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Money is any object that is generally accepted as payment of goods and services and the
repayment of debt. Money functions as medium of exchange, a unit of account and a store a
value.
Inflation is defined as a sustained increase in the general level of prices for goods and services.
It is measured as an annual percentage increase.
This module covers the basic concepts of Money such as interest rate calculation, inflation and
its impact on interest rates and cost of capital in a company.
Introduction to money
Here are the basic characteristics of money:
6. Compound Interest is calculated on both the initial principal amount and its accrued interest
of each period.
Calculation:
example:
The real rate of interest for home loans = 10.0 -3.5 = 6.5%
Retail Banking
Getting Started
Retail banking is a process in which a bank executes transactions directly with the consumers, rather
than corporations or other banks. Services offered include savings and checking accounts, mortgages,
personal loans, debit or credit cards and certificates of deposit (CDs). This module covers retail banking
operations, characteristics of retail banking sector, delivery channels and various payment instruments.
Liabilities are interests to be paid on deposits made by individual customers and also the deposit
amount withhold by bank.
product Structuring
product distribution
Legal and compliance
Audit, MIS, Central Bank Reporting and Risk Setup
Back Office: The back office operations include:
A/C Maintenance
Transaction Process
Collections
Reconciliation
Accounting
Deposits
Loans
Mortgages
Insurance
Securities
Payments-Cards
Multiple Channel Delivery: The multiple channel deliveries of retail banking include:
Branch
PC
Call center
ATM
sales agent
Mass
Small Business
Affluent
Medium size business
private
Large business
Deposit Products
Deposits are classified into demand deposits and term deposits. Here are the features of deposit
products:
A customer can deposit and withdraw money from his account. However, the frequency and
limit of withdrawal differs from account to account.
A customer can issue checks to withdraw or transfer money from his account.
There may be restrictions on the number of checks issued in a month.
Interest is usually paid for all deposit products except for certain accounts like checking
accounts.
A customer has to maintain a minimum balance in most of the accounts, except a No Frill or
Zero Balance account, failing which the bank will charge a penalty.
Demand Deposit: A demand deposit is a type of account which can be withdrawn at any time without
any advance notice to the depository institution.
Term Deposit: A Term deposit is a type of account which cannot be accessed for a pre-determined
period. Funds can be withdrawn after the fixed term.
Types of Accounts
The Features of different account types are shown in the comparison table.
Delivery Channels
Delivery channel is the mode through which products and services reach customers. Efficient delivery
channels provide easy access to the customers throughout the world. Until recently, branch banking was
the single delivery channel for banking products and services but now it is supplemented with multiple
channels.
Branch Banking
Atm Banking
Mobile Banking
Online Banking
Telephone Banking
Branch Banking
Branch banking is a banking system consisting of a head office and interconnected branches providing
financial services in different parts of the country.
Teller Operations : Accept and process customer transactions at the teller window
Relationship Manager: Performs tasks, such as new account opening, account maintenance and product
sales
Teller Operations: The following functionalities form a part of teller operations:
Cash advances
consumer mortgage/loan payments
Currency and coin orders
Deposits, including commercial deposits
Fee collection
Foreign currency exchange
Payments
Stop payments
Transfers
Wire Transfers
Withdrawals
Cash Deposits
Cash Payments
Transfer of funds
Balance Inquiry
Marking stop payment of a check
ATM Banking
The number of ATMs has increased from 9.3% in 1982 to 15.5% in 2002. Access to ATM is done by
means of a card, typically a dual ATM or debit card. Transaction is directly linked to the consumer's bank
account. The amount is debited against the funds in that account.
cash withdrawal where the limit per day is restricted by respective bank guidelines
Money transfer between accounts
Cash or check deposits
Utility bill Payments
Balance enquiry or account statements
Types of Risks
Here is a comprehensive view of the various types of risks
1. Credit Risk
2. Liquidity Risk
3. Market Risk
currency risk
commodity risk
equity risk
Interest rate risk
4. Operational Risk
5. Legal Risk
Risk Measurement
Value at Risk (VaR) is an estimate of the worst expected loss of a portfolio under normal market
conditions over a specific time interval at a given confidence level.
The three pillars of risk management are define, measure, and manage.
Factors Affecting Risk Measurement: The following factors are considered during risk measurement:
Historic Simulation
Variance Covariance
Monte Carlo Simulation
Risk Management Methods: Let's take a look at the methods by which risks are managed:
Diversifying
Hedging or Insurance
Setting Risk Limits
Ignoring Risk
Basel II: Here are some pieces of information relevant to Basel II. It involves:
Basel III : Basel III helps to strengthen bank capital requirements by increasing bank liquidity and
decreasing bank leverage.
Capital requirements: Basel III rule from 2010 requires bank to hold 4.5% of common equity and
6% to tier I capital.
Leverage ratio: The banks maintain a leverage ratio in excess of 3% under Basel III.
Liquidity requirements: Basel III introduces two required liquidity ratios. They include Liquidity
coverage ratio and net stable funding ration.
Quantitative: Quantitative pillar involves minimum capital requirements. The calculation of capital
requirements is done considering:
The credit risk
The operational risk
The trading book changes (market risk)
Qualitative: Qualitative pillar involves the supervisory review process, which includes the following:
Capital structure
Risk exposures
Capital adequacy
Bank's Minimum Capital Ratio = Total Capital/(Market Risk + Credit Risk + Operational Risk)
IRB Approach: The bank's internal assessment of key risk drivers serve as the primary input. Risk weights
and capital charges are determined by the quantitative inputs from banks and formulas specified by
Bank for International settlements (BIS). IRB approach depends on four quantitative inputs. These are:
Probability of Default (PD) - It is the likelihood with which a borrower defaults over a given time
horizon.
Loss Given Default (LGD) - It is the percentage of exposure that is lost if a default occurs.
Exposure at Default (EAD) - It is the amount of the facility that is likely to be drawn if a default
occurs.
Maturity (M) - It is the remaining economic maturity of the exposure.
Let's Recap
In this module, you have learnt the following:
Risk is defined as the deviation from deviation from expectation and is an extremely important
concept for financial services industry.
Hedging and insurance are good techniques to reduce risks.
BASEL I,II and III implications help banking institutions to manage risks.
VaR is an efficient way to measure risk as a factor of time, confidence level and percentage of
loss on investment.
Historical, Variance Co-variance and Monte Carlo based methods are used to measure VaR.
There is a rumor that the public issue of Gamma Ltd. will be a hot issue in the market. Based on that
rumor, Mr. James invests all his savings in this public issue. What type of investor is Mr.James?
ans:speculator
protects investors