banking business - consol - 09-apr-08

8/14/2019 Banking Business - Consol - 09-Apr-08

http://slidepdf.com/reader/full/banking-business-consol-09-apr-08 1/51

ABN AMRO School of Knowledge

Internal Learning Programme

Banking Business

For Internal Use only



Session – 1

Busines of Banking

&Types & Constitution of Banks



3

Contents

1. Definition of Banking Business.

2. Permitted & Prohibited Business under Banking.

3. Types of Banks & constitution of Banks

4. Reserve Bank of India Act 1934.

5. Banking Regulation Act 1949.



4

Definition of Banking Business

Acceptance of deposits of money from the public for the purpose of lending or investment.

Involves two basic functions (a) acceptance of deposits (b) lending or investments of such

deposits.

The deposits are repayable on demand or at an agreed time frame.

Banks can accept ‘deposits of money’ and not anything else for lending & investments.

Acceptance of deposits by Non Banking Financial Companies is not Banking and is

regulated by RBI.

Acceptance of deposits by other companies is not Banking and is regulated under the

Companies Act under the Companies (Acceptance of Deposit) Rules.

Individuals, firms & unincorporated associations are prohibited from accepting deposits by

the RBI.



5

Permitted Business under Banking

Borrowing, raising or accepting money/deposits.Lending money with or without security.

Dealing in bills of exchange, promissory notes, bills of lading.

Granting & issuing Letter of Credits, travelers cheques.

Dealing in bullion and foreign exchange.

Purchasing & selling of bonds, scrip's & securities on behalf of others.

Negotiating of loans & advances.

Acting as agent of the Government.

Merchant Banking operations.

Transact Guarantee & Indemnity business.

Execute trusts, undertake administration of estates.

Deal in property as security for advances.

Lease financing & factoring.



6

Prohibited business under Banking

Engaging directly or indirectly in trading activities and undertaking trading risks.

Buying or selling of goods directly or indirectly.

Bartering of goods directly or indirectly.

Holding property beyond seven years except as is required for its own use.



7

Types of Banks & constitution of Banks

Banks in India fall under one of the following categories

Body corporate constituted under special statutes.

Companies registered under the companies ACT 1956 or Foreign Companies.

Co-operative Societies registered under the Co-operative Societies Act.

State Bank of India constituted under State Bank of India Act 1955.

State Bank of India subsidiaries constituted under State Bank (Subsidiary Bank) Act 1959.

All Nationalized Banks constituted under The Banking Companies (Acquisition & Transfer

of Undertaking) Act, 1970 &1980.

Regional Rural Banks constituted under the Regional Rural Banks Act 1974..

All private Sector Banks registered under the Companies Act 1956.

All foreign banks incorporated outside India.

Co-operative Banks registered under the Central Act, Multi-Units State Co-operative

Societies Act.

Co-operative Banks registered under the State Co-operative Societies Act.



8

Reserve Bank of India Act, 1934

Created to constitute the Reserve Bank of India.

Regulates issue of Bank notes.

Keeps & maintains reserves including foreign exchange for securing monetary stability.

Operates currency & credit systems through monetary controls, cash reserves, bank rate.

Banker to Government.

Acts as lender of last resort.

Regulates acceptance of deposits by NBFC’s.

Financial supervision of Banks and financial institutions.

Collection & furnishing of credit information.

General provisions regarding audit & accounts.

RBI Act, 1934 Does not directly deal with the regulation of Banking system but plays the

role of a regulator.



9

Banking Regulation Act, 1949

Enacted to regulate Banking Companies.

The Act is applicable to Banking companies including Co-operative Banks in addition to

other applicable laws.

Regulates entry into Banking business by licensing.

Issues guidelines for shareholding, directorship and voting rights.

Issues guidelines regarding loans & advances, interest rates, maintenance of assets,

selective credit control.

Issues guidelines regarding audit, inspection and submission of Balance Sheet & other

financials.

Suspension & winding up of banking business.



Session - 2

Licensing & Management of Banks



11

Contents

1. Licensing Requirements for establishing a Bank

2. Branch Licensing

3. Capital Requirements

4. Tier I & Tier II Capital

5. Shareholding & Voting Rights

6. Board of Directors



12

Licensing Requirements

• Introduced under Section 22 of the Banking Regulation Act. 1949

• All Banks in existence at that point in time were given six months to apply for licenses.

• Licensing was introduced to ensure continuance of only those Banks which were established

and operating on sound lines.

Banking License is granted by RBI after tests of entry are fulfilled.

• Will the company be able to repay its present & future depositors.

• Whether the company is being managed on sound & ethical lines..

• Will the proposed management be detrimental to the interest of depositors.

•Whether the company has enough capital structure and earning prospects & the source of

capital funding.

• What is the business mix & the geographical area to be serviced.

• In case of foreign companies

- whether Indian Banking companies are being discriminated in any way in the home

country of the foreign company seeking license in India.

- Consent of the home country regulator.



13

Branch Licensing

• Introduced under Section 23 of the Banking Regulation Act. 1949• Branch or Place of Business includes any office where deposits are received, cheques

cashed or money’s lent. ATM’s are also treated as Branches

• License are granted mainly based on geographical coverage, economic viability and logistic

support available.

• Relocation, merger or closure of branches in urban areas needs only intimation to RBI.

• Closure of branches in rural areas requires specific permission from RBI.

• Opening of Branches at overseas locations requires specific RBI permission.

• Opening a temporary place of business for up to one month is exempt from RBI permission.

• Specific RBI permission is required for providing foreign exchange services from any Branch.

• Registration with SEBI is required for undertaking capital market activities.

• Bank branches are required to obtain license under the Shops & Establishment Act also

before commencing Branch operations.



14

Capital Requirements

•Minimum Paid-Up Capital & Reserves Requirement

• For Banking Companies Incorporated in India

• Multi State Banks INR 500,000

• Multi State Bank with place of business in Mumbai and/or Calcutta INR 1,000,000

• Bank with operations in one state only but no place of business in

Mumbai or Calcutta

INR 100,000

• Bank with operations in one state only but place of business inMumbai or Calcutta

INR 500,000

• For Banking Companies Incorporated outside India

• No Place of business in Mumbai or Calcutta INR 1,500,000

• Place of business in Mumbai or Calcutta INR 2,000,000

• New Banks• New Private Sector Banks INR 200 Crores

• Foreign Bank USD 50 Mn

• The authorised capital of each public sector Bank cannot be less than INR 1500 Crores



15

Tier I & Tier II Capital

• The actual capital requirement depends on the size of business.

• The present Capital Adequacy ratio is 8% comprising of Tier I & Tier II Capital

• Tier I Capital

• Paid-up capital, statutory reserves & other disclosed free reserves

• Capital reserves – arising out of sale of capital assets

• Tier II Capital

• Undisclosed reserves & preference shares

• Revaluation reserves – at a discount of 55%

• General Provisions & Loss Reserve – upto a maximum of 1.25% of RWA• Hybrid Debt Capital Instruments – fixed maturity – does not trigger liquidation

• Subordinated Debts – unsecured – subordinated to the claims of other creditors – not

redeemable without RBI permission – only upto 50% of Tier I Capital – initial maturity

more that 5 years – remaining maturity more than 1 year.



16

Shareholding & Voting Rights

• Shareholding in Banks

• Banks are allowed to issue there shares to the Indian public without any ceiling.

- Carrying on banking business exclusively outside India

• Foreign investors are allowed to hold only upto 10% of Paid–up capital in Indian

Commercial Banks.

• Shareholding by Banks

• Allowed to form subsidiaries with 100% holding, but only for

- Carrying on Banking Business

• Allowed to hold shares in other companies subject to a maximum of

- 30% of paid up capital of the ‘other’ company

- 30% of its own paid up capital

• Voting Rights

• One vote for every share subject to maximum of 10% of total voting rights.

• One vote for every share holder in case of Co-operative Banks.

• No restriction applicable on voting rights of the Govt. of India in Public Sector Banks.

• Holding of shares in any company where the Managing Director or Manger is

interested is prohibited.



17

Board of Directors

Whole Time Directors

• A Whole Time Directors can hold office only for a period of 5 years at one time.

• This term can be extended for periods not exceeding 5 years on each occasions.

• Cannot engage in any business and vocation.

• Cannot be a director in any other company other than subsidiaries or companies created for

promotion of arts, commerce, charity.

• Are not entitled to any commission or share in profits of the Banking Company.

• At least 51% of all Directors should have professional experience in fields like accountancy,

agriculture, rural economy, law etc.

• Of these 51%, At least two Directors should have specialized knowledge in agriculture, or small

scale industry or rural economy.

• None of these 51% Directors should be holding more than 10% in any company either singly or

jointly through family members.

• A person cannot be on the Board of two Banking companies simultaneously.

• A Banking company cannot have more than 3 persons on its Boards who are directors in other

companies who can jointly exercising more than 20% voting rights.

Part Time Directors

• Cannot hold office for consecutive periods exceeding 8 years.



Session - 3

Regulations on Reserves & Priority Sector



19

Contents

1. Reserve Funds

2. Maintenance of Cash Reserves

3. Maintenance of Liquid Assets

4. Maintenance of Assets in India

5. Priority Sector Lending



20

Reserve Funds

• Reserve Funds are a means of regulating lending activity of Banks to ensure safety andtimely return of depositors money.

• Every Banking Company incorporated in India has to create a reserve fund.

• Every year 20% of the profits before dividend payout is to be transferred to a reserve fund.

• Exemption can be given by RBI to Banks which have adequate paid-up capital & reserves in

relation to its deposit liabilities.

• Any appropriation from reserve fund is to be reported to RBI within 21 days.

Foreign Banks

• Every year 20% of the profits is to be deposited with RBI.

• For such exemptions, the balance already in the reserve fund and the share premium account

should be more than the paid-up capital.

Banks Incorporated in India

• Exemption can be given by Central Govt. on RBI recommendation to Banks which have

adequate paid-up capital & reserves in relation to its deposit liabilities.



21

Maintenance of Cash Reserves

• Every Scheduled Bank has to Maintain an average daily Cash Reserve with RBI.

• Also known as the Cash Reserve Ratio or CRR.

• At present the CRR to be maintained is 7.5% of the aggregate demand & time liabilities.

• The CRR can be increase by RBI upto 20% of the total demand & time liabilities.

• No interest is payable on any excess CRR maintained with RBI..

• A return has to be submitted by all scheduled Banks to RBI within 7 days of each alternate Friday.

.

• The Banks receive interest at the rate of 6% from RBI.

• Penal interest of 3% to 5% above Bank rate is payable to RBI on any shortfall in CRR.

• Non Scheduled Banks need not maintain CRR at 30% of demand & time liabilities.

• The CRR need not be maintained with RBI, it can be with the Bank itself.

• A return needs to be filed with RBI before 20th of every month showing amount so held every

alternate Friday.

• Liabilities for calculating CRR would not include borrowings from NABARD, RRB, RBI, EXIM

Bank & other banks except state co-op banks



22

Maintenance of Liquid Assets

• Every Banking company has to maintain in India, 20% of daily demand & time liabilities

in liquid assets.

• Liquid assets includes Cash, Gold or unencumbered approved securities.

• Balance maintained with RBI, SBI & other banks notified by central Govt. is treated as cash

maintained in India.

• CRR maintained with RBI is also treated a Cash maintained in India.

• Capital & reserves of Foreign Banks with RBI is also treated as Cash maintained in India.

• Securities are valued at current market price.

• Every Banking company has to maintain in India, 25% of daily demand & time liabilities

in India in liquid assets. This can be raised to 40% by RBI.

• A monthly return within 20 days of the end of month is submitted to RBI showing amount so held

every alternate Friday.

• Penal interest of 3% to 5% above Bank rate is payable to RBI on any shortfall.

• Also known as Statutory Liquidity Ratio.



23

Maintenance of Assets in India

• Every Banking company has to maintain in India, assets worth 75% of demand & timeliabilities in India at the end of each quarter. .

• Liquid assets includes Cash, Gold or unencumbered approved securities.

• This is to ensure resources mobilised in India are largely invested in India.

• A return within 30 days of the end of the quarter is submitted to RBI showing amount so held.



24

Priority Sector Lending

• Those sectors which should receive priority in lending over other sectors as they are

important for development of the basic needs of the country.

• 18% of all advances to priority sector should go to the agricultural sector.

• 40% of all advances have to be made to the Priority Sector.

Foreign Banks

• 12% of all advances to priority sector should go towards export finance.

• 10% of all advances to priority sector should go to weaker sections.

Banks incorporated in India

• Any shortfall towards lending to SSI’s can be invested in bonds issued by SIDBI.

• 40% of all advances have to be made to the Priority Sector.

• 12% of all advances to priority sector should go towards SSI’s & export finance.

Priority sector includes

• Primary Sector – agriculture & allied activities.

• Tertiary Sector - small road & water supply operators, self employed & professionals,

education, housing, retail traders.

• Secondary Sector – SSI’s, Cottage industries, tiny industries, Small scale service &

business enterprises.



Session – 4

Generic Client Groups & Products



26

Contents

1. Major Generic Client Groups & products

3 Major Banking Products

- Bank Guarantees

- Letter of Credits

- Bill Finance

- Money Market Instruments

- Working Capital Facilities

- Cash Credits / OD’s

2. Fundamental Principles of Lending

- Term Loans

- Fixed Income Products



27

Major Generic Client Groups & Products

Personal Banking Business & Commercial Corporates & Institutions

• Savings / Deposit Accounts• Loans• Credit cards• Mortgages• Retirement planning• Foreign Exchange• Insurance

• Broking & Online trading

• Current Accounts• Cash Credits / Overdrafts • Term Loans• Bill Finance• Bank Guarantees • Letter of Credits• Money Market Instruments

• Foreign Exchange

Equity Capital Markets• Corporate Broking• Proprietary Trading• Derivative Products• Mergers & Acquisitions• Equity Research• Risk Advisory Services

Financial Markets• Fixed Income• Foreign Exchange• Structured Funding• FM Trading• SecuritizationPrivate Banking

• Banking Services• Investment advisory• Discretionary portfolio mgt• Estate planning•Trust

Transaction Banking

Private Equity

Asset Management



28

Fundamental Principles of Lending

• Since lending is one of the major activities of banks its fundamental principles are of utmost

importance.

Principles of Good Lending

• Safety - Since banks deal with money borrowed from depositors it has to be satisfied

that the advance is safe and will be recoverable in future.

• Liquidity - 70% of banks deposits are payable within a year. Hence lending should

ensure that money is not locked for a long period of time. It should be in line

with the repayment schedule.

• Profitability - Fair return on investment to cover administrative expenses and reasonable

profits is essential.

• Productive Purposes - Advances cannot be granted for non-productive or speculative purposes.

• Risk Diversification - Advances should be diversified across locations, industry, business houses

and borrowers.

• Security - Adequate security should be obtained against advances depending on the

risk perception. Against security adequate margin should also be kept.



29

Credit Facilities

• Types of Credit facilities

- Fund based credit facilities - Involves lending of money to the customer

- Non Fund based credit facilities - Does not involve lending of money to the

customer

• Fund Based facilities include

- Cash Credits / Overdrafts - A facility where a bank allows its customer to borrow upto a

certain limit on an account. The entire limit need not be drawnby the borrower at once and can draw it as and when in need.

- Bill Finance - Covered in the next slide(s)

- Term Loans - Facility granted to meet Capital Expenditure. The total amount

is granted at once and is repaid by the borrower over a long

period of time

• Non Fund Based facilities include

- Bank Guarantees - Covered in the next slide(s)

- Cash Credits - Covered in the next slide(s)



30

Bill Finance

• Bill Finance involves discounting or purchase of bills arising out of sale of goods.

• Bills Purchased - Bills payable on demand negotiated by the bank.

Categories of Bill Finance

• Bill Finance entitles the bank to the ownership of the instrument / bill.

• Bills can be clean or documentary. Clean Bills are not supported by documents of title to the

goods whereas Documentary Bills contain title to the goods.

• Bills Discounting - Bills payable after a period of time that is not on demand.

• Adv against Bills for Collection - Advance payment extended by banks against bills after keeping a

prescribed margin.

• Drawee Bills Acceptance - Bank makes payment against the bills to the drawer and is

reimbursed by the borrower with interest.

• Bills Co-acceptance facility - Bank accepts the bill along with the borrower thus undertaking

joint

liability for the payment to the drawer of the bill.



31

Bank Guarantees

• It’s a guarantee given by a bank to a third party to pay him a certain amount on behalf of a

customer on the failure of the customer to fulfill any contractual obligation.

. Types of Bank Guarantees

- Financial Guarantee - issued as a proxy to Earnest Money Deposit requirements in

contractual works.

- Performance Guarantee - issued as a guarantee that the customer will perform as per the

conditions stipulated in in the contract.

- Deferred Payment Guarantee - issued as a guarantee towards payment of instalments over a

period of time

- Statutory Guarantees - issued to courts & other statutory bodies guaranteeing that the

customer will honour his commitments imposed under law

• Bank Guarantees are independent contract between the Bank & the Third Party and Bank’s

obligation to pay Primary i.e. not dependent any any dispute between the beneficiary & thecustomer.

• Every Bank Guarantees has a stipulated financial liability and a fixed period of validity & claim period.

• Under the Law of limitation a beneficiary can enforce the claim against the Bank within 30 years if it

is a Govt. Dept or within 3 years in other cases.



32

Letter of Credits

• Used mostly in foreign trade for effecting payment by bankers on behalf of its customer to

suppliers of goods & services on production of documents as stipulated in the LC.

• Any advance payment required is made by the bank to the seller.

• Buyer of goods & services gets credit till the documents reaches his bankers.

• Advantages of an LC to the buyer ( Bank’s customer)

• Usance bills are payable over a period of time giving additional credit to the buyer.

• The buyer can insist on quality inspection of goods before payment to supplier.

• Payment is assured on complying with LC terms.

• Receives immediate payment in his country post shipment of goods.

• Advantages of an LC to the seller ( Beneficiary of the LC)

• Seller need not bother about import regulations in buyers country.

• Seller need not bother about currency fluctuations. Contd….

• Also known as documentary credit and is governed by Uniform Customs & Practice for Documentary

Credits (UCPDC-500) released by the International Chamber of Commerce.



33

Letter of Credits …. Contd.

• Issuing Bank - The bank which opens the letter of credit

• Advising Bank - The bank in the sellers country through which the LC is advised to the seller

• Partner Banks in LC’s

• Negotiating Bank - The bank in the sellers country which makes payment on the bills drawn by seller.

• Confirming Bank - The advising bank which besides advising the credit to the beneficiary also takes the

responsibility of payment to.

Acceptance Credit - Immediate Payment on LC

• Types of LC’s

• Reimbursing Bank - The bank appointed by the issuing bank to make reimbursement to the Negotiatingor confirming Bank.

Usance Bills - Payment over a agreed period of

time.Revocable - Can be cancelled without notice Irrevocable - No cancellation without sellers consent

With Recourse - Seller remains liable to its bankfor payment by the buyer/ bank.

Without Recourse – No Liability of the seller to its bankfor payment by buyer / bank.

Anticipatory LC – Preshipment advance allowed

Revolving LC – Continual LC for regular trade.



34

Fixed Income

• Fixed income refers to any type of investment that yields a regular or fixed return.

• Refers largely to Bonds, Debentures & Preferred Stocks.

Types of Bonds by issuer

• Sovereign/Government Bonds

• Agency Bonds / Municipal Bonds

• Corporate Bonds - Senior Debt & Subordinated Debt

Types of Bonds by payout

• Fixed Rate Bonds - have a coupon that remains constant throughout the life of the bond

• Floating Rate Bonds - have a coupon that is linked to a money market index

• Zero Coupon Bond - do not pay any interest but trade at a substantial discount from par value

• Inflation Index Bond - in which the principal amount is indexed to inflation

• Accrual Bond – fixed interest bond issued at face value and repaid at maturity with accrued interest

• Convertible Bond - can be converted into shares of issuing company at some pre-announced ratio

• High Yield Debt Bond - are bonds that are rated below investment grade but come with a high coupon

• A Bond is a debt security, in which the issuer owes the holders a debt and is obliged to repay the

principal and interest (coupon) on maturity .

Contd….

Bonds



35

Fixed Income …,. Contd

• Preferred stocks are preference shares issued by companies.

• There is a preference over dividend payouts to these shareholders as compared to

Ordinary share holders.

• Often dividends not paid in any year is accumulated and paid when surplus is available.

• These may not always be referred as Fixed Income

• A Debenture is a long-term debt instrument used by governments and large companies to obtain funds .

• It is similar to a Bond except that a debenture is usually unsecured in the sense that there are no

pledges on specific assets

• It is however secured by all properties not otherwise pledged

• In the case of bankruptcy debenture holders are considered as general creditors.

Preferred Stock

Debentures



36

Money Market Instruments

• Money market is the global financial market for short-term borrowing and lending typically upto 13months.

• The money market consists of banks, financial institutions, trading companies, dealers in money or credit

• Is affected by liquidity / money supply in the market.

• The need to borrow money from the call money market arises due to short-term mismatches of funds.

• As a part of their operations, banks borrow money from their depositors and lend money to their borrowers. In this process, banks’ assets and liabilities get locked into different maturity brackets.

Common Money Market Instruments

• Certificate of Deposits - A time deposit at a bank with a specific maturity date. It is generally insured

hence risk free.

• Commercial Paper - An unsecured promissory notes issued by corporates with a fixed maturity of

one to 270 days issued ; usually sold at a discount from face value. • Inter-corporate Deposits - Unsecured loan issued by one corporate to another.

• Treasury Bills - Short-term debt obligations of a national government that are issued with

maturity of 3 to 12 months.

• Call Money - This market deals with overnight borrowing and lending among the banks.



Session – 5

New Age Banking Products



38

Contents

1. Derivatives

3. Securitisation

2. Foreign Exchange

4. Transaction Banking

5. Asset Management



39

Derivatives

• A product that is derived from the value of an underlying assets such as currency, commodities,

shares, bonds or any of the indices.

• These are contracts which aim to hedge against uncertain movements in prices of the underlying

assets.

Types of Derivatives

• Derivatives could be Over the Counter (OTC) - i.e. made to order on specific requirements.

Exchanged Traded (ETC) - i.e. standardized products traded on exchanges

• Forward Contracts - Is an OTC derivative involving fixation of rates in advance for deliveries in future.

- The seller agrees to deliver goods to the buyer on a future date at a fixed rate.

- The rate specified is known as forward rate and is at a premium or discount to

the spot rate.

- Since price is fixed today it eliminates risk of any adverse price movements.

- Delivery under forward contracts is essential.

- Margins are not necessary and are not marked to market every day.

• Futures - Is an ETC derivative involving an agreement to buy or sell an asset at a certain

price at certain time in future. Another version of Forward Contracts.

- Standardizes the minimum price movement for the contract.

- Delivery is not a must, the buyer and seller can set off at the current rate.

- Works on margin requirements and is marked to market every day.Contd….



40

Derivatives ……Contd.

• Options - Is an ETC derivative conveying the rights to buy or sell an agreed quantity, at an

agreed price without any obligation to do so.

- Involves a right to the option buyer to allow the option contract to lapse without

any obligation to buy or sell.

- The option buyer exercises this option on payment of a premium which is levied

upfront.

- The Option seller usually a bank or FI is under obligation to deliver the contract.

- Options conferring a right to buy at a fixed rate on or before a fixed date arecalled Call Options.

- Options conferring a right to sell at a fixed rate on or before a fixed date are

called Put Options.

• Swaps - It is an OTC derivative involving Currency Swaps or Interest Rate Swaps only.

- Involves simultaneous sale and purchase of one currency or interest stream for another.

- Currency Swaps involve exchange of pre-determined streams of payments in

different currencies on pre-determined dates, at pre-determined exchange

rates.

- Interest Rate Swaps involves exchange of different streams of interest structures

- There is no exchange of principal amounts.



42

Foreign Exchange ……Contd

Forward Margins – Premiums & Discounts

• If the forward rate of the currency is higher than the spot rate the currency is said to be at a premium

• If the forward rate of the currency is lower than the spot rate the currency is said to be at a discount

Fixed and Floating Rates

• Fixed rate is the official rate set by monetary authorities pegged to another currency. Fixed

exchange rates may be allowed to fluctuate within an upper and lower band.

• Floating rate is a function of demand and supply.

Factors affecting Forex rates

• Interest Rate is the single biggest factor affecting exchange rates

• Movement of Capital to Emerging Markets

• Balance of payment positions

• Monetary controls

Direct Quotes and Indirect Quotes

• Under direct quotes local currency is variable i.e. 1 USD = 45 INR

• Under Indirect quotes currencies are quoted against USD ;currently GBP, EUR, AUD & NZD only.



43

Securitisation

• Securitisation is the process of conversion of existing assets or future cash flows into marketable

securities.

• It deals with conversion of assets which are not marketable into marketable ones.

• The conversion of existing assets into marketable securities is known as asset-backed securitisation

• The conversion of future cash flows into marketable securities is known as future-flows securitisation.

• Some of the assets that can be securitised are loans like car loans, housing loans

• Some of the future cash flows that can be securitised are credit card payments, car rentals or any other

form of future receivables.

• Banks have a pool of assets where funds are locked.

• To free these blocked funds the assets are transferred by the originator to a Special Purpose Vehicle

(SPV)

•The SPV will act as an intermediary which divides the assets of the originator into marketable securities

• Only one type of asset (eg: auto loans) of similar maturity (eg: 20 to 24 months) will be bundled together for

creating the securitised instrument .

• These securities are issued by the SPV to investors and are known as pass-through-certificates (PTCs).

• The difference between rate of interest payable by the obligor and return promised to the investor investing

in PTCs is the servicing fee for the SPV



44

Transaction Banking

• Transaction Banking is a global payments, products and services business

• Core products include Cash & Payment, Cards, and Trade.

Cash & Payments Cards Trade

• Direct Debit Systems

•Subscriber Collections

•Chq & Cash Collections

•Electronic Payments

•Salary & Tax Payments

• Card Transactions

• Collections

• Handles Document Flow

• Payment handling for trade

• Collection & advance remittances



45

Asset Management

• Asset Management is the management of the financial assets in order to maximize return

• Forms of Asset Management

Portfolio Management

• Wealth Management

• Portfolio Management

Institutional Fund Mgt

• Pension Funds

Mutual Funds

• Equity Funds

- Diversified

- Mid Cap- Sector Specific

- Tax Saving

• Debt Funds

- Gilt Funds

- Income Funds

- Liquid Funds

• Balanced Funds

• A mutual fund is a professionally-managed firm of collective investments that collects money from

many investors and invests it in stocks, bonds, money market instruments, and/or other securities.

• Investment Managers conduct an assessment of each client's individual needs and risk profile

before recommending appropriate investments.

• Major objective of Asset Management is Long Term Returns and Risk Diversification.



Session – 6

New Age Banking Technology



47

New Age Banking Technology

• RTGS

- Stands for Real Time Gross Settlement

- A system through which electronic instructions can be given by banks to transfer funds from their

account to the account of another bank.

- The RTGS system is maintained and operated by the RBI- Funds transfer between banks takes place on a ‘real time’ basis

- . Money reaches the beneficiary in 2 hours

Electronic Clearing & Payment Systems

• MICR Clearing system

- Stands for Magnetic Ink Character Recognition.

- Details of cheques are encoded with special magnetic ink

- Information on city, bank, branch, type of account & amount is captured

• OCR Clearing system

- Stands for Optic Character recognition- Image of the cheque is captured and presented instead of physical cheque

- Used for low value high volume of cheques

Contd…..



48

New Age Banking Technology ….Contd.

• SWIFT

- Stands for Society for Worldwide Inter Bank Financial Telecommunications- SIWFT is a message transmission system wholly owned by its 200+ member banks

- All message formats standardised ; 400+ standardised formats are available

- SWIFT assumes financial liability for accuracy & timely delivery of all messages

• CHIPS

- Stands for Clearing House Inter Bank Payment System

- Is run by New York Clearing House for transfer of payments internationally

- Most international fund transfers happen through CHIPS as most international trade happens in USDs

- Settlement of payments carried through CHIPS is through Federal Reserve Bank

- Has direct interface with SWIFT system

• CHAPS

- Stands for Clearing House Automated Payment Systems

- Set up in the UK

• CHATS

- Stands for Clearing House Automated Transfer Systems

- Set up in Hong Kong



Session – 7

Risk Management



50

Risk Management

• Risk Management is a structured approach to managing uncertainty through risk assessment, developingstrategies to manage it, and mitigation of risk.

Types of Banking Risks

- Credit Risk - Risk due to uncertainty in a counterparty’s ability to meet obligations

- Liquidity Risk - Risk of Banks inability to ensure availability of funds to meet commitments

- Market Risk - Is the risk that the value of an investment will decrease due to moves in market

factors. The four standard market risk factors are:

Equity Risk - the risk that stock prices will change.

Interest Rate Risk, - the risk that interest rates will change.

Currency Risk - or the risk that foreign exchange rates will change.

Commodity Risk - the risk that commodity prices will change.

- Operational Risk - Risk due to failure of internal processes, people or systems

- Reputational Risk - Risk arising from negative public opinion

- Legal Risk - Risk of non compliance with applicable laws

Contd….



Risk Management …. Contd

BASEL II Framework for Risk Mitigation

• BASEL II as part of Basel Capital Accord is aimed at risk sensitive capital requirements.

• Takes into account Operational Risk of banks also.

Three Pillars of BASEL II Accord

• Minimum Capital Requirement

• Supervisory Review Process

• Market Discipline

Risk Weighted Assets & Capital Adequacy

• In terms of the minimum amount of capital that is required within banks and other institutions, based on a

percentage of the assets, weighted by risk.

• Risk-weighted assets is a move away from having a static requirement for capital. Instead, it is based on

the risks on a bank's assets.

• The Capital Adequacy Ratio is 8% of RWA

banking business - consol - 09-apr-08

Documents