Cheque
 Demand Draft / Pay Order
 ECS (Electronic Clearing System)
 EFT (Electronic Funds Transfer)
 Wire Transfer (SWIFT- Society for Worldwide Interbank Financial
Telecommunication )
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 Clearing (Local Checks)
 Step 1 Check is deposited into checking account
 Step 2 Receiving Bank routes the check to the clearing house
 Step 3 Clearing house forwards the check to the drawee bank, which makes
sure that the money is there and that the check is legitimate
 Step 4 The money is made available
 Collections (Outstation Checks)
 When a check is payable at any outstation location, it is sent on collection to that
particular location
 Clearing will happen as mentioned above
 Money is available through inter branch transfer or demand draft
 It involves additional time and charges
CLEARING AND COLLECTIONS
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 Safe Custody
 Bank is in the business of providing safe custody of documents
 Safe Deposit Lockers
 Bank provides a secure space on hire to its customers
 Lockers can neither be opened by the hirer or the Bank individually
 Both must come together and use their respective keys to open the locker
SAFE CUSTODY / LOCKERS
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 Involves payments/collections on behalf of various central/state
governments
 Payments
 Pension Payments of employees of
 central government
 railways
 defense, etc.
 Payment of government bills / salaries
 Collections
 Collection of Income tax, customs and excise duties
 PPF Deposits
GOVERNMENT BUSINESS
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 SLR (Statutory Liquidity Ratio)
 SLR is also determined as a percentage of demand and time
liabilities (with some variation in the components taken by CRR) of a
bank .SLR has to be determined in the form of specified liquid assets
like balance with SBI , governments securities , etc.
 RBI uses both CRR and SLR as tools for controlling money supply
and also credit creating capacity of commercial banks.
 Maintained in the form of cash, gold or government securities as a certain
percentage of bank’s demand and time liabilities.
 In India Current SLR is 25%
STATUTORY RATIOS
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 CRR (Cash Reserve Ratio)
 CRR is determined on a fortnightly basis on a specified percentage of
demand and time liabilities of a bank. Demand liabilities of a bank are
balances in current accounts, savings account and other sundry
accounts where the creditors may claim payment without notice to the
bank. Time liabilities include short deposits, fixed deposits and other
types of liabilities, which will not be claimed immediately. Banks have
to maintain CRR in the form of current account balance with the RBI.
 Maintained in form of cash reserves or current account with the Central Bank, as a
certain percentage of bank’s demand and time liabilities.
 The objective is to ensure the safety and liquidity of the deposits with the banks.
 In India Current CRR is 5%
STATUTORY RATIOS
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 A currency not in its country of origin is Foreign Currency
 Technically Foreign Currency has to be exchanged with local legal
tender (Domestic Currency) to be used in another country and is
therefore called Foreign Exchange
 Currency of one country is like a commodity in other country and can
be bought or sold like any commodity
 Final settlement of transactions of each currency is always in the
country of origin
FOREX RATIOS
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UNDERSTANDING FOREX
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 The three terms under ‘FX out’ are synonymous in that each will result in a
Sale of FOREX
 The three terms under ‘FX in’ are synonymous in that each will result in a
Purchase of FOREX
FOREX OUT - SALE FOREX IN - PURCHASE
SELL BUY
DRAFT Issue/
TRAVELLERS CHEQUE Issue
DRAFT Payment/
TRAVELLERS CHEQUE Payment
IMPORT EXPORT

RATES
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To buy or sell any foreign currency one will have a rate at
which it can be bought or sold
Remember, one is selling or buying the foreign currency
against local currency (and not buying or selling local
currency)
‘Buy’ and ‘Sell’ rates are always quoted simultaneously
Rates for various foreign currencies are determined by usual
market forces such as demand and supply, interest rates etc.
As two currencies are involved, rates can be quoted in two
ways – Indirect and Direct.

RATES
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Foreign Exchange Rates :
 The Rupee is said to have “fallen” or lost value against the dollar if one dollar can
buy more rupee than before. The dollar is said to have “risen” against the rupee.
 The effects of exchange rate fluctuations have far reaching impact on a country and
the world economy. If one currency can buy an increasing amount of another
currency , it is said to be “strong”. However, just because a currency is strong does
not mean that everyone in that country is better off. A stronger rupee means that
Indian can buy foreign goods more cheaply, but foreigners will find Indian goods
more expensive. A strong dollar will affect the earnings of an export firm. For an
import, the cost of purchase will drop.

RATES
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Indirect - One unit of Foreign currency is equal to how many
units of Local currency, e.g. for Pound in London
USD 1 = GBP 0.6725
Direct - One unit of Home currency is equal to how many units
of Foreign currency, e.g. for Pound in London
GBP 1 = US$ 1.4870
Indian Rupees are always quoted in Indirect mode.
As an established international practice, only strong currencies
(four) are quoted in Direct mode.
USD, GBP, EUR and AUD
The first currency quoted in a currency pair is called the Base
currency

RATES
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Currency Rates quoted by various Banks are
available 24 hours, on line by Reuters
However, for small FOREX Transactions (say up to
US $20,000), Authorized Dealers quote “Card Rates”.
These are fixed at the beginning of the day

DETERMINING EXCHANGE RATE
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 Demand and Supply of one currency relative to the demand and
supply of another
 Price
 Law of One Price
 Purchasing Power Parity (PPP)
 Money supply and price inflation
 Interest rates
 Investor psychology and “Bandwagon” effects
Exchange Rate may or may not reflect all available
public Information

EXCHANGE RATE FORECASTING
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 Demand and Supply of one currency relative to the demand and
supply of another
 Price
 Law of One Price
 Purchasing Power Parity (PPP)
 Money supply and price inflation
 Interest rates
 Investor psychology and “Bandwagon” effects
Exchange Rate may or may not reflect all available
public Information

ACCOUNTS TERMINOLOGY
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 Movement of foreign exchange across borders requires presence of
accounts in each currency in each country
 NOSTRO – Domestic Bank’s account with Foreign Bank in that
country’s currency
‘Our a/c with them’
eg. USD account of SBI Mumbai with Chase in New York
 VOSTRO – Foreign Bank’s account with Domestic Bank in Local
currency
‘Their a/c with us’
eg. Rupee account of Chase New York with SBI Mumbai
 LORO – When two correspondent banks refer to another bank’s
account with a third Bank
‘Their a/c with them’

FOREX
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 Spot rate: Rate of currency exchange on a particular day (usually on
T+2 basis - payment actually is made two days later )
 Forward rate: Two parties agree to exchange currencies on a specific
future date at a rate decided today which is inclusive of forward
margins (premium/discount) on Spot rates.
A buyer and a seller agree on the exchange rate for any date in the
future and the transaction occurs when the date arrives, regardless of
what the market rates are then. Forward transactions can be arranged
for a few days, months or even years in the future.

FOREX
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 Notional rate: A fixed rate for conversion of foreign currency assets /
liabilities into domestic currency for purpose of Balance Sheet and
reporting to Central Bank as on date of revaluation say 31 March.
 Middle Rate: The reference rate, typically half-way between Selling
and Buying Rate for calculation of spread.

FOREX TRANSACTIONS….
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 An example of Spot Transaction – Draft Issue
 Draft of US$ 50 issued on US Bank towards admission fees to Foreign University at Spot
rate (Card rate) of USD 1 @INR 45
 Accounting Entries : Sale of US$50 @ INR 45 = Rs.2,250
Debit Customer A/C in INR Rs.2,250/-
Credit USD Correspondent A/C in INR Rs.2,250/-
(Pro forma account)
(Pro forma account)
Debit USD Trading A/C in USD US$ 50/-
Credit USD NOSTRO Mirror A/C in USD US$ 50/-
On presentation the draft will be paid by debit to NOSTRO account in
designated US Bank

FOREX TRANSACTIONS….
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 A Bank doing International transactions needs to have a relationship
with banks in various countries, at least one in each currency, where
it will maintain its account in that country’s currency –
CORRESPONDENT BANKS
 They should recognize mutual communication for which they
exchange a code – CHECK SIGNAL
 This is a variable Alpha Numeric code generated on the basis of set
Algorithm appended to each message
 International Business also requires electronic communication
channels for conduct of Trade and payments - SWIFT

SWIFT
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 A Bank doing International transactions needs to have a relationship
with banks in various countries, at least one in each currency, where
it will maintain its account in that country’s currency –
CORRESPONDENT BANKS
 They should recognize mutual communication for which they
exchange a code – CHECK SIGNAL
 This is a variable Alpha Numeric code generated on the basis of set
Algorithm appended to each message
 International Business also requires electronic communication
channels for conduct of Trade and payments - SWIFT

SWIFT
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 A secure messaging system used to exchange financial messages
between two financial institutions on standardised message formats
for uniformity
 Industry owned cooperatives formed in 1973, now has 7,667 members
and participants in 202 countries
 Having the global financial community's foremost messaging
infrastructure that offers –
 the highest resilience
 enhanced automation and sstraight through processing (STP)
 the lowest risk and reduced costs
 Emphasis on security, reliability and availability

SWIFT
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 Daily messages regularly exceed 9 million
 Overseen by regulatory authorities
 24x7x365 support centres

WHO USES SWIFT?
4/4/2014
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DIAGRAMMATIC REPRESENTATION OF FUNDS
FLOW
4/4/2014
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INVESTMENT BANK
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Investment Bank
 Investment banks are financial intermediaries who, much like commercial banks,
have a principal purpose of bringing borrowers and lenders together
 Investment or Merchant Banking services cater mostly to corporate customers.
These banks are involved in skill based activity, which call for servicing the entire
range of financial needs of a client. Normally, the services rendered are organizing
and extending finance for investment in projects, assistance in financial
management, raising foreign currency loans, financing export of capital goods,
financing hire purchases transactions, equipment's, etc. They create a market by
bringing the buyers and sellers together. They also arrange mergers and
acquisitions, undertake global custody, and provide fund management and advisory
services to corporate. They underwrite or guarantee an issue. Merchant banks may
not offer all the services referred to above and may specialize in one fo the different
services mentioned.

INVESTMENT BANKING
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Investment Bank is,
 An institution which acts as an underwriter or agent for corporations issuing
securities
 It has a large role in facilitating mergers and acquisitions, private equity placements
and corporate restructuring
 Unlike traditional banks, investment banks do not accept deposits from and provide
loans to individuals.
 Investment Banking involves
 Advisory services to investor and
 Investing on behalf of the investor
 Investment Banking is offered to
 High Net worth Individuals of Bank

WEALTH MANAGEMENT
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Wealth Management
Why?
Do you have $1 million in assets? $10 million? $20 million or
more?
Are you building a legacy or getting ready to leave one?
Are you exercising stock options or executing a will?
If Yes, then you need Wealth Management

WEALTH MANAGEMENT
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Wealth management reflects three fundamentals of financial
security needed during the life of an individual and after –
 Accumulation
 Continue growing assets, amassing wealth
 Takes place during early stages of life (getting married, having children, etc.)
 Preservation
 Maintaining lifestyle during retirement
 Protecting family or business after you are no more
 Transfer
 Creating a Lasting Legacy for future generations
 Either sharing the rewards of your life's work with heirs or to benefit a cause or charity

RISK AND REWARD
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What is Risk?
 We are faced by uncertainty about the future
 In finance this uncertainty set is populated by returns
 Some we want
 Some we don’t want
 The undesired elements of the uncertainty set are known as
RISK
The desired outcomes are reward

DIMENSIONS OF RISK AND REWARD
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 Likelihood
 Consequence
 The product of likelihood and consequence equal risk
 The Rumsfeld quotation:
 There are the risks that we know that we know
 There are the risks that we know that we don’t know
 And there are the risks that we don’t know that we don’t know.
 Strictly the first of these is not a risk -it is an expectation and we
price expectations
 The second we provide capital against
 The third ……

RISK MANAGEMENT
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 Risk Management is
 Attempting to
 Identify and then manage threats
 That could severely impact or bring down the organization
 It involves
 reviewing operations of the organization
 identifying potential threats to the organization
 identifying likelihood of their occurrence
 taking appropriate actions to address the most likely threats

4/4/2014 47
THANK YOU

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