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Evolution of Banking The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Indian Banking Regulation Act 1949 was formulated to govern the financial sector. In 1921 the presidency Banks of Bengal, Bombay and Madras with their 70 branches were merged in 1921 to form the Imperial Bank of India. During the First 5 year plan in 1951, an act was passed in Parliament in May 1955 nationalizing the Imperial Bank and the State Bank of India was constituted on 1 July 1955 During the period 1906-1911, several Commercial banks such as BOI, Central Bank of India, BoB, Bank of Mysore etc were established which were all Joint Stock Banks
Definition of a Bank Indian Banking Regulation Act (1949) defines Banking as the Acceptance of money for the purpose of lending or investment, from deposits received from the public, repayable on demand or otherwise withdrawable by cheques, drafts or order to otherwise (Standing Instructions, ECS).
Nationalization of Banks First only State Bank of India (SBI) was nationalized in July 1955 under the SBI Act of 1955. Nationalization of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960. In 1969, Mrs. Indira Gandhi the then prime minister nationalized 14 banks then. These banks were mostly owned by businessmen and even managed by them.
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Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank Indian Bank Indian Overseas Bank Bank of Baroda Union Bank Allahabad Bank United Bank of India UCO Bank Bank of India
1980 : Nationalisation of seven more banks with deposits over 200 crores. Problems: Nationalized banks had job guarantee so employee efficiency very low, indiscipline and high absenteeism, trade union problems etc. Compare with present banks TYPE OF BANKS AND THEIR FUNCTIONS
1. 2. 3. 4. 5. 6. 7. 8.
Central Bank State Bank of India Scheduled and Non Scheduled Banks Co operative Banking Retail Banking Private Banking Investment Banking Corporate Banking
1. CENTRAL BANK: RBI 1.A Central bank has the sole right of note issuance i.e. legal tender currency 2.It should be the channel, and the sole channel for the output and intake of legal tender currency. 3.It should be the holder of all the government balances, and the holder of all the reserves of the other banks and branches of banks in the country. 4. It should be the agent , so to speak, through which the financial operations, at home and abroad, of the government would be performed. 5. Based on its Monetary Policy It should further be the duty of the central bank to effect so far as it could , suitable contraction and suitable expansion on money supply, aiming generally at stability, bby using the following tools: OMO- Open Market Operation, sterilization, CRR, SLR, Bank Rate etc(Discussed in class, notes given) 6. When necessary, it should be the ultimate source from which emergency credit might be obtained in the form of rediscounting approved bills, or advances on approved short term securities or government papers. Lender of last resort/ Banker to Banks 7. It does not deal directly with the public. It indirectly helps agriculture, industry by augmenting resources of other banks, channeled through agencies such NABARD, SIDBI, NHB ie priority sector targets 8. Maintains the foreign exchange reserves and gold reserves for the country(Discussed in classnotes given) 9. Clearing House of Commercial Banks (Discussed in class-notes given) 10. Rediscounting bills for scheduled banks (Discussed in class-notes given) 11. Moral Suasion- Mild persuasion to banks and financial institutions to follow RBI requirements based on market situations
2. STATE BANK OF INDIA The State Bank of India acts as an agent of the Reserve Bank of India and performs the following functions: (1) Borrows money:- The Bank borrows money from the public by accepting deposits such as current account deposits, fixed deposits and demand deposits. (2) Lends money:- It lends money to merchants , industries and manufacturers. It also lends to farmers and co-operative institutions. It lends mostly on the security of easily realizable commodities like rice, wheat, cotton, oil-seeds, cloth, gold and government securities. The Bank can lend against agricultural bills upto a maximum period of fifteen months and incase of other bills upto a maximum period of six months. (3) Banker s Bank:-The State Bank of India acts as the banker s bank. In discharging this responsibility, the bank provides loans to commercial bank when required and also rediscount their bill. (4) It also acts as the clearing house of the commercial bank where RBI doesnot have its branches (CLEARING FUNCTIONS DISCUSSED IN CLASS). SBI and its Associate banks are responsible for
clearing: SBBJ State Bank of Bikaner & Jaipur, SBH State Bank of Hyderabad, SBM State Bank of Mysore, SBIN State Bank of Indore, SBP State Bank of Patiala, SBT State Bank of Travancore. (4) Government s Bank:- The State Bank of India also acts as the agent of the Reserve Bank of India. As an agent, the State Bank of India maintains the treasuries of the State Government. The Bank also manages the debts (buying or selling of Bonds and Treasury Bills) floated by the State Governments. (5) Remittance:- The State Bank of India facilitates remittance of money from one place to another. It also helps in the transfer on the funds of the State and Central Government. (6) Functions as Central Bank:- The State Bank of India performs the functions of a Central Bank where RBI does not have its presence. (7) Subsidiary service functions:- The State Bank performs various subsidiary services also. It collects checks, drafts, bill of exchange, dividends interest, salaries and pensions on behalf of its customers.. It receives valuables and documents for safe custody and maintains safe deposit vaults 3. SCHEDULED AND NON SCHEDULED BANKS In the RBI ACT OF 1934, all banks listed in the second schedule is known as Scheduled banks All Scheduled bank operations are under strict surveillance of RBI. All nationalised banks, most private sector banks, foreign banks are scheduled. Most cooperative banks are non scheduled (not subjected to strict financial discipline). Advantages of scheduled banks: 1. RBI can rediscount the bills already discounted by them 2.Their drafts, bank guarantee, letter of credit accepted in all government offices 3.RBI acts as lender of last resort 4. All government accounts and transaction get routed through them 5. More account holders and lesser interest payment towards deposits as compared to non scheduled banks 4. COOPERATIVE BANKING Definition by Paul Lambert: It is an enterprise formed and directed by an association of users, applying within itself the rules of democracy and directly intended to serve both its own members and the community as a whole. It is a voluntary concern with equitable participation and control among all concerned. 1.It is organized by those who themselves need credit 2. Runs as a democracy: Run by Board of Director elected on the basis of one vote per member Cosmos, Saraswat, SuvarnaSahakarietc 1. Rural Co-operative banks: predominantly agriculture credit banks-short, medium and long term to agriculture, handicraft, cottage industries. Issues: Recovery, problem of valuing land, livestock, perishable agricultural commodities, improper title of property as security, limited resources and fund shortage, high Non performing Assets, chances of financial mis-management by the management itself (corruption). 2.Urban Co-operative banks: Formed formeeting the credit requirement of the urban lower middle class which larger banks do not wish to lend due to high cost of advancing and recovery. Nor do these people have large incomes or large assets to offer as security. Membership open to traders, merchant, professionals etc who have to contribute to share capital. They have their own funds (paid up share capital) and borrowed funds (deposits from public and borrowing from other banks)
5. RETAIL BANKING Basic Functions 1. Acceptance of Deposits: Classification of Deposits: Demand Deposits/Current Deposits-Repayable on demand-Savings accounts for individuals, Current Accounts for businesses (CASA) Fixed Deposits/Time Deposits The deposit is placed for a fix time period and fixed interest rate/ instructions needed for premature withdrawal. In exchange for the lack of liquidity, banks offer a higher yield on time deposits than they offer on regular savings accounts. Interest calculation for premature withdrawal of deposit and savings account interestcalculation explained in class 2. Loans & Advances: Accepts funds so that they can lend out credit to customers for consumption towards cars, houses, consumer goods, construction etc 3. Use of Cheques: Since the deposits with banks are withdrawable by cheques it elevates bank deposits to the position of money n 4. Banking as a part of the Financial Services industry a. Acting as an Intermediary: Collects Savings from those who have them and give to those who need them. b. Distribution of third party products such as mutual funds, insurance, RBI bonds etc c. General Utility services such as Bill payments, safety lockers, tax payments, issuing travellers chequesetc d. Non Traditional financial services in the recent times: Wealth Management and Relationship Management Services, selling gold coins Major Income Streams for Retail Banks BANKING SPREAD: The bank spread is the difference between the bank's cost of funds, in terms of interest paid to depositors, and the rate of interest the bank charges to debtors on bank loans. Interest income on term loans,home loans, personal loans , credit cards, overdrafts, cash credit. (Net Interest Income) FEE BASED INCOMES: Third party incomes as Distributors of mutual funds, life insurance, general Insurance i.e. mediclaims& Property insurance, RBI Bonds, equity trading brokerage , portfolio management schemes, merchant outlets: swipe machines, issuing bank guarantees, letter of credit etc FOREIGN EXCHANGE INCOMES: 1. Conversion charges on currency notes OTC 2. Conversion charges on Inward and Outward fund remittances 3. Converting foreign currency for exporters and importers 4. Foreign Currency loans to Exporters / Importers via Corporate Banking 5. Multi currency accounts (2007) for exporters with inter project fund transferability in any currency and country
INVESTMENT INCOME Income from investment in interbank call money market, Liquid plus &ultra short term mutual funds, government securities, Treasury bills, Certificate of Deposits, commercial papers Negotiable Instruments Transactions related to NI are governed by the negotiable instruments act 1881. Section 13 defines a negotiable instrument means a promissory payable either to order or bearer Bills of exchange/cheques/drafts/ certificate of deposits-unsecured borrowing by scheduled banks for a period ranging 3 months to 1 yr by issuing promissory notes/ Accommodation bill- it is a bill of exchange where a reputed third party is providing a guarantee towards repayment as a favor without any compensation for the same. This third party remains liable till the bill amount is repaid to the bank BANK S ASSETS: Loans and Bank s Investments BANK S LIABILITIES: Savings account, current account, fixed deposits and bank borrowings from other sources KYC-Know your Customer or Client/ AML- Placement, Layering and Integration (Please refer to notes given in class)
Credit Creation of Banks: Loans Created Deposit Primary deposits: hard cash,cheque,drafts etc, total supply of money doesnot increase from that when people come and open the account with these. When banks loan out these primary deposits Derivative deposits are created which add to the money supply. Banks advance loans to Brokers, financial institutions, individuals etc and Discount Bill of exchange, promissory notes etc thereby increasing credit money supply. The loan amounts are credited to the respective borrower s accounts and they are authorised to draw cheques up to the sanctioned amounts. Therefore debt gets converted to money. Therefore the deposits of the respective borrowers bank increases. Incase the borrower is an account holder in the same bank that has advanced the loan; the deposits of the same bank will increase. Where the bank had lent out via the cheque route, the borrower will credit the cheque into his respective bank account, whether in a different bank or the same one. This will increase that banks deposit base by the equivalent amount. Thus money available for credit increases. Whenever any bank purchases an income earning asset, it credits that amount to the account of the seller, thereby indirectly creating a new deposit, which the respective borrower/seller can withdraw using cheques. Thus banks convert debt into money Balance Sheet approach: Let us assume a Deposit of INR 2000, of which the bank has to keep 20% as cash reserves and may lend the rest Step 1: Bank A Liability New Dep: Rs 2000 Total: Liab: 2000 Step 2: bank A Liability Deposit: 2000
Asset New cash: 2000 Asset: 2000
Asset Cash: 400 Loan to X: 1600
Total: Liab: 2000
Step 3 : Bank B (X is an Account holder) Liability Asset New Dep: 1600 Cash in hand: 1600 Total: Liab: 1600 Asset: 1600 Step 4: bank B Liability Deposit: 1600 Total Liability: 1600
Asset Cash in hand:320 Loan to Y: 1280 Total Asset: 1600
Step 5: Bank C (Y is an Account holder) Liability Asset New Dep: 1280 Total: Liab: 1280 Cash in hand: 1280 Asset: 1280
Credit creation multiplier (K) K (Deposit multiplier)=1/ r , where r=percentage of deposit to be kept as liquid money under the Cash Reserve Ratio requirement , which is currently at 5.75% Therefore K=1/5.75% which is around 18 times. Thus Credit creation can take place up to 20 times the initial deposit amount.
ROLES AND FUNCTIONS OF DIFFERENT DEPARTMENTS 1. MIHU: May I help you: 1. Primary screening and addressing customers requirements when they enter the branch and then directing them to the respective departments as per their queries and demands. 2. Judge the potential of customers for cross sale of banking products based on their perceived net worth and thereby directing them to Branch Banking or Priority banking for either starting a new relationship or deepening existing relationship. 3. Divert customers to Alternate Delivery Channels (ADC) such as Phone Banking and Internet Banking to save the time of Service executives. 4. Assist in resolving very basic service queries 2. CUSTOMER SERVICE: Following services are performed by them 1. Operational aspect of physically opening customer Accounts post checking the accuracy of all documents and resolution of any discrepancy . Marking them according to the customer type as Special Category Client or high risk client in case he s a politician, police official etc who has enough influence to damage the bank s reputation in case of any customer issue. 2. Ensuring that all KYC norms (Address proof, photo ID, photograph etc) are followed and collected during account opening
3. Follow AML guidelines diligently. Track accounts with heavy inflow/outflow and report to the relevant authorities to safeguard the interest of the bank. Raise STRs i.e. Suspicious Transaction Report based on these heavy irregular fund flows 4. Keep a tab on clients whose cash flows highly exceed their mentioned profession or business. 5. Resolve queries pertaining to Credit cards, personal loans and home loans, assisting clients in their payments, change of EMI structure or part or full foreclosure and services related to accounts. 6. Responsible for service and resolution of queries pertaining to products such as interest calculation on deposits, placing fresh deposits and renewing the ones which have maturing selecting the optimum interest rates and time periods as per client specifications 7. Assist the customers in inward and outward remittances/ money transfers 8. Generating leads or Cross Sale of investments and other banking products by selling some of the products themselves like credit cards, deposits which are low involvement product or else directing the customer to the Relationship Manager for the respective product or department by generating warm leads . 9. All services pertaining to Locker opening, maintenance and collecting the charges are their responsibility 10. Maintaining Branch inventories of credit cards, debit cards, Sealed passwords for Accounts, internet banking, phone banking, account opening kits and cards. These are all held by them confidentially in fire proof lockers etc 11. Ensuring all transactions, documentation, accounts opening formalities, service standards are followed as per rules laid down by group compliance, country risk and reputation analysis before opening Non Resident accounts (CRRT-Country Risk and Reputational Table), which has a list of countries which are high risk for money laundering, terrorism financing etc. They are responsible for meeting branch audit requirements
3. TELLERS (CASHIERS) 1. Receipt and payment of cash over the counter and following certain security norms in case the amounts are very large i.e. letter from customer stating source of funds or its usage/Pan Card copy etc 2. Account to account fund transfers within the same bank/ branch. 3. Safeguard interest of customers from fraudulent practices by identifying signature mismatches and forgery on cheques, since they have a specimen signature on the records 4. Identify and destroy counterfeit currency 5. Encashment and also issuance of traveller s cheques, gift cheques, and demand drafts. 6. RTGS-real Time Gross Settlement-/ NEFT-National Electronic Fund transfer 7. Maintenance of Cash in ATMs 8. Exchanging foreign currency OTC (Over the Counter) 9. Acceptance and Clearing of cheques RTGS: The acronym 'RTGS' stands for Real Time Gross Settlement. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system through the banking channel. Settlement in 'real time' means payment transaction is not subjected to any waiting period. The
transactions are settled as soon as they are processed. 'Gross settlement' means the transaction is settled on one to one basis without bunching with any other transaction. NEFT settlement takes place 6 times a day during the week days (9.00 am, 11.00 am, 12.00 noon. 13.00 hours, 15.00 hours and 17.00 hours) and 3 times during Saturdays (9.00 am, 11.00 am and 12.00 noon). Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time. Contrary to this, in RTGS, transactions are processed continuously throughout the RTGS business hours. The minimum amount to be remitted through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS transactions. No minimum or maximum stipulation has been fixed for EFT and NEFT transactions. 4. BRANCH BANKING SEGMENT HSBC- Power Vantage/ Citibank-Citi Blue Mid market and Mass market Customers. The account opening cheques range from Rs.5000 for Mass market, while 1 Lac for Mid market, especially in multinationals Relationship Managers and Financial Consultants are assigned to customers to cross-sell banking products and offer wealth management services. Apart from the other products such as retail assets, credit cards etc, the focus is to primarily to sell Life Insurance with a secondary focus on mutual funds. Commissions on basic insurance products ranged from 15% to 40% on the first years premium as against 2.25% in mutual funds when Entry Load was prevalent i.e. ( 5 lac of Premium in insurance @ 40% commission gives a revenue of INR 200,000 , while approx INR 90,00,000 of MF sales gave the similar revenues) Even now with entry load ban on MFs upfront charges and reduced charges on insurance, even then insurance is much more profitable. Since Branch banking is a Volumes game and not a Value proposition the products aggressively sold are all very high revenue products, so that large percentage of income may be derived from the smaller amounts sold per customer
5. PRIORITY BANKING HSBC- Premier/ ABN Amro-Van Gogh Preferred Banking/ Citibank-Citigold/ Standard CharteredPriority Circle Value proposition with account opening amounts ranging from 25 30 lacs 1. Experienced Relationship Managers and Customer Service Managers assigned to fewer groups of customers for personalised and specialised services 2. Wealth Management Services to customers, consolidating previous, existing and fresh investments spanning equity, debt and sectoral mutual funds, stocks, bonds, gold, deposits, commodities, insurance, foreign investments, real estate etc. Thereby providing customised investment solutions which are extensively tracked, rebalanced and allocated according to customer risk profiling and cash flows 3. High focus on Structured investment products using derivatives etc are designed especially for these clients 4. Higher Deposit rates are offered, while fees are waived off in mostly all banking transactions and products 5. Very high limits offered on debit and credit cards with international service facilities included which are either free or heavily subsidised. All annual charges on cards are waived. 6. Extremely competitive rates are offered on currency conversion, while remittance charges are mostly waived or discounted
Multiple account facilities in different countries offered to High Net worth clients with business interest across the globe. In one country the priority account minimum balance needs to be maintained, while in other countries it can be a zero balance account. 8. Interest Rates charged on Home loans and personal loans are at a significant discount to Branch banking customers, and also with much lesser documentation requirements 6. RELATIONSHIP MANAGEMENT 1. Wealth Management: Financial Planning, Investor risk profiling, Asset allocation & Product selection, Portfolio tracking & rebalancing 2. Managing incremental cross sale of investments and other banking products 3. Retention of customers, deepen the relationship with constant interaction and ensure quality service and resolution of queries within given TAT (Turn around time) 4. Acquire new relationships and grow their balances through investments in various products . Maintain and grow CASA balances. 5. Sales of all categories of Life Insurance products i.e. market linked plans (ULIPs), term policies and Endowment Plans 6. Equity research, advisory, monitoring and stock trading through the Portfolio Management Services route 7. Constant reviewing and monitoring customer s portfolios and detailed financial planning to address any need gaps using proprietary software. Thereby make changes in the portfolio based on current market levels and movements debt, equity and commodities side 8. Provide structured products to HNI clients. Most products are designed with inbuilt features to participate in the derivatives segment and involve aggressive option trading strategies and positions in Futures, to either enhance profitability or hedge risks 9. Track foreign currency markets to enable Non Resident customers profit from exchange rate fluctuations 10. Also focus on the corporate relationship segment (company accounts) as an avenue for high revenue from large company investments, by liaising with the corporate banking channel 11. Ensuring all audit and compliance norms are followed. Cross border investment and insurance norms have been followed. All investments have to be documented extensively capturing the minutest of investor/investment details. Anti Money Laundering measures have to be followed and country specific risk measures have to be taken as per CRRT (Country Risk Reputational Table) i.e. investments coming from Iraq, Nigeria, Zambia etc which are of risky nature
12. Conduct regular market research to review, assess, analyze, report on competitor activities of other banks and financial institutions ,and capturing changing consumer behavior and general industry trends
7. RETAIL ASSETS 1 Selling Home loans, car loans and Personal loans to existing and new customers 2. For home loans, liaison with designated lawyers and property valuers to ensure that the property to be kept as mortgage is secure with clear title, no encumbrances and with required market valuation for ensuring the security of the loan. 4. Credit managers verify customer income documents, calculate his repayment capacity and then Sanction loans. 5. The final Disbursal of loan ie. Cheque handed out to borrower, takes place post a clear legal report of the property papers from lawyers and based on the technical valuation report by property valuer of the current market value of property 6. Hold marketing events at the bank, companies, societies, clubs, malls, multiplexes etc sometimes offering concessional interest rates to promote loans. 7. Types of products: Home Loans, Loan against property, Loan against commercial property, Balance transfer, Top up . Also discuss the detailed process of Sanctioning and Disbursement of loans (Discussed in details class) 8. RETAIL LIABILITIES 1. Selling CASA: Current accounts and savings accounts 2. Selling Fixed deposits to increase the banks deposit base
9. CUSTOMER ACQUISITIONS TEAM (CAT) 1. Initiating and implementing Marketing effortsfor acquiring new accounts by individual sales efforts, organizing customer meets, seminars & events 2. Procuring databases from various sources for cold calling and selling banking propositions 3. Taking customer references from existing and prospective clients for sourcing more accounts 4. Collecting and completing the required documentation for account opening 10. TRAINING & DEVELOPMENT 1. Ensure all mandatory certifications are completed by the sales and service staff and provide training for the same 2. Develop Learning & management modules covering a wide range of banking, finance and investment topics with online tests for getting a formal qualification 3. Extensive training provided on identifying money laundering trails and investments routed from high risk countries. 4. Provide training on new product launches, changes in bank policies, new technologies, rebranding and re launching existing products 5. Regular training on investments, insurance and financial planning for customers
6. Create talent pools by identifying and segregating employees based on various skill sets ranging from team management, selling skills, knowledge quotient, customer handling techniques etc by conducting regular workshops 7. Update staff on new legislations, competitor strategies and prevailing market opportunities 11. AUDIT & COMPLIANCE 1. Oversee that all branch operations are conducted based on Group compliance norms and legalities laid down by external entities such as the central bank, IRDA, AMFI etc 2. Ensure Sales Quality is maintained on all banking product sales. Checking that there is no wrong selling due to target pressure, forgery of documents while selling banking products, mismatch of signatures, product not matching the clients risk profile, investment tenure and age. 3. Conduct regular audit on all investment & insurance sales making sure that cross border investment norms are maintained (US, Canada Australia etc) Anti Money Laundering guidelines are followed, CRRT (Country Risk and Reputations Table) countries such as African countries etc are highlighted, documentation and records are all in order, the Sales person had all the mandatory licenses and customer interest has been met 12. RESEARCH TEAM 1. Daily updates, mails & messages on market trends and occurrences spread over all investment types 2. Compile extensive and detailed studies about markets, economics, new & existing funds, equity, global and local trends, sectors etc. 3. Track and research all mutual funds based over many parameters and compile a White list or Choice list which streamlines the best mutual funds in every sector and category based on their research which are recommended by the bank 4. Assist the sales team in closing large investment deals with their value added inputs based on views and market direction
13. BACK OFFICE OPERATIONS Back office functions. Issuance of cheque books, debit and credit cards and their respective passwords, placement and withdrawal of deposits, generating internet & phone banking passwords, generating account opening kits, bank statement etc 14. COLLECTIONS Recovery and settlement of bad loans, credit card defaults etc Customer background checks, field investigation reports and risk management measures such as verifying customer s area of residence and whether he stays in a negative area , healthiness of his prior banking transactions, previous loan repayment records, credit history etc before the bank authorizes loans or credit cards RATES GOVERNING BANKS PLR-PRIME LENDING RATE: RBI: 11-12%/ 5 top Commercial Banks 11-15%-Prime Lending Rate (PLR) is that rate of interest at which a bank lends to its best customers with highest credit worthiness
CASH RESERVE RATIO: 6%- liquid cash that banks have to maintain with the Reserve Bank of India (RBI) as a percentage of their demand and time liabilities and borrowing from CBLO market STATUTORY LIQUIDITY RATIO: 25% - SLR refers to the amount that all banks require to maintain in form of approved government securities. BANK RATE: 6%- Longer term borrowing rate from RBI, bill re discounting rate REPO RATE: 5.75%- Short term Bank borrowing from RBI by pledging government bonds as security when banks have to meet temporary shortfalls. The banks then repay the loan by repurchasing the securities from RBI by paying the principle and the applicable rate REVERSE REPO RATE: 4.5%- Short term lending to RBI when banks have surplus liquidity CAR- Capital Adequacy Ratio- As per Basel 2 norms the minimum is 8% while RBI has fixed 9% as CAR -It is amount of a bank's own z (Tier 1 and Tier 2 capital) expressed as a percentage of its risk weighted credit exposures i.e. (Capital/Risk) determines the capacity of the bank in terms of honoring deposit withdrawals and managing other risk such as credit default risk, operational risk. In case of Scheduled Commercial Banks CAR= 9 per cent For New Private Sector Banks CAR = 10 per cent For Banks undertaking Insurance Business CAR = 10 per cent For Local Area Banks CAR =15 per cent LAF: Liquidity Adjustment facility- The RBI uses Repo and Reverse Repo to aid banks in adjusting their liquidity requirements and help in meeting Monetary policy measures. The difference between the two rates is called the Interest Rate Corridor (Explained in class) 6. PRIVATE BANKING Caters to Super High Net worth customers- minimum account opening cheques: 4 crores (HSBC), 1 Crore (ICICI). Aim is to make fee based incomes by offering structured Products and specialized investment services from which bank earns commissions. Stress is mainly on customized investment products which are specifically designed for them using derivatives, Equity linked note, capital protection equity plans using Constant Proportionate portfolio investment (CPPI model) (Explained in class)etc. Lending functions are secondary and a part of the service functions. Customer service being rendered on a more personal basis, dedicated Relationship Managers with 8 to 10 years of investment experience. All products and services are offered at discounted or special rates. Deposit rates better, remittance charges waived, foreign exchange conversion rate few paisesplus minus the interbank rate, loan rates discounted, documentation waived (fundamentally similar services given to HNIs in Retail banking except Investment products which are personally customized for these individual clients while in Retail HNI banking, products are customized for the entire group of customers)