Bank management-1

Evolved some time in late 19 th century- integral part of capitalism-savings and loans intermediaries-banks in post industrial revolution days evolved to meet the needs of constituents and regulators-the British system evolved around a central banking system with a central bank and clearing banks with large network of branches-German one on integration of identity of interests by financial players-US system dominated by Unit banks-active inter bank market in US-

Bank management-1

Factors affecting banking system deposits-retail loans-trade discounts-bill finance-200 BC Babylonians had a rudimentary banking practice-In Ancient Greece and Rome-Manu on credit giving-in Rome for ex some banks carried on business on their own while govt appointed banks to collect taxes-people used to settle accounts with creditors by giving a cheque-even drafts in rudimentary form called Attributio-There were also loan banks-from these banks the poor citizens received loans with out paying interest-they lent money for 3-4 years on the security of land-mostly in private hands-The Bank of Venice established in 1157 perhaps the most ancient bank-it was an office for transfer of public debt-Monte in Florence in 1336As early as 1349 banking business carried on by drapers of Barcelona-the Drapers were not allowed to commence banking till they had given sufficient security-

Bank management-1

During 1401 public bank established in Barcelona-used to exchange money,receive deposits and discount bills of exchange for both citizens and foreigners-these deposits could be with drawn on demand or transferred from the account of one person to another-also gave a receipt which entailed depositor to with draw deposits with in 6 months-these written orders evolved into modern cheques-Safe custody in Englandissue recipts-goldsmiths notes may be considered as the precursor of the bank note-goldsmiths used to deposit their reserves of treasure with the exchequer with the sanction and under the care of the govt-Charles 2 shut up this exchequerfirst bank failure-goldsmiths ruined-Then came Bank of England in 1694-

Bank management-1

Branch vs Unit Banking System-the unit and branch banking systems evolved around the central banking system which consists of the central bank,commercial banks and other financial institutions-unit banking consists of provision of banking services by a single institution-the size and area are far more smaller under Unit Banking System-unit bank may have branches in a strictly limited area-A third of banking offices in US are unit banks-their presence is a result of lawpractical earlier due to limited transportation facilities-giving way to branch banking-unit banks held together by a correspondent banking system-correspondent bank acts as a medium for remittance between one bank and another-it also facilitates consultation in lending risks and loan sharing Unit banking concentrated between Mississippi and Rockies in USA-

Bank management-1

In branch banking system a typical commercial bank is a large institution having large no of branches-branches are controlled from one location referred as HO-eastern side of USA-66137 branches in India-banking in a majority of developed countries patterned after British Banking System-second banking was organised along national lines-principles were universal however-advantage of unit banking is local adaptability-also Agri,MSME unit finance-local resources put to use locallybranch banking facilitates allocationn or transfer of savings to their most efficient use,division of labour,provision of remittance facilities,spread of risks etc-branch banking facilitates allocation or transfer of savings to their most efficient use irrespective of origin-interest rates based on risk perception and policy-uniform-loans purely on viability criterion-management of reserves more

Bank Management-1

Absence of delegation in branch banking-HO centricRETAIL VS WHOLESALE BANKING-retail banking is mobilisation of deposits from individuals and lending toowholesale banking refers to large customers-large value banking-inter bank is wholesaleprimary or retail banking in 60 s in UK conducted by clearing houses-households and medium sized firms-in wholesale banking mix of domestic and foreign currency accounts accounting for more than half of all assets and liabilities-second size of deposits and advances large and cheap to process-nature of advances tailor made to each financing problem with definite period at variable interest rate-two systems separated by practices and regulatory controls-interbank markets in domestic and foreign currency markets,-

Bank management-1

Other features of wholesale banking are issue of CD in domestic currency and FC- lending by Term loans another feature-liquidity distribution theory states that wholesale banks are pure brokers or distributors of liquid assets-As producers of liquidityfinancial institutions use factors of production to transform primary securities into technically different productsin wholesale banking brokerage function is dominantwholesale banks balance or match the maturity of their assets and liabilities obviating the need for reserves-production of liquidity including transformation of short term funds into long term borrowing-

Bank management-1

A Universal bank offers a wide variety of financial services beyond the strict traditional boundaries of a commercial bankcore business is deposit taking and lending-financial services supermarket-combination of commercial and investment banking besides other activities including sale of MF and insurance products-most banks are universal ones-GlassSteagall Act in USA-severe restrictions-scrapped-so more M&As in this field paving way to universal banking-increase in efficiency-lower cost ,higher output and better products-as growth increases any fall will have ripple effects-monopoly likely-is there capacity in the bank to deal with new risks?so need of risk managemt more in universal banking-

Bank management-1

Indian Banking System-Indian joint stock banks important constituent of Indian Financial system-any co which accepts for the purpose of lending or investment deposits of money from the public repayable on demand or otherwise and withdrawable by cheque,draft or otherwiseScheduled and non scheduled banks as per RBI-second schedule of RBI Act,1934-compromise commercial banks,RRBs,UCBs and State Co-op banks-scheduled banks into commercial banks and co-op banks-com banks into PSBs,pvt sector,foreign banks and RRBs-PSBs again into SBI and associates and nationalised Bank,old pvt sector and new generation pvt sector- the scbs,dcbs,pacs-State co-op agri and rural devpmt banks and primary agri depmt banks-

Bank management-1

Branch banking-only one CB office for every 73000 people in India in 1967-unevenness in spread-corrected after nationalisation-Imperial Bank into SBI in 1955-to open more metro branches minimum rural presence mandated-New branch licensing policy in 1978-expansion of banking in deficit areas and reduction of inter district disparities-Dantwala committee,James Raj Committee and Kamath Working groupmore freedom to open branches-In DEC 1995 new norms for branch opening-3 yr profitabilty record and NPA below 15 pcpopulation served per branch declined 64000 at nationalisaion to 15000 in 2002-rural branches 49 %-lead bank scheme-new generation banks-bank mergers and amalgamations-New Bank of India with PNB-for ex-

Bank management-1

Central Bank-1894-Bank of Englands first version-banks of issue-after first world war chaotic monetary conditions-Brussels Financial Conference 1920-in 1900 only 18 central banks ,now 172-unique place in economic mapVarying functions-state owned and state controlled Bank of England to Federal Reserve owned by member banks and coordinated by Federal Reserve BoardActing as bank of issuecontroller of currency-bankersbank,lender of last resort,Agent,advisor and banker to the Govt-custodian of nations metallic reserves-monopoly of note issue-exchange transactions-rules with regard to imports,exports,remittances,convertibility-external value of currencyInstrmts of monetary policy include bank rate policy,open market operations,Variable Reserve system,selective credit control,credit rationing,moral suasion,and Direct ActionMonetary policy-control of banks-audit-

Bank managemt
RBI Departments-Urban Banks Depts,Rural planning and Credit depsartment,Foreign Exchange Department,Bord for Financial Supervision,Dept of Banking Operations,Dept of Non Banking Supervision,DBOD,Dept of IT,,Legal Dept,Monetary Policy Dept,Internal Debt Management Dept,Dept of External Investmts and Operations,Dept of Govt and Bank Depts,Dept of Stastistical Analysis and computer services,Dept of Paymt and Settlemt System-

Bank management-1

Commercial banking-the functions of commercial banks include-retail and wholesale deposits and advances-demand deposits and term deposits-so a broker and dealer in moneyby discounting bills bank converts future claims into moneyalso forex transactions like imports,exports,remittance,custodial and advisory services, colletion/discount of NIs.,remittances,ancillary services etcAgency services-CB provides range of invstmt servicessubscription,premia,other remittances-executor and trustee deptgeneral utility servises-issue of credit instruments likeL/C,S,t/Cs,acceptance of bills of exchange,safe custody of valuables and dicuments,transaction of forex business,acting as a referee as to the respectability and financial standing of customers,providing advisory services etc-

Bank management

ALM-Narasimham committee recommended risk management practices-intense competition in both asset and liability markets-has brought pressure on managements for spread management--volatality in domestic and FX int rates - ALM to be supported by a risk mgmt philosophyinformation is the key to ALM process-The ALM process mainly addresses liquidity and interest rate risks-considering the large network of branches-first implemented by banks in 1999-managent of the structure of assets and liabilities-idea is to increase the net earnings with in overall risk preference-

Bank management

Scope of ALM- ALM functions extend to liquidity risk management,management of market risk,trading risk management ,funding and capital planning and growth projectionResidual maturity is the time period which a particular asset or liability will still take to mature that is become due for paymentMaturity buckets are different time intervals say 2-7 b days,8-14 days,1528 days,29-90 days,91-180 days,181-365 days,1-3 years,3-5 years and above 5 years in which depending upon its residual maturityMismatch position-When in a particular maturity bucket the amount of maturing liabilities or assts does not match we have a mismatch positionthis creates a liquidity surplus or liquidity crunch position and depending upon the interest rate movement such situation may turn out to be risky for the banks-for example the net cumulative mismatch for the next day ,2-7 days,8-14 days and 15-25 days buckets should not exceed 5%,10%,,15%,and 20% respectively of the cumulative cash out flow for the respective buckets

Bank management

The investments in SLR securtities assumed to be illiquid due to lack of depth in secondary markets-within each time bucket there could be mismatches- these upto one year would be relevant since these provide early earning signals of impending liquidity problems-the main focus should be on short term mismatches namely 1-14 days and 15-28 days-banks are however expected to monitor their cumulative mismatches (running total)across all time buckets by establishing internal prudential limits with the approval of the board-The mismatches or what are called as negative gaps during the 114 days and 15-28 days in normal course may not exceed 20% of the cash outflows in each time bucket-

Bank management

The statement of structural liquidity must be prepared by placing all cash inflows and outflows in the maturity ladder according to the expected timing of cash flows-a maturing liability will be a cash outflow while a maturing asset will be a cash inflow-rupee inflows and outflows on account of forex operations also needs to be factored in-while determining the likely cash inflows or outflows a number of assumptions are made by the banks-for example Indian banks with large branch network can afford to have large tolerance limits in mismatches in the long term if term deposit component is high-assumption here is rollover of deposits-currency risk managemt is one aspect of A&L-the calculation of exchange position

Bank management

Currency risks-floating exchange rates-hence volatilitymanaging currency risk is one aspect of A&L.ever since RBI introduced the concept nof end of the day near square positions banks have been setting up overnight limits and selectively undertaking active day time trading-the calculation of exchange position has been redefined and banks given discretion to set up overnight limits linked to maintenance of capital as say 8-9 % of open position limit-presently banmks are free to set up gap limits with RBIs approval but are required to adopt Value at Risk to measure the risk associated with forward exposures-thus the open position limits together with the gap limits form the risk management approach to forex risk operations-

Bank management

Gap analysis is the simplest analytical for calculating interest rate risk as explained here interest rate sensitive assets,liabilities and off balance sheet positions are distributed into a certain number of pre defined time bands according to their maturity(fixed rate)or time remaining for their next repricing(floating rate)-the periodic gap analysis indicates the interest rate risk exposure of banks over distinct maturities and suggests magnitude of policy changes needed to alter the risk profileDuration Gap Analysis-matching the duration of assets and liabilities instead of matching the maturity of repricing methods is the most effective way to protect ECONOMIC VALUE of banks from exposure to interest rate risks -

Bank management

DURATION GAP MODEL focusses on managing economic vale of banks by recognising the change in the market value of assets,liabilities and off balance sheet items-diration is a measure of the percentage change in the economic value opf a position that will occur given a small change in interest rates-the attraction of duration analysis is that it provides a comprehensive measure of interest rate risk for the total portfolioSIMULATION METHOD-simulation technique attempts to overcome the limitations of gap analysis and duration gap methods by computer modelling of the banks interest rate sensitivity-such modelling involves making assumptionsabout future path of interest changes,shape of yield curve,changes in business activity,pricing ang hedging strategies etcinvolves detailed analysis of various components of on and off balance sheet positions-value at risk is simulated-

Bank management

DFIs-IDBI,ICICI,SFCs,LIC etc-long term lending for capital intensive projects-now on the wane-most of them getting converted into commercial banks-interest rates generally lowavoids A&L problem by tying up cheap lines of credit-still baggage of huge NPAs fiorced many of them to convetrt into commercial banks-

Bank management-1

Organisational structure-co-op banks can be divided into rural co-op banks and primary urban co-op banks-rural co-op banks have a short term structure and a long term structure-under short term pac DCB and SCBs-under long term SCARDB and SCARDB at apex level-PACs-RIDF-Role of NABARDDevelopmt Banking-term lending-IDBI-SFCs-SIDBIdeclining role-committee on banking sector reforms S H Khan-transitional path for DFIs to become banks-/NBFCdelink supervision from refinance-ownership of FI to transferred to GOI from RBI-corporate structure-mergers between banks and FIs-function specific regulatory framework-focus on off site supervision-move to universal banking-meet prudential norms-BFS to look into supervision-

Banking-1

Provide long term project finance including finance for infrastructureNABARD-apex bank for agri credit disbursement-functions include credit planning,preparation of state focus group,monitoring the flow of ground level credit-issuing policy and operational guidelines ro rural finance institutionsPromotion and Developmt-institutional devpmt and client organisations,capacity building in partner institutions,supporting experimentation with new devpmt models and practices in credit delivery,innovative product development,R&D support,Assisting RBI/GOI in policies relating to rural credit,promotion of rural non farm sector etcUnder Financial Services it refinances RFIs enables them tyo lend-,loans to state governments for strengthening of co-operatives and also developing infrastructure in rural asreas,support of micro credit innovations of NGOs and others ,monitoring of loans also inspects SCBs DSCBs, RRBs,SCARDBS,Apex Weavers Societies etc-

Banking-1

EXIM BANK- Export Import Bank of India Dealt separatelyNHB-NHB Act 1987to directions to HFCs to ensure growthb along sound vlines.,make loans and advances to CBs and HFCsestablished under any act of parliament or state legislature-cost effective housing-channelising resources,augmentation of supply of builable land,to encourage public agencies to emerge as facilitators and suppliers of serviced land for housing-Has Developmental,Financing and Regulatory and supervisory roles-training-refinance to HFCs and Banks-regulation-

Banking-1

Housing and Urban Development Corporation Ltd-HUDCOset up in 1970-provides loans to public institutions,Viz-State Housing Boards,Co-operative Societies etcHDFC-Housing Development Finance Corporation-demand for housing-the housing industry is the second largest employment generator in the country-It is estimated that the budgeted 2 million units would lead to the creation of an additional 10 million man years of direct employment and another 15 million indirect man power employmentoriginal share capital Rs 100 Million-Enhance residential stockincrease flow of ownership-privately owned-now merged with HDFC Bank-Rumoured to get merged with HDFC bank-

Banking-1

IDBI-Largest DFI-10 th largest in the world-in 1964 fully owned subsidiary of RBI-Vested with the responsibility of co-ordinating the working of institutions engaged in financing,promoting,and developing industries-undertakes/supports wide ranging promotional activities wide ranging promotional activities including entrepreneurial development,consultancy for SMEs and technology upgradation programmes for large scale industriesRole as a catalyst-can finance all types of industrial concerns covered under IDBI ActPromotionL/,technical consultancy and entrepreneur devpmtIFCI-Earliest-1948-finance to consumer goods,service industries,basic industries,capital and intermediate goods and infgrastructure-regional dipersal-Founded institutions like MDI,ICRA,TFCI,Institute for Labour studies etc Industrial Investment Bank of IndiuaICI IDFCPFCLIC ICICI-Now merged wioth ICICI Bank=SIDBIUTI

Bank management-1

NBFCs-heterogeneous in activity and size-5100 NBFCs in 1996-deposits 7.1 pc of household savings in one study-lower transaction costs,quick decision making-rate of return on deposits high-eqpmt leasing,HP Housing Finance,Consumer finance etc-Aasw per RBI is a co,principal business of receiving deposits and lending-excludes FIs- and a co principally into agri lendig-can be an eqpmt leasing co,HP co,HFC,IC,Loan co,Mutual Benefit co or nidhi or miscellaneous non banking co or a residuary NBFC-Mutual bBenefit Finance cos exempt from most provisions-since 1996 RBI has imposed a ceiling of 15 pc on int rates and prohibited ads in any form-cannot pay any brokerage for soliciting deposits-NBFC deposit rates were freed in Aug 1996-ceiling does not apply unless MBFC s havepositive net owned fundsNOF to deposit ratio of 1:20-

Bank management-1

Types of NBFC-NBFC pure-in terms of sec 45-1(f) of RBI Act 1934-receiving deposits and lendingEqpmt leasing Co-self explanatoryHP-Hire purchase-self explanatoryInvestmt Co-IC-Acquisition of securities and trading in such securities to earn a profitLoan Co-LC-providing Finance by making loans or advancesfor activities other than their own-excludes,EL/HP/HFCsMutual benefit financial co-ie-Nidhi-(MBFC)-means any co notified by Central govt under sec 620A of Companies ActMisc NBFC-ie-chit fund comanaging,conducting or supervising as a promoter/agent in any transaction-co enters into no of subscriber transactions -

Bank managemt-1

Each subscriber shall in turn get allotment as determined by auction or by tender as provided in agrmt-thus entitling prize amtResiduary non banking co-(RNBC)co which receives deposits undert any scheme or arrangement in one lump sum or in instalmens by contribution/subscription/sale of units/certificates/insrmts in any manner-do not belong to any four earlierNon Banking non financial co-industrial concern as defined under IDBI Act 1964-co mainly in agriculture/trading in goods,/services/real estate not classified above HFC-Housing finance co-including acquisition of plots-NHB supervisionCapital adequacy by 1998-min cap ratio in tier1 and 2-

Bank management-1

Among recent regulatory initiatives are prescription of min level of NOFs,maintenance of liquid assets,creation of reserve funds and tranfer thereto a certain % of profits-also credit rating,capital adequacy,income recognition,asset classification,provision for BDD,Exposure normss all for purposes of financial solvency and reporting-NBFCs mainly classified into those accepting public deposits,those that do not but are engaged in financial business,and core investmt cos which hold at least 90 pc of their assets as invstmts in group/subsidiary cos-CRAR as high as 15 pc,exposure norms,ceiling in real estate/unquoted shares-those NBFCs not accepting public deposits and holding investmts to the extent of 90 pc or more of their securities issued by their group exempted grom most regulations except registration and creation of reserve fund-

Bank management-1

Residuary NBFC-upto 80 pc in prescribed investmt pattern-to be entrusted to a PSB-to pay 6 pc interest minimum on daily deposit schemes-other provisions like min and max period of deposits-prohibition from forfeiture of any part of deposits,disclosure reqmts in application form and advertisemts,periodical returns to RBI-mutual benefit coregulsated by RBI-By DCA in operational matters-Min Rs 25 lacs NOF-regn certificate from RBI--Chit Fund cos and Chit Funds Act 1982-upto 25 pc of NOF from public and 15 pc from shareholders-that is the limit on deposits for chit fund cosNationalisation and social responsibility of Banks-priority sector-40 pc of DTL--more branches in rural areas-lead bank scheme-sub targets for areas like agriculture-

Bank management

Bank wise and branchwise profitability measured by return on assets,interest rate spread,business per branch,operating expense per branch,profit per branch,business per employee,establishment expenses per employee,profit per employee,net interest margin(diff betn interest income and interest expenditure),non interest income as percentage of total income,net and gross NPAs,CAPITAL Adequacy,CD ratios--

Bank management-1

Guidelines for new private banks include min NW of Rs 300 cr,capital adequacy ratio of 12.NPAs less than 5 pc Triple A credit rating,and should not have defaulted in public liabilities-banks/FI invstmt not more than 5 pc-HQ anywhere,min promoters holding in capital 40 pc for wich lock in period of 5 yrs from date of licensing,corporastes upto 10 pc of capital,srams length with these corporates,above 40 pc holding to be diluted in one yr,preference to promoters with experience in PS lending,meet all PS and prudential norms 25 pc branches in rural-semi urban centres,NRI stake upto 40 pc foreign co-promoters equity in case of technical collaboration restricted to 20 pc within the overall ceiling of 40 pc to NRIsaggregate foreign invst not more than 74 pc FDIplus NRI nplus plus FDIPercent of SB and CA in 2009-10 33.2%-Concept of CD ratio-half of incremental deposits from CA and SB-calculation of interest on daily basis for SB from April 2010-

Bank management-1

CD Ratio-credit growth could often outstrip deposit growth-in early 2011 RBI noticed that the incremental CD Ratio was more than 100 pc in caser of SBI,,ICICI,HDFC,Andhra and Kotak Mahindra banks-if the ratio is more than 100 % it means that banks have lent more money during that period than their deposits- --in such a scenario RBI is worried that banks may be borrowing from the repo window(overnight refinance facility provided by RBI) and call money market to fuerl growth-gap between deposits and deposits perodically to be analysed-for every Rs 100 taken as deposits Rs 30 goes for reserve allocation,ie Rs 24 in govt securities and Rs 6 as CRRso the ideal CD Ratio is between 65 and 75 pc borrowing from repo window permits banks presently to borrow at lower rate say 6.5 pc and lend at higher rates to improve net interest margins-