Banking & Insurance

(Module : 1)
Avinash Ahuja (11101) Hashmatullah Alizai (11102) Rahul Bhat (11105) Jagdish Devjani (11111) Urvija Pandey (11130) Tarun Sharma (11138) Yatiksha Chauhan (11151) Shivani Sharma (11181)

BANKING SECTOR REFORMS

-Hashmatullah Alizai (11102)

Narasimham Committee Report I - 1991

The Narsimham Committee was set up in order to study the problems of the Indian financial system and to suggest some recommendations for improvement in the efficiency and productivity of the financial institution.

The committee has given the following major recommendations

Reduction in the SLR and CRR
Phasing out Directed Credit Programme Interest Rate Determination

Structural Reorganizations of the Banking

sector Establishment of the ARF Tribunal Removal of Dual control Banking Autonomy

Narasimham Committee Report II - 1998

In 1998 the government appointed yet another committee under the chairmanship of Mr. Narsimham. It is better known as the Banking Sector Committee. It was told to review the banking reform progress and design a programme for further strengthening the financial system of India. The committee focused on various areas such as capital adequacy, bank mergers, bank legislation, etc.

Report recommendations
Strengthening Banks in India
Narrow Banking Capital Adequacy Ratio

Bank ownership
Review of banking laws

Report recommendations

Apart from these major recommendations, the committee has also recommended faster computerization, technology upgradation, training of staff, depoliticizing of banks, professionalism in banking, reviewing bank recruitment, etc.

THEORY OF INTEREST RATES

-Avinash Ahuja (11101)

Interest rate
An interest rate is the rate at which interest is

paid by borrowers for the use of money that they borrow from a lender The nominal interest rate is the amount, in percentage terms, of interest payable. The real interest rate, which measures the purchasing power of interest receipts, is calculated by adjusting the nominal rate charged to take inflation into account

Cash Reserve Ratio

Certain percentage of bank

deposits which banks are required to keep with RBI Higher the CRR with the RBI lower will be the liquidity RBI is empowered to vary CRR between 15 percent and 3 percent

Statutory Liquidity Ratio

Maintain a certain

amount of liquid assets from their time and demand deposits These liquid assets can be cash, precious metals, approved securities like bonds etc A reduction from 38.5% to 25% because of the suggestion by Narshimam Committee

Bank Rate
The rate of interest

charged by the RBI for providing funds or loans to the banking system Increase in Bank Rate decreases the supply of money in the market Bank rate is also known as Discount rate

Repo Rate & Reverse Repo Rate

Repo rate is the rate at which RBI lends to

commercial banks Reduction in Repo rate helps the commercial banks to get money at a cheaper rate & viceversa Reverse Repo rate is the rate at which RBI borrows money from the commercial banks High rates will lead to high inflation

Credit Ceiling
RBI issues prior information or direction that loans to

the commercial banks will be given up to a certain limit Commercial bank will be tight in advancing loans to the public Allocate loans to limited sectors E.g.
Agriculture sector advances Priority sector lending

Current scenario in India (Jan 2013)

Indicator
Bank Rate CRR SLR Repo Rate Reverse Repo Rate

Current Rate
8.75% 4% 23% 7.75% 6.75%

Impact Of Cut In CRR On Interest Rates

CRR Fixed as a percentage of total deposit.

More money chases the same no. of borrowers

so interest rate decreases.

IMPACT OF LOW INTEREST RATES

-Jagdish Devjani(Roll No. 11111)

IMPACT ON THE ECONOMY

Reduce the incentive to save. Lower interest

rates give a smaller return from saving. Cheaper Borrowing costs. Lower interest rates make the cost of borrowing cheaper. Lower mortgage interest payments. A fall in interest rates will reduce the monthly cost of mortgage repayments. Rising Asset Prices. Lower interest rates make it more attractive to buy assets such as housing. This will cause a rise in house prices and therefore rise in wealth. Increased wealth will also encourage consumer spending as confidence will be higher. (Wealth Effect)

 Overall, lower interest rates should cause a rise in

Aggregate Demand (AD)

IMPACT ON THE EXCHANGE RATES

Depreciation in the Exchange Rate.

A lower interest rate, makes it relatively less

attractive to save money in that country. Therefore there will be less demand for the currency causing a fall in its value. A fall in the exchange rate makes exports more competitive and imports more expensive. This leads to an increase in AD.

IMPACT ON INFLATION
Lower interest rates for prolonged periods lead to

the problem of inflation. If a society's demands for a certain good exceed the supply, then the product's price will go up. When inflation increases, economic growth begins to slow. The price of the good increases, and so demand for it wanes. Less demand leads to less production, and eventually unemployment ensues.

IMPACT ON EQUITY MARKETS

Low real interest rates boost the equity market.

There are two theoretical explanations.

1.

2.

The fact that equities should be priced as the value of future cash flows, discounted to the current day by an interest rate. Lower that discount rate and you raise the present value of shares. The second reason is simple asset switching; low rates on bonds and cash make investors seek out the greater attractions of equities

IMPACT ON THE CURRENT ACCOUNT

On the one hand, lower interest rates encourage

consumer spending; therefore there will be a rise in spending on imports. This will cause a deterioration in the current account. However, lower interest rates should cause a depreciation in the exchange rate. This makes exports more competitive, and if demand is relatively elastic, the impact of a lower exchange rate should cause an improvement in the current account. Therefore, it is not certain how the current account will be affected.

ANOMALIES IN INTEREST RATE THEORY

If the Central Bank cut the base rate, banks may

not pass this base rate cut onto consumers. Bank Lending: Interest rates may be low, but banks may be unwilling to lend. Consumer Confidence: If confidence is low, a cut in interest rates may not encourage more spending.

ANOMALIES IN INTEREST RATE THEORY

Deflation: If we had deflation then even if interest

rates are very low, then people may still prefer to save because the effective real interest rate is still quite high. Time Lag: A cut in interest rates can have up to 18 months to affect the economy. For example, you may have a two year fixed mortgage deal. Therefore, you are not affected by the lower interest rate until the end of your two year fixed mortgage term.

Retail Banking

-Urvija Pandey (11130)

Retail banking is banking in which banking institutions execute transactions directly with consumers. Services offered include Savings and transactional accounts Mortgages Personal loans Debit cards Credit cards Mutual Funds Depository Services including Demat Facilities

Retail Banking is based on the principle: Banking for the people, by the people and of the people.

Why Banks Focus on Retail Business??

Financial Disintermediation: Providing finance for manufacturing activities had a greater priority traditionally whose demand is now steadily decreasing. Advent of Economic Liberalization: LPG policy opened gates for new players in banking sector increasing competition.

Emerging Issues in Handling Retail Banking

1. Knowing Your Customer: Each branch should set up data warehouse wherein meaningful data on customers, their preferences, spending patterns etc can be mined. 2. Technology Isuues: Providing anytime, anywhere convenience to vast no. of customers requires huge investment. 3. Product Innovation: Products should be introduced to create value, not amusement. 4. Pricing of Products: Banking Sector is witnessing a price war with each bank wanting to have a larger slice of the market share.

5. Issues Related to Human Resource:

Motivating the front line staff Changing the image of the bank from a transaction provider to a solution provider. 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 decreases.

Problems of Retail Banking

Infrastructure Less speed Increasing volumes

Strategies for Success in Retail banking

Advanced Technology Skilled Manpower in all branches Balanced and sustained growth in deposiits and advances Strategic Cost management Market research and market intelligence Risk Management Customer Realtionship Management Universal Banking More delivery channels Service Quality with human touch

CUSTOMER RELATIONSHIP MANAGEMENT

-Rahul Bhat(11105)

Customer Relationship Management

Customer Relationship Management includes all the marketing activities, which are designed to establish, develop, maintain , and sustain a successful relationship with the target customers. CRM identifies the present and future markets, selects the markets to serve and identifies the progress of existing and new services. Thus, CRM is a managerial philosophy that seeks to build long term relationships with customers

CRM manages the relationships between a firm and its customers.

Managing customer relationships requires managing customer knowledge. CRM and knowledge management are directed towards improving and continuously delivering good services to customers

Source: Pinnacle Research Journals 68 http://www.pinnaclejournals.com Vol.1 Issue 6, September 2012

 Banking sector is a customer-oriented service where the customer is the

KEY focus where research is necessary to understand customers needs Successful customer relationship management focuses on understanding the needs and desires of the customers and is achieved by placing these needs at the heart of the business by integrating them with the organisations strategy, people, technology and business processes

CRM- A Powerful Tool : CRM- A powerful Tool to Help to exploit sales potential and maximize the value of the customer to the bank. CRM integrates various components of a business such as sales, marketing, IT and accounting . it will add customer loyalty to the business. The core objective of modern CRM methodology is to help businesses to use technology and human resources to gain a better view of customer behaviour.
Source: Pinnacle Research Journals 68 http://www.pinnaclejournals.com Vol.1 Issue 6, September 2012

Marketing Coin Head Tail CRM Advertising

Customer Relationship Management and Advertising is an integral part of

Marketing. However, CRM and advertising are two different sides of the coin called marketing. Advertising is too expensive. On the other hand, CRM is based on word of mouth. Hence, meeting customer needs is most important in the competitive banking sector. CRM has 3 application areas: Customer Acquisition Customer Value Maximization Customer Retention
Source: Pinnacle Research Journals 68 http://www.pinnaclejournals.com Vol.1 Issue 6, September 2012

Why CRM?

It is a must nowadays (Industry trend)

Cut-throat Competition in Banking sector

Compulsory and essential to provide innovative

products and personalized services Maintain Customer data & increase business To retain old business and get new business For continues business growth Customer satisfaction to customer delightfulness

CRM Strategies/Steps
Recognize the Customer. Use the right blend of formality and informality Be Patient (have self-control) with difficult customers. It will pay off in the

long run Know strength and weaknesses of your competitors and have all knowledge of your Products Smile while serving the customers

CRM consists of Blending Tradition with Technology

With the use of information and communication technology, banks can offer

personalized service Banks use CRM tools to identify which customers are to be targeted Currently are moving with a large range of products , providing tailormade solutions to cater to their needs so CRM is important
Source: Pinnacle Research Journals 68 http://www.pinnaclejournals.com Vol.1 Issue 6, September 2012

Commercial banking system and structure

-Yatiksha Chauhan (11151)

Commercial Bank
Oldest and largest financial intermediaries

Depositaries of public savings

Disburser of finance Create money in certain multiples of the deposits

made known as money multiplier Liquidity management and profitability management are its goal

Structure of banking system

Globalisation and Innovation

Led to considerable change in banking industry WTO and IMF are the universal organisation in

banking field

Impact of universal organisation on banking industry Pressure on government to undertake economic reforms Banks have to abide by internationally accepted norms Disinvestment and deregulation of interest rates, more competition

Impact of globalization
Brought structural changes in banking and financial

services Entry of foreign banks through acquisition of domestic bank in host country or strategic alliances State lost its monopoly and private banks have come up Provision of trade related services

Banking Laws

-Shivani Sharma (11181)

The Reserve Bank of India Act,1934

Bank established on 1 April, 1935 in accordance with provisions of this Act. Main functions of RBI defined as : Monetary Authority Regulator and Supervisor of financial system Manager of exchange control Developmental Role Related Functions

The Banking Regulation Act

Act passed Banking Companies Act in 1949, later as

Banking regulation Act with effect from March 1, 1966. Some important sections are : Banking Banking Company Demand Liabilities Publish Balance sheet Balance sheet audited by qualified auditors

Different Customers Different Laws

Joint Hindu Family Societies Trusts

Author II. Trustee III. Beneficiary IV. Trust Deed Company Sole Proprietorship
I.

Rights of a Banker
Right of a general lien Right of setoff Right of appropriation Right to change interest, levy charges, etc.

Obligations of a Banker
Honour cheques

Wrong Dishonour of cheque

Maintain Confidentiality Premature Closure Act in Good Faith Without Negligence Deceased Depositors Payment to nominee Closure of Accounts

Central Banking
-Tarun

Sharma (11138)

Reserve Bank of India

Indias central bank
It was established on 1st April, 1935 under provisions

of RBI Act, 1934

Share capital was divided in shares of Rs 100 each

fully paid up which was owned privately

In 1949, RBI was nationalised

Preamble
The Preamble of the Reserve Bank of India

describes the basic functions of the Reserve Bank as:

"...to regulate the issue of Bank Notes and keeping

of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

Main Functions
Bank of Issue:
Under Section 22 of the Reserve Bank of India Act, the

Bank has the sole right to issue bank notes of all denominations.
The distribution of one rupee notes and coins and small

coins all over the country is undertaken by the Reserve Bank as agent of the Government.

Main Functions
Regulator and supervisor of the financial system
Prescribes broad parameters of banking operations

within which the country's banking and financial system functions.

Objective: maintain public confidence in the system,

protect depositors' interest and provide cost-effective banking services to the public.

Main Functions
Monetary Authority:
Formulates, implements and monitors the monetary

policy.
Objective: maintaining price stability and ensuring

adequate flow of credit to productive sectors.

Main Functions
Managerial of exchange control
RBI manages to reach the goals of the Foreign

Exchange Management Act, 1999.

Objective: to facilitate external trade and payment and

promote orderly development and maintenance of foreign exchange market in India.

Main Functions
Issuer of currency
The bank issues and exchanges or destroys currency

notes and coins that are not fit for circulation.

Objective: to give the public adequate quantity of

supplies of currency notes and coins and in good quality.

RBI maintains the economic structure of the country so

that it can achieve the objective of price stability as well as economic development

Main Functions
Banker of Government:
performs merchant banking function for the central and

the state governments; also acts as their banker.

Banker of Banks:
maintains banking accounts of all scheduled banks It is the duty of the RBI to control the credit through the

CRR, bank rate and open market operations.

Selective Credit Control

Minimum margins for lending against specific

securities.
Ceiling on the amounts of credit for certain purposes. Discriminatory rate of interest charged on certain

types of advances.

Direct Credit Control

Part of the interest rate structure i.e. on small

savings and provident funds, are administratively set.

Banks are mandatory required to keep 23% of their

deposits in the form of government securities.

Banks are required to lend to the priority sectors to

the extent of 40% of their advances.