BANKING AND INSURANCESession I

BASICS OF BANKING

The bfsi Landscape

WHAT IS A BANK?• A bank is an institution that provides financial

service, particularly taking deposits and extending credit

• Generally understood as an institution that holds a banking license

• Most importantly provide collection and clearing services

EVOLUTION OF BANKING

• Mid to late 1700s – General Bank of India• Early 1800s – Establishment of the Presidency Banks – Bank of Bengal,

Bank of Madras and Bank of Bombay• Mid to late 1800s – entry of European Banks – BNP and Credit Lyonnais• 1921 – Amalgamation of all Presidency Banks – birth of Imperial Bank

of India (later changed to State Bank of India)• Establishment of Reserve Bank of India – Apr 1, 1935 • Nationalization of banks – 1969 and 1980• 1994-95 – entry of new-age private sector banks• 1995 to date: banking transformation• 2000 to date: IT as a change catalyst

INDIA

THE INTERMEDIARY ROLEEconomy

Surplus DeficitBANKING

• Households• Businesses• Insurance

Companies• Mutual Funds

• Households• Businesses• _ _ _ _ _ _ _ _ _ _

Channelising Funds

THE TRANSFORMATIONAL ROLE

Key Requirements• Safety & Security• Growth• Liquidity

Key Requirements• Time/Schedule• Risk

Transforming Needs & Profile

Economy

Surplus DeficitBANKING

THE TRANSACTIONAL ROLE• Banks move money• They help complete transactions• They act as agents• They provide other services that enable

transactions

Importer / Buyer(USA-based)

Exporter / Seller(India-based)

Quantity/Quality Payment/Timeliness

BANKING

Move money and complete transactions

THE STABILIZING ROLE

• Provide stability to an economy’s financial system

• Stability achieved by identifying and managing risks

OTHER ROLES

• Guarantor Role• Advisor Role• Custodian Role• Policy Role

Not all roles are played by all banks – there are many different types of banks – some perform all roles, while others focus on a few of these roles

TYPES OF BANKS IN INDIA

Public Sector Banks

Foreign Banks

Regional RuralBanks

Private SectorBanks

• Predominantly Government of India owned

• Limited autonomy in operations

• Directed lending to a certain extent

• Vast branch network

• Laggards in technology adoption

• Two sub-groups – new age private sector and old age private sector

• Tech savvy, aggressive, innovative new age banks – broad basket of products

• Relationship oriented, localized old age banks

• Established for meeting banking requirements of specific groups

• Prominent in Maharashtra and Gujarat

• Limited product offerings

• Limited presence

• Growing interest• Expanding

operations• Typically

catered to the requirements of MNCs and blue-chip Indian corporates

• A few in consumer lending

CooperativeBanks

• Focused on rural markets

• Focused on financial inclusion

• Promoted by any one of the Public Sector Banks

• Products and Services geared to meet rural requirements

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BANKING SECTOR REFORMS

Several committees constituted to resolve problems of Commercial Banking in India, two most important are- a) Narasimham Committee I (1991)- aimed at

bringing “operational flexibility” and “functional autonomy” so as to enhance efficiency, productivity and profitability

b) Narasimham Committee II (1998)- bringing structural changes so as to strengthen banking system to make it more stable

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MAJOR RECOMMENDATIONS

NARISHIMAM COMMITTEE REPORT I Four-tier hierarchy for banking structure - three

to four large banks with SBI at top Parity in treatment of Private sector banks lic

sector banks Follow BIS/Basel norms Lifting of ban - setting new banks in Private sector Liberal Governmental policies for expansion of

foreign bank branches and rationalization of foreign operations of Indian banks

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MAJOR RECOMMENDATIONS (CONTD.) Progressively bring down - Statutory Liquidity Ratio

(SLR) and Cash Reserve Ratio (CRR) Tighten prudential norms for the commercial banks Deregulate interest rates Redefine priority sector - to comprise SME and

marginal farmers, and EWS Increase competition in lending between DFIs and

banks Disinvest in PS banks Each public sector bank - set up at least one RBS and

treated at par with RRBs

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MAJOR RECOMMENDATIONS (CONTD.)Narasimham Committee Report II

Merger of strong PS banks and closure of some weaker banks

Amicable golden handshake scheme for surplus banking sector staff

Setting up ARC to tackle NPAs in banks Enhancement of capital adequacy norms Healthy competition between PS banks and private

sector banks essential.

PRE-GLOBALIZED SCENARIO OF SERVICE CULTURE IN THE INDIAN BANKS

SERVICE CULTUREWAS EXTREMELY

DEMOTIVATED & NON INTERESTED EMPLOYER& EMPLOYEE.

NON COMPETETIVE ATTITUDE.

PRODUCT FOCUSED & NOT CUSTOMERSERVICE FOCUSED.

CUSTOMER UNFRIENDLY

FORMALIZED

THE BANKING SECTOR TODAY

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Depth Countrywide coverage

Large number of players

Increasingly sophisticated financial markets

Technology Increasing use of

technology in operations

Poised to expand and deepen technology usage

Diversification Emergence of

integrated players Diversifying capital

deployment Leveraging synergies

Regulation Robust regulatory

system aligned to international standards

Efficient monetary management

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A New orientation among banks…

Sell products Product research:

what will sell? Product sales and

profitability targets Product specialist

groups Introduce new

offerings every few years/months

“Branch banking” Focus - customer

acquisition

Meet customers’ needs

Customer research: what does the customer want?

Customer segment sales and profitability targets

Customer owners Customer specific

new offerings every week/day

Customer convenience

Deepen relationships

Traditional/ public sector New/ private sector

Mobile &

Internet banking

ATM Network

Good Waiting room

Promotional

discountsLow

interest rates

Intro. Of new

schemes

Change inProduct line

Consultancy

servic

e

Financial service

Flower of banking service

Technological Innovations in Banking sector.

Data Mining.

Tie up Arrangements

Plastic money.

Virtual banking- don’t visit the branch

ATM

Insurance Product

Marketing Agents for Distribution of Products

Mobile Banking

Phone Banking

Additional Banking Services

Merchant Banking

Loan Syndication.

Mutual Fund

Factoring.

Forfeiting.

Venture Capital.

YOU ARE A CORPORATE BANKER IF……

Understanding Role of Central Banks

RESERVE BANK OF INDIA

CENTRAL BANK IN INDIA – THE RBI

Govt. of India

Reserve Bank of India

Powerful –authorized to enact

banking laws

Central Banker or Banker’s Banker

• Banking Regulation Act

• Negotiable Instruments Act

MonetaryPolicy

BankingRegulation

FinancialInd. Health

Devpt.Role

PaymentSystems

INTRODUCTION Regulatory framework of the country. Degrees of Imperfections cannot be

denied Financial system deals in other people’s

money Trust ,confidence and faith in it is

crucially important for its smooth functioning

CONTD…….. Centre of the Indian Financial and Monetary

System Apex Institution – Guiding, Monitoring and

Controlling. Started functioning from 1st April 1935 , on

the terms of Reserve Bank of India Act,1934 Was a Private Shareholders Institution till Jan

1949 after which it became a state-owned institution under the RBI Act.

FUNCTIONS OF RBI To maintain Monetary Stability To maintain Financial Stability To maintain stable payment system To promote the development of

financial infrastructure of markets and systems

credit allocation To regulate the overall volume of

money

ROLES OF RBI Note Issuing

Authority Governments

Banker Bankers’ Bank Supervising

Authority Exchange control authority

NOTE ISSUING AUTHORITY Since its inception, RBI has the sole right or

authority or monopoly of issuing currency notes other than one rupee notes and coins, and coins of smaller denominations.

Although one rupee notes and coins, and coins of smaller denominations are issued by Government of India, they are put into circulation by RBI

All affairs of the bank relating to note issue are conducted by its Issue Department

CONTD…

BANKER TO THE GOVERNMENT Maintaining Accounts Receiving the Revenue of

the governments Making Payments of the

governments Providing Remittance

Facilities Issuing Treasury Bills Providing Ways & Means

Finance Advisor to the

Government Representing the

Government

BANKERS’ BANK The bank controls the

volume of reserves of commercial banks and thereby determines the deposits/credit creating ability of the banks.

The banks hold a part of their reserves with the RBI

In times of need, the banks borrow funds from RBI

It is, therefore, called the bank of last resort or the lender of the last resort.

CONTD… Clearing House & Remittance

Facilities Real Time Gross Settlement:

Introduced in 2004, it is the beginning of a clearing system at the national level

On the whole, the RBI is the ultimate source of money and credit in India

SUPERVISING AUTHORITY Supervise and control commercial

and co-operative banks. To issue the licenses for the

establishments of new banksTo issue licenses for setting up of bank

branchesTo prescribe minimum requirements

regarding paid-up capital and reserves, maintenance of cash and other liquid assets.

CONTD… To inspect the working of banks in India as

well as abroad in respect of their Organizational set- up

To conduct the investigations , from time to time , regarding irregularities, frauds, complaints, etc…

To control methods of operations of banks To control appointment, re-appointment,

termination of appointment of the chairman and CEOs of Private sector banks

EXCHANGE CONTROL AUTHORITY It manages the exchange rate between the

rupee and other currencies To negotiate with the monetary authorities

and financial institutions like IMF, World Bank and Asian Development Bank.

The RBI is the custodian of the country’s foreign exchange reserves, and it is vested with the responsibility of managing the investment and utilization of the reserves in the most advantageous manner.

MONETARY POLICY

TECHNIQUES USED BY RBI OMO - Open market operations. Bank Rate - The rate at which RBI

rediscounts the bills. Cash Reserve Ratio – The CRR refers to

the cash which banks have to maintain with the RBI as a percentage of their demand liabilities.

Statutory Liquidity Ratio – The SLR is the ratio of cash in hand exclusive of cash balances maintained by banks for CRR.

PAYMENT SYSTEM Paper-based Payments

Use of paper-based instruments (like cheques, drafts, and the like) accounts for nearly 60% of the volume of total non-cash transactions in the country.

In value terms, the share is presently around 11%. This share has been steadily decreasing over a period of time and electronic mode gained popularity due to the concerted efforts of Reserve Bank of India to popularize the electronic payment products in preference to cash and cheques.

Since paper based payments occupy an important place in the country,

Reserve Bank had introduced Magnetic Ink Character Recognition (MICR) technology for speeding up and bringing in efficiency in processing of cheques.

ELECTRONIC PAYMENTS Electronic Clearing Service (ECS) Credit

The Bank introduced the ECS (Credit) scheme during the 1990s to handle bulk and repetitive payment requirements (like salary, interest, dividend payments) of corporates and other institutions. ECS (Credit) facilitates customer accounts to be credited on the specified value date and is presently available at all major cities in the country.

National Electronic Funds Transfer (NEFT) System In November 2005, a more secure system was introduced for facilitating

one-to-one funds transfer requirements of individuals / corporates. Available across a longer time window, the NEFT system provides for batch settlements at hourly intervals, thus enabling near real-time transfer of funds. Certain other unique features viz. accepting cash for originating transactions, initiating transfer requests without any minimum or maximum amount limitations, facilitating one-way transfers to Nepal, receiving confirmation of the date / time of credit to the account of the beneficiaries, etc., are available in the system.

Real Time Gross Settlement (RTGS) System RTGS is a funds transfer systems where transfer of money takes place from

one bank to another on a "real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period. "Gross settlement" means the transaction is settled on one to one basis without bunching or netting with any other transaction. Once processed, payments are final and irrevocable. This was introduced in in 2004 and settles all inter-bank payments and customer transactions above ` 2 lakh.

KYCKNOW YOUR CUSTOMER

INTRODUCTION

Based on the RBI guidelines,our Banks Board has approved the new “Know Your Customer (KYC) Policy and Anti Money Laundering (AML) Policy in November 2004 for implementation across the bank based on the Basel Committee recommendation on Customer Due Diligence and suggestion made by the Financial Action Task Force(FATF) on Anti Money Laundering(AML) standards for combating Financing of Terrorism (CFT)

 

OBJECTIVES OF KYC & AML To enable the Bank to know/understand its

customers and their financial dealings better. To protect the Bank’s reputation To protect bank’s channels, products, services

form being used as a channel for misuse/money laundering

To protect the bank, its employees & customers from this menace

To adhere to KYC policies and procedures To take appropriate action & report the same

once suspicious activity is detected To comply with applicable local & international

laws adopted by banks

OBJECTIVES OF KYC KYC_AML standards will help banks in weeding out

unwanted customers and serving genuine customers. This way, banks will help themselves in better control over business. This will protect reputation risk / operational risk and integrity of banking industry.

Money laundering doesn’t affect individuals directly but it do affects entire society / economy across the world. It do affects genuine customers. Money Laundering affects demand / supply for money / exchange rates in money market / capital flows.

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BANKING CONCEPTS PLR or prime lending rate - rate of interest at which banks

lend to their credit-worthy or favored customers. It is treated as a benchmark rate for most retail and term

loans. influenced by RBI’s policy rates — the repo rate and cash

reserve ratio

Deposit Rates - Interest rate paid on deposit accounts by commercial banks and other Fis

Bank rate - rate of interest which RBI charges on loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by RBI to control money supply

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Repo Rate - rate at which banks borrow from RBI. A reduction in repo rate will help banks to get money at a cheaper rate.

Reverse Repo rate - rate at which RBI borrows money from

banks. An increase in Reverse repo rate can cause banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system. Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man.

Difference between Bank Rate and Repo Rate While repo rate - applicable to short-term loans and used for

controlling amount of money in market, bank rate - a long-term measure and governed by long-term monetary policies

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STATUTORY LIQUIDITY RATIO (SLR) OBJECTIVE 1) To restrict expansion of bank credit. 2) To augment investment of the banks in Government

securities. 3) To ensure solvency of banks. Commonly used to contain inflation and fuel growth, by

increasing or decreasing it respectively MAINTAINED IN THE FORM OF :a) Cashb) Gold – marked to market c) Unencumbered approved securities or Gilts - valued at a

price as specified by RBI

CURRENT SLR – SLR RATE = Total Demand/Time Liabilities x 100%

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CASH RESERVE RATIO (CRR)

OBJECTIVE Banks required to hold a certain proportion of their deposits in

the form of cash, deposited with RBI/currency chests, considered as equivalent to holding cash with themselves

This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by RBI - CRR or Cash Reserve Ratio

Also known as - Cash Asset Ratio or Liquidity Ratio

PURPOSE – Higher the ratio (i.e. CRR), lower is amount that banks will be

able to use for lending and investment.

EXISTING CRR