Here are the key points about the evolution of banking in the USA: 1. Early banks (1791-1832) required special permission from state governments to open and operate. A central bank was established in 1791. 2. From 1832-1864, state governments took over bank supervision. Banks issued their own currencies which were supposed to be convertible to gold/silver. Over 10,000 different bank notes circulated. 3. 1865-1914 was dominated by National bank notes as the main currency until Federal Reserve notes in 1914. The 1907 financial panic caused an economic depression. 4. 1929-1933 saw the onset of the Great Depression. Over 1,000 US banks failed by late 1931.

1. Introduction
A 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.

2. INDIAN
FINANCIAL
SYS.
FORMAL INFORMAL
FINANCIAL FINANCIAL
SYS. SYS.
Moneylenders
REGULATORS: FIANANCIAL
Local Bankers
MoF, INST. FINANCIAL FINANCIAL FINANCIAL
Traders
SEBI, RBI, (INTERMED- MKT. INSTRUMENTS SERVICES
Landlords
IRDA IARIES)
Pawn Brokers

3. Financial
Inst.
(Intermediaries)
Insurance
Non-Banking &
Banking Inst. Mutual Funds
Inst. Housing
Finance co.
Scheduled Scheduled Non-Banking Development
Public Pvt.
Commercial Cooperative Finance Financial
Sector Sector
Banks Banks Co. Inst.

4. Scheduled
Commercial
Banks
Foreign
Public Private Regional
Banks
Sector Sector Rural
In
Banks Banks Banks
India

5. Development
Financial
Inst.
All-India Financial
Inst.: IFCI, IDBI, IIBI, State-level Other
SIDBI, IDFC, Inst.: Inst.:
NABARD SFCs, SIDCs ECGC, DICGC
EXIM Bank, NHB

6. 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 Exchanges
Domestic International
Mkt. Mkt.

7. Types of Money
⇒ Broad Money
⇒ Narrow Money
⇒ Fiat Money
Others:
a) Gold & Silver Coins (Ginni)
b) Metal Money
c) Paper Money
d) Plastic Money
e) Virtual Money

9. Capital Formation The "capital stock" is one
of the basic determinants of an economy's
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 economy's
productive capacity and, hence, the more
rapid the growth of aggregate income.

10. Pool
In 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…

11. A temporary affiliation of two or more people
in an attempt to manipulate a security's
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

12. Netting
Reducing 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.

13. Cash flows before netting
£100m £60m
U.K.
£40m parent £200m
£100m
German U.S.
£100m
subsidiary subsidiary

14. Cash flows after netting
£60m £140m
U.K.
parent
German U.S.
subsidiary subsidiary

15. 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

16. Banking Institutions
The mobilization of deposits &
disbursement of credit to various
sectors of the economy

17. Functions of Banking Inst.
• Transfer of funds
• Collection
• Foreign Exchange
• Safe deposit locker
• Gift Cheques &
• Merchant Banking.

18. Public Sector Banks
Major Govt. holding
• SBI and its associates
• Nationalized Bank

19. 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.

20. Nationalised Bank
The 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.

21. Private Sector Bank
New 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.

22. Foreign Banks in India
Foreign 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.

23. BANKING
What you all
understand from the
term Banking???

24. The Banking Regulation Act,1949, known till
1965 as the Banking Companies Act 1949,
defines Banking as:-
“ accepting for the purposes of lending or
investment, deposits of money from the
public, repayable on demand or otherwise
and withdrawable by cheque, draft, order
or otherwise”

25. Origin of Banking in India
1683 – East India Company ( By – Madras based officers)banking of
western type only.
1779 – The Hindustan Bank
1786 – General Bank of India
Then came 3 presidency banks, in the early part of the nineteenth
century, namely:-
1806 – Bank of Bengal
1840 – Bank of Bombay
1846 – Bank of Madras
In the second half of the nineteenth century :-
1) More Exchange banks
2) Indian joint stock banks.

26. Continued ….
In 1900 –
1) 9 joint stock banks
2) 8 exchange banks
3) 3 Presidency Banks
In 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”.

27. Origin of Commercial Banking
1000 B.C. – Originated from Temples and Royal Palaces in
Babylon, as they attract peoples faith.
Then Goldsmiths came – when coins made of precious
metals like gold and silver as commonly accepted forms of
wealth in 1640.

28. Structure of Present Indian Banking System
Reserve Bank of India
1) 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

29. 2) Non – Scheduled Banks –
a) Central Co - operative Banks & Primary
Credit Societies.
b) Commercial Banks
Conditions 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.

30. Functions of Commercial Banks
Divided 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

31. 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

32. Continued…
Social Functions or Role of Banks in Economic
Development
1) Capital Formation
2) Inducement to Innovation
3) Investment – friendly Interest Rate Structure
4) Development of Rural Sector
5) Implementation of Monetary Policy
6) Employment Opportunities

33. Money Market
It is the market of instruments which are for
• Very short Period
• Low Return
• Normally safe & Secure
Money 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

34. 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

35. 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.

36. 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

37. 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

38. 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
•

39. Commodity Market
• Physical commodity Market (Mandi)
• Commodity Exchange
NCDEX
MCX

40. 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

41. 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.

42. 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

43. Financial Institutions
• Development Institutions
• Investment Institutions
• Regulatory Institutions
• Banking Institutions
• Non Banking Finance Institutions /Companies
(NBFC)

45. Explain the reasons for
imposing the social control
over the commercial banks
of India. How far has it
succeeded in achieving the
GOAL?

46. What are excess reserves with the banks? What is
their Utility?
If banks happen to keep cash reserves beyond the Reserve
Bank’s requirement of cash reserve ratio, they are having
excess reserves.
Example : -
CRR – 10%, Demand Deposits = Rs. 10,000.
Actual Cash Reserves = Rs. 1500
Required cash Reserves = 10 % of Rs. 10,000 i.e. Rs.1,000
Excess Reserves = Rs.(1500 – 1000) = Rs. 500
Banks can utilize these excess reserves whenever it
desires to make more loans. It can make more loans 10
times of its excess reserves, assuming CRR = 10% and
Credit Multiplier = 1 / 10% = 10.

47. “Real utility of excess reserves is
realized by the banks when the
central bank tries to squeeze their
liquidity through higher Bank Rate
or through the sale of securities
during inflation”.

48. Banking in USA

49. Starting
The U.S. banking industry can be categorized into five
eras.
1st Era => 1791 to 1832
In 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 1864
In 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…

50. Cont…
3rd Era => 1865 to 1914
National 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.

51. 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 currency
b) State Banks – can not issue currency
Commercial 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.

52. 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.

53. The case of Lehman’s Bank, where
they have not much reserves, and
resulted into Bankruptcy

54. Wholesale Banking
It is the provision of services by banks to the like of :
a) Large corporate clients
b) Mid-sized companies
c) Real estate developers and investors
d) International trade finance businesses
e) 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.

55. 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

56. Retail Banking

58. 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

59. Introduction
Banks across the country are tripping over themselves to
enter new segments like –
a) Car Loans
b) Consumer Loans
c) Housing Finance
d) Education loan
e) Credit Cards
The 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”

60. 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.

61. Major forces that are driving and shaping consumer lending.
Competition
Major Forces
Securitization Automation
Are
Regulation

62. 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

63. 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 processing
Low cost of Multi distribution
Success Factors
funding channels
Low intermediation Flexible
Or operating cost technology
Proper credit
Marketing
Appraisal
capabilities Large product Mechanism
portfolio

64. 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’.

65. Retail Banking Strategies
Retail banking covers both asset – side and liability side products.
The liabilities side include –
a) ATMs
b) E – banking
c) tele – banking
The 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.

66. Strategies
Market 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.

67. 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.

68. 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.

69. 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.

70. Universal Banking

71. Universal Banking
It 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.

73. 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”.

74. 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;

75. 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)

77. PRINCIPLES OF LENDING
Principles of Safety of Funds.
Principles of Profitability.
Principles of Liquidity.
Principles of Purpose.
Principles of Risk Spread.
Principles of Security.

78. PRINCIPLES OF LENDING
Principles of Safety of
Funds:
Willingness.
Honesty.
Integrity.
Character.

79. PRINCIPLES OF LENDING
Principles of Profitability
Must Cover
Cost of Funds.
Cost of its Administration.
Risk Cost.

80. PRINCIPLES OF LENDING
Principles of Liquidity
Problem may include:
Liquidity Crises.
ALM mismatch.
Bank’s inability to meet its obligations.
Account turning NPA.

81. PRINCIPLES OF LENDING
Principles of Purpose
Productive Purpose:
Helps generate additional income.
It works like incentive for pursuing
the activity.
Generate cash and builds capacity
to repay.
Unproductive purpose acts like a
burden.

82. PRINCIPLES OF LENDING
Principles of Risk Spread:
Sector wise.
Industry wise.
Geographical Area wise.
Borrower wise.

83. PRINCIPLES OF LENDING
Principles of Security
To fall back upon in case of:
Unwillingness of the borrower.
Absence of capacity of the
borrower.

84. PRINCIPLES OF LENDING
Features of Good
Security:
Marketability.
Ascertainability.
Stability.

85. PRINCIPLES OF LENDING
Marketability:
Ready Market.
Regular Transactions.
Locally available.

86. PRINCIPLES OF LENDING
Ascertainability:
Physically
identifiable.
Monetarily Valuable.

87. PRINCIPLES OF LENDING
Stability:
Physically not
perishable.
Monetarily not

88. PRINCIPLES OF LENDING
Transferability:
Legally.
Physically to prospective
buyers.

89. Balance Sheet

90. Components of a
Bank Balance sheet
Liabilities Assets
1. Capital 1. Cash & Balances with
2. Reserve & Surplus RBI
3. Deposits 2. Bal. With Banks &
Money at Call and
4. Borrowings Short Notices
5. Other Liabilities 3. Investments
4. Advances
5. Fixed Assets
6. Other Assets
Contingent Liabilities

91. Components of Liabilities
1.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.

92. Components of Liabilities
2. Reserves & Surplus
Components under this head includes:
I. Statutory Reserves
II. Capital Reserves
III. Investment Fluctuation Reserve
IV. Revenue and Other Reserves
V. Balance in Profit and Loss Account

93. Components of Liabilities
3. 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 Deposits
II. Savings Bank Deposits
III. Term Deposits

94. Components of Liabilities
4. 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 & Agencies
II. Borrowings outside India

95. Components of Liabilities
5. Other Liabilities & Provisions
It is grouped as under:
I. Bills Payable
II. Inter Office Adjustments (Net)
III. Interest Accrued
IV. Unsecured Redeemable Bonds
(Subordinated Debt for Tier-II Capital)
V. Others(including provisions)

96. Components of Assets
1. Cash & Bank Balances with RBI
I. Cash in hand
(including foreign currency notes)
II. Balances with Reserve Bank of India
In Current Accounts
In Other Accounts

97. Components of Assets
2. BALANCES WITH BANKS AND MONEY AT
CALL & SHORT NOTICE
I. 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 Institutions
II. Outside India
a) In Current Accounts
b) In Other Deposit Accounts
c) Money at Call & Short Notice

98. Components of Assets
3. 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

99. Components of Assets
4. Advances
The most important assets for a bank.
A. i) Bills Purchased and Discounted
ii) Cash Credits, Overdrafts & Loans
repayable on demand
iii) Term Loans
B. Particulars of Advances :
i) Secured by tangible assets
(including advances against Book Debts)
ii) Covered by Bank/ Government Guarantees
iii) Unsecured

100. Components of Assets
5. 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

101. Contingent Liability
Bank’s obligations under LCs,
Guarantees, Acceptances on behalf of
constituents and Bills accepted by the
bank are reflected under this heads.

102. COMPONENTS OF PROJECT
APPRAISAL
Technical feasibility.
Economic viability.
Financial feasibility.
Managerial capacity.
Marketing possibilities.

103. COMPONENTS OF APPRAISAL
Technical 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.

104. COMPONENTS OF APPRAISAL
Technical 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

105. COMPONENTS OF APPRAISAL
Economic 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.

106. COMPONENTS OF APPRAISAL
Managerial viability:
Adequacy and suitability of
management structure.
Whether technically/ professionally
qualified.
Reputation in the market and
experience
Ability to withstand competition.
Financial standing.
Bargaining power with suppliers.

107. COMPONENTS OF APPRAISAL
Managerial 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.

108. COMPONENTS OF APPRAISAL
Managerial 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.

109. COMPONENTS OF APPRAISAL
Market Appraisal:
Availability or creation of market
- whether diversified.
Demand forecasting based on
overall demand and supply
position including global
scenario.
Product promotion measures

110. COMPONENTS OF APPRAISAL
Market Appraisal:
Fluctuations Expected in
demand & supply position in near
future.
Future Growth Potential.
Government Policies in
Pricing.
Pollution.
Custom and excise duties.

111. COMPONENTS OF APPRAISAL
Market 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.

112. COMPONENTS OF APPRAISAL
Market 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.

113. COMPONENTS OF APPRAISAL
Financial 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.

114. COMPONENTS OF APPRAISAL
Financial 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

115. COMPONENTS OF APPRAISAL
Financial 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 in
subsidiaries or associated firms).

116. COMPONENTS OF APPRAISAL
Financial 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.

117. COMPONENTS OF APPRAISAL
Financial Parameters to be considered:
Trend Analysis:
Net Current Assets.
Tangible Net Worth.
Profitability - Net Profit/Sales.
Cost are reasonable.

118. COMPONENTS OF APPRAISAL
Financial Parameters to be considered:
For new units only:
Repayment Period.
Return on Project Tangible Net worth
Asset Coverage Ratio.
(Primary + Collateral)/ Aggregate
Secured Loans.

119. The Narasimham Committee
1990s India had traumatic moments
1) Banks were burdened with large percentage
of non-performing loans
2) Customer service had suffered and out-
mode practices were in vogue
3) Overall re-hauling was needed for entire
financial systems in general and banking
sector in particular
The Narasimham Committee was set up to
recommend changes in financial system

120. 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

121. ALM – Asset-Liability Management
Definition – 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.

122. 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.

123. Purpose & Objective of ALM
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 ration.
It is aimed to stabilize short-term profits,
long-term earnings and long-term
substance of the bank.

124. Significance of ALM
• Volatility
• Product Innovations & Complexities
• Regulatory Environment

125. 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.

126. Liquidity Management
Bank’s liquidity management is the
process of generating funds to meet
contractual or relationship obligations at
reasonable prices at all times.
New loan demands, existing
commitments, and deposit withdrawals are
the basic contractual or relationship
obligations that a bank must meet.

127. Adequacy of liquidity position
for a bank
Analysis of following factors throw light
on a bank’s adequacy of liquidity
position:
a. Historical Funding requirement
b. Current liquidity position
c. Anticipated future funding needs
d. Sources of funds
e. Options for reducing funding needs
f. Present and anticipated asset quality
g. Present and future earning capacity and
h. Present and planned capital position

128. Funding Avenues
To satisfy funding needs, a bank must
perform one or a combination of the
following:
a. Dispose off liquid assets
b. Increase short term borrowings
c. Decrease holding of less liquid assets
d. Increase liability of a term nature
e. Increase Capital funds

129. Statement of Structural
Liquidity
All Assets & Liabilities to be reported as per
their 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

130. An Example of Structural Liquidity
Statement
15-28 30 Days- 3 Mths - 6 Mths - 1Year - 3 3 Years - Over 5
1-14Days Days 3 Month 6 Mths 1Year Years 5 Years Years Total
Capital 200 200
Liab-fixed Int 300 200 200 600 600 300 200 200 2600
Liab-floating Int 350 400 350 450 500 450 450 450 3400
Others 50 50 0 200 300
Total outflow 700 650 550 1050 1100 750 650 1050 6500
Investments 200 150 250 250 300 100 350 900 2500
Loans-fixed Int 50 50 0 100 150 50 100 100 600
Loans - floating 200 150 200 150 150 150 50 50 1100
Loans BPLR Linked 100 150 200 500 350 500 100 100 2000
Others 50 50 0 0 0 0 0 200 300
Total Inflow 600 550 650 1000 950 800 600 1350 6500
Gap -100 -100 100 -50 -150 50 -50 300 0
Cumulative Gap -100 -200 -100 -150 -300 -250 -300 0 0
Gap % to Total Outflow -15.38
-14.29 18.18 -4.76 -13.64 6.67 -7.69 28.57

131. 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.

132. CAMELS – Ratings for Banks
For evaluation and rating of Indian Banks Six
parameters were used.
C – Capital Adequacy
A – Asset Quality
M – Management
E – Earning Performance
L – Liquidity & Systems
employed 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.

133. Component Ratings
Each 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 Adequacy
A – Asset Quality
C – Compliance
S – Systems
Composite Ratings
It is used by the supervisors as the Prime indicator of
bank condition, assigned on a scale of A to E.

134. Cross Selling?

135. Corporate Banking
Corporate banks or wholesale banks normally supply capital
for business ventures and construction activities on a long –
term basis.
Wholesale banking is an umbrella term encompassing the
products and services that a commercial bank provides to its
corporate customers.
In today's technological, competitive and pressure packed
environment, wholesale bankers have two basic choices-:
1) either ensure their current operation at peak
efficiency so as to effectively meet its customer need’s.
2) or develop alternative strategies outside their current
operations requirement.

136. 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.

137. Consortium Finance
Every 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.

138. Lending

139. Introduction
Lending 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.

140. Credit policy Lays down
Exposure
Levels
Credit Risk Credit appraisal
assessment standards
Policy
Lays down Delegation
Documentation
Of
standards
Powers
Takeover
Of Pricing
Advances

141. Need for Credit Policy
The credit policy document is a document that carefully
specifies the do’s and dont’s while sanctioning the loan
proposals.
1) To screen out loans
2) Which can be outrightly rejected
3) Loans that can be sanctioned without any reference.
Analyzing
Selecting
Sanctioning
Monitoring

142. Components of Credit Policy
Miscellaneous
Loan
policies
Other
General
Specific
Policies
issues
Components
Specific
Quality
Loan
Control
Categories

143. Significant issues that are to be incorporated in
the policy
1) 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 factors
Essentially, 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.

144. 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 Procedure
Banks 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

145. 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 Leverage
5) Management Evaluation
6) Fundamental Analysis.
a) Capital structure
b) Asset / liability position
c) Profitability
d) Sensitivity to interest rate structures, tax policies

146. Rating Criteria for Banks
The criteria for rating the bank are normally based on:-
a) Assets
b) Equity
c) Profits
If 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.

147. Credit Rating
It 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.