bank management 1

7/28/2019 Bank Management 1

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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 Britishsystem 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 dominatedby Unit banks-active inter bank market in US-


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Bank management-1

Factors affecting banking systemdeposits-retail loans-tradediscounts-bill finance-200 BC Babylonians had a rudimentary

banking practice-In Ancient Greece and Rome-Manu on creditgiving-in Rome for ex some banks carried on business on theirown while govt appointed banks to collect taxes-people used

to settle accounts with creditors by giving a cheque-evendrafts in rudimentary form called Attributio-There were alsoloan banks-from these banks the poor citizens received loanswith out paying interest-they lent money for 3-4 years on thesecurity of land-mostly in private hands-The Bank of Venice

established in 1157 perhaps the most ancient bank-it was anoffice for transfer of public debt-Monte in Florence in 1336-As early as 1349 banking business carried on by drapers ofBarcelona-the Drapers were not allowed to commence

banking till they had given sufficient security-


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Bank management-1

During 1401 public bank established in Barcelona-used toexchange money,receive deposits and discount bills ofexchange 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 entaileddepositor to with draw deposits with in 6 months-these writtenorders evolved into modern cheques-Safe custody in England-issue 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 andunder the care of the govt-Charles 2 shut up this exchequer-first bank failure-goldsmiths ruined-Then came Bank ofEngland in 1694-


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Bank management-1

Branch vs Unit Banking System-the unit and branch bankingsystems evolved around the central banking system whichconsists of the central bank,commercial banks and otherfinancial 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 mayhave branches in a strictly limited area-A third of bankingoffices in US are unit banks-their presence is a result of law-

practical earlier due to limited transportation facilities-givingway to branch banking-unit banks held together by a

correspondent banking system-correspondent bank acts as amedium for remittance between one bank and another-it alsofacilitates consultation in lending risks and loan sharingUnit banking concentrated between Mississippi and Rockies inUSA-


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Bank management-1

In branch banking system a typical commercial bank is a largeinstitution having large no of branches-branches are controlledfrom one location referred as HO-eastern side of USA-66137

branches in India-banking in a majority of developed countriespatterned after British Banking System-second banking was

organised along national lines-principles were universalhowever-advantage of unit banking is local adaptability-alsoAgri,MSME unit finance-local resources put to use locally-

branch banking facilitates allocationn or transfer of savings totheir most efficient use,division of labour,provision of

remittance facilities,spread of risks etc-branch bankingfacilitates allocation or transfer of savings to their mostefficient use irrespective of origin-interest rates based on risk

perception and policy-uniform-loans purely on viabilitycriterion-management of reserves more


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Bank Management-1

Absence of delegation in branch banking-HO centric-

RETAIL VS WHOLESALE BANKING-retail banking ismobilisation of deposits from individuals and lending too-wholesale banking refers to large customers-large value

banking-inter bank is wholesaleprimary or retail banking in60 s in UK conducted by clearing houses-households andmedium sized firms-in wholesale banking mix of domestic andforeign currency accounts accounting for more than half of allassets and liabilities-second size of deposits and advanceslarge and cheap to process-nature of advances tailor made to

each financing problem with definite period at variable interestrate-two systems separated by practices and regulatorycontrols-interbank markets in domestic and foreign currencymarkets,-


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Bank management-1

Other features of wholesale banking are issue of CDin domestic currency and FC- lending by Term loansanother feature-liquidity distribution theory states thatwholesale banks are pure brokers or distributors of

liquid assets-As producers of liquidityfinancialinstitutions use factors of production to transformprimary securities into technically different products-in wholesale banking brokerage function is dominant-wholesale banks balance or match the maturity of

their assets and liabilities obviating the need forreserves-production of liquidity includingtransformation of short term funds into long term

borrowing-


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Bank management-1

A Universal bank offers a wide variety of financial servicesbeyond the strict traditional boundaries of a commercial bank-core business is deposit taking and lending-financial servicessupermarket-combination of commercial and investment

banking besides other activities including sale of MF andinsurance products-most banks are universal ones-Glass-Steagall Act in USA-severe restrictions-scrapped-so moreM&As in this field paving way to universal banking-increasein efficiency-lower cost ,higher output and better products-as

growth increases any fall will have ripple effects-monopolylikely-is there capacity in the bank to deal with new risks?soneed of risk managemt more in universal banking-


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Bank management-1

Indian Banking System-Indian joint stock banks importantconstituent of Indian Financial system-any co which acceptsfor the purpose of lending or investment deposits of moneyfrom the public repayable on demand or otherwise andwithdrawable by cheque,draft or otherwise-

Scheduled and non scheduled banks as per RBI-secondschedule of RBI Act,1934-compromise commercial

banks,RRBs,UCBs and State Co-op banks-scheduled banksinto commercial banks and co-op banks-com banks intoPSBs,pvt sector,foreign banks and RRBs-PSBs again into SBI

and associates and nationalised Bank,old pvt sector and newgeneration pvt sector- the scbs,dcbs,pacs-State co-op agri andrural devpmt banks and primary agri depmt banks-


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Bank management-1

Branch banking-only one CB office for every 73000 people inIndia in 1967-unevenness in spread-corrected afternationalisation-Imperial Bank into SBI in 1955-to open moremetro branches minimum rural presence mandated-New

branch licensing policy in 1978-expansion of banking indeficit areas and reduction of inter district disparities-Dantwalacommittee,James Raj Committee and Kamath Working group-more freedom to open branches-In DEC 1995 new norms for

branch opening-3 yr profitabilty record and NPA below 15 pc-

population served per branch declined 64000 at nationalisaionto 15000 in 2002-rural branches 49 %-lead bank scheme-newgeneration banks-bank mergers and amalgamations-New Bankof India with PNB-for ex-


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Bank management-1

Central Bank-1894-Bank of Englands first version-banks of issue-afterfirst world war chaotic monetary conditions-Brussels Financial Conference1920-in 1900 only 18 central banks ,now 172-unique place in economicmap-

Varying functions-state owned and state controlled Bank of England toFederal Reserve owned by member banks and coordinated by Federal

Reserve Board- Acting as bank of issuecontroller of currency-bankersbank,lender of last

resort,Agent,advisor and banker to the Govt-custodian of nations metallicreserves-monopoly of note issue-exchange transactions-rules with regard toimports,exports,remittances,convertibility-external value of currency-

Instrmts of monetary policy include bank rate policy,open market

operations,Variable Reserve system,selective credit control,creditrationing,moral suasion,and Direct Action-

Monetary policy-control of banks-audit-


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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 BankingSupervision,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 andcomputer services,Dept of Paymt and Settlemt

System-


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Bank management-1

Commercial banking-the functions of commercial banksinclude-retail and wholesale deposits and advances-demanddeposits and term deposits-so a broker and dealer in money-

by discounting bills bank converts future claims into money-also forex transactions like

imports,exports,remittance,custodial and advisory services, -colletion/discount of NIs.,remittances,ancillary services etc-

Agency services-CB provides range of invstmt services-subscription,premia,other remittances-executor and trusteedeptgeneral utility servises-issue of credit instruments

likeL/C,S,t/Cs,acceptance of bills of exchange,safe custody ofvaluables and dicuments,transaction of forex business,actingas a referee as to the respectability and financial standing ofcustomers,providing advisory services etc-


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Bank management

ALM-Narasimham committee recommended riskmanagement practices-intense competition in bothasset and liability markets-has brought pressure onmanagements for spread management--volatality in

domestic and FX int rates - ALM to be supportedby a risk mgmt philosophyinformation is the key toALM process-The ALM process mainly addressesliquidity and interest rate risks-considering the largenetwork of branches-first implemented by banks in

1999-managent of the structure of assets andliabilities-idea is to increase the net earnings with inoverall risk preference-


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Bank management

Scope of ALM- ALM functions extend to liquidity riskmanagement,management of market risk,trading risk management ,fundingand capital planning and growth projection-

Residual maturity is the time period which a particular asset or liability willstill take to mature that is become due for payment-

Maturity buckets are different time intervals say 2-7 b days,8-14 days,15-28 days,29-90 days,91-180 days,181-365 days,1-3 years,3-5 years andabove 5 years in which depending upon its residual maturity-

Mismatch position-When in a particular maturity bucket the amount ofmaturing liabilities or assts does not match we have a mismatch position-this creates a liquidity surplus or liquidity crunch position and dependingupon 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 ,2-7days,8-14 days and 15-25 days buckets should not exceed5%,10%,,15%,and 20% respectively of the cumulative cash out flow forthe respective buckets


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Bank management

The investments in SLR securtities assumed to be illiquid dueto lack of depth in secondary markets-within each time bucketthere could be mismatches- these upto one year would berelevant since these provide early earning signals of impending

liquidity problems-the main focus should be on short termmismatches namely 1-14 days and 15-28 days-banks arehowever 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 1-14 days and 15-28 days in normal course may not exceed 20%of the cash outflows in each time bucket-


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Bank management

The statement of structural liquidity must be prepared byplacing all cash inflows and outflows in the maturity ladderaccording to the expected timing of cash flows-a maturingliability will be a cash outflow while a maturing asset will be a

cash inflow-rupee inflows and outflows on account of forexoperations also needs to be factored in-while determining thelikely cash inflows or outflows a number of assumptions aremade by the banks-for example Indian banks with large branchnetwork can afford to have large tolerance limits in

mismatches in the long term if term deposit component ishigh-assumption here is rollover of deposits-currency riskmanagemt is one aspect of A&L-the calculation of exchange

position


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Bank management

Currency risks-floating exchange rates-hence volatility-managing currency risk is one aspect of A&L.ever since RBIintroduced 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 calculationof exchange position has been redefined and banks givendiscretion to set up overnight limits linked to maintenance ofcapital as say 8-9 % of open position limit-presently banmksare free to set up gap limits with RBIs approval but are

required to adopt Value at Risk to measure the risk associatedwith forward exposures-thus the open position limits togetherwith the gap limits form the risk management approach toforex risk operations-


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Bank management

Gap analysis is the simplest analytical for calculating interestrate riskas explained here interest rate sensitiveassets,liabilities and off balance sheet positions are distributedinto a certain number of pre defined time bands according to

their maturity(fixed rate)or time remaining for their nextrepricing(floating rate)-the periodic gap analysis indicates theinterest rate risk exposure of banks over distinct maturities andsuggests magnitude of policy changes needed to alter the risk

profile-

Duration Gap Analysis-matching the duration of assets andliabilities instead of matching the maturity of repricingmethods is the most effective way to protect ECONOMICVALUE of banks from exposure to interest rate risks -


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Bank management

DURATION GAP MODEL focusses on managing economic vale of banksby recognising the change in the market value of assets,liabilities and offbalance sheet items-diration is a measure of the percentage change in theeconomic value opf a position that will occur given a small change ininterest rates-the attraction of duration analysis is that it provides acomprehensive measure of interest rate risk for the total portfolio-

SIMULATION METHOD-simulation technique attempts to overcome thelimitations of gap analysis and duration gap methods by computermodelling of the banks interest rate sensitivity-such modelling involvesmaking assumptionsabout future path of interest changes,shape of yieldcurve,changes in business activity,pricing ang hedging strategies etc-involves detailed analysis of various components of on and off balance

sheet positions-value at risk is simulated-


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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 low-avoids A&L problem by tying up cheap lines

of credit-still baggage of huge NPAs fiorced

many of them to convetrt into commercialbanks-


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Bank management-1

Organisational structure-co-op banks can be divided into ruralco-op banks and primary urban co-op banks-rural co-op bankshave a short term structure and a long term structure-undershort term pac DCB and SCBs-under long term SCARDB and

SCARDB at apex level-PACs-RIDF-Role of NABARD- Developmt Banking-term lending-IDBI-SFCs-SIDBI-

declining role-committee on banking sector reformsS HKhan-transitional path for DFIs to become banks-/NBFC-delink supervision from refinance-ownership of FI to

transferred to GOI from RBI-corporate structure-mergersbetween banks and FIs-function specific regulatoryframework-focus on off site supervision-move to universal

banking-meet prudential norms-BFS to look into supervision-


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Banking-1

Provide long term project finance including finance for infrastructure-

NABARD-apex bank for agri credit disbursement-functions include creditplanning,preparation of state focus group,monitoring the flow of groundlevel credit-issuing policy and operational guidelines ro rural financeinstitutions-

Promotion and Developmt-institutional devpmt and clientorganisations,capacity building in partner institutions,supportingexperimentation with new devpmt models and practices in creditdelivery,innovative product development,R&D support,Assisting RBI/GOIin policies relating to rural credit,promotion of rural non farm sector etc-Under Financial Services it refinances RFIsenables them tyo lend-,loansto state governments for strengthening of co-operatives and also developing

infrastructure in rural asreas,support of micro credit innovations of NGOsand others ,monitoring of loansalso inspects SCBs DSCBs,RRBs,SCARDBS,Apex Weavers Societies etc-


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Banking-1

EXIM BANK- Export Import Bank of IndiaDealtseparately-

NHB-NHB Act 1987to directions to HFCs toensure growthb along sound vlines.,make loans and

advances to CBs and HFCsestablished under any actof parliament or state legislature-cost effectivehousing-channelising resources,augmentation ofsupply of builable land,to encourage public agenciesto emerge as facilitators and suppliers of servicedland for housing-Has Developmental,Financing andRegulatory and supervisory roles-training-refinanceto HFCs and Banks-regulation-


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Banking-1

Housing and Urban Development Corporation Ltd-HUDCO-set up in 1970-provides loans to public institutions,Viz-StateHousing Boards,Co-operative Societies etc-

HDFC-Housing Development Finance Corporation-demand

for housing-the housing industry is the second largestemployment generator in the country-It is estimated that the

budgeted 2 million units would lead to the creation of anadditional 10 million man years of direct employment andanother 15 million indirect man power employmentoriginal

share capital Rs 100 Million-Enhance residential stock-increase flow of ownership-privately owned-now merged withHDFC Bank-Rumoured to get merged with HDFC bank-


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Banking-1

IDBI-Largest DFI-10 th largest in the world-in 1964 fully owned subsidiary of RBI-Vested with theresponsibility of co-ordinating the working of institutions engaged in financing,promoting,and developingindustries-undertakes/supports wide ranging promotional activities wide ranging promotional activitiesincluding entrepreneurial development,consultancy for SMEs and technology upgradation programmes forlarge scale industries-

Role as a catalyst-can finance all types of industrial concerns covered under IDBI Act-PromotionL/,technical consultancy and entrepreneur devpmt-

IFCI-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 Labourstudies etc

Industrial Investment Bank of Indiua-

ICI

IDFC-

PFC-

LIC

ICICI-Now merged wioth ICICI Bank=- SIDBI-

UTI


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Bank management-1

NBFCs-heterogeneous in activity and size-5100 NBFCs in1996-deposits 7.1 pc of household savings in one study-lowertransaction costs,quick decision making-rate of return ondeposits high-eqpmt leasing,HP Housing Finance,Consumerfinance etc-Aasw per RBI is a co,principal business of

receiving deposits and lending-excludes FIs- and a coprincipally into agri lendig-can be an eqpmt leasing co,HPco,HFC,IC,Loan co,Mutual Benefit co or nidhi ormiscellaneous non banking coor a residuary NBFC-Mutual

bBenefit Finance cos exempt from most provisions-since 1996RBI has imposed a ceiling of 15 pc on int rates and prohibitedads in any form-cannot pay any brokerage for solicitingdeposits-NBFC deposit rates were freed in Aug 1996-ceilingdoes not apply unless MBFC s havepositive net owned funds-

NOF to deposit ratio of 1:20-


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Bank management-1

Types of NBFC-NBFC pure-in terms of sec 45-1(f) of RBIAct 1934-receiving deposits and lending-

Eqpmt leasing Co-self explanatory-

HP-Hire purchase-self explanatory-

Investmt Co-IC-Acquisition of securities and trading in suchsecurities to earn a profit-

Loan Co-LC-providing Finance by making loans or advances-for activities other than their own-excludes,EL/HP/HFCs-

Mutual benefit financial co-ie-Nidhi-(MBFC)-means any co

notified by Central govt under sec 620A of Companies Act- Misc NBFC-ie-chit fund comanaging,conducting or

supervising as a promoter/agent in any transaction-co entersinto no of subscriber transactions -


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Bank managemt-1

Each subscriber shall in turn get allotment as determined byauction or by tender as provided in agrmt-thus entitling prizeamt-

Residuary non banking co-(RNBC)co which receives depositsundert any scheme or arrangement in one lump sum or in

instalmens by contribution/subscription/sale ofunits/certificates/insrmts in any manner-do not belong to anyfour earlier-

Non Banking non financial co-industrial concern as definedunder 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

supervision-

Capital adequacy by 1998-min cap ratio in tier1 and 2-


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Bank management-1

Among recent regulatory initiatives are prescription of minlevel of NOFs,maintenance of liquid assets,creation of reservefunds and tranfer thereto a certain % of profits-also creditrating,capital adequacy,income recognition,assetclassification,provision for BDD,Exposure normss all for

purposes of financial solvency and reporting-NBFCs mainlyclassified into those accepting public deposits,those that do not

but are engaged in financial business,and core investmt coswhich hold at least 90 pc of their assets as invstmts ingroup/subsidiary cos-CRAR as high as 15 pc,exposurenorms,ceiling in real estate/unquoted shares-those NBFCs notaccepting public deposits and holding investmts to the extentof 90 pc or more of their securities issued by their groupexempted grom most regulations except registration andcreation of reserve fund-


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Bank management-1

Residuary NBFC-upto 80 pc in prescribed investmt pattern-tobe entrusted to a PSB-to pay 6 pc interest minimum on dailydeposit schemes-other provisions like min and max period ofdeposits-prohibition from forfeiture of any part ofdeposits,disclosure reqmts in application form and

advertisemts,periodical returns to RBI-mutual benefit co-regulsated by RBI-By DCA in operational matters-Min Rs 25lacs NOF-regn certificate from RBI--Chit Fund cos and ChitFunds Act 1982-upto 25 pc of NOF from public and 15 pcfrom shareholders-that is the limit on deposits for chit fundcos-

Nationalisation and social responsibility of Banks-prioritysector-40 pc of DTL--more branches in rural areas-lead bankscheme-sub targets for areas like agriculture-


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Bank management

Bank wise and branchwise profitabilitymeasured by return on assets,interest ratespread,business per branch,operating expense

per branch,profit per branch,business peremployee,establishment expenses peremployee,profit per employee,net interestmargin(diff betn interest income and interest

expenditure),non interest income as percentageof total income,net and gross NPAs,CAPITALAdequacy,CD ratios--


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Bank management-1

Guidelines for new private banks include min NW of Rs 300 cr,capitaladequacy ratio of 12.NPAs less than 5 pc Triple A credit rating,and shouldnot 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 ofcapital,srams length with these corporates,above 40 pc holding to be diluted

in one yr,preference to promoters with experience in PS lending,meet allPS and prudential norms 25 pc branches in rural-semi urban centres,NRIstake upto 40 pc foreign co-promoters equity in case of technicalcollaboration restricted to 20 pc within the overall ceiling of 40 pc to NRIs-aggregate foreign invst not more than 74 pc FDIplus NRI nplus plus FDI-

Percent of SB and CA in 2009-10 33.2%-Concept of CD ratio-half ofincremental deposits from CA and SB-calculation of interest on daily basisfor SB from April 2010-


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Bank management-1

CD Ratio-credit growth could often outstrip deposit growth-inearly 2011 RBI noticed that the incremental CD Ratio wasmore than 100 pc in caser of SBI,,ICICI,HDFC,Andhra andKotak Mahindra banks-if the ratio is more than 100 % itmeans that banks have lent more money during that period

than their deposits- --in such a scenario RBI is worried thatbanks may be borrowing from the repo window(overnightrefinance facility provided by RBI) and call money market tofuerl growth-gap between deposits and deposits perodically to

be analysed-for every Rs 100 taken as deposits Rs 30 goes forreserve allocation,ie Rs 24 in govt securities and Rs 6 asCRRso the ideal CD Ratio is between 65 and 75 pc

borrowing from repo window permits banks presently toborrow at lower rate say 6.5 pc and lend at higher rates toimprove net interest margins-

bank management 1

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