ASSIGNMENT DRIVE WINTER 2014

PROGRAM MBADS (SEM 4/SEM 6) MBAFLEX/ MBA (SEM 4) PGDBMN (SEM 2)

SUBJECT CODE & NAME MA0044 & INSTITUTIONAL BANKING
BK ID B1818 CREDITS 4 MARKS 60

Q.No 1 Institutional banking refers to meeting the financial needs of the institutional clients by
financial institutions, including commercial banks. Explain the challenges of institutional
banking.

Explanation of all the seven challenges 10

Answer:
Challenges
Capital requirements
With the rapid growth in the corporate sector, there has been an increase in the requirement of capital.
Financial institutions should continuously monitor their capital and should be well capitalised to meet the needs
of the industry. One of the challenges will be raising capital by financial institutions for large scale lending to
industries, however, this should not be at the cost of lending to agriculture, small industries and small
businesses. Debate over channelising larger portion of available credit to the most potentially productive sector
or to the sectors where the investment efficiency is lower is yet to be fully resolved although sectoral
limitations/caps in financing has been stipulated by RBI. Institutional banks should look into the potential
needs of institutional clients for assessing their needs and demands for coming out with the right
product/services.
Awareness of products and services need versus demand
Institutional banks also need to take into account various behavioural and motivational attributes of potential
consumers for a successful financial partnering to succeed. This means, financial institutions should not limit
themselves to lending alone but should go beyond their ambit to understand their customers, their behavioural
and motivational attributes which help in closer monitoring of the portfolio which is essential from the point of
recovery of advance. Today, access to financial products is constrained by several factors, which include lack of
awareness about the financial products, unaffordable products, high transaction costs and products which are
not convenient, inflexible, not customised and of low quality. Institutional banks should look into the potential
needs of institutional clients, more importantly assessing client needs and demands pitching the right
product/service, etc.

 Need for effective corporate governance in banks

Institutional banks are different from other corporates in important respects and that makes corporate
governance of banks not only different but also more critical. Institutional banks facilitate economic growth.
They are the conduits of monetary policy transmission and constitute the economys payment and settlement
system. While regulation plays a role in ensuring robust corporate standards in banks, the point to be
recognised is that effective regulation is necessary but not a sufficient condition for good corporate governance.
In this context, the relevant issues pertaining to corporate governance of banks in India are bank ownership,
accountability, transparency, ethics, compensation, splitting the posts of the chairman and CEO of banks and
corporate governance under financial holding company structure, which would require adequate attention.
Need to review laws governing the institutional banking sector
The existing statutory arrangement in India is complex, with different laws governing different segments of the
banking industry. The nationalised banks are governed by the Banking Companies (Acquisition and Transfer of
Undertaking) Acts of 1970 and 1980 while SBI and its subsidiaries are governed by their respective statutes.
Private sector banks come under the purview of the Companies Act, 1956 and the Banking Regulation Act, 1949.
Foreign banks which have registered their documents with the registrar under Section 592 of the Companies Act
are also banking companies under the Banking Regulation Act. Certain provisions of the Banking Regulation
Act have been made applicable to public sector banks. Similarly, some provisions of the RBI Act too are
applicable to nationalised banks, SBI and its subsidiaries, private sector banks and foreign banks. The sector
currently requires a uniform regulation to govern all banks and all financial institutions, which will simplify the
process of financing the needs of the various segments.
Costs and risks in using technology to change the face of institutional banking
Technology advancement and adoption have changed the face of banking in India. Widespread technology
deployment in the banking business has also brought some new issues and challenges to the fore. These can be
broadly divided into two categories costs and risks. Information Technology (IT) deployment objectives, with
broader strategic business objectives should ensure adequate operational and management controls over
purchase as well as maintenance of appropriate technology solutions. This is the main aspect. The second aspect
relating to IT risks is a very critical issue. With the increased use of IT, there are attendant risks posed to the
banks as well as their customers in terms of monetary loss, data theft and breach of privacy, and banks need to
be extremely cognizant of such risks.
Emerging trends in payment systems and related challenges
The smooth functioning of the market infrastructure for enabling payment and settlement systems is essential
for market and financial stability, for economic efficiency and for the smooth functioning of the financial
markets. The financial sector and the payment and settlement system infrastructure have to be subservient to
the real sector and this cannot be reversed. The evolving payment systems scenario offers new challenges and

opportunities to all segments of this industry. To leverage on the opportunities provided by new products, the
system providers/banks need to ensure that the challenges are adequately addressed. It should also ensure that
the products cover all segments of the population and that an incentive is provided to adopt these products. The
regulatory process will support all orderly development of new systems and processes within the legal mandate.
The important issues in this context are how banks can provide cost-effective, safe, speedier and hassle-free
payment and settlement products and solutions.

Risk management
The process of risk management in banks and financial institutions is a challenge faced by the financial sector
and continues to be at the centre of an ongoing search for the right policy prescription.
While newer skill set for managing newer areas and unfamiliar elements of risks would continue to pose
questions even to the most savvy of banks, they have to adopt a converged approach to risk where they will reevaluate their risk management acumen in a manner that calls for higher levels of transparency, structural
integrity and operational control.
To combat internal fraud and to protect clients and accounts, behaviour and rules-based tools will have to be
brought in. Better risk management and surveillance applications that address systemic and customer-oriented
risks, potential conflicts of interest, financial valuation, volatility of market movements and regulations will
have to be embedded into the operational structure.

2 Explain the role of Development Finance Institutions (DFIs) in infrastructure Development.

What is Risk mitigation? Write the simplification of procedures and removing red-tapism.

Explanation of role of DFIs in infrastructure development

Meaning of Risk mitigation
Explanation of simplification of procedures and removing red-tapism 5+2+3=10

Answer:
Role of DFIs in Infrastructure Development
The significance of Development Finance Institutions (DFIs) lies in their ability to make available the means to
utilise savings generated in the economy, thus helping in capital formation, which is essential for the
infrastructure development in the country.
Inadequate supply of infrastructure facilities is ranked as the most problematic factor for doing business in the
country. However, in the last 10 years, the private sector has emerged as a key financier by bringing in
investments and building infrastructure. GOI in the11th Five Year Plan (200712) intends to raise the
infrastructure investment to over 9% of GDP, accompanied by a projected rise of private sector investment to
30%. For the 12th Five Year Plan (201217), the Indian Planning Commission estimates that achieving GDP
growth of 9% would require gross capital formation of 38.7% of GDP, and a rise in infrastructure investment

from a baseline of 8% of GDP in the FY2012 to 10% in the FY 2017. The total estimated amount of infrastructure
investment required for the 5-year period is US$1 trillion that is an investment of US$200 billion every year for
the next 5 years.
The government is actively promoting the expansion of PPPs across all key infrastructure activities (highways,
ports, power and telecoms), as well as putting in place the appropriate institutional and regulatory frameworks.
Risk mitigation
Infrastructure projects in developing countries like India are perceived as highly vulnerable to risks such as risks
arising during the period of construction leading to time and cost over-runs, operational risks, market risks,
interest rate risks, foreign exchange risks, payment risks, regulatory risks and political risks. The aim of the
policy makers should be to reduce the perceived risks by introducing greater policy clarity and, at the same time,
providing an environment that will reassure investors.
Simplification of procedures and removing red-tapism
Issues that aggravate the problems of fund raising include legal disputes regarding land acquisition, red-tapism
in the Government leading to delay in getting other clearances (leading to time and cost overruns) and linkages
(e.g., coal, power and water), etc. It is felt that in respect of mega projects, beyond certain cut-off point, singlewindow clearance approach could cut down the implementation period.

3 Explain the legal structure of Micro Finance in India (MFI). Explain the challenges faced by
MFI.

Explanation of legal structure of MFI

Explanation of challenges faced by MFI 4+6=10

Answer:
Legal structure
An MFI in India acquires permission to lend through registration. Table 7.1 shows the types of MFIs. Each legal
structure has different formation requirements and privileges.
MFIs in India are registered as one of the following five entities:
NGOs engaged in microfinance (NGO-MFIs), which comprises societies and trusts for societies the
provisions of Societies Registration Act, 1860 are applicable and for trusts, provisions of Indian Trusts Act, 1882
are applicable.
For co-operative societies that are registered under the conventional state-level co-operative acts, the
national-level Multi-State Co-operative Legislation Act (MSCA 2002), or under the new state-level Mutually
Aided Co-operative Acts (MACS Act), the relevant provisions are applicable.
Section 25 Companies Act, 1956 is applicable for not-for-profit MFIs.

 For-profit NBFCs, which are registered under the Companies Act, 1956 the relevant provisions are applicable.
For banks including co-operative banks that provide microfinance along with their other usual banking
services, the relevant portion of Banking Services Regulation Act is applicable.

Challenges:
Regional imbalances
The first challenge is the skewed distribution of SHGs across states in India. The concentration in the southern
states is more and about 60% of the total SHGs are located here. But in states which have a larger poor
population, the coverage is comparatively low.
From credit to enterprise
The next challenge is the issue of maturity of SHGs (after linking them to banks). SHGs have to be induced to
act as matured enterprises, to factor in livelihood diversification, provide accessibility to the supply chain and
create links to the capital market and also for appropriation of production and processing technologies.
Quality of SHGs
Ensuring the quality of SHGs in an environment where growth is happening at exponential rate is another
challenge. SHGBank Linkage Programme is growing at a fast rate and hence the quality of SHGs has been put
to great stress. This is indicated in SHGs poor maintenance of books and accounts, lack of policies, etc.
Role of state governments
Next is the need to understand and define the role of the state governments vis--vis the linkage programme. On
the one hand, only due to the proactive involvement of state governments, the programme has achieved its
outreach and scale; on the other hand, due to over enthusiasm, without assessing the manpower and skill sets
available many SHGs/JLGs were formed, and it became a difficult task to nurture the linkage programme,
handhold and maintain them over time.
Sustainability
One more challenge pertains to sustainability of the MFIs. The MFI model has been considered expensive in
terms of delivery of financial services. This can be seen in the cost of supervision of loans, which is high, while
the loan volumes are low. The high cost of credit is passed on by the MFIs to their clients who are poor rural
people. The borrowers may not feel the pinch for small loans but they may when the size of the loan and
repayment period increases. Therefore, it becomes necessary for the MFIs to develop new strategies to increase
their range of products and services and also the volume of their financial services.
Lack of capital
MFIs that are showing a steady growth are facing a paucity of funds; this constraint is an impediment to their
growth. Since most of the MFIs are socially oriented, they do not have sufficient access to obtain financial

capital and hence their debt equity ratios are high. Reliable mechanism for meeting the equity requirement of
the MFIs in the country is absent. MFDF, set up by NABARD, has been augmented and also re-designated as the
Micro Finance Development Equity Fund (MFDEF). This fund is expected to play a vital role in meeting the
equity finance needs of MFIs in India.
Borrowings
Borrowing is a challenge faced by MFIs. Relatively, it is now easier for MFIs to raise loan from banks to meet
their financial needs. This change happened when the RBI gave permission to banks to lend to MFIs and also
treat such lending as their obligation towards priority sector-funding. But we find that this challenge has still
not been fully met.
Reach of MFIs
It is now recognised that widening and deepening the outreach of the poor through MFIs has both social and
commercial dimensions. Since the sustainability of MFIs and their clients complement each other, it follows
that building up the capacities of the MFIs and their primary stakeholders are pre-conditions for the successful
delivery of flexible, client responsive and innovative microfinance services to the poor.
Deployment of latest technology
Currently, the technology employed by many MFIs, especially the smaller ones, is limited primarily to using
spreadsheets or similar programs. As a general rule, these institutions do not have the resources to deploy
sophisticated IT systems similar to those employed by commercial lenders, yet they have to manage complex
operations. RBI should take steps towards providing the latest technology to MFIs.

Lack of corporate governance

The lack of suitable corporate governance policies is one of the main obstacles for the growth of the
microfinance sector. This is ranked as a major risk for MFIs. MFI directors need to solve this problem by
implementing specific initiatives to improve their institutions corporate governance policy.

4 Explain the major considerations in trade finance. Explain the methods of payment in
international trade. Write the services available for exporters.

Explanation of major considerations in trade finance

Explanation of methods of payment in international trade
Explanation of services available for exporters 2+4+4=10

Answer:
There are certain important considerations in trade finance. They are:

 Nature of goods Capital goods require medium- to long-term finance while consumer goods and
perishables require short-term finance.
Bargaining strength of two parties A buyers market will favour the importer, and the exporter may
have to offer longer credit terms, bear currency and credit risks. A sellers market, however, favours the
exporter.
Nature of relationship If the exporter and importer belong to the same Multi-National Company
(MNC) or corporate group, the exporter may sell on open account credit, while absence of any relationship may
require third party guarantee such as a Letter of Credit (LC).
Other factors The availability of financing instruments, government regulation regarding export and
import, etc. also influence the nature of trade finance. The volume of the transaction and the length of the credit
period, as well as the degree of various risks (e.g. the economic and political environment in the importers
country) may significantly raise the costs of financing or create difficulties in obtaining funding.
Methods of payment in international trade
Popular methods of payment in international trade include the following:
Cash-in-advance In cash-in-advance payment terms (in the form of wire-transfer), the credit risk of the
exporter is avoided because the payment is received well before the goods are transferred.
Letters of Credit (LC) One of the very secure payment methods available to international traders is the
LC. An LC is very useful as reliable credit information about the importer (foreign buyer) is difficult to obtain.
With this method, the exporter is better assured about the creditworthiness of the importers foreign bank. An
LC also protects the buyer because no payment obligation arises until the goods are actually shipped or
delivered as agreed.
Documentary Collections (D/C) In this method, the exporter entrusts the collection of the money to
his bank. The bank sends documents to the importers bank, along with instructions for payment. Funds are
received from the importer through his bank and remitted to the exporters bank. Banks are involved in the
transaction and exchange of documents. In D/C, the bill of exchange is used as the base for payment, which can
be either at sight (document against payment) or on a specified date (document against acceptance).
Open account In an open account transaction, the shipping and delivery of the goods are done before
payment is due, which is normally after 3090 days. Obviously, this is the most advantageous method of
payment to the importer both in terms of cash flow and cost flow, but it is one of the highest risk options
available for an exporter.
The following services are available for exporters:
Duty Exemption and Remission Scheme Under the Duty Exemption Scheme, duty free import of
inputs of certain goods, which are used either as raw materials or as components for export production is
available. Duty Remission Scheme enables post-export replenishment or remission of duty on inputs used in
export product.

 Advance Licence Scheme Under this scheme, duty free import of materials, which are physically
incorporated in an export product (making normal allowance for wastage), is possible. This involves a specific
export obligation of the manufactured goods in terms of value and quantity.
Export Promotion Capital Goods (EPCG) Scheme This scheme allows importing of capital goods
used for pre-production, production and post-production thereof including computer software systems at a
concessional 5% customs duty. This is also subject to obligation to export goods/software equivalent to eight
times of duty saved on the imported capital goods. Under this scheme, the obligation can be fulfilled over a
period of 8 years reckoned from the date of issuance of licence.
Duty Free Replenishment Certificate (DFRC) This certificate is issued for import of input materials
utilised in the manufacture of goods (to be exported) without the payment of basic customs duty. But this is
issued only on the completion of exports.
Duty Entitlement Passbook (DEPB) Scheme A passbook is provided to an exporter for neutralising
the incidence of customs duty on the import content of the product exported. Under this scheme, an exporter
may apply for credit, as a specified percentage of Free on Board (FOB) value of exports, made in freely
convertible currency.
Schemes connected with gems and jewellery sector Under these schemes, exporters of gems and
jewellery can import/procure duty free inputs for manufacturing. There is a scheme connected with gems and
jewellery sector to cater its foreign trade finance.
Special economic zone This is a specifically delinked duty free zone formed for the purpose of duty free
trade operations and comprises the free trade zone and the export marketing zone. The business units in
these zones can import/procure all types of goods and services without payment of duty, but subject to certain
conditions.
Export Oriented Unit (EOU) Scheme All schemes like Electronics Hardware Technology Park (EHTP)
Scheme, Software Technology Park (STP) Scheme and Biotechnology Park Scheme are those which operate
under the duty free regime and are formed for the purpose of development of international trade in the country.
This scheme supports importing and procurement of any type of goods without making any payment of duty for
the export of goods manufactured, and also supports procurement of capital goods.
Free Trade and Warehousing Zone (FTWZ) This policy is formed for the creation of trade-related
infrastructure for facilitating foreign trade of goods and services, thus providing freedom to carry out trade
transactions in free currency.

5 Write brief introduction of International Development Association (IDA). Explain the

operations of IDA and financial support to India by IDA.

Explanation of IDA

Operations of IDA
Financial Support by IDA 4+3+3=10

Answer:
International Development Association (IDA)
The IDA is the part of the World Bank that helps the worlds 81 poorest countries of which 39 are in Africa. The
IDA was established in 1960 and aims to reduce poverty by providing loans (called credits) and grants for
programmes that increase economic growth, reduce inequalities, and improve peoples living conditions in
backward and underdeveloped nations. It is the soft loan window of the World Bank. IDA-financed operations
deliver positive change for billions of people, the majority of whom survive on less than $2 a day.
To be eligible, the IDA borrowers must (a) lack sovereign creditworthiness, (b) have a per capita income of less
than (in fiscal year 2012 ($1,175) and (c) must meet certain "performance" criteria set by the World Bank. The
IDA lends money on concessional basis with no interest charges and a lengthy repayment period which
stretches to over 25 to 40 years, including a 5- to 10-year grace period.
The IDA also provides grants to countries at risk of debt distress. In addition, the IDA also assists debt ridden
countries through the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief
Initiative (MDRI). The lending terms are determined with reference to the recipient countries' risk of debt
distress, the level of per capita income, and the creditworthiness for the IBRD borrowing. Recipients with a high
risk of debt distress receive 100% of their financial assistance in the form of grants and those with a medium
risk of debt distress receive 50% in the form of grants. Other recipients receive IDA credits on regular or blend
and hard-terms with 40-year and 25-year maturities respectively.
The IDA supports a range of development activities such as primary education, basic health, water and
sanitation agriculture, basic infrastructure and institutional reforms. Presently, the IDA places emphasis on four
thematic areas: gender; climate change; fragile and conflict affected areas and crisis response.
Operations of IDA
The IDA is overseen by its 172 shareholder countries, which comprise of the Board of Governors. While the
IBRD raises most of its funds on the worlds financial markets, IDA is funded largely by contributions from the
governments of its member countries. Additional funds are secured from IBRD and the IFC and from
borrowers repayments of earlier IDA credits. Donors meet every three years to replenish IDA resources and
review its policy framework.
An assessment during 2011 by the Centre for Global Development of the quality of aid from donor countries and
aid agencies showed that IDA, as well as a handful of other multilateral funds, spent aid money smarter than
most bilateral funds, extracting far more value for money in building a more stable, safer, and more prosperous
global system. In a climate where donor finances are stretched, there is even more need for donors to make
greater and better use of multilateral channels. The leader among those channels is IDA.
Financial support to India by IDA

The IDA has provided more than US$1 billion in support for rural water supply and sanitation over fifteen years,
benefiting about 25 million rural people. Since 1993, the IDA has financed three Sodic Lands Reclamation
Projects in Uttar Pradesh, India with a total of nearly US$445 million.

6 Explain the role of technology in Institutional Banking. Write the advantages of technology in
Institutional Banking.

Explanation of role of technology in Institutional Banking

Advantages of technology in Institutional Banking 6+4=10

Answer:
Role of Technology in Institutional Banking
Technology plays a dominant role in effectively managing the business of DFIs. Though banks have made
tremendous achievements through information technology, they need to make better use of the newer
technologies that are being evolved every day, by extending their services to all sections of the society. The use of
technology in out-of-reach areas can play a significant role in providing financial services to industries located
in backward and neglected areas. This is very important for all-round development.
Information Technology (IT) not only increases the operational efficiency of financial institutions, but also helps
the customers, who are the prime focus of all the banks and financial institutions.
There is an enormous opportunity for the business growth of financial institutions, on one hand, which in turn
leads to the growth of the nation. There have been quite a few inventive concepts like solar power and mobiletechnology-based connectivity, to name a few that the banks have made available for branches. There are quite a
few choices that lead to a greater reach of such services. Each financial institution should determine the
technological model that is tailored for their needs. The Reserve Bank has declared its plan of expansion of
banking reach in the North East even farther through meeting the Very Small Aperture Terminal (VSAT)
connectivity expense. This undertaking is being handled by Indian Banks Association (IBA). Mobile phone
technology has made rapid inroads into the length and breadth of India, and banks can provide newer
technologies to rural areas by taking advantage of this situation. When banks take advantage of this expanded
reach of telecom by providing services through this medium, large financial institutions can also adopt this
model to improve their reach and service. The integrated chips in mobile phones also have the capacity to act as
a multi-application smart card, thereby bringing virtual banking service to almost all mobile phone users. Thus,
it holds a huge potential as a delivery agent of the future. But, such a development requires provision of minimal
and indispensable security features without breaking the confidentiality of the transactions of the customers.
When talking about advantages, there is an issue relating to data quality and consistency which do not reflect
levels of comfort. This needs to be resolved soon. It is time that banks and financial institutions look at common
data standards and protocols so as to make the information systems truly interoperable and facilitate easy data
flow. Information governance is emerging as a distinct discipline and this deserves much more attention.

The plausible use of IT in the coming years also includes the following:
Distinction in customer service
Ease of Customer Relationship Management (CRM) through available information which can be loaded and
accessed from data warehouses
Enhanced asset-liability management for the financial institution which has a direct impact on profits
Improved compliance with Anti-Money Laundering laws
Conformity with Basel II norms