Management of Banking and Financial Services, 4th Edition by Pearson

Book description

Management of Banking and Financial Services 4th, provides a thorough landscape of the banking and financial services in the country. The book addresses the issues of rapid globalization, competition nurtured by customer awareness, threat of security invasion and fraud in an era of technology savvy world, demands for transparency and the regulator’s overdrive to capital efficiency or asset quality.It has updated chapters on credit risk management, solvency, interest rate volatility and adequate liquidity which should be measured and managed.All the chapters have been rigorously updated.

Table of contents

  1. Cover Page
  2. Title Page
  3. Copyright Page
  4. Contents (1/2)
  5. Contents (2/2)
  6. Foreword
  7. Preface
  8. Overview
  9. Acknowledgements
  10. About the Authors
  11. Chapter 1: Managing Banking and Financial Services—Current Issues and Future Challenges
      1. Fintech1
      2. Digital currencies2
        1. Money – the traditional understanding
        2. E money
        3. Digital currency
        4. Assets – such as Bitcoins (see below – The Bitcoin phenomenon)
        5. The Bitcoin phenomenon
      3. Climate change and financial system3
      1. A Rewind to the Financial Crisis of 2007–08
      2. The Causes of the Crisis
      3. Prevalent models of banking
      4. Investment banks, Commercial banks and Universal banks – What is the difference?
      5. Macroeconomic and Financial Stability—Understanding the Linkages
      6. The Role of ‘Trust’ in Financial Stability
      7. The Role of Regulation in Ensuring Financial Stability
      8. The Objectives of Financial Regulation
      9. Financial Stability—the Over-arching Agenda for the Future
      1. Financial Stability in India
      1. The financial institutional structure in India
    6. Who Owns the Commercial Banks in India?
      1. Public Sector Banks
        1. At the end of March 2016, there were 27 public sector banks in India, comprising of State Bank of India and its associate banks (6), and 21 nationalized banks.
      2. Private Sector Banks
        1. At the end of March 2016, there were 21 private sector banks in India.
      3. Small Finance Banks (SFB)
      4. Payments Banks
      5. Foreign Banks
    7. Indian banks operating overseas
      1. Regional Rural Banks (RRBs)
        1. The RRBs were created for rural credit delivery and to ensure financial inclusion. Their capital base is held by the central government, relevant state government and the commercial bank that ‘sponsors’ them, in the ratio of 50:15:35, respectively. Recent
        2. However, an issue that is considered to hamper performance efficiency of RRBs is the multiplicity of control—RBI is the banking regulator, while NABARD39 is the supervisor with limited supervisory powers.
      2. Non Banking Financial Institutions (NBFI)
      3. Non Banking Finance Companies (NBFC)
      4. Housing Finance Companies (HFC)
      5. Co-operative Credit Institutions
      6. Banking Models in India
      7. The Indian Financial Code (2015)
      8. The Way Forward…
      9. Technology - the game changer (1/3)
      10. Technology - the game changer (2/3)
      11. Technology - the game changer (3/3)
  12. Chapter 2: Monetary Policy—Implications for Bank Management
      1. A Macroeconomic View
        1. Money ‘Money’ is generally defined as anything that people are willing to accept in payment for goods and services or to pay off debts—in other words, money is generally an acceptable medium of exchange, usable by all, with standardized quality, durable,
        2. Money Supply Money supply is the total quantity of money in the economy. While we will look at the various measurement parameters adopted by central banks a little later, in the narrow sense, ‘money supply’ is defined as the currency in circulation in the
        3. Measuring Money Supply There are three broad measures economists use when looking at the money supply: M1, a narrow measure of money’s function as a medium of exchange; M2, a broader measure that also reflects money’s function as a store of value; and M3,
      2. Central Bank Tools to Regulate Money Supply
        1. Tool 1 : Reserve Requirements
        2. Tool 2: Bank/ Discount rate
        3. Tool 3: Open Market Operations (OMO)
      3. The Impact of OMOs on Other Tools of Monetary Policy
      4. Central Bank Signaling Through the ‘Policy Rate’
      5. Popularity of the ‘Repo’ Rate as the Policy Rate
      6. Other Factors that Impact Monetary Base and Bank Reserves
      1. The Monetary Base in India
      2. Measuring Money Supply in India9
      3. Operation of Reserve Requirements in India10
      4. Net Demand and Time Liabilities
      5. Operation of the Bank Rate in India
      6. Open Market Operations in India
      7. Repo Market Instruments Outside the LAF
        1. The Market Stabilization Scheme (MSS-2004) It has been designed to lend more flexibility to liquidity management. Increasing capital inflows into India has necessitated managing their impact on liquidity. However, since external capital flows could be vol
      1. The United States of America13
        1. Monetary Policy Tool 1—Reserve Requirements Reserve requirements are the portion of deposits that banks may not lend and have to keep either on hand or on deposit at a Federal Reserve Bank. Within limits specified by law, the Board of Governors has sole a
      2. Net Transaction Accounts
        1. Total transaction accounts consists of demand deposits, automatic transfer service (ATS)accounts, NOW accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible bankers acceptances, and obligations issued by affiliates maturi
        2. Monetary Policy Tool 3—Open Market Operations Open market operations (OMOs)—the purchase and sale of securities in the open market by a central bank—are a key tool used by the Federal Reserve in the implementation of monetary policy. The short-term object
      3. The Eurosystem16
        1. Monetary Policy Tool 1—Minimum Reserve Requirements All credit institutions17 in the system are required to hold minimum reserves in separate accounts with the NCBs over a specified maintenance period (around a month). The Eurosystem pays a short-term int
        2. Reserve Coefficients
        3. Standardized Deductions
        4. Lump-Sum Allowance
        5. Monetary Policy Tool 2—Open Market Operations OMOs, coordinated by the ECB, but carried out by NCBs, take four distinct forms: Open market operations play an important role in steering interest rates, managing the liquidity situation in the market and sig
        6. Monetary Policy Tool 3—Standing Facilities The two standing facilities—a marginal lending facility and a deposit facility—offered by the Eurosystem set boundaries for overnight market rates by providing and absorbing liquidity. As their names imply, the m
      4. Other Developed and Developing Countries (1/3)
      5. Other Developed and Developing Countries (2/3)
      6. Other Developed and Developing Countries (3/3)
        1. Demand Liabilities Demand liabilities’ include all liabilities which are payable on demand and they include:
        2. Time Liabilities Time liabilities are those which are payable otherwise than on demand and they include:
        3. Some Special Cases
        4. Other Demand and Time Liabilities (ODTL) ODTL include the following:
        5. Liabilities not to be Included for DTL/NDTL Computation The following will not form part of liabilities for the purpose of the CRR:
  13. Chapter 3: Banks’ Financial Statements (1/5)
  14. Chapter 3: Banks’ Financial Statements (2/5)
  15. Chapter 3: Banks’ Financial Statements (3/5)
  16. Chapter 3: Banks’ Financial Statements (4/5)
  17. Chapter 3: Banks’ Financial Statements (5/5)
    1. PI = 1/2 (RI)2
      1. The Net Interest Margin (NIM)—An Important Indicator of Banking Efficiency and Profitability The NIM, operating expenses and ‘other income’ are crucial in determining profitability of banks. The NIM indicates the margin taken by the banking sector while c
        1. Off Balance Sheet (OBS) Exposures—Contingent Liabilities of Banks in India: Earlier, we have seen the important role ‘other income’ plays in bank profitability. One of the main sources of other income is OBS.
          1. Letter of Credit A letter of credit (LC) is defined as ‘an arrangement by means of which bank acting at the request of the customer, undertakes to pay a third party a predetermined amount by a given date, according to agreed stipulations and against prese
          2. Bank Guarantee A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in the case of his default. The person who gives the guarantee is called the surety, the person in respect of whose default the guara
          3. Payment and Clearing Operations This is one of the most important fee-based services of the banking system. A cheque is the most common form of payment system used by banks. Apart from cheque, which is a paper-based payment mechanism, transfer of funds ca
          4. The following charts and table depict Banks’ performance indicators in 2014–15.18
          5. Growth in banks’ off balance sheet (contingent) liabilities
          6. Growth in select items of Income and Expenditure of banks
          7. (Chart 2.8, page 8 of Report)
          8. Chart: More indicators of banks’ financial performance
          9. (Chart 2.9, page 8 of Report)
          10. Table: Banks’ ROA and ROE (percent)
          11. (Table 2.1, page 8 of Report)
    2. BASIC CONCEPTS (1/5)
    3. BASIC CONCEPTS (2/5)
    4. BASIC CONCEPTS (3/5)
    5. BASIC CONCEPTS (4/5)
    6. BASIC CONCEPTS (5/5)
      1. Bank Liabilities (1/5)
      2. Bank Liabilities (2/5)
      3. Bank Liabilities (3/5)
      4. Bank Liabilities (4/5)
      5. Bank Liabilities (5/5)
        1. Net Worth The net worth of a bank is measured by the aggregate of its share capital, reserves and surplus. In any enterprise, capital is required to absorb unexpected losses. A bank typically sustains losses when the value of its assets is eroded—leading
        2. Deposits The primary source of borrowed funds for a typical bank is ‘deposits’—predominantly raised from the public. We will see in subsequent chapters the rationale and implications of banks garnering household, corporate and government savings in order
        3. Borrowings Banks can borrow from the markets, both domestic and overseas, other institutions and banks, and from the central bank. Such borrowings, typically contribute a lower proportion to the banks’ total sources of funds. Generally, borrowings are use
      6. Bank Assets (1/5)
      7. Bank Assets (2/5)
      8. Bank Assets (3/5)
      9. Bank Assets (4/5)
      10. Bank Assets (5/5)
        1. Investments Investment securities help banks in several ways. They help to meet liquidity needs, earn interest, take ­advantage of interest rate movements and are a part of the banks’ treasury functions. At the time of investment, banks must be able to de
        2. Loans and Advances This category of assets is the most important for banks because it defines their roles as financial intermediaries and impacts their profitability to a large extent. These assets also carry a high level of default risk and each asset or
        3. Fixed Assets In sharp contrast to other industrial and service sectors, banks own relatively few fixed assets. Compared to non-financial firms, banks operate with lower fixed costs and exhibit lower operating leverage.
      11. Contingent Liabilities (1/5)
      12. Contingent Liabilities (2/5)
      13. Contingent Liabilities (3/5)
      14. Contingent Liabilities (4/5)
      15. Contingent Liabilities (5/5)
      16. The Income Statement (1/5)
      17. The Income Statement (2/5)
      18. The Income Statement (3/5)
      19. The Income Statement (4/5)
      20. The Income Statement (5/5)
        1. Other Income As pointed out earlier, banks are increasing their earnings through fee-based services, such as fund transfers and remittances, custodial services, collections, government business, agency business, opening letters of credit, issuing letters
        2. Interest Expended This represents variable cost for the bank. However, due to the variety of borrowed sources of funds in terms of tenure, price and covenants, keeping this cost in check is a challenge for banks. Banks typically operate on narrow spreads
    7. Financial Statements of Banks Operating in India (1/5)
    8. Financial Statements of Banks Operating in India (2/5)
    9. Financial Statements of Banks Operating in India (3/5)
    10. Financial Statements of Banks Operating in India (4/5)
    11. Financial Statements of Banks Operating in India (5/5)
      1. Bank Liabilities (1/5)
      2. Bank Liabilities (2/5)
      3. Bank Liabilities (3/5)
      4. Bank Liabilities (4/5)
      5. Bank Liabilities (5/5)
        1. Capital Banks have to show the authorized, subscribed and paid-up capital under this head.
        2. Deposits The balance sheet of a bank operating in India will show the following classifications.
        3. Borrowings In its balance sheet, a bank operating in India would show ‘borrowings’ under two categories—borrowings in India and ‘borrowings outside India’.
        4. Other Liabilities and Provisions These categories of liabilities are typically grouped as follows.
      6. Bank Assets (1/5)
      7. Bank Assets (2/5)
      8. Bank Assets (3/5)
      9. Bank Assets (4/5)
      10. Bank Assets (5/5)
        1. Cash and Balances with the RBI All cash assets of the bank are listed under this head, and this would be the most liquid part of the balance sheet.
        2. Balances with Banks and Money at Call and Short Notice Under this head, banks separately disclose the balances they hold with other banks in various deposit accounts, in and outside India. These balances are held for various purposes, including settlement
        3. Investments In times of soft interest rates, investments yield substantial incomes to banks.
        4. Loans and Advances Indian banks classify their loan assets in three ways—by nature of credit facility granted, by security arrangements and by sector. The numerical total of ‘advances’ under all three categories is the same, since the same data has been p
        5. Fixed Assets Indian banks classify ‘fixed assets’ on their balance sheets into the following categories:
        6. Other Assets These are residual assets of relatively small magnitude.
        7. Contingent Liabilities Generally, contingent liabilities are shown under the following broad heads.
      11. Income Statement of Indian Banks (1/5)
      12. Income Statement of Indian Banks (2/5)
      13. Income Statement of Indian Banks (3/5)
      14. Income Statement of Indian Banks (4/5)
      15. Income Statement of Indian Banks (5/5)
        1. Income
        2. Expenses
        3. Operating expenses: These expenses are typically the overheads and other expenses necessary for a bank to function. They are categorized as follows:
        4. Provisions and contingencies: Provisions made for loan losses, taxes and diminution in the value of investments will be included under this head.
      16. Other Disclosures to be Made by Banks in India (1/5)
      17. Other Disclosures to be Made by Banks in India (2/5)
      18. Other Disclosures to be Made by Banks in India (3/5)
      19. Other Disclosures to be Made by Banks in India (4/5)
      20. Other Disclosures to be Made by Banks in India (5/5)
    12. Analyzing Banks’ Financial Statements (1/5)
    13. Analyzing Banks’ Financial Statements (2/5)
    14. Analyzing Banks’ Financial Statements (3/5)
    15. Analyzing Banks’ Financial Statements (4/5)
    16. Analyzing Banks’ Financial Statements (5/5)
      1. Profitability by Line of Business (1/5)
      2. Profitability by Line of Business (2/5)
      3. Profitability by Line of Business (3/5)
      4. Profitability by Line of Business (4/5)
      5. Profitability by Line of Business (5/5)
  18. Chapter 4: Sources of Bank Funds (1/5)
  19. Chapter 4: Sources of Bank Funds (2/5)
  20. Chapter 4: Sources of Bank Funds (3/5)
  21. Chapter 4: Sources of Bank Funds (4/5)
  22. Chapter 4: Sources of Bank Funds (5/5)
    1. Thus, the effective interest rate that the bank pays on the `50,000 FD, if the interest amounts are withdrawn every month will be 10.46 per cent (i.e., 436.04 * 12/50,000).
      1. Cash Certificates
        1. General Features This is a variation of the re-investment deposit scheme, where the maturity value will be a pre-determined lump sum. The amount of initial deposit will be the issue price of the cash certificate and will be computed based on the maturity
          1. IRA and KEOGH Plans These are long-term sources of funds for banks. They act as custodians for personal pension plans that individuals may use to defer federal income taxes on contributions and subsequent investment earnings. Both IRAs are allowed under t
          2. Federal Funds Federal funds are short-term unsecured transfers of immediately available funds between depository institutions for one business day (i.e., overnight loans). Federal funds are best suited for institutions short of reserves to meet their lega
          3. Borrowing from the Federal Reserve This is seen as a viable alternative to the Federal funds market. There are three types of loans available based on the bank’s needs. Each type of loan comes at a different price. They could take the form of: (a) adjustm
          4. Repurchase Agreements Repurchase agreements contract to sell (typically high quality and usually government securities) securities temporarily by a borrower of funds to a lender of funds with the borrower agreeing to buy back the securities at a predeterm
          5. Non-Deposit Funds These are money market liabilities purchased for relatively short time periods to adjust liquidity demands. The use of these purchased funds came into existence due to tight money periods in which deposit rate ceilings caused banks to de
          6. Negotiable CDs These were initially developed to attract large corporate deposits and savings from wealthy individuals. They are interest-bearing receipts evidencing deposit of funds in the bank for a specified time period, at a specified interest rate. H
          7. Discount Window Advances The 12 regional Federal Reserves operate discount windows29 from which banks can borrow (subject to Regulation A rules). A discount window loan must be secured by collateral acceptable to a Federal Reserve (usually US government s
          8. Eurocurrency Deposits These were originally developed in Western Europe to provide liquid funds for financial institutions to lend to one another or to customers. These are dollar-denominated deposits placed in banks outside US territory. Many Eurodollar
          9. Bankers’ Acceptances These are time drafts drawn on a bank by either an exporter or importer to finance international business transactions. The bank may discount the acceptance in the money market to (in effect) finance the transaction.
          10. Commercial Papers These are high quality short-term debt obligations (unsecured promissory notes) issued by corporations with strong credit ratings to meet the firm’s working capital needs. Banks can issue such paper through their affiliated or holding co
          11. Federal Home Loan Bank Borrowings Under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) of 1989, FHLBs can provide discount window services to banks. FHLBs function as special lending facilities for the housing finance industry. T
          12. Long-Term Non-Deposit Sources These include mortgages to fund the construction of new buildings, capital notes and debentures. Generally, the interest costs on these funds, though substantially higher than money market loans, are more stable.
          13. The Basel Committee Guidelines The BCBS has issued three documents covering money laundering issues.
          14. IAIS Guidelines This association has issued its Guidance Paper 5, ‘Anti-Money Laundering Guidance Notes for Insurance Supervisors and Insurance Entities’, which parallels the BCBS’s statement on prevention.
          15. International Organization of Securities Commissioners (IOSCO) Guidelines IOSCO in its ‘Resolution on Money Laundering’ proposes seven specific areas for security regulators in individual countries to consider while establishing requirements for firms und
        2. Rbi’s Kyc Norms36
          1. QUESTIONS ON CASE
    2. BASIC CONCEPTS (1/5)
    3. BASIC CONCEPTS (2/5)
    4. BASIC CONCEPTS (3/5)
    5. BASIC CONCEPTS (4/5)
    6. BASIC CONCEPTS (5/5)
      1. Protecting the Depositor—Deposit Insurance (1/5)
      2. Protecting the Depositor—Deposit Insurance (2/5)
      3. Protecting the Depositor—Deposit Insurance (3/5)
      4. Protecting the Depositor—Deposit Insurance (4/5)
      5. Protecting the Depositor—Deposit Insurance (5/5)
      6. Deposit Insurance in India (1/5)
      7. Deposit Insurance in India (2/5)
      8. Deposit Insurance in India (3/5)
      9. Deposit Insurance in India (4/5)
      10. Deposit Insurance in India (5/5)
      1. The Need to Price with Precision (1/5)
      2. The Need to Price with Precision (2/5)
      3. The Need to Price with Precision (3/5)
      4. The Need to Price with Precision (4/5)
      5. The Need to Price with Precision (5/5)
      6. Some Commonly Used Approaches to Deposit Pricing (1/5)
      7. Some Commonly Used Approaches to Deposit Pricing (2/5)
      8. Some Commonly Used Approaches to Deposit Pricing (3/5)
      9. Some Commonly Used Approaches to Deposit Pricing (4/5)
      10. Some Commonly Used Approaches to Deposit Pricing (5/5)
      11. Marginal Cost of Funds Approach (1/5)
      12. Marginal Cost of Funds Approach (2/5)
      13. Marginal Cost of Funds Approach (3/5)
      14. Marginal Cost of Funds Approach (4/5)
      15. Marginal Cost of Funds Approach (5/5)
      16. New Cost of Funds Analysis (1/5)
      17. New Cost of Funds Analysis (2/5)
      18. New Cost of Funds Analysis (3/5)
      19. New Cost of Funds Analysis (4/5)
      20. New Cost of Funds Analysis (5/5)
      21. Deposits and Interest Rate Risk11 (1/5)
      22. Deposits and Interest Rate Risk11 (2/5)
      23. Deposits and Interest Rate Risk11 (3/5)
      24. Deposits and Interest Rate Risk11 (4/5)
      25. Deposits and Interest Rate Risk11 (5/5)
      1. The Funding Gap (1/5)
      2. The Funding Gap (2/5)
      3. The Funding Gap (3/5)
      4. The Funding Gap (4/5)
      5. The Funding Gap (5/5)
      6. The Indian Scenario (1/5)
      7. The Indian Scenario (2/5)
      8. The Indian Scenario (3/5)
      9. The Indian Scenario (4/5)
      10. The Indian Scenario (5/5)
        1. Non deposit sources of funds
        2. Some prominent money market sources of funds – banking sector securities17
        3. a. Call, notice and term money market
        4. b. Certificate of deposit (CD)
        5. c. Repo
      11. Annexure I. contains a brief description of select non deposit sources of funds for banks in the USA. (1/5)
      12. Annexure I. contains a brief description of select non deposit sources of funds for banks in the USA. (2/5)
      13. Annexure I. contains a brief description of select non deposit sources of funds for banks in the USA. (3/5)
      14. Annexure I. contains a brief description of select non deposit sources of funds for banks in the USA. (4/5)
      15. Annexure I. contains a brief description of select non deposit sources of funds for banks in the USA. (5/5)
      16. Long term borrowing by banks18 (1/5)
      17. Long term borrowing by banks18 (2/5)
      18. Long term borrowing by banks18 (3/5)
      19. Long term borrowing by banks18 (4/5)
      20. Long term borrowing by banks18 (5/5)
        1. Are Non-Deposit Sources More Costly and Risky? Borrowings from the market are generally perceived to be more expensive than deposit sources. Where banks tend to rely on borrowings to fund their lending operations, they are exposed to market risks—the cost
      1. ‘Banking’ Defined (1/5)
      2. ‘Banking’ Defined (2/5)
      3. ‘Banking’ Defined (3/5)
      4. ‘Banking’ Defined (4/5)
      5. ‘Banking’ Defined (5/5)
      6. Who is a Customer? (1/5)
      7. Who is a Customer? (2/5)
      8. Who is a Customer? (3/5)
      9. Who is a Customer? (4/5)
      10. Who is a Customer? (5/5)
  23. Chapter 5: Uses of Bank Funds—The Lending Function
      1. Introduction
      2. Banks’ Role as Financial Intermediaries
      3. Gains from Lending
      4. Who Needs Credit?
      5. Features of Bank Credit
      6. Types of Lending
        1. Short-Term Loans Typically, these are loans with maturities of 1 year or less. Most of these loans are granted with the primary purpose of financing working capital needs of the borrower, resulting from temporary build up of inventories and receivables. I
        2. Long-Term Loans Bank lending, which used to traditionally focus on ‘short-term’ loans, started looking at lending for periods longer than a year only from the 1930s onwards. These are called ‘term loans’ and have the following characteristics:
        3. Revolving Credits Revolving credits offer the most flexibility to borrowers. Assessed to meet the borrowers’ requirements over a period of 1 year or more, revolving credits permit drawings from the line of credit at any time, and similarly, repay the whol
      1. Constituents of the Credit Process13 (1/2)
      2. Constituents of the Credit Process13 (2/2)
        1. The Loan Policy To ensure alignment of individual goals of credit officers to the bank’s overall goals, banks formulate ‘loan policies’. These are written documents, authorized by individual bank’s Board of Directors, that formalize and set guidelines for
        2. Business Development and Initial Recommendations Within the broad framework of the loan policy of the bank, and based on the bank’s goals in building its loan asset portfolio, credit officers seek to reinforce the relationship with existing customers, bui
        3. Broad Steps to Credit Analysis
        4. Step 1—Building the ‘credit file’: The first step to effective credit analysis is gathering information to build the ‘credit file’. The preliminary information so obtained would throw light on the borrower’s antecedents, his credit history and track recor
        5. Step 2—Project and financial appraisal: Once the preliminary investigation is done, the internal and external factors, such as management integrity and capability, the company’s performance and market value and the industry characteristics are evaluated.
        6. Step 3—Qualitative analysis: Integrity is the most important quality that the banker looks for in a borrower, and the most difficult to measure. So is assessment of the quality of the management team. However, lenders will have to make qualitative assessm
        7. Step 4—Due diligence: Bypassing due diligence can be very costly for a bank. Many loans have run into problems since bankers did not take this step seriously. This is a time-consuming activity but well worth the effort. Due diligence can include checking
        8. Step 5—Risk assessment: A key function of the credit officer is to identify and analyze the key risks associated with the proposed credit. All potential internal and external risks are to be identified and their severity assessed in terms of how these ris
        9. Step 6—Making the recommendation: Finally, based on a thorough analysis of the project, the borrower and the market, and after examining the ‘fit’ of the credit with the ‘loan policy’, the credit officer makes his recommendations to consider the loan favo
        10. Credit Delivery and Administration Who takes the decision to lend? Depending on the size of the bank, the loan size and type of exposures planned, the final decision to lend may be taken by an authorized layer of the bank. Typically, banks fix ‘discretion
        11. Loan Documentation Different types of borrowers and different types of security interests necessitate loan documentation procedures that would be valid in a court of law. Accordingly, once the loan agreement is signed, the borrowers and guarantors execute
        12. Terms and Conditions of Lending These are very important ingredients of any loan agreement. The bank derives control over the borrower’s operations and also mitigates the risks of lending through this part of the loan agreement. The terms and conditions c
        13. Events of Default Such events, when they happen, may trigger the end of the banker–borrower relationship. An illustrative list of situations that may lead to an event of default include the following:
        14. Updating the Credit File and Periodic Follow-Up The credit file has to be continuously updated throughout the above process. Further, once the loan is disbursed, the following activities have to be carried out either by the credit officer himself or a tea
        15. Credit Review and Monitoring This is the most important step in credit management, and one that lends value to bank financing. Banks that have succeeded in credit management, and hence reduction of credit risk, are those that have separated credit review
      1. Financial Ratio Analysis
      2. Common Size Ratio Comparisons
      3. Cash Flow Analysis
      1. Fund Based Lending
        1. Loans for Working Capital
        2. Loans for Capital Expenditure and Industrial Credit
        3. Loan Syndication28
        4. Loans for Agriculture
        5. Loans to Consumers or Retail Lending
      2. Non-fund Based Lending
      3. Asset Based Lending
        1. Loans for Infrastructure—Project Finance
      1. Step 1: Arrive at Cost of Funds
      2. Step 3: Assess Default Risk and Enforceability of Securities
      3. Step 4: Fixing the Profit Margin
      4. Some More Models of Loan Pricing
        1. Fixed Versus Floating Rates When the interest rates are relatively stable and the yield curve slopes upward, banks would be willing to lend at fixed interest rates, above the rates they pay for shorter term liabilities. In an environment where rates are v
        2. Hedging and Matched Funding As described above, many borrowers prefer fixed rate loans. If banks have to make fixed rate loans in deference to borrower preferences, they attempt to control loss of profits due to interest rate volatility by using interest
        3. The Price Leadership Model The basic model described above makes the assumption that the bank knows its costs accurately, and can estimate probability of default and recovery rate for each borrower or class of borrowers. The basic model also fails to buil
        4. Cost Benefit Loan Pricing It is a practice for many banks to base their loan rates on the base reference rate, the LIBOR or the prime rate. Some banks have also developed sophisticated loan pricing systems that determine whether their loan prices fully co
        5. Customer Profitability Analysis Periodically, or every time a borrower approaches the bank with a request for modifications in loan terms, a customer profitability analysis should be carried out by the bank. The analysis is used to evaluate whether the ne
      5. Principal Factors (1/4)
      6. Principal Factors (2/4)
      7. Principal Factors (3/4)
      8. Principal Factors (4/4)
        1. The Borrower/Management
        2. The Firm/Project
        3. Commercial Bank Relationships
        4. Industry
        5. Risk Modifiers
  24. Chapter 6: Banks in India—Credit Delivery and Legal Aspects of Lending
      1. Cash Credit
      2. Loan System for Delivery of Bank Credit—The Working Capital Demand Loan
        1. RBI Guidelines—Loan component and cash credit component2
      3. Overdrafts
      4. Bills Finance
        1. Clean Bills This is a bill of exchange not supported by any documents of title to goods,6 since the seller has already delivered the goods and the documents to the buyer. Clean bills are also drawn to effect discharge of a debt or claim. Clean bills are t
        2. Documentary Bills A bill of exchange accompanied by documents of title to goods is a documentary bill. The goods have been despatched by the seller but the transfer of documents of title to goods has not yet taken place. Examples of documents of title to
        3. Supply Bills These bills do not fall in the ambit of the Negotiable Instruments Act. They are in the nature of ‘debts’ and can be assigned in favour of the bank.
        4. Precautions to be Taken While Purchasing/Discounting Bills
        5. Advances Against Bills Sent on Collection
        6. Drawee Bills In the earlier cases, the drawer of the bill, who is the seller, is financed by the bank. When the bank finances the buyer, the drawee, the buyer’s bank itself discounts the bills and sends the amount to the seller. This has the effect of fin
      5. Pricing of Loans
        1. Reset of interest rates under MCLR
        2. Interest rates on advances made in foreign currency
      6. Exemptions
      1. What are Unsecured Loans?
      2. What are Secured Loans?
        1. Securities and Their Features Can the banker accept any asset offered by the borrower as security for the advances made? Some basic safeguards observed while accepting assets as securities would help the bank recover most of its dues in the event of defau
        2. Safeguard 1—Ensure adequate ‘margin’: For a bank, ‘margin’ signifies the difference between the market value of the security and the amount of advance granted against it. For example, if the bank has sanctioned `75 lakh as advance against a security worth
        3. Safeguard 2—Easy marketability: In case of default, the security should have wide and ready marketability, to enable the bank sell off the security and realize its dues. For example, gold or jewels held as security are more liquid since they have wider ma
        4. Safeguard 3—Documentation: The bank’s security interest is evidenced by legally valid documents that are executed by the borrower. These documents have to be periodically reviewed, especially in the case of securities for long-term loans or revolving cred
      3. What is a ‘Security’? (1/2)
      4. What is a ‘Security’? (2/2)
        1. What is ‘Right of Set Off’? The bank’s right of set off enables it to adjust the credit balance (or deposit) in one account of a customer with the debit balance (or loan) in another account of the same customer. For example, if a customer has a term depos
      5. Working Capital Finance
        1. Projected Turnover Method This method is generally used for assessing working capital finance requirements in case of borrowers whose fund-based working capital requirements are less than `2 crore. According to this method, the working capital requirement
        2. The Permissible Bank Finance Method This method is generally applied by banks to working capital limits of over `2 crore.
        3. Cash Budget Method This method is prevalently applied to borrowers with fund-based limits of over `10 crore from the banking system. Optional to all borrowers in industry, trade and service sectors, this method is preferred by borrowers in the constructi
      6. Fixing the Working Capital Credit Limit
      7. Financing Receivables
      8. Financing Capital and Non-Operating Expenditure
      9. Peer to Peer (P2P) lending – using technology for lending27
        1. What is P2P lending?
        2. P2P- regulatory challenges
        3. Country experiences
  25. Credit Monitoring, Sickness and Rehabilitation
      1. The Need for Credit Review and Monitoring
      2. Triggers of Financial Distress
      3. Financial Distress Models—The Altman’s Z-Score
      4. Some Alternate Models Predicting Financial Distress
      5. The Workout Function
    2. Credit Information companies in india 17
      1. CIBIL and Loan Approval
      2. Other Credit Information Companies in India
    3. Debt Restructuring and rehabilitation of sick firms in India—the Workout function
      1. What is Restructuring?
      2. Criteria for Considering Restructuring
      3. Relief Measures under Restructuring
      4. Valuation of Restructured Advances
        1. Objectives of the Scheme The objectives of the scheme are:
        2. Features The features of the scheme are as follows:
        3. The Methodology The methodology is similar to the rehabilitation schemes operated for the SME sector.
        4. The CDR Structure The mechanism operates with a three-tier structure, consisting of the following:
        5. The Legal Issues The legal issues are as follows:
      5. Case Study I: India Cements Ltd (1/2)
      6. Case Study I: India Cements Ltd (2/2)
        1. Need for Restructuring When India Cements Ltd submitted a CDR proposal to the FIs at the end of 2002, it had stated that the bunching up of debt repayments over the next few years and inadequate cash flow generation was making it difficult for the company
        2. India Cements Debt Restructuring India Cements mandated HSBC Securities and Capital Markets (India) Pvt. Ltd as exclusive adviser in the restructuring process. As part of the debt-restructuring exercise, India Cements agreed to divest its entire stake in
        3. The Debt-Restructuring Proposal21 According to the debt-restructuring proposal, India Cements would use the proceeds from the sale of Visaka Cement to settle the debt in that company and then settle certain loans and interest and pressing creditors. It al
        4. Plan Under the CDR22 In a debt-restructuring plan cleared by the CDR Forum of FIs and banks, the company had committed to the following:
  26. Chapter 8 : Managing Credit Risk— An Overview
      1. Expected Versus Unexpected Loss
      2. Defining Credit Risk6
        1. Credit Risk of the Portfolio From our earlier discussions, it would be evident that managing the credit portfolio of a bank involves a higher level of risk-reward decisions than managing a portfolio of market investments. This is due to the fact that ther
        2. The Relationship Between Credit and Other Risks While loans are the largest source of credit risk and exposure to credit risk continues to be a leading source of problems, there are other sources of credit risk throughout the activities of a bank, in the
      3. International guidelines and standards for Credit Risk management – The Basel Committee on Banking Supervision (BCBS)
      4. Classifying ‘Impaired’ Loans
        1. International accounting practices set forth standards for estimating the impairment of a loan for general financial reporting purposes. Regulators are expected to follow these standards ‘to the letter’ for determining the provisions and allowances for lo
      5. Loan Workouts and Going to Court for Recovery
      6. Credit Risk Models
      1. A Basic Model
      2. Modeling Credit Risk
    4. Securitization
      1. Asset Reconstruction Companies (ARC)
      2. Covered Bonds
        1. How do originators/issuers benefit from covered bonds?
        2. How do covered bonds benefit the borrowers/investors?
        3. How do covered bonds benefit the economy?
        4. Comparing Securitization and Covered Bonds
      3. Legislation on covered bonds—select countries
        1. The USA
        2. Singapore
        3. The UK
        4. Europe
      4. Credit Derivatives
        1. Why Do Banks Use Credit Derivatives?
      5. Some Basic Credit Derivative Structures (1/2)
      6. Some Basic Credit Derivative Structures (2/2)
      1. Some Important Exposure Norms35
      2. Large Exposures Framework (LEF)
      3. Prudential Norms for Asset Classification, Income Recognition and Provisioning37
        1. What are NPAs? An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. An NPA is a loan or an advance where
      4. Income Recognition
        1. Income Recognition—Policy The policy for income recognition has to be objective and based on the record of recovery. In line with international best practices, income from NPAs is not to be recognized on accrual basis but is booked as income only when it
        2. Reversal of Income If any advance, including bills purchased and discounted becomes an ‘NPA’ as at close of any year, the unrealized interest accrued and credited to income account in the past periods should be reversed. This will apply to government guar
        3. Leased Assets The unrealized finance charge component of finance income42 on the leased asset, accrued and credited to income account before the asset became non-performing, should be reversed or provided for in the current accounting period.
        4. Appropriation of Recovery in NPAs Interest realized on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/additional credit facilities sanctioned to the borrower.
      5. Asset Classification
        1. Categories of NPAs Banks in India are required to classify NPAs into the following three categories based on (a) the period for which the asset has remained non-performing and (b) the realizability of the dues.
        2. Doubtful Assets
        3. Sub-standard Assets A general provision of 15 per cent on total outstanding should be made (without making any allowance for ECGC guarantee cover and securities available). The ‘unsecured exposures’ identified as ‘sub-standard’ would attract additional p
        4. What is an ‘Unsecured’ Exposure? RBI defines an ‘unsecured’ exposure as one where the realisable value of the security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, of the outstanding exposure.
        5. Standard Assets Under the existing norms, banks should make a general provision of a minimum of 0.25 per cent—1 per cent on standard assets on global loan portfolio basis. Within this framework, standard assets in specific sectors would attract lower or h
      6. Floating Provisions44 Internal policies approved by the Banks’ Board would determine the level of floating provisions. Such provisions will have to be separately held for ‘advances’ and ‘investments’ and would be used only under ‘extraordinary circumstanc
      7. “Accelerated “ provisions
        1. Writing-Off NPAs Provisions made for NPAs are not eligible for tax deductions. However, tax benefits can be claimed for writing off advances.
      1. Securitization—The Act
      2. Securitization—the Guidelines
        1. Salient Features of the Current Operational Guidelines on Securitization
      3. Sale of Assets by Banks not Involving SC/RC
        1. Salient Features of Direct Assignment Guidelines of RBI
        2. Comparison of Guidelines—Securitization vs Direct Assignment
      4. Strengthening the securitization framework in India
      5. Asset Reconstruction companies in India
      6. How do ARCs work?48
      7. Some commonly used accounting and financial terminologies in respect of ARC (not an exhaustive list)
      8. Securitization—The Indian Experience
      9. India’s Securitization market in 201650
      10. Credit Derivatives in India52 (1/4)
      11. Credit Derivatives in India52 (2/4)
      12. Credit Derivatives in India52 (3/4)
      13. Credit Derivatives in India52 (4/4)
        1. The Key Players in ABS
  27. Chapter 9 : Managing Credit Risk— Advanced Topics
      1. Estimating PD, EAD and LGD—The Issues
      2. Why Do We Need Credit Risk Models?
      3. Credit Risk Models—Best Practice Industry Models
      1. The Credit Migration Approach (Used by Credit Metrics™11)
      2. Model Applied to Loan Commitments
      3. Calculation of Portfolio Risk28
      4. The Credit Migration Approach (Used by CreditPortfolioView)
      1. The KMV36 Model
        1. The Market Value of the Firm’s Assets The Market value is computed as the PV of the future stream of free cash flows that is expected to be generated by the firm. An appropriate ‘discount rate’37 is used to discount the future cash flows and arrive at the
        2. The Risk of the Assets The value computed above is scenario-based and can be impacted by business and other risks in future. The asset values can fluctuate in future, and could be higher or lower than expected. This ‘volatility’ is asset risk.
        3. Leverage The firm would have to repay all its contracted liabilities. The relative measure of outstanding liabilities (this would typically be taken at book value) to the market value of assets is an indication of ‘leverage’.38
      2. Improvements Made to the Basic Structural Model in the Current Version EDF8.059
      1. Credit Risk+™ Model
      1. Kamakura Risk Manager Version 8.0 and Kamakura Public Firm Models Version 5.075
      2. A Brief Description of the Approaches Follows77
        1. The Jarrow Chava Model
        2. Merton Structural Model
        3. Jarrow Merton Hybrid Model
      3. Which Model is Better—Structured or Reduced Form?
      1. Pricing Credit Default Swaps—Understanding the Cash Flows
      2. Pricing Credit Default Swaps—Grasping the Basics
      3. Pricing Collateralized Debt Obligations—The Basics
        1. Understanding the CDO We have seen in the previous chapter that a CDO, like securitization, is a way of creating securities with differing risk characteristics from a portfolio of debt instruments.
        2. Pricing the CDO The concept of ‘default correlation’ is important to determine the pricing of a tranched CDO, such as tranched iTraxx.
      1. The Financial Crisis—An Overview and Analysis104
        1. The Way Forward There are two alternatives before banks.
      2. Current Developments and Regulatory Changes
        1. 1. USA - The Dodd Frank Act (2010)109
        2. 2. European Union - MIFID II and MIFIR (2014)110
        3. 3. Basel III Regulations
      3. Some developments
    8. A note on data analytics113 and business simulation
      1. Business Simulations: 5 Reasons Why Business Simulations Are Great Learning Tools114 (1/4)
      2. Business Simulations: 5 Reasons Why Business Simulations Are Great Learning Tools114 (2/4)
      3. Business Simulations: 5 Reasons Why Business Simulations Are Great Learning Tools114 (3/4)
      4. Business Simulations: 5 Reasons Why Business Simulations Are Great Learning Tools114 (4/4)
        1. 1. Risk Free Learning
        2. 2. Multiplayer Environment
        3. 3. Interactive Game Play
        4. 4. Realistic Story Arc
        5. 5. In-game Rewards
  28. Chapter 10 : Managing Market Risk—Banks’ Investment Portfolio
      1. Safety of Capital We have seen that substantial credit risk is attached to the loan portfolio of banks. To offset this risk, banks invest in securities with low default risk thus preserving the capital.
        1. Liquidity Banks need adequate liquidity to pay off unanticipated demands from the depositors and other liability holders, as well as meet the loan demands. In case a bank does not have liquid funds at the time these demands are made, it has two options—it
        2. Yield From the above point, it follows that banks will have to make investments in securities that will also yield reasonable returns. However, paradoxically, higher returns will flow from investments with higher risk. Portfolio managers will, therefore,
        3. Diversification of Credit Risk Over time, banks develop expertise in lending to a specific sector or industry and find it difficult to diversify their loan portfolios. Hence, banks invest in securities spanning diverse geographic areas or industries to of
        4. Managing Interest Rate Risk Exposure Banks can easily and quickly adjust the maturity or duration (refer chapter on ‘risk management’) of their securities portfolio in times of interest rate volatility. This flexibility will not be typically available wit
        5. Meeting Pledging Requirements Most bank borrowings can be collateralized with assets and marketable securities are accepted as qualifying collateral.
      2. The Treasury Functions
        1. Features of Treasury Profit The following are the features of treasury profit:
        2. Sources of Treasury Profit
        3. 1. Foreign exchange business: Buying and selling foreign currency to customers is a source of non-interest income for banks. The difference between the ‘bid’ and ‘ask’ rates, called the spread, constitutes the banks’ profit. Banks buy foreign currency fro
        4. 2. Money market products: These are securities with short maturities and durations, typically 1 year or less. They are held to meet liquidity and pledging requirements and also for a reasonable return.
        5. 3. Securities market products: Banks’ investment portfolios are typically dominated by securities that can be bought and sold in the government securities and capital markets. Each of these securities exhibit varying risk and return features. In most coun
      3. Risks and Returns of Investment Securities
    2. MEASURING MARKET RISK WITH VaR and Expected Shortfall (ES)
      1. Approaches to VaR Computation (1/2)
      2. Approaches to VaR Computation (2/2)
        1. Supplementing VaR—Stress Testing and Scenario Analysis When the VaR is exceeded, how large can the losses be?
      3. ES and VaR – a comparison
        1. Did VaR and Other Such Measures Fail During the 2007–2008 Global Financial Turmoil? It has been pointed out that banks, which used VaR as a primary tool of market risk management, failed, while derivative exchanges, which deal with more complex products,
      1. Classification of the Investment Portfolio
        1. Category 1: Held to Maturity (HTM)
        2. Categories 2 and 3: ‘Available for Sale’ and Held for Trading (AFS AND HFT)
        3. Shifting Among Categories
      2. Valuation of Investments
        1. Held to Maturity
        2. Available for Sale
        3. Held for Trading Individual securities in the HFT will be marked to market at monthly or more frequent intervals and provided for (as in the case of those in the AFS category). However, the book value of the individual securities in this category would no
      3. Investment Reserve
      4. Determination of ‘Market Value’ While Marking to Market (HFT and AFS Categories)
        1. Quoted Securities The ‘market value’ for the purpose of periodical valuation of investments included in the AFS arid HFT categories would be the market price of the security available from the trades/quotes on the stock exchanges, price list of the RBI or
        2. Unquoted Securities
        3. Central government securities: Banks should value the unquoted central government securities on the basis of the prices/YTM31 rates published periodically by the PDAI/ FIMMDA. Treasury Bills are to be valued at carrying cost.
      5. ‘Non-Performing’ Investments
      6. Income Recognition (1/2)
      7. Income Recognition (2/2)
        1. Solution
  29. Chapter 11 : Capital—Risk, Regulation and Adequacy
      1. Why Regulate Bank Capital?
      2. To What Should Capital be Linked to Ensure Bank Safety?
      3. The Concept of Economic Capital3
      4. The Concept of Regulatory Capital
    2. RISK-BASED CAPITAL STANDARDS5—regulatory capital
      1. Demystifying the Basel Accords I, II and III
        1. The Numerator of ‘Capital Adequacy’ Ratio We will start with the ratio ‘equity (capital)/assets’ mentioned earlier. What defines capital of a bank? Is it the book value of equity and reserves shown on the balance sheet, or is it the economic capital descr
        2. The Denominator of the ‘Capital Adequacy’ Ratio Let us now look at the denominator – ‘assets’. The discussion in the preceding section has established that rather than total assets of the bank the riskiness of the assets would determine how fast the bank’
        3. How Successive Basel Accords Have Treated ‘Capital Adequacy’ Basel I and Basel II (as well as Basel 2.5) concentrated on the measurement of the riskiness of assets in the denominator and the calculation of ‘risk weighted assets’. The numerator, ‘capital’
      2. Basel Accord I
      3. Basel Accord II
        1. Structure of the New Accord The new Accord is based on three mutually reinforcing ‘pillars’, which together are expected to contribute to the safety and soundness of the international financial system (see Figure 11.4).
        2. Calculation of Capital Adequacy Under Basel II
      4. Basel Accord III7 (1/2)
      5. Basel Accord III7 (2/2)
        1. Shortcomings in Basel II
        2. The Move to Basel III Basel III, as we can see from the following paragraphs, makes an effort to fix the lacunae in Basel II that came to light during the financial crisis as also to reflect other lessons of the crisis. It is also evident that Basel III d
        3. Objectives of Basel III According to the Basel committee, the Basel III proposals have two primary objectives:
        4. Some Specific Enhancements Proposed in Basel III (Over Basel II)
    3. Basel IV –or is it Basel 3.5? Move to more regulatory approaches to risk measurement
      1. 1. Market Risk Requirements – Fundamental Review of Trading Book (FRTB)
        1. Trading book requirements (see end note 12 for a brief description of trading and banking books). There has been a substantial tightening in the banking book/ trading book boundary with the objective of reducing the scope of regulatory arbitrage, such as
        2. Internal models for market risk measurement: Banks wishing to use internal models have to go through a number of steps, such as (a) qualitative and quantitative assessment of the model by the supervisor; (b) post approval nomination of specific trading de
        3. Revised standardized approach: The revised standardized approach is complex, requiring calculation of risk sensitivities. Additionally, the approach specifies inclusion of a standardized default charge (as for credit risk), and a residual risk add-on to c
      2. 2. Counterparty Credit Risk
      3. 3. Interest Rate Risk in the Banking Book (IRRBB)
      4. 4. Credit Risk – Revisions to Standardized Approach and IRB Approach, and the Revisions to the Securitizations Framework
      5. Securitization Exposures – Final Standards
        1. (a.) Hierarchy
        2. (b.) Approaches
      6. 5. Operational Risk
      7. 6. Capital Floors
      8. 7. Pillar 3 Disclosure Requirements – Consolidated and Enhanced Framework
      9. Further regulatory initiatives
        1. a. Risk weighting of Sovereign exposures:
        2. b. IFRS 9:
      1. Capital Components–Banks in India
        1. While the overall definitions of the BCBS document of CET1, additional Tier 1 and Tier 2 capital have been retained, the RBI has spelt out the components of each type of capital relevant to Indian banks. Table 11.12 provides a comparative picture of capi
        2. Pillar I-Implementation In accordance with the Basel II norms summarized in the BIS document ‘International convergence of capital measurement and capital standards—a Revised framework’ issued in June 2006 (please refer Section II), the RBI requires that
      2. Capital Funds of Banks Operating in India
      3. Counter Cyclical Capital buffer (CCCB)
      4. Leverage Ratio
      5. Capital Measure
      6. Exposure Measure : General Measurement Principles
      7. Calculating Capital Charges and Risk-Weighted Assets
      8. I. Capital Charge for Credit Risk Banks in India currently follow the ‘Standardized Approach’ (described in Section II). Under this approach, ratings assigned by external credit rating agencies will largely support the credit risk measurement. The assets
        1. II. Capital Charge for Market Risk The RBI defines market risk as the risk of losses in on balance sheet and off balance sheet positions arising from movements in market prices. The market risk positions subject to capital charge requirement are as follow
      9. Measurement of capital charge for interest rate risk in the trading book
        1. We have learnt in Section II of the modifications in the standardized method by BCBS. RBI modifications to the method given above are awaited.
        2. III. Capital Charge for Operational Risk The RBI’s definition of operational risk is the same as the Basel Committee’s definition. The definition includes legal risk, but excludes strategic and reputation risk. Legal risk includes (but is not restricted t
      1. Step 1: Calculate risk-weighted assets for credit risk, which implies excluding securities held under trading book. In this case, the trading book would be `1,500 crores (`700 crores of government securities + `500 crores of bank bonds + `300 crores of o
        1. Step 2: Calculate risk-weighted assets for market risk. This comprises computing capital charge for specific risk for (see table on specific risks given in the RBI circular) the following:
        2. Step 3: Compute general market risk.
        3. Step 4: Consolidate general and specific risks to give the total capital charge for the trading book of interest rate related instruments. Thus, total capital charge for market risks 5 `32.33 crores 1 `17.82 crores 5 `50.15 crores.
        4. Step 5: Compute the CRAR for the banking book as well as the trading book, in short, for the assets of the bank. For this purpose, the capital charge as above needs to be converted into equivalent risk-weighted assets. In India, the minimum CRAR is 9 per
      2. Steps for Computing Risk-Weighted Assets (1/2)
      3. Steps for Computing Risk-Weighted Assets (2/2)
        1. Step 1: Risk-weighted assets for credit risk
        2. Step 2: As in Illustration 11.7, we now calculate the risk-weighted assets for market risk.
        3. Step 3: Compute capital charge for market risks by consolidating the following:
        4. Step 4: We can now compute the capital ratio. To facilitate computation of CRAR for the whole book, this capital charge for market risks in the trading book needs to be converted into equivalent risk-weighted assets. Since a CRAR of 9 per cent is require
      4. Determination of risk weighted assets under the Basel norms38
        1. Capital for Credit Risk The ‘standardized approach’ for credit risk in its current form retains some part of the 1988 Accord, such as the definition of ‘capital’. Its novelty lies in replacing the existing risk-weighting scheme by a system where risk-weig
        2. The Internal Ratings Based (IRB) Approach to Credit Risk Under this advanced approach, banks can use their internal estimates of borrower creditworthiness to assess the credit risk in their portfolio, subject to stringent methodological and disclosure sta
        3. Credit Risk—The Securitization Framework
      5. Capital Requirement for Interest Rate (Market) Risk
      6. Capital Requirement for Operational Risk
        1. The Basic Indicator Approach Banks using the basic indicator approach must hold capital for operational risk equal to the average over the previous 3 years of a fixed percentage (denoted alpha) of positive annual gross income. Figures for any year in whic
        2. The Standardized Approach In the ‘standardized approach’, banks’ activities are divided into eight business lines: corporate finance, trading and sales, retail banking, commercial banking, payment and settlement, agency services, asset management and reta
        3. Advanced Measurement Approach (AMA) Under the AMA, the regulatory capital requirement will equal the risk measure generated by the bank’s internal operational risk measurement system using the quantitative and qualitative criteria for the AMA. AS stated i
      7. Fundamental Principles for Operational Risk Management43 (1/2)
      8. Fundamental Principles for Operational Risk Management43 (2/2)
        1. The Board of Directors
        2. Senior Management
        3. Identification and Assessment
        4. Monitoring and Reporting
        5. Control and Mitigation
        6. Business Resiliency and Continuity
        7. Rbi Guidelines to Banks in India on Operational Risk Management On the basis of the Basel Committee’s guidelines, the RBI has framed draft guidelines in March 2005 on operational risk measurement and management for adoption by banks in India by March 2007
        8. The Basic Indicator Approach At the minimum, all banks in India should adopt this approach while computing capital for operational risk while implementing Basel II. Under the basic indicator approach, banks have to hold capital for operational risk equal
        9. Advanced Measurement Methodologies
        10. Other Issues
        12. Application of Pillar II to Indian Banks The RBI reiterates the Basel Committee principles and the specific areas for supervisory review as given above.
        13. Application of Pillar III to Indian Banks The RBI has formulated disclosure requirements based on the Basel Committee recommendations. The effective dates of commencement of disclosures would be July 1, 2013. The requirements under this Pillar can be acce
        14. A. Estimated increase in stock of provisions on transition to Ind AS
        15. B. Classification and measurement
        16. C. Impact on equity and regulatory capital on transition
        17. D. Transitional arrangements for the impact of ECL accounting on regulatory capital
  30. Chapter 12 : Managing Interest Rate and Liquidity Risks
      1. Interest rate risk in the banking book – Basel committee standards – Salient features
      2. Types of risks
      3. Revised Principles for IRRBB
        1. Principles for Banks
        2. Risk Management framework
        3. Principles for Supervisors
      4. The standardised framework
      5. Overall structure of the standardised framework
      6. Components of the standardised framework
        1. Cash flow bucketing
      7. Calculation of change in Economic Value of Equity ( ∆EVE)
      8. Calculation of change in projected Net Interest Income (∆NII)
      9. Components of interest rates
      10. IRRBB and CSRBB
      11. Measuring Interest Rate Risk8 (1/3)
      12. Measuring Interest Rate Risk8 (2/3)
      13. Measuring Interest Rate Risk8 (3/3)
        1. Method 1: Measuring Interest Rate Risk—Traditional GAP Analysis Traditional GAP. models are the most basic interest rate risk exposure measurement techniques employed by banks. These models focus on GAP as a static measure of risk and NII as the target me
        2. Strengths and weaknesses of this approach: Static Gap analysis is one of the most commonly used approaches to assessing interest rate risk exposure. The principal advantage of this approach is that it is easy to understand and compute. Specific balance sh
        3. Measuring interest rate risk—Linking the GAP and net interest margin. Some ALM measures focus on the ‘GAP ratio’ while evaluating interest rate risk. The GAP ratio is defined as the ratio of RSAs to RSLs. Thus
        4. Method 2: Measuring Interest Rate Risk—Earnings Sensitivity Analysis Earnings Sensitivity analysis is an extension of the static GAP analysis. It essentially assesses the impact on net income using ‘what if’ models, carrying out iterations of static GAP a
        5. Method 3: Measuring Interest Rate Risk—Rate-Adjusted GAP This method is a simpler variation of the Earnings Sensitivity analysis method described above, and is typically used under circumstances where the complexity and size of a bank’s assets and liabili
        6. Method 4: Measuring Long-Term Interest Rate Risk—Duration GAP Analysis A fundamental criticism of the static GAP and Earnings Sensitivity analyzes pertain to their preoccupation with short-term interest rate risk in banks. A bank’s assets and liabilities,
        7. ‘Immunizing’ Market Value of Equity From Table 12.4, a bank will have to operate with its DGAP at zero, if it desires to maintain its MVE while interest rates change. This implies that the bank’s average asset duration should be slightly below the average
        8. Other Target Variables Used for Immunizing Interest Rate Risk
        9. Net interest income (NII) and market value of equity (MVE): Banks are sometimes interested in immunizing the market value of equity and NII simultaneously or independently. In such cases, variations of the immunization process are used. For instance, Toev
        10. Strengths and weaknesses of the ‘duration’ approach: The primary strength of ‘duration analysis’ lies in its ability to provide a comprehensive measure of interest rate risk for the entire portfolio of the bank—assets, liabilities and surplus (equity). Th
      14. Managing Interest Rate Risk—A Strategic Approach
      15. Interest Rate Risk or Model Risk?
      16. Alternative Methods to Reduce Interest Rate Risk
      1. Swaps
    5. Interest Rate Futures
      1. How Banks Apply Hedging Techniques to Mitigate Interest Rate Risk Banks can hedge at micro level (microhedging) or at the macro level (macrohedging). In microhedging, the bank can immunize itself against variations in asset or liability interest rates. Fo
        1. Applying Hedging to GAP and DGAP According to Koch and Macdonald,26 the hedging strategy of a bank using GAP and Earnings Sensitivity analysis to measure its interest rate risk is determined by: (a) whether a bank is asset or liability sensitive, and (b)
      2. Forward Rate Agreements (FRAs)
        1. Risks Involved in Using FRAs
      3. Interest Rate Options
        1. Caplets and Floorlets In financial terms, the call option described above is called a ‘caplet’ and the put option, a ‘floorlet’. The reason for the nomenclature is clear—a ‘caplet’ protects the bank against large increases in interest rates—it has effecti
        2. Interest Rate ‘Collars’ In some cases, to compensate for the premium paid on ‘caps’ and ‘floors’, banks buy interest rate ‘collars’ or ‘reverse collars’.
      4. Interest Rate Guarantees
      5. Swaptions
      6. Arbiloans
      7. Derivatives Market Growth—The Issues
      1. Sources of Liquidity Risk
      2. Modern Approaches to Liquidity Risk Management
        1. The Liquidity Policy Similar to a bank’s ‘loan policy’, which we saw in an earlier chapter, many banks have the practice of formulating a ‘liquidity policy’ for the bank.
      3. Approach to Managing Liquidity for Long-Term Survival and Growth
        1. Asset Management All bank assets are a potential source of liquidity. The asset portfolio of a bank can provide liquidity in the following circumstances—(a) on maturity of the asset; (b) on sale of the asset; and (c) the use of the asset as collateral for
        2. Liability Management Liability management has been popular with larger banks since 1960s and 1970s. As the name suggests, the strategy focuses on sources of funds to mitigate liquidity risk.
        3. Asset Management or Liability Management? Choosing between the strategies of ‘asset management’ and ‘liability management’ depends to a large extent on not only the size and nature of operations of a bank, but also expectations of how interest rates are g
      4. Approach to Managing Liquidity in the Short Term— Some Tools for Risk Measurement
        1. 1. The Working Funds Approach The working funds typically constitute bank’s capital and outside liabilities, such as deposits and borrowings as well as float funds.
        2. The limitations of the approach are as follows:
        3. 2. The Ratios Approach Table 12.6 describes some key ratios and limits that could be employed by banks to assess and manage liquidity risk. The applicability of these ratios to a specific bank would depend on the nature of business and risk profile of th
        4. The limitations of balance sheet ratios are as follows:
        5. 3. Cash Flow Approach This forward-looking approach forecasts the cash flows of the bank over a specified planning horizon, and estimates liquidity needs by identifying the likely gaps between sources and uses of funds. The bank then makes a decision on i
        6. Interpretation of the Result The above comparison seems to show that the bank benefits more by liability management. However, in reality, the decision will depend on the following:
      5. Basel III—The International Framework for Liquidity Risk Measurements, Standards and Monitoring (1/2)
      6. Basel III—The International Framework for Liquidity Risk Measurements, Standards and Monitoring (2/2)
        1. The Numerator of the LCR – HQLA (The individual components of HQLA are to be multiplied by the factors given in the table)
        2. The denominator of the LCR–net cash outflows over a 30 day period (The individual components of cash outflows and inflows are to be multiplied by the factors given in the table.)
      1. Interest Rate Derivatives in India
        1. OTC Derivatives in India Conventionally, OTC derivative contracts are classified based on the underlying into (a) foreign exchange contracts, (b) interest rate contracts, (c) credit linked contracts, (d) equity linked contracts, and (e) commodity linked c
        2. Reporting of OTC derivatives–CCP and TR44
        3. The Need for TR (Trade Repositories)
      2. The Exchange Traded Interest Rate Derivatives in India
      3. ALM Framework for Indian Banks
        1. Liquidity Risk Management Guidelines Primarily, liquidity was to be tracked through maturity or cash flow mismatches. For this purpose, a standard tool was to be adopted, involving the use of a maturity ladder and calculation of cumulative surplus or defi
        2. Interest Rate Risk Management Guidelines45 RBI has proposed in April 2006 that the Modified Duration Gap approach be adopted for interest rate risk management. The steps to be followed for computing the Modified DGAP would be as follows:
      4. Liquidity Risk Management in Indian Banks (1/3)
      5. Liquidity Risk Management in Indian Banks (2/3)
      6. Liquidity Risk Management in Indian Banks (3/3)
      7. Symptoms of Potential Liquidity Problems—An Illustrative List (1/2)
      8. Symptoms of Potential Liquidity Problems—An Illustrative List (2/2)
  31. Chapter 13 : Banking Functions, Retail Banking and Laws in Everyday Banking
      1. Negotiable Instruments
        1. Bill of Exchange It is an instrument in writing, containing an unconditional order, signed by the maker, directing a person to pay a certain sum of money to a certain person or to the order of that certain person or to the bearer of the instrument (Refer
        2. Cheque The characteristic features of a cheque can be specified as follows:
        3. Difference Between Cheque and Bill of Exchange Every cheque is a bill of exchange. However, every bill of exchange is not necessarily a cheque. The essential differences are as follows:
      2. Types of Deposits
        1. Demand Deposits These are of two types:
        2. Time Deposits These are also called as fixed deposits or term deposits. These are repayable after the expiry of a specified period varying from 7 days to 120 months.
      3. Non-Resident Indian (NRI) Accounts
      4. Mandates and Power of Attorney
        1. Mandates The following are the salient features of mandates:
        2. Power of Attorney The following are the salient features of power of attorney:
        3. Lien Lien is the right of the creditor to retain possession of the goods and securities owned by the debtor until the debt due from the latter is paid. General lien gives a right to possess the goods, banker’s lien adds to it, the right of sale in case of
      1. Why Banks Focus on Retail Business
        1. Financial Disintermediation
        2. Advent of Economic Liberalization Privatization and globalization has opened the gate for a lot of new players in the banking sector, which has resulted in competition with each other for market share. The confluence of increased purchasing power, consum
        3. Instant Solution for the Ills in the Banking Business Retail banking has the potential to provide decent ret urns for banks with an extended clientele base in an era of thinning margins and non-performing advances.
      2. Emerging Issues in Handling Retail Banking
        1. Knowing the Customer A concept which is easier said than practised. Each branch should set up data warehouse wherein meaningful data on customers, their preferences, spending patterns, etc. can be mined.
        2. Technology Issues Retail banking calls for huge investments in technology, e.g., providing anytime, anywhere convenience to vast number of customers and delivery channels through asynchronous transfer modes (ATMs), which requires a huge investment by the
        3. Product Innovation All new products may not become successful. Products should be introduced to create value, not amusement. The days of selling products on the shelves are gone in the banking sector.
        4. Pricing of Products The banking sector is witnessing a pricing war with each bank wanting to have a larger slice of the market share. The much needed transparency in pricing is also missing with many hidden charges. For example, ‘minimum amount due’ and ‘
        5. Issues Related to Human Resources
        6. Low-Cost and No-Cost Deposits Bank managers are in need of more savings bank and current accounts so that their cost of liability would be less.
      3. Swot Analysis of Retail Banking
      4. Strategies for Success in Retail Banking
      1. Marketing—Coin
      2. Crm Strategies/Steps
      3. Three Tip Questions for Managers
      4. Image-Building Exercises
      5. Blending Tradition with Technology
      1. Key Acts That Govern the Functioning of the Banking Sector2
        1. The Reserve Bank of India Act, 1934
        2. The Negotiable Instrument Act, 1881
        3. The Banking Regulation Act
      2. Different Customers—Different Laws
        1. Joint Hindu Family A Hindu undivided family (HUF) or joint family possesses ancestral properties and carries on an ancestral business. The ownership of such property passes on to the member of the family according to Hindu Law. In the case of a joint Hind
        2. Societies Voluntary societies committed to promotion of art, science, literature or to charitable purpose may be incorporated under the following acts:
        3. Trusts According to the Indian Trusts Act, 1882, a trust is an obligation annexed to the ownership of the property, arising out of a confidence reposed by the owner, or declared and accepted by the owner for the benefit of the author, or of the author and
        4. Joint Stock Company A joint stock company is an artificial entity with perpetual section succession brought into existence under the provision of the Companies Act. Legally, a company is considered as an entity separate from its member and hence possesses
        5. Sole Proprietor and Partnership An individual running a business or commercial activity under a name other than his/her own is known as a sole proprietor.
      3. Bank–Customer Relationship
      4. Rights of a Banker
        1. Right of General Lien The right of a general lien is as follows:
        2. Right of Setoff The right of a setoff is as follows:
        3. Right to Appropriation: Who and How The right to appropriation is as follows:
        4. Right to Charge Interest and Levy Charges As a creditor, the bank has the implied right to charge interest on loans given to customers. Periodically, the customer account is debited with the interest due. The banks may also levy charges to meet incidental
      5. Obligations of a Banker
        1. Honour Cheques The following points are related to honour cheques:
        2. Wrong Dishonour of Cheque This may happen due to following causes:
        3. Maintain Confidentiality A customer account reflects his/her true financial position. This information is very sensitive and may directly reflect on the customer’s reputation. Therefore, the banker should:
        4. Premature Closure A bank may allow premature encashment of a fixed deposit at the request of customer. In this case, the banker’s obligations are as follows:
        5. Act in Good Faith Without Negligence The banker collects numerous cheques on behalf of the customers and cannot verify the validity of each instrument. The Negotiable Instrument Act protection to the banker can be specified as follows:
        6. Deceased Depositors The key points to be considered regarding deceased depositors are as follows:
        7. Payment to Nominee The payment to the nominee is made in the following conditions:
        8. Closure of Accounts The banker must comply with a written directive from the customer to dose his/her account. The customer must be asked to return unused cheques.
      1. Case Questions
      2. True or False
  32. Chapter 14 : Banking System—Services and Innovations
      1. Globalization and Innovations
      1. The ICICI Bank
        1. Features in Savings Bank Account The salient features of the savings account are given below:
      2. HSBC Bank
        1. Retail Banking—Products and Services HSBC Bank offers a wide range of financial products and services, from current and savings account to term deposits, automobile and home loans, mutual funds, loans against shares, gold and silver, Master and Visa credi
      3. The State Bank of India (SBI)
      1. Accounts
      2. Credit Cards
      3. Standard Privileges for HSBC Card Holders
      4. Loans
      5. Wealth Management
      6. Insurance
      7. Special Offers
      8. Case Questions
      1. Case Questions
  33. Chapter 15 : International Banking—Foreign Exchange and Trade Finance
    1. Introduction
      1. Exchange Rates
      2. Forex Market
      3. Transfer Systems
        1. Types of Rates There are different types of exchange rates. These are briefly discussed as follows:
      4. Direct and Indirect Quotations
      5. Functioning of Foreign Exchange Market
      1. Forex Dealing Room Operations
      2. Spot, Forward, Cash, Tom Rates in an Inter-Bank Market
      3. Bid and Offer Rates
        1. Premium and Discount A currency is said to be at a premium, when it is costlier for a forward value date. In the case of direct quotes, the premium is added to the spot rate for both buying and selling to arrive at the forward rate. A currency is said to
        2. Pips and the Big Figure Exchange rates are usually quoted up to five figures by banks. The first three digits of the quote are the big figure.
        3. Cross Rate It is an expression of the value of one foreign currency versus another foreign currency, neither of which is a domestic currency. For example,
        4. Volatility The exchange rate fluctuation is referred to as volatility. The turnover signifies the volume of business transacted during this period. It can be seen from the chart that although turnover has been increasing, the volatility in ­exchange rates
      4. Foreign Exchange Market
      1. Financing International Trade Through Letters of Credit
      2. Flowchart Depicting a Typical Import Transaction with Letter of Credit
      1. Pre-Shipment Finance Pre-shipment credit is a short-term working capital finance provided by a bank to an exporter enabling the latter to procure raw materials, to process/manufacture the goods, arrange for transport and warehouse and for shipment of the
      2. Features of Packing Credit in Local Currency
      3. Features of Pre-Shipment Credit in Foreign Currency (PCFC)
      4. Post-Shipment Finance
      1. Features of Foreign Currency Loans
  34. Chapter 16 : High-Tech Banking—E-Payment Systems and Electronic Banking
      1. Why Do We Need Technology in Banking?
      2. Benefits of Electronic Banking
        1. For Banks
        2. The benefits of electronic banking (e-banking) for banks are as follows:
        3. For Customers
        4. The benefits of e-banking for customers are as follows:
      1. The Importance of Payments and Settlement Systems
      2. International Standards and Codes for Payment and Settlement Systems
      1. Paper-Based Instruments in Retail Payment Systems—An Overview
      2. Electronic Retail Payment Systems—An Overview
        1. Electronic Clearing Service (ECS)
        2. Electronic Funds Transfer ( EFT ) and National Electronic Funds Transfer (NEFT )
      1. Credit Cards
        1. The Parties to Credit Card Transactions
        2. How Do Credit Card Issuers Make Money?
        3. Credit Cards—Benefits
      2. Debit Cards
        1. Benefits to Customers
        2. Benefits to Merchants
        3. Benefits to the merchants are as follows:
      3. Credit and Debit Cards in India
      4. Other Payment Channels/Products
        1. Automated Teller Machines (ATM)
        2. Mobile Banking
        3. Prepaid Payment Instruments
      1. 1. Identity Thefts In the virtual world, a person’s identity is defined by the user name, passwords or account names. Identity theft is the misuse of personal data or documents in order to impersonate another individual to carry out illegal or fraudulent
        1. 2. Carding/Skimming ‘Carding’ sites can be found on the Internet, where fraudsters buy and sell access to bank accounts, stolen card numbers, dumps from magnetic strips and even personal profiles.
        2. 3. Phishing ‘Phishing’ is a famous word these days—signifying fraudulent capture and recording of customers’ security details, to be used later for committing fraud. It originates from the analogy that Internet fraudsters are using email lures to ‘fish’
        3. 4. Mules ‘Mules’ are individuals ‘recruited’ over the Internet with the sole purpose of being intermediaries for illegally acquired funds. These funds could have been acquired through methods such as phishing and other types of scams. The name ‘mule’ is
  35. Chapter 1 7: Understanding Financial Services
    1. Non-Banking Financial Company
      1. Infrastructure Finance Companies (IFC) Are in long term funding for developing or operating and maintaining or developing, operating and maintaining any infrastructure project in road, highway, port, airport inland port, waterways, water supply, irrigatio
    2. Venture Capital and Private Equity
      1. Stages in Venture Capital (VC) Investing
      1. Major Parties Involved in Credit Card Transaction
      2. Working of Credit Cards
      3. Charges and Profits in Credit Card Transactions
    5. IPO (Initial Public Offering)
    6. Microfinance
      1. Challenges
    7. Pension Funds
      1. Pension Funds in India
    8. Alternate investments
      1. Commodities
      2. Hedge Funds
    9. Consumer rights and protection applicable to financial services
      1. Consumer Protection and Regulation in India
  36. Chapter 18 : Insurance Services
      1. Basic Features of Insurance Contracts
      2. Benefits of Insurance
        1. Protection Life insurance guarantees the full protection against risk of death of the assured. In case of death, the full sum assured is payable.
        2. Long-Term Saving By paying a small premium in easy installments for a long period, a handsome saving can be achieved.
        3. Liquidity A loan can be obtained against an assured policy whenever required.
        4. Tax Relief Tax relief in income tax and wealth tax can be availed on the premium paid for life insurance.
      3. Types of Insurance Products
      1. The Insurance Sector
        1. History The insurance industry has a long history. Life insurance, in its existing form, came to India from the UK in 1818. The Indian Life Insurance Companies Act of 1912, was the first measure to regulate the life insurance business. Later in 1928, the
        2. Globalization and Liberalization The wave of globalization and liberalization is in full swing in the Indian markets. The insurance sector, being one of the most affected markets, has experienced a plethora of new relationships in the last couple of years
      2. Changing Scenario of the Life Insurance Sector
      3. Insurance Regulatory Development Authority (Irda)
      4. IRDA Regulations
        1. Tax Concession An investment in life insurance is not only a safety net, but also a great way to reduce tax burden. An illustrative list of income tax benefits available under various plans of life insurance is provided in Table 18.3.
      5. Life Insurance Corporation of India
      6. Export Credit Guarantee Corporation of India (Ecgc)
        1. Overseas Investment Risk Insurance The ECGC has evolved a scheme to provide protection for Indian investments abroad. Any investments made by way of equity capital or untied loan for the purpose of setting up or expansion of overseas projects will be elig
      1. How Does Bancassurance Help Banks?
      2. How Does Bancassurance Help Insurance Companies?
      3. How Does Bancassurance Help Customers?
      1. The Industry After the Financial Crisis4
      2. Challenges
        1. Catastrophes Natural catastrophes include storms, floods and earthquakes. In recent years, the magnitude of catastrophic property—casualty disaster has become a major topic of debate. An approach based on traditional insurance according to the solidarity
      3. Opportunities
      4. Convergence
      5. The Growth of Insurance Demand
  37. Chapter 19 : Mutual Funds, Securities Trading, Universal Banking and Credit Rating
    1. Mutual Funds
      1. Advantages of Mutual Funds
      2. Types of Mutual Funds
      3. Important Terms
        1. Net Asset Value Net asset value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the NAV of the scheme divided by the number of units outstanding on the valuation date.
        2. Sale Price The Sale price refers to the price you pay when you invest in a scheme. Also called ‘offer price’, it may include a sales load (also known as Entry Load).
        3. Repurchase Price Repurchase price refers to the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called ‘bid price’.
        4. Redemption Price This is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV-related.
        5. Sales Load Sales load is a charge collected by a scheme when it sells the units. It is also called ‘front-end’ load. Schemes that do not charge a load are called ‘no-load’ schemes.
        6. Exit Load or Repurchase Exit load refers to a charge collected by a `mutual fund` company when it buys back the units from the holders.
    2. Trading in Securities/Shares
      1. Factors Behind Growth of Online Trading
      2. Impact on Securities Market
    3. Universal Banking
      1. Size and Market Power
      2. Diversification—Insurance and Securities
      3. Core of Universal Banking
      4. Impartial Investment Advice
      5. Benefits to Banks
      6. Benefits to Customers
      7. Challenges
    4. Credit Rating Services
      1. Credit Rating—An Overview
      2. Information to Investors
      3. Benefits to Issuers
      4. Benefit to the Regulators
      5. Differences of Opinion in the Credit Rating Industry
  38. Chapter 20 : Cash Management and Demand Forecasting in ATMs1
      1. Outsourced Agents for ATMs
        1. Bharath Bank ATMs The ATM operation is coordinated by a delivery channel coordinator and it is similar to the functioning of Global Bank. The ATM switch is located at BKC and all forecasting is carried out in BKC. Bharath Bank deploys only one outsourced
        2. Bharath Bank Retail Branches Each of the 22 retails outlets are aware of the retention limits set upon them by BKC and are also notified by the main branch at Nariman Point that any excess cash above the retention limit should be returned to the main bran
        3. The Reserve Bank of India The RBI is known as the banker’s bank in India. This is so because the banks fulfill all their excess cash requirements by borrowing from the RBI. Most of the banks have a currency chest option wherein they are able to put in cas
      1. Information Flow in the Supply Chain—Role of IT Infrastructure
        1. Card Operation Centre There is a VISA server at the Global Bank corporate office at Hyderabad. This server is connected to the main VISA server at Singapore. Once a VISA card holder logs into any Global Bank ATM, the Global Bank server at Hyderabad passes
        2. Payments and Receipts The inflow of cash to a bank takes place either through deposits of the customers, borrowings from the RBI or other commercial banks. The banks only go to the RBI when their expected outflows in a particular day exceed the available
        3. Geographical Locations The geographical location of the branches and the ATMs are of vital importance in order to ensure either responsiveness of efficiency of the supply chain. While analyzing the ‘cash dispensed figures’ for the various ATM locations fo
        4. Status of Accounts The asymmetry in the nature of accounts is one main factor that leads to wide fluctuations in the demand for/or supply of cash. The catchment area can necessarily have resident individuals, shopping malls or a large chunk of salaried pe
      1. Time Series Analysis of Cash Withdrawals from ATMs
      2. Sales Trends and Other Factors
      3. ATM Departments in Global Bank
        1. AOC (ATM Operation Centre)
        2. CMC (Card Management Centre) Preparing ATM cards as per the application from the respective branches (FATM).
        3. PMC (Pin Management Centre) Preparing PIN (Personal Identification Number) for all the ATM cards prepared by CMC.
        4. COC (Card Operation Centre)
  39. Chapter 21 : Mergers and Acquisitions in the Banking Sector
      1. Profiles of Banks
        1. Profile of Bank of Madura The profile of BoM is listed as follows:
        2. Profile of Icici Bank The profile of ICICI Bank is listed as follows:
      2. Swap Ratio and Stock Price Fluctuations
      3. Suitability Analysis
      4. Synergies of the Merger (1/3)
      5. Synergies of the Merger (2/3)
      6. Synergies of the Merger (3/3)
        1. The Establishment of Mitsubishi Tokyo UFJ Financial Group Inc. and MUFJ Bank The merger and the establishment of Mitsubishi Tokyo Financial Group Inc. (MUFG) and the combined new bank named as Bank of Tokyo Mitsubhishi–UFJ (MUFJ Bank) were fully completed
  40. Chapter 22 : Innovations in Products and Services—Cases of Three Banks1
      1. UK Banking
      2. Barclay Card
      3. Barclays Capital
      4. Barclays Global Investors
      5. Barclays Wealth Management
        1. Barclays Stockbrokers It is the largest ‘execution only’ stockbroker in the UK. Barclays Private Bank offers a full service private bank to high net worth clients in the UK and abroad.
        2. Barclays Financial Planning This provides regulated financial planning advice on life, pensions and investment products. Its financial planning managers can offer customers expert advice and access to leading financial providers from across the market. In
        3. International Retail Banking This provides a range of banking services, including current accounts, savings, investments, mortgages and loans, as well as services to corporate customers across Spain, France, Portugal, Italy, Africa and the Middle East. Ba
      6. Performance and Governance
      7. Products and Services
        1. Barclays Bank Account (BBA) The basic Barclays Bank Account is known as BBA and can be applied over the web or several means including manual. Basic accounts like BBA can be later upgraded to add other facilities easily. All current accounts are by nature
        2. Young Persons Account ( YPA) Young Persons Account is a current account facility tailor-made for the age group of 16–19 with extra benefits. The product features are provided as follows:
        3. Barclay Plus Account (BPA) The Barclay Plus Account is designed for the people in the age group of 11–15 who want to manage their money better. The most important features of this type of account are as follows:
        4. Cash Card Account (CCA) The Cash Card Account is for someone who wants an account and does not want a cheque book. The CCA is a bank account offering basic banking facilities without a cheque book. This concept is working well in countries like UK and Jap
        5. Student Account Student accounts are designed to help students make maximum out of student life. The product comes with a range of offerings and features.
        6. Student Barclay Card This product is designed to help students manage their money throughout their university life. Significant features of the product include:
        7. Graduate Package This product is designed to help graduates when they are starting off their careers. The basic account in this package is called as ‘Graduate Additions’, which comes with features worth up to £382 all for just £5 a month, including the f
        8. Higher Education Account This is a current account with no monthly fee and is designed for students who are pursuing their higher education. The account helps students bridge the gap till they settle in their lives.
        9. Career Development Loan This is for people who want to take a career development course (either full-time or part-time) to improve their career prospects. Important information about the loan is mentioned as follows:
        10. Professional Studies Loan This loan is for students who want to study a full-time course to gain a professional qualification. The students need not pay anything up to 9 months after the completion of the course. Salient features of the product are follow
        11. Barclays Personal Loans
      8. Other Services
        1. Insurance Products Various Barclays insurance products are summarized as follows:
      9. Savings and Investment
        1. Easy Access Savings The easy access accounts cover short-term savings. The customer does not have to give notice to get his money and interest rates reflect the way he saves.
        2. Open Plan Savings One can pool his savings to get better rates. Open plan savings lets the customer create a number of savings ‘pots’ for specific purposes, such as a wedding or new car. The pots’ balances are combined to give the customer a potentially h
        3. Savings Bonds The bonds provide guaranteed fixed interest rates for the term of the bond. The customer can open a bond with just £2,000 over a term ranging from 1 to 3 years. However, he can withdraw money during the term of the bond.
        4. Children Savings Barclays provides several ways to save for children, including the Government’s Child Trust Fund and Junior BPA for children up to 10 years old.
      10. Recent Initiatives
        1. Comprehensive Mobile Phone Insurance Its cover includes loss, theft, accidental damage, water and liquid damage, electrical and mechanical breakdown, unauthorized calls up to £2,000 per claim; accessories up to the value of £250 per claim alongside cover
        2. Green Flag Roadside Assistance This service that include home call, covers roadside assistance for 30 minutes at the side of the road. If vehicle is not able to be repaired, transportation will be arranged with another vehicle to drop up to five passenger
        3. Legal Helpline Legal helpline provides access to a helpline, 24-hours a day, covering a wide range of subjects by an independent team of solicitors and legal executives on call. Advice on English and Scottish law is also available over the phone.
        4. Insurance Products Barclays is urging shoppers to be aware of how much their suitcase will be worth on their return to the UK and how much they stand to lose if their uninsured or under-insured luggage gets lost. Barclays has launched a range of competiti
      11. Barclays Strategy
        1. Long-Term Barclays aims to be one of the most admired financial services organizations in the world in the eyes of shareholders, customers, colleagues and the communities in which they work.
        2. Medium-Term They aim to focus their energy where it will create the most value and, therefore, get them closer to achieving their goals. They believe this will be best achieved by concentrating on four medium-term themes that are as follows:
      12. Case Questions
    2. Ing Vysya Bank3
      1. Milestones of the Bank Over the Long Years of Its Services
      2. The Origin of Ing Group
      3. The New Identity: Ing Vysya Bank
        1. Performance over the decades ING Vysya Bank Ltd is an entity formed with the coming together of the erstwhile Vysya Bank Ltd, a premier bank in the Indian private sector, and a global financial powerhouse ING, of Dutch origin.
      4. Customer Relationship Management
        1. The Citizen Charter The success of the banking industry in achieving its socio-economic and growth objectives will depend upon the ability to provide satisfactory service of high standard to the customers at an affordable cost. For any business for that m
      5. IT Implementation for Quick Customer Response
        1. Tie-up with Ibm IBM, along with its business partners Avaya Global Comment and Talisma, has implemented ‘Customer Service Line’, a customer relationship management (CRM) solution for ING Vysya Bank.
        2. Tie-up with iGate Solutions iGate Global brings together the best technology and domain expertise in the banking space to offer the full spectrum of services that include process consulting IT strategy, managed operations and back-office solutions, and t
      6. Retail Banking
        1. Smartserv Smartserv is a comprehensive personal assistance service provided by ING Vysya Bank to its customers. The core benefits offered by this service are as follows:
        2. Demand Deposits It can take one of the following forms:
        3. Term Deposits
        4. Loans The ING Vysya Bank offers the following types of loans:
        5. Cards The following are the types of cards offered by the ING Vysya Bank to the customers:
      7. ING Vysya Bank’s Retail Banking Strategy
        1. Prospects of Retail Credit as a Market Segment for ING Vysya Bank One of the prominent features of retail banking and in particular retail credit is that it is a volume-driven business. Further, retail credit ensures that the business risk is widely dispe
        2. Asset Portfolio In order to maximize the benefits flowing out of retail credit, it is very essential that a lot of thought and effort are put towards building volumes. There are several strategies for sustained business growth and profitability. Let us lo
      8. Case Questions
    3. State Bank of India
      1. Features of the State Bank of India
      2. Primary Activities
        1. Treasury Operations The State Bank is the largest player and market mover in both the rupee and Forex markets in India. Treasury operations have expanded significantly beyond the conventional role of liquidity management and regulatory compliance to emerg
        2. Corporate Banking Group The bank’s corporate banking group (CBG) consists of three strategic business units (SBUs), namely Corporate Accounts Group (CAG), Leasing SBU and Project Finance SBU.
      3. Secondary Activities
        1. Associates and Subsidiaries
      4. Products and Services
        1. Personal Banking SBI has a wide range of products in personal banking which are designed with huge flexibility to meet every customer’s needs. The personal banking products are listed as follows:
        2. NRI Accounts The following types of NRI accounts are offered by SBI:
        3. Agricultural Accounts The important types of agricultural accounts offered by SBI are given as follows:
        4. International Banking In international banking segment, SBI offers the following services:
        5. SME Schemes SBI has been playing a vital role in the development of small-scale industries since 1956. It has over 50 specialized SSI branches and more than 400 branches.
      5. Case Questions
  41. Chapter 23 : Innovations in Products and Services in Banking—Cases of Public and Private Sector Banks (1/2)
  42. Chapter 23 : Innovations in Products and Services in Banking—Cases of Public and Private Sector Banks (2/2)
    1. Pull Requests Customers send simple, standard SMS messages to a published number of the bank to get online information on his/her account(s). The requests which can be sent by the customers are as follows:
      1. SIB Privilege Card This is a multi-purpose photo card which can be used in all the ATMs of the bank and also at all the networked branches. The privilege card holders can withdraw money up to `25,000 at the networked branches.
        1. Other Service Features Offered by Sib
          1. General Insurance Business SIB entered into a MOU on 29 November 2002 with United India Insurance Company, a south-based general insurance major in public sector to act as their corporate agent. SIB is the first corporate agent of the United India Insuran
          2. Exporter’s Credit Insurance Export credit guarantee corporation (ECGC) of India, a Government of India enterprise, established to promote export/import, has appointed SIB as its corporate agent to market their exporter’s credit insurance policies. As SIB
          3. RTGS for Customer Transactions Real Time Gross Settlement (RTGS) is an electronic payment system, which provides online settlement of payments between financial institutions. The SIB started RTGS operations since 16 July 2004. All the networked branches o
          4. SIB Collect It was introduced by the bank to facilitate the fast collection of cheques and other outstation instruments.
          5. SIB Cash Passport Cash Passport is offered by the SIB in agreement with Interpayment Services Limited (a subsidiary of Travelex Global and Financial Services, UK, formerly The Thomas Cook Group of England). Cash Passport card is to be loaded in US dollar,
        2. Case Questions
    2. CORPORATION BANK1 (1/2)
    3. CORPORATION BANK1 (2/2)
      1. Personal banking (1/2)
      2. Personal banking (2/2)
        1. Deposit Schemes
      3. Loan Schemes (1/2)
      4. Loan Schemes (2/2)
        1. Home Loan and Insurance Corporation Bank in association with LIC of India presents life insurance cover to the housing loan taken by the customer.
      5. Cards (1/2)
      6. Cards (2/2)
        1. Debit Card: Corp Convenience
        2. Credit Card
      7. High-tech Banking Products and Services (1/2)
      8. High-tech Banking Products and Services (2/2)
        1. Internet Banking
        2. Functional Modules
        3. Corp E-Cheque
        4. Tele-Banking
      9. Products and Services for Non-Residents (1/2)
      10. Products and Services for Non-Residents (2/2)
        1. Deposit Schemes
        2. Telegraphic Transfer Telegraphic transfer (TT) or wire transfer is the most popular medium for quick money transfers. Corporation Bank offers the facility of speedy money transfer with unique features. Most of the city-based branches of Corporation Bank a
        3. Portfolio Services Investment in shares, i.e., buying and selling shares through secondary market is called ‘portfolio investment’. NRIs can invest in shares/securities in terms of guidelines issued under portfolio investment scheme (PIS).
      11. Important Services (1/2)
      12. Important Services (2/2)
        1. Any Branch Banking Any branch banking (ABB) is a facility for customers to operate their account from any networked branch. The branch where the customer maintains his account is the base branch and the branch from where he carries out his transactions is
        2. Corp Powercheq—Multi City Cheque Facility (MCC) Multi City Cheques is a facility wherein the customer can issue cheques drawn at the base branch and payable at selected remote centers. These cheques will thus be treated as local cheques in the remote cent
        3. Corp Mediclaim Corporation Bank offers a group mediclaim scheme in association with New India Assurance Company Ltd., the bank’s partner in general insurance. This product was devised to meet the medical insurance needs of the customers, who may be unexpe
        4. Corp E-rail Corporation Bank has e-enabled railway reservation booking. It has entered into a tie-up with the Indian Railway Catering and Tourism Corporation Ltd. (IRCTC) for online booking of railway tickets. All customers who are availing of CorpNet Int
        5. Corp Billpay At Corp Billpay one can pay bills and make other payments online. Instead of writing a cheque each time, one can use any device connected to the Internet (e.g., computer and kiosk) and make payments with the click of a mouse.
        6. Corp Mobile Recharge Electronic recharge of pre-paid mobile phones is a facility which enables customers having prepaid mobile phones to electronically recharge their mobile phone cards by debiting their account through Corporation Bank ATMs or through SM
        7. Corp Anytime Premium Corporation Bank has introduced the Corp anytime premium facility to pay LIC premium through its ATM network spread throughout the country for its customers, holding a tie-up with Life Insurance Corporation, its strategic partner. Cor
        8. Corp Junior Corp Junior leverages on the power and convenience of the free Corp Bank ATM card and the vast nationwide online interconnected ATM network of the bank. Corp Junior enables parents with children studying away from them to remit money at period
        9. Mutual Funds The bank is aiming to become a financial supermarket where its customers are able to purchase a wide range of quality financial products under one roof. The bank offers a wide range of mutual fund products, be it equity, diversified or sector
        10. Depository Services Majority of the security related transactions in the Indian capital market have shifted to the dematerialized form. Therefore, it has become all the more necessary for investors to maintain depository accounts. Corporation Banks also o
      13. Case Questions (1/2)
      14. Case Questions (2/2)
    4. South Indian Bank2 (1/2)
    5. South Indian Bank2 (2/2)
      1. Introduction (1/2)
      2. Introduction (2/2)
      3. SIB Deposit Schemes (1/2)
      4. SIB Deposit Schemes (2/2)
        1. SIB Flexi Deposit Scheme This deposit scheme offered by SIB uses the positive features of both a fixed deposit as well as a saving account. In flexi deposit, a fixed deposit and the savings account are linked by a common identity number for the consumer.
        2. Kalpakanidhi Deposits It is a reinvestment plan with cumulative interest. The interest is added to the principal on quarterly basis, and hence, there is a scope for higher returns. Principal along with interest is paid only on the maturity date. This prod
        3. Fast Cash Deposits This is a facility provided by SIB where it allows the consumers to enjoy the interest rates of a fixed deposit for ultra short-term duration. Deposits can be made for as short as 30 days. The various schemes available in fast cash are
        4. Recurring Deposits This scheme by the bank is targeted at people living on a monthly salaried income. Recurring deposit aims to improve the long-term savings for these salaried people. Since they would not have a large amount to deposit in the fixed depos
        5. Mangala Deposits This is a unique scheme offered by SIB. Mangala deposits are a kind of recurring deposit scheme in which the bank gives the customer the option to change the monthly installments at the beginning of every new financial year so that they c
        6. Holiday Recurring Deposit Holiday recurring deposit scheme is offered by the SIB for a period of 12 months. This is aimed at the customers who want to save some amount every month for going on a holiday or tour at the end of a year. In this scheme, the ba
      5. Loans and Advances (1/2)
      6. Loans and Advances (2/2)
        1. SIB Planters Choice It targets individuals and/or jointly with family members/firms/companies with traditional plantations—tea, coffee, rubber, coconut and cardamom. The purpose of the loan is for purchasing agricultural land/existing plantation and devel
        2. SIB Utsav It is a family specific loan, intended to establish and retain a long-term relationship with the members of more than two generations of each family, who avail of this facility to celebrate auspicious occasions. The target group for this product
        3. The Retreat The Retreat home loan scheme details in a nutshell are as follows:
        4. Consumer Delight This scheme is meant for the purchase of consumer durables. The target is any person having regular income and profit-making firms with 2 years of existence. The maximum loan amount granted is `2 lakh and margin is 25 per cent. The repay
        5. Flexi Loan The purpose of the flexi loan is not limited by the bank. However, the purpose should not be for hoarding, speculation or activity restricted by the Government of India or state governments or local bodies. The purpose of the loan should be mad
        6. Gold Power The scheme in a nutshell is as follows:
        7. Gold Rush The scheme in a nutshell is as follows:
        8. Home Loan The home loan is given for single or joint account holder. The loan for new construction/purchase and take over is maximum `50 lakh while for renovation/additions/major repair and improvement is maximum `5 lakh. The period of loan (including hol
        9. Mercantile Credit It targets traders for the purpose of providing working capital. The quantum of finance is minimum `1 lakh and maximum `50 lakh.
        10. NRI Flexi Loan It targets NRIs for investment in residential/commercial buildings except for investment in non-banking business, in agricultural or plantation, real estate business and construction of farm house for trading in transferable development rig
        11. Overdraft Facility for NRI It provides a facility of overdraft up to `25,000 in NRE SB account. The criteria is an equal amount of NRE/FCNR deposit with the bank. The rate of interest is deposits rate plus 1 per cent irrespective of the size of the loan/o
        12. Personal Loans It targets permanent employees of government PSUs, blue chip companies and reputed institutions where salary deduction undertaking is available. It also provides line of credit to SB account holders, whose salary is being credited to the ac
        13. Rental Loan Scheme It provides loan against lease rent receivables. Repayment is through EMI equal to un- expired lease period or extended lease period subject to a maximum of 7 years. Loan repayment period will be the remaining period of lease period or
        14. Vitjan Pradan The borrowers of this loan scheme are students who have completed 18 years. In the case of minor students, parents will be the borrowers. The maximum amount is `5 lakh for domestic studies and `15 lakh for foreign studies. Margin is nil up t
        15. SIB Life Line It is a unique family health care loan package with insurance cover designed to support financially for timely medical treatment of various ailments. The financial parameters are as follows:
        16. SIB Sthree Shakthi The targets of this loan scheme are the employed women and housewives whose husbands are employees, agriculturists, professionals or businessmen. Eligible amount of loan is total emoluments/income of permanent nature received by self/hu
        17. SIB Help-Line for Nurses It is a special loan scheme for nurses proceeding for employment abroad. The purpose of the loan is to meet expenses like one way ticket charges, initial expenses with recruiting agency, initial expenses abroad till first salary i
        18. Agriflex The target group of this loan scheme is individuals and/or jointly with spouse/parents or joint property owners. The net worth in landed property should be at least twice the loan amount. The purpose of the loan is any agricultural and allied act
      7. NRI Schemes (1/2)
      8. NRI Schemes (2/2)
        1. NRI Deposit Schemes The various schemes are NRE, NRO, FCNR (B) and RFC. For NRE, accounts can be in the form of current, savings, term deposit and recurring deposit. Joint accounts are also permitted.
        2. Swift Centres SIB is the one among the few banks in India using new version of IP based SWIFT network. It is the fastest way for transfer of funds.
        3. Online Money Transfer It can be done through various schemes like TT remittance, Xpress money, Wall Street instant cash and SIB express.
        4. Loans and Advances Various types of loans are available for NRIs. Loan against deposits is available up to 90 per cent of the deposit amount against security of fixed deposits under NRE and NRO. The rate of interest for loan against NRE/NR deposit is depo
        5. NRI Family Welfare Scheme This scheme provides reimbursement of hospitalization expenses for NRI and his family and also personal accident cover for the NRI at a reduced rate of premium. All NRIs who maintain account with SIB within the age limit of 3–75
        6. Special Services SIB offers special services for NRIs. The bank has 13 NRI branches and NRI newsletter.
        7. Tele-Transfer For tele-transfer of funds to India, NRIs can instruct their banks abroad to remit the amount directly to the correspondent bank, giving SIB account number to the correspondent bank and the name of SIB branch where the account is maintained.
        8. Draft Drawing Arrangements NRIs can send remittance through DD through any bank/exchange companies abroad for credit of account with SIB. SIB has inward rupee drafts drawing arrangements with the following banks/exchange companies.
        9. Banking Channels SIB’s motto of ‘blending tradition with technology’ can be very well seen in ‘Sibertech’, an initiative to connect its 264 key branches electronically and hence providing ‘anywhere banking’. The bank uses the Infosys’ banking solution sof
        10. Branch Banking SIB has over 650 branch offices across 14 states in India with the head office at Thrissur, Kerala. Almost all services are offered at the branch. However, the bank is increasingly trying to reduce the branch usage by providing anywhere, an
        11. Internet Banking Services Sibernet is now used to describe the Internet banking service provided by SIB. Using Sibernet, users can conduct banking operations from whatever location be it home, office, cyber-cafe or anywhere in the world where there is Int
        12. ATM SIB has its ATMs which allow the customers to enjoy the facilities of anywhere, anytime banking using SIB ATM card. It is present in all major cities in India and operating 24 hours a day.
        13. SIB Premium This product is targeted towards current account and overdraft account holders who may require frequent transfer of funds in their course of business. Some of its features are as follows:
        14. SIB’s Global ATM-cum-debit Cards SIB’s global ATM-cum-debit cards are now acceptable in the Master Card International (MCI) network system as well as in the domestic NFS network system. SIB’s debit cards are supported in more than 8,30,000 ATMs together w
        15. SIB Mobile Service As a registered user of SIB mobile service, a customer can send pull requests and/or receive push alerts.
  43. Appendix
  44. Index (1/2)
  45. Index (2/2)

Product information

  • Title: Management of Banking and Financial Services, 4th Edition by Pearson
  • Author(s): Suresh Padmalatha, Paul Justin
  • Release date: December 2017
  • Publisher(s): Pearson India
  • ISBN: 9789353062378