book

Management of Banking and Financial Services, 2nd Edition

by Padmalatha Suresh, Justin Paul

June 2010

Intermediate to advanced

616 pages

29h 42m

English

Pearson India

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Cover
Title Page
Contents
About the Authors
Foreword
Preface to the Second Edition
Preface
01 - Managing Banking and Financial Services—Current Issues and Future Challenges
SECTION I THE SETTINGSECTION II THE GLOBAL FINANCIAL SYSTEM—CURRENT ISSUESThe Causes of the CrisisMacro Economic and Financial Stability—Understanding the LinkagesThe Role of ‘Trust’ in Financial StabilityThe Role of Regulation in Ensuring Financial StabilityThe Objectives of Financial RegulationFinancial Stability—The Overarching Agenda for the FutureSECTION III THE INDIAN FINANCIAL SYSTEM—AN OVERVIEWFinancial Stability in IndiaSECTION IV THE INDIAN BANKING SYSTEM—AN OVERVIEWThe Bank Market Structure in IndiaWho Owns the Commercial Banks in India?Evolution of Indian BankingANNEXURE I: BANKING SECTOR REFORMSANNEXURE II: COMMITTEE ON FINANCIAL SECTOR REFORMS—2009: MAIN PROPOSALS OF THE RAGHURAM RAJAN COMMITTEEANNEXURE III: SELECT MAJOR POLICY AND LEGAL REFORMS SINCE 1991–9221
02 - Monetary Policy—Implications for Bank Management
SECTION I BASIC CONCEPTSA Macroeconomic ViewCentral Bank Tools to Regulate Money SupplyThe Impact of OMOs on Other Tools of Monetary PolicyCentral Bank Signaling Through the ‘Policy Rate’Popularity of the ‘Repo’ Rate as the Policy RateThe Monetary RatiosOther Factors that Impact Monetary Base and Bank ReservesSECTION II APPLICATION OF THE MONETARY POLICY TOOLS IN INDIAThe Monetary Base in IndiaMeasuring Money Supply in IndiaOperation of Reserve Requirements in IndiaNet Demand and Time LiabilitiesOpen Market Operations in IndiaRepo Market Instruments Outside the LAFSECTION III MONETARY POLICY TOOLS IN SELECT COUNTRIESThe United States of AmericaCanadaThe EurosystemOther Developed and Developing CountriesANNEXURE I: COMPUTATION OF THE NDTL FOR THE BANKING SYSTEM IN INDIA
03 - Banks’ Financial Statements
SECTION I BASIC CONCEPTSBank LiabilitiesBank AssetsContingent LiabilitiesThe Income StatementSECTION II FINANCIAL STATEMENTS OF BANKS OPERATING IN INDIABank LiabilitiesBank AssetsIncome Statement of Indian BanksOther Disclosures to be Made by Banks in IndiaSECTION III ANALYZING BANKS’ FINANCIAL STATEMENTSANNEXURE I: CAMELS RATINGSANNEXURE II: KEY PERFORMANCE INDICATORS (KPI)FOR BANKSANNEXURE III: SOME ALTERNATIVE MODELS FOR BANK FINANCIAL STATEMENT ANALYSISANNEXURE IV: GROWTH OF NON-INTEREST INCOME IN INDIAANNEXURE V: CHANGES IN INTERNATIONAL ACCOUNTING STANDARDS AND CODE OF GOOD PRACTICES ON TRANSPARENCY IN MONETARY AND FINANCIAL POLICIES—THE INTERNATIONAL MONETARY FUND

04 - Sources of Bank Funds
SECTION I BASIC CONCEPTSSECTION II BANK LIABILITIES—DEPOSITSProtecting the Depositor—Deposit InsuranceDeposit Insurance in IndiaSECTION III PRICING DEPOSIT SERVICESThe Need to Price with PrecisionSome Commonly Used Approaches to Deposit PricingMarginal Cost of Funds ApproachNew Cost of Funds AnalysisDeposits and Interest Rate RiskSECTION IV BANK LIABILITIES—NON-DEPOSIT SOURCESThe Funding GapThe Indian ScenarioSECTION V BANK DEPOSITS IN INDIA—SOME IMPORTANT LEGAL ASPECTSBanking’ DefinedWho is a Customer?Who is Eligible to be a Customer?General Guidelines for Opening Deposit AccountsTermination of Banker–Customer RelationshipTypes of Deposit AccountsSECTION VI DESIGN OF DEPOSIT SCHEMES—SOME ILLUSTRATIONSRecurring Deposit Scheme (RD)Reinvestment Deposit SchemeFixed Deposit SchemeCash CertificatesANNEXURE I: SOME IMPORTANT NON-DEPOSIT FUNDING SOURCES FOR BANKS IN INDIA AND THE USAANNEXURE II: SOME IMPORTANT LEGAL PROVISIONS RELEVANT FOR BANKERSANNEXURE III: A SUMMARY OF IMPORTANT LEGAL ASPECTS OF BANK DEPOSITS IN INDIAANNEXURE IV: ANTI-MONEY LAUNDERING AND KNOW YOUR CUSTOMER GUIDELINES—INTERNATIONALBest Practices and Guidelines for Indian Banks
05 - Uses of Bank Funds—The Lending Function
SECTION I BASIC CONCEPTSIntroductionBanks’ Role as Financial IntermediariesGains from LendingWho Needs Credit?Features of Bank CreditTypes of LendingSECTION II THE CREDIT PROCESSConstituents of the Credit ProcessSECTION III FINANCIAL APPRAISAL FOR THE CREDIT DECISIONFinancial Ratio AnalysisCommon Size Ratio ComparisonsCash Flow AnalysisSECTION IV DIFFERENT TYPES OF LOANS AND THEIR FEATURESLoans for Working CapitalLoans for Capital Expenditure and Industrial CreditLoan SyndicationLoans for AgricultureLoans for Infrastructure—Project FinanceLoans to Consumers or Retail LendingNon-Fund Based CreditSECTION V LOAN PRICING AND CUSTOMER PROFITABILITY ANALYSISStep 1: Arrive at Cost of FundsStep 2: Determine Servicing Costs for the CustomerStep 3: Assess Default Risk and Enforceability of SecuritiesStep 4: Fixing the Profit MarginSome More Models of Loan PricingANNEXURE I: RISK CLASSIFICATION CRITERIA AND THE ROLE OF CREDIT RATINGANNEXURE II: CREDIT APPRAISAL—SOME COMMONLY USED FINANCIAL RATIOSANNEXURE III: INCOME STATEMENT-BASED CASH FLOW ANALYSIS
06 - Banks in India—Credit Delivery and Legal Aspects of Lending
SECTION I MODES OF CREDIT DELIVERYCash CreditLoan System for Delivery of Bank Credit—The Working Capital Demand LoanOverdraftsBills FinancePricing of LoansSECTION II LEGAL ASPECTS OF LENDINGWhat are Unsecured Loans?What are Secured Loans?What is a ‘Security’?ANNEXURE I: TYPES OF BORROWERS AND MODES OF LENDINGANNEXURE II: RECLASSIFICATION OF BORROWERS' FINANCIAL STATEMENTS FOR CREDIT APPRAISALANNEXURE III: SOME COMMON SECURITIES FOR BANK LOANS
07 - Credit Monitoring, Sickness and Rehabilitation
SECTION I BASIC CONCEPTSThe Need for Credit Review and MonitoringTriggers of Financial DistressFinancial Distress Models—The Altman's Z ScoreSome Alternate Models PredictingFinancial DistressThe Workout FunctionSECTION II BANKS IN INDIA—CREDIT MONITORING AND REHABILITATION PROCESSDebt Restructuring and Rehabilitation of Sick Firms in India—Past and PresentMonitoring by the States—State Level Inter-Institutional CommitteesDebt-Restructuring Mechanism for SMEsANNEXURE I: WARNING SIGNS THAT BANKS SHOULD LOOK OUT FOR—AN ILLUSTRATIVE CHECKLISTANNEXURE II: SMALL/MEDIUM ENTERPRISE AND CORPORATE DEBT RESTRUCTURING IN INDIAANNEXURE III: CASE STUDIES: DEBT RESTRUCTURED UNDER CDR
08 - Managing Credit Risk—An Overview
SECTION I BASIC CONCEPTSExpected Versus Unexpected LossDefining Credit RiskThe Basel Committee's Principles of Credit Risk ManagementLoan Workouts and Going to Court for RecoveryCredit Risk ModelsSECTION II MEASURING CREDIT RISK—INTRODUCTION TO SOME POPULAR CREDIT RISK MODELSA Basic ModelModeling Credit RiskSECTION III CREDIT RISK TRANSFERS—LOAN SALES AND CREDIT DERIVATIVESCredit DerivativesSome Basic Credit Derivative StructuresSECTION IV TREATMENT OF CREDIT RISK IN INDIA—SOME IMPORTANT EXPOSURE NORMS, PRUDENTIAL NORMS FOR ASSET CLASSIFICATION, INCOME RECOGNITION AND PROVISIONINGSome Important Exposure NormsPrudential Norms for Asset Classification, Income Recognition and ProvisioningIncome RecognitionAsset ClassificationProvisioning NormsSECTION V TREATMENT OF CREDIT RISK IN INDIA—SECURITIZATION AND CREDIT DERIVATIVESSecuritization—The ActSecuritization—The Indian ExperienceThe Securitization Market in India—2008–2009Credit DerivativesANNEXURE I: BASEL COMMITTEE—PRINCIPLES FOR THE ASSESSMENT OF BANKS’ MANAGEMENT OF CREDIT RISKANNEXURE II: SALIENT FEATURES OF SECURITIZATION
09 - Managing Credit Risk—Advanced Topics
SECTION I BASIC CONCEPTSEstimating PD, EAD and LGD—The IssuesWhy Do We Need Credit Risk Models?Credit Risk Models—Best Practice Industry ModelsSECTION II SELECT APPROACHES AND MODELS—THE CREDIT MIGRATION APPROACHThe Credit Migration Approach (Used by Credit Metrics)Calculation of Portfolio RiskThe Credit Migration Approach (Used by Credit Portfolio View)SECTION III SELECT APPROACHES AND MODELS—THE OPTION PRICING APPROACHThe KMV ModelSECTION IV SELECT APPROACHES AND MODELS—THE ACTUARIAL APPROACHCredit Risk+™ ModelSECTION V SELECT APPROACHES AND MODELS—THE REDUCED FORM APPROACHKamakura Risk Manager Version 7.0 and Kamakura Public Firm Models Version 4.1Which Model is Better—Structured or Reduced-Form?SECTION VI PRICING CREDIT DERIVATIVESPricing Credit Default Swaps—Understanding the Cash FlowsPricing Credit Default Swaps—Grasping the BasicsPricing Collateralized Debt Obligations—The BasicsSECTION VII CREDIT RISK MEASUREMENT AFTER THE FINANCIAL CRISISThe Financial Crisis—An Overview and AnalysisCurrent Developments and Regulatory ChangesANNEXURE I: THE GLOBAL CREDIT CRISIS—A BRIEF CHRONOLOGY OF EVENTS IN 2007–08
10 - Uses of Bank Funds—Investments
SECTION I BASIC CONCEPTSThe Treasury FunctionsRisks and Returns of Investment SecuritiesSECTION II MEASURING MARKET RISK WITH VARApproaches to VaR ComputationSECTION III BANKS’ INVESTMENT PORTFOLIO IN INDIA—VALUATION AND PRUDENTIAL NORMS'Classification of the Investment PortfolioValuation of InvestmentsInvestment ReserveDetermination of ‘Market Value’ While Marking to Market (HFT and AFS Categories)‘Non-Performing’ InvestmentsIncome RecognitionANNEXURE I: CASE STUDY—LTCM COLLAPSE AND LINK WITH VARANNEXURE II: SUMMARY OF REGULATORY RESPONSES TO MARKET RISK MEASUREMENT PRACTICES BY BANKS AFTER THE GLOBAL FINANCIAL CRISIS
11 - Capital—Risk, Regulation and Adequacy
SECTION I BASIC CONCEPTSWhy Regulate Bank Capital?To What Should Capital be Linked to Ensure Bank Safety?The Concept of Economic CapitalThe Concept of Regulatory CapitalSECTION II RISK-BASED CAPITAL STANDARDS—REGULATORY CAPITALBasel Accord IBasel Accord IIDetermination of Capital Requirements Under the New Basel PlanCapital Requirement for Interest Rate (Market) RiskCapital Requirement for Operational RiskConstitution of Banks’ Capital FundsCalculation of the Capital RatioStress Testing and Its Applicability to Regulatory CapitalSECTION III APPLICATION OF CAPITAL ADEQUACY TO BANKS IN INDIACapital Funds of Banks Operating in IndiaTier 1 CapitalTier 2 CapitalTotal Capital FundsCalculating Capital Charges and Risk-Weighted AssetsSECTION IV ILLUSTRATIVE PROBLEMS ON CALCULATING CAPITAL ADEQUACYSteps for Computing Risk-Weighted AssetsANNEXURE I: GUIDELINES FOR OPERATIONAL RISK MANAGEMENTANNEXURE II: THE FINANCIAL CRISIS OF 2007—BASEL II AND THE BLAME GAMEANNEXURE III: PILLARS II AND III OF BASEL II ACCORD AND THEIR APPLICATION TO INDIAN BANKSANNEXURE IV: CAPITAL ADEQUACY RATIOS OF INDIAN BANKS—SOME COMPARATIVE TABLES
12 - Risk Management in Banks
SECTION I THE CHANGING FACE OF BANKING RISKSSECTION II ASSET LIABILITY MANAGEMENTSECTION III INTEREST RATE RISK MANAGEMENTManaging Interest Rate RiskMeasuring Interest Rate RiskManaging Interest Rate Risk—A Strategic ApproachInterest Rate Risk or Model Risk?Alternative Methods to Reduce Interest Rate RiskSECTION IV MANAGING INTEREST RATE RISK—INTEREST RATE DERIVATIVESSwapsInterest Rate FuturesForward Rate Agreements (FRAs)Interest Rate OptionsInterest Rate GuaranteesSwaptionsArbiloansDerivatives Market Growth—The Issues
SECTION V LIQUIDITY RISK MANAGEMENT
Sources of Liquidity RiskHow to Measure Liquidity?Modern Approaches to Liquidity Risk ManagementApproach to Managing Liquidity for Long-Term Survival and GrowthApproach to Managing Liquidity in the Short Term—Some Tools for Risk MeasurementLiquidity Risk—Stress Testing ProcessRating the Bank's Liquidity by the RegulatorSECTION VI APPLICABILITY TO BANKS IN INDIAInterest Rate Derivatives in IndiaALM Framework for Indian BanksLiquidity Risk Management in Indian BanksANNEXURE I: THEORIES OF INTEREST RATESANNEXURE II: CONCEPT OF DURATION AND CONVEXITYANNEXURE III: FEATURES OF A SOUND LIQUIDITY AND FUNDS MANAGEMENT POLICY AND SYMPTOMS OF POTENTIAL LIQUIDITY RISKANNEXURE IV: MANAGEMENT OF LIQUIDITY RISK IN FINANCIAL GROUPS—KEY FINDINGSANNEXURE V: ALM IN INDIA—CLASSIFICATION OF BANK LIABILITIES AND ASSETS ACCORDING TO RATE SENSITIVITY AND MATURITY PROFILE
13 - Banking Functions, Retail Banking and Laws in Everyday Banking
SECTION I BASIC CONCEPTSNegotiable InstrumentsTypes of DepositsNon-Resident Indian (NRI) AccountsMandates and Power of AttorneySECTION II RETAIL BANKING—NATURE AND SCOPEWhy Banks Focus on Retail BusinessEmerging Issues in Handling Retail BankingSWOT Analysis of Retail BankingStrategies for Success in Retail BankingSECTION III CUSTOMER RELATIONSHIP MANAGEMENT (CRM)CRM Strategies/StepsThree Tip Questions for ManagersImage-Building ExercisesBlending Tradition with TechnologySECTION IV LAWS IN EVERYDAY BANKINGKey Acts That Govern the Functioning of the Banking SectorDifferent Customers—Different LawsBank–Customer RelationshipRights of a BankerObligations of a Banker
14 - Banking System—Services and Innovations
SECTION I COMMERCIAL BANKING SYSTEM AND STRUCTUREGlobalization and InnovationsSECTION II CASE STUDIES OF BANKSThe ICICI BankHSBC BankThe State Bank of India (SBI)SECTION III CASE IN DETAIL—HSBC BANKAccountsCredit CardsStandard Privileges for HSBC Card HoldersLoansWealth ManagementInsuranceSpecial Offers
15 - International Banking—Foreign Exchange and Trade Finance
INTRODUCTIONSECTION I BASIC CONCEPTSExchange RatesFOREX MarketTransfer SystemsDirect and Indirect QuotationsFunctioning of Foreign Exchange MarketSECTION II INTER-BANK MARKET AND FOREX DEALINGForex Dealing Room OperationsSpot, Forward, Cash, Tom Rates in an Inter-Bank MarketBid and Offer RatesForeign Exchange MarketSECTION III TRADE FINANCE—LETTERS OF CREDITFinancing International Trade Through Letters of CreditFlowchart Depicting a Typical Import Transaction with Letter of CreditTypes of LCSECTION IV TRADE FINANCE—FINANCING EXPORTERSThe Export Credit SchemeFeatures of Packing Credit in Local CurrencyFeatures of Pre-Shipment Credit in Foreign Currency (PCFC)Post-Shipment FinanceSECTION V FOREIGN CURRENCY LOAN (FCL)Features of Foreign Currency Loans
16 - High-Tech Banking—E-Payment Systems and Electronic Banking
SECTION I BASIC CONCEPTSWhy Do We Need Technology in Banking?Benefits of Electronic BankingSECTION II E-PAYMENTSThe Importance of Payments and Settlement SystemsInternational Standards and Codes for Payment and Settlement SystemsPayment and Settlement Systems in IndiaSECTION III RETAIL PAYMENT SYSTEMSPaper-Based Instruments in Retail Payment Systems—An OverviewElectronic Retail Payment Systems—AnOverviewSECTION IV PLASTIC MONEY AND E-MONEYCredit CardsDebit CardsCredit and Debit Cards in IndiaOther Payment Channels/ProductsSECTION V SECURITY ISSUES IN E-BANKING
17 - Insurance Services
SECTION I BASIC CONCEPTSBasic Features of Insurance ContractsBenefits of InsuranceTypes of Insurance ProductsSECTION II INDIA'S INSURANCE SECTOR—AN OVERVIEWThe Insurance SectorChanging Scenario of the Life Insurance SectorInsurance Regulatory Development Authority (IRDA)IRDA RegulationsLife Insurance Corporation of IndiaExport Credit Guarantee Corporation of India (ECGC)SECTION III BANKS AND INSURANCE SERVICES—BANCASSURANCE IN INDIAHow Does Bancassurance Help Banks?How Does Bancassurance Help Insurance Companies?How Does Bancassurance Help Customers?SECTION IV GLOBAL INSURANCE INDUSTRY, OPPORTUNITIES AND CHALLENGESThe Industry After the Financial CrisisChallengesOpportunitiesConvergenceThe Growth of Insurance Demand
18 - Mutual Funds, Securities Trading, Universal Banking and Credit Rating
SECTION I MUTUAL FUNDSAdvantages of Mutual FundsTypes of Mutual FundsImportant TermsSECTION II TRADING IN SECURITIES/SHARESFactors Behind Growth of Online TradingImpact on Securities MarketSECTION III UNIVERSAL BANKINGSize and Market PowerDiversification: Insurance and SecuritiesCore of Universal BankingImpartial Investment AdviceBenefits to BanksBenefits to CustomersChallengesSECTION IV CREDIT RATING SERVICESCredit Rating—An OverviewInformation to InvestorsBenefits to IssuersBenefit to the RegulatorsDifferences of Opinion in the Credit Rating Industry
19 - Cash Management and Demand Forecasting in ATMs
SECTION I INTRODUCTIONSECTION II THE CASE OF BHARATH BANKOutsourced Agents for ATMsSECTION III THE CASE OF GLOBAL BANKInformation Flow in the Supply Chain—Role of IT InfrastructureSECTION IV CASH DEMAND FORECASTINGTime Series Analysis of Cash Withdrawals from ATMsSales Trends and Other FactorsANNEXURE I: ATM—POST- AND PRE-INSTALLATION ACTIVITIES
20 - Mergers and Acquisitions in the Banking Sector
SECTION I MERGERS AND ACQUISITIONSSECTION II CASE OF BANK OF MADURA MERGER WITH ICICI BANKProfiles of BanksSwap Ratio and Stock Price FluctuationsSuitability AnalysisSynergies of the MergerANNEXURE I: SHARE PRICE VOLUME DATAANNEXURE II: THE MERGER OF BANK OF TOKYOMitsubishi and UFJ Bank
21 - Innovations in Products and Services—Cases of Three Banks
Case Study I Barclays BankUk BankingBarclay CardBarclays CapitalBarclays Global InvestorsBarclays Wealth ManagementPerformance and GovernanceProducts and ServicesOther ServicesSavings and InvestmentsRecent InitiativesBarclays StrategyCase Study II ING Vysya BankMilestones of the Bank over the Long Years of Its ServicesThe Origin of ING GroupThe New Identity: ING Vysya BankCustomer Relationship ManagementIT Implementation for Quick Customer ResponseRetail BankingING Vysya Bank's Retail Banking StrategyCase Study III State Bank of IndiaFeatures of the State Bank of IndiaPrimary ActivitiesSecondary ActivitiesProducts and Services
22 - Innovations in Products and Services in Banking—Cases of Public and Private Sector Banks
Case Study I Corporation BankPersonal BankingLoan SchemesCardsHigh-Tech Banking Products and ServicesProducts and Services for Non-ResidentsImportant ServicesCase Study II South Indian BankIntroductionSIB Deposit SchemesLoans and AdvancesNRI SchemesOther Service Features Offered by SIB
Appendix: Objective-Type Questions on Commercial Banking
Notes
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Chapter 8
Chapter 9
Chapter 10
Chapter 11
Chapter 12
Chapter 13
Chapter 14
Chapter 15
Chapter 16
Chapter 17
Chapter 19
Chapter 20
Chapter 21
Chapter 22
Acknowledgements
Copyright

Content preview from Management of Banking and Financial Services, 2nd Edition

Chapter Sixteen

1. INFINET stands for Indian Financial Network—the communication backbone for the Indian banking and financial sector. All banks and financial institutions are members of the INFINET, which functions as a closed user group.

2. Most money exists not as cash but as notations in the ledgers of depository institutions (banks and other financial institutions). Debiting one party's account and crediting another party's account execute notational money transactions. Banks must be prepared to convert notational demand deposits into cash on demand by the customer.

3. Please refer to chapter ‘Monetary Policy Implications for Bank Management’ for a discussion on ‘reserve requirements’.

4. Core banking applications help provide complete ...

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