IMT - NAGPUR

COMMERCIAL BANK MANAGEMENT

COURSE OUTLINE

PGDM (2010 – 2012) - TERM IV

ACADEMIC SESSION 2011-12

Faculty : Prof. D N PanigrahiMBA (Fin-FMS, DU), CFA, CAIIB & DFS

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COMMERCIAL BANKING/BANK MANAGEMENT

1. COURSE OBJECTIVES :

This course is devoted to the management of commercial banks. It aims to help students to understand the role and functions of Commercial Banks, main strategic issues in retail and

corporate banking and the risks faced by the Banking Industry in India.

Particular emphasis are made on customer-focused banking, integrated risk management like interest-rate risk, liquidity risk, market risk, operational risk, credit risk and its pricing, capital allocation & Basel II, value-based measurement etc.

Familiarizing the students with the legal and regulatory framework for banks in India. Equipping the students with the tools and techniques used in interpreting and evaluating the performance, productivity

and efficiency of the Commercial Banks. Equipping the students with the in-depth knowledge of Bank Financial Management Process. Familiarizing the students with the new Banking Practices and Processes including new banking technologies. This course will make you marketable in Banking & Financial Services Sector for varied job profiles like (i)

General Banking Operations in Commercial Banks (ii) Retail Banking & Marketing (both liabilities & assets) (iii) Bank Credit or Loan Management function, Project Finance etc. in Commercial Banks & FIs like SIDBI, IFCI, SBI Caps etc. (iv) Loan functions of HDFC Ltd. & other Housing Finance Companies like LICHF, SBIHF & DHFL etc. (v) Bank Treasury, Investment & Risk Management Function (vi) RBI, NABARD, NHB, EXIM Bank, ECGC etc. (vii) NBFCs engaged in Asset based financing, Project finance etc.

2. Course Description : This course covers an entire gamut of topics in Commercial Banking and Bank Management to give the students a thorough exposure. This course mainly focuses on the following areas :

a. Principles & Practices of Banking & Banking Operationsb. Indian Banking System, Legal & Regulatory Environmentc. Bank Lending & Loan Management Functiond. Investment/Treasury Management Functionse. Bank Financial Statement analysis & Performance Evaluationf. Asset Liability Management (ALM) & Profitabilityg. Risk Management in Banksh. Bank Capital Management & Basel II Capital Accord

2A. Pre-requisites : This course assumes a basic knowledge of Accounting & Finance (like Financial Statement Analysis and Time Value of Money) and basic mathematics like elementary Algebra, Calculus, Graphs and elementary Statistics.

2B. Link to other Subjects :a. Banks on the basic understanding of Financial Accounting, Management Accounting and Financial

Management/Corporate Finance.b. This finance discipline will help you understand other related finance topics like Derivatives & Risk Management,

Treasury Management, Financial Markets & Institutions. 3. Learning Methodology/Pedagogy :

The pedagogy will focus on discussion of concepts, problems/issues involved, legal provisions, theoretical and practical aspects of Commercial Banking & Bank Management.

Cases will be used to develop applied skills and managerial attitudes in analyzing and handling problems with a global orientation. Some representative problems/Case studies will be discussed in the class and some others will be given to the students for solving as home assignments. There will also be Individual and/or Group Assignment(s)/project(s) on Banking & Bank Management, the details of which will be given later.

Students are expected to refer to the books and materials mentioned by the Faculty and try as much as possible to learn through a participatory way. Apart from the teaching materials given to the students at the beginning, some supplementary notes may be given during the course by the faculty.

N.B. : Students are expected to bring their own Scientific/Financial Calculator to the class for effective participation.

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4. ROLE EXPECTATIONS FROM FACULTY :

Faculty will treat their obligations for classes as they would treat any serious professional engagement. That includes: 1) PREPARING THOROUGHLY for class; 2) PUNCTUALITY in beginning class sessions, except under unusual circumstances; adherence to the established schedule for classes and exams; 3) PROVIDING SUFFICIENT INFORMATION and materials to enable students to prepare adequately for class; 4) DISPLAYING APPROPRIATE COURTESY to all involved in the class sessions.5) SUPPLYING TIMELY INFORMATION ABOUT STUDENT PERFORMANCE on projects, assignments, and examinations; 6) PROVIDING CONSTRUCTIVE FEEDBACK TO STUDENTS concerning their performance. Faculty should be as objective in their feedback to students as they expect students to be in their evaluation of faculty.

5. ROLE EXPECTATIONS FROM STUDENTS :

Students will treat their classroom obligations as they would treat any serious professional engagement. That includes: 1) PREPARING THOROUGHLY for each session in accordance with the instructor's requests; 2) ARRIVING PROMPTLY IN TIME AND REMAINING until the end of each class meeting, except in unusual circumstances; 3) PARTICIPATING FULLY AND CONSTRUCTIVELY in all classroom activities and discussions; 4) DISPLAYING APPROPRIATE COURTESY to all involved in the class sessions. 5) ADHERING TO DEADLINES AND TIMETABLES established by the instructor; 6) PROVIDING CONSTRUCTIVE FEEDBACK TO FACULTY MEMBERS regarding their performance. Students should be as objective in their comments about

instructors as they expect instructors to be in their evaluations of students. Please note the following points for strict adherence :

a) Bad conduct, unprofessional and disruptive behaviour may result in the student being dismissed from the course.

b) Dismissal from the course will be treated as a disciplinary offence and will carry additional/consequential penalties as per the rules/norms of the Institute.

c) Class room doors will be closed 5 minutes after the commencement of the class. No student will be allowed to enter the class after that. Class room doors will be open only at the end of the class. No student will be allowed to leave the class in the middle of the class.

d) Attendance will be taken at any time randomly during the class hours. e) Apart from the imposition of penal/disciplinary action for any misconduct, marks will be deducted for

such bad conduct. f) Students are allowed to attend their class in a subject only in their own section unless specially

permitted by APO.

6. Evaluation/Assessment of Students' Performance : The evaluation process will consist of several components to give weightage to different aspects of students' capabilities

in the learning process. The components will be as follows : a. Class Activity (Punctuality/Sincerity/Class Participation/Quizzes) : 15%b. Assignments/Mini-Case Submissions : 10%c. Term End Group Assignment/Project : 15%d. Mid-Term Examination : 30%e. End-Term Examination : 30%

In all components grading will be done on a relative basis. However, there would be an expectation of minimum absolute performance from the students in order to determine the cut-off for passing in a particular component.

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7. Term End Project : The Class representative(s) will advise me the group details by the 2nd or 3rd class and I’ll allot the topic/ assignment to each group for the term end project. The respective groups are required to submit the Synopsis to me by e-mail latest by the 5th class (in about 300 words), Interim- Review by the 10th class and Final Presentation & Soft-copy Submission by the 15th class. Your Synopsis, Interim assessment and Final Report & Class Executive Presentations will be part of evaluation. Synopsis to consist of :

1. The basic purpose of the project & a statement of the issue or problem to be studied.2. Sources of data, information and corporate experiences or case studies.3. Expected out-come of end-term project - from the point of view of understanding the Commercial

Banking, Bank Management & strategy.

The suggested Frame of Study is as below :

1. The basic purpose of the project & a statement of the issue or problem to be studied.2. Sources of data, information and corporate experiences or cases to give study the basic strength and

to make it more authentic.3. Presentation of study and findings / observations.4. Managerial applications/ implications& conclusions.5. References / notes

Please retain a copy of all assignments handed in. Late assignments will be penalized by one letter grade per day.

Statement on Academic Integrity :

Ethical and professional behaviour is expected in this course. Acts of academic dishonesty are taken seriously and you are encouraged to review the Institute’s academic integrity policies. Acts of academic dishonesty include: a) unauthorized assistance on an examination: b) falsification or invention of data; c) unauthorized collaboration on an academic exercise; d) plagiarism and e) giving attendance for others.

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8. Course Materials :

Prescribed Text Book :

Management of Banking & Financial Services (MOBFS) - by Suresh & Paul/2e (Pearson Education India).

Additional Readings :

1. Financial Markets & Institutions – By Saunders & Cornett/3e (TMH)2. Management of Banking – By MacDonald & Koch/6e (Cengage India)3. Principles & Practice of Banking – by IIBF/Mcmillan4. Regulatory aspects of Banking – by IIBF/Mcmillan5. Banking Law & Practice – by P N Varshney (Sultan Chand & Sons)6. Bank Management & Financial Services – by Peter Rose/8e (McGraw Hill). 7. Commercial Banking : The Management of Risk – by B E Gup/3e (Wiley India)Apart from the recommended text and further readings and lecture notes, students are advised to read Economic Times, Business Standard, Business Line, CFA Analyst & Professional Banker (ICFAI), Indian Banker (IBA) and BanQuest (IIBF) regularly to gain real insights into the subject. Some useful websites are as under : www.rbi.org.in, www.iba.org.in, www.iibf.org.in, www.bis.org, www.bba.org.

8. CAREER ENHANCEMENT FOR BETTER JOB PROSPECTS :

Those of IMT students who are interested in a career in Banking and Financial Sector should take extra interest from the beginning to equip themselves with tools and techniques of Banking, Bank Credit analysis & management and other role functions to enhance their employability skills. I advise such of the students to enroll at the earliest for some professional banking diplomas offered by Indian Institute of Banking & Finance, Mumbai (IIBF, web site www.iibf.org.in), viz., DBF, CeTF, DIB, PGDFA etc. in order to excel in their careers.

Contact hours with the faculty : By appointment only.Faculty's e-mail id : dnpanigrahi@imtnag.ac.in

COMMERCIAL BANKING/BANK MANAGEMENT

SESSION-WISE PLAN AND READINGS (Revised wef June 22, 2011)

Session #

Coverage of Topics Suggested Readings/

Assignments1 Introduction to Banking : Functions & Speciality of Banks : Definition of Banking

and Bank. Role & Functions of Commercial Banks and Financial Institutions (FIs). Why FIs & Banks are different/special ? Understanding the primary or core activities of a bank - the process of financial intermediation. Mobilisation of resources (Deposits/Funds raising), Deployment of resources (Lending & Investment). Average Cost of Funds & Average Yield on Advances (Loans) & Investments and its impact on Profitability, CASA, CD and ID ratio.

MOBFS – Ch. 1Lecture Notes

Compiled Notes (CN) – pgs 12 - 37

Understanding the ancillary functions/subsidiary activities of a Commercial Bank. Payment & Collection Services. Non-fund based & Fee-based services : Funds Transfer, LC & LG (BG), Agency Services, Safe Custody of Valuables & Safe Deposit Lockers. Emerging Trends in Banking in India : Universal Banking, Electronic Banking, Globalisation of Banking, Bancassurance and Para-banking activities.

2 Banking Regulation/Legal & Regulatory aspects/framework : Govt. & RBI’s Supervisory powers. Salient provisions of BR act 1949 & RBI act 1934. Role & functions of RBI : Issuing Notes, Banker to Governments, Bankers’ Bank, Banks’ Supervision, Development & Promotion of Banking & Financial System, Exchange Control, Controlling Money Supply & Credit Control/Monetary & Credit Policy. Tools of Monetary Control/Key Policy Rates and Ratios : Bank Rate, REPO & Reverse REPO rates, Open Market Operations (OMO), Market Stabilisation Scheme (MSS), Selective Credit Credit Control (SCC), Moral Suasion, Statutory Reserves : CRR & SLR. Priority Sector Advances (PSA), Regulatory Restrictions on Bank Lending, Prudential Credit Exposure Limits, Other Provisions/regulations related to banking. Legal provisions on Customer Service – various customer service committees, Banking Ombudsman Scheme, COPRA and BCSBI etc. Narashimam Committee I & II on Banking Sector Reforms. Other Relevant committees & their recommendations.

MOBFS – Ch. 2Lecture Notes

3 Retail Banking Operations : Banker-Customer Relationship : Definition of Customer, Different forms of Banker-Customer Relationship, Banker’s Duties & Rights/Customer’s Rights & Obligations, Legal & Strategic Relationships. Relationship Banking/ Marketing & CRM. Eight Competencies of Relationship Banking/Marketing. Seeking Customers & Retaining Customers – the biggest challenge for the today’s banker : Strategies thereof. Different types of Customers & their Accounts. Opening of Deposit Accounts : KYC-AML guidelines/Customer Due Diligence (CDD) exercise, Resource Mobilsation, Deposit Products/Accounts in India & abroad, Managing & Pricing Deposit Services. Managing float through liabilities. Deposit Management : Mobilising No cost & Low Cost Deposits (CASA & CASA ratio) : the strategies thereof. Concepts of Fixed and Floating Rates of Interest. Operation in Deposit Accounts : Specimen Signature, Mandate & Power of Attorney, Nomination, Transfer & Closing of Deposit Accounts, Deposit Insurance & DIC. Negotiable Instruments (Cheques/Drafts, Bills of Exchange, Promissory Notes) & Related Matters/Special features, Cheques : Negotiability, Validity, Crossing & Endorsement.

MOBFS – Ch. 13 & 04Lecture Notes

4 New Banking Technology and Payment & Settlement System : TBA, CBS, ATM, Credit, Debit & Smart/Charge Cards, Mechanics of Credit Card transaction. Tele Banking, Internet Banking & Mobile Banking, Electronic Transfer of Funds : Different Clearing Systems, ECS, EFT, NEFT, RTGS, SWIFT, MICR, Cheque Truncation System (CTS) & e-Cheque etc.

5 & 6 Understanding Bank Financial Statements : Interpreting bank balance sheets & income/ operating statements. Assets & Liabilities of Commercial Banks, Bank Profitability Analysis. Financial Statement Analysis & Bank Performance Measurement/Evaluation – RoE Model. Managing Non-Interest Incomes & Non-Interest Expenses – Importance & Strategies thereof.

MOBFS – Ch. 03Lecture Notes

CN - pgs 01-11, 38 - 102

7 Corporate Banking/Managing Bank’s Loan Portfolio/Lending Function : Importance of Bank Lending, Sound/Basic Principles of Bank Lending. Types of Credit facilities : Fund based and Non-fund based; Secured & Unsecured etc. Term Loan & Working Capital Finance. Asset Based –vs- Cash flow based lending. Attributes of a good Security. Fundamentals of Credit Analysis, Assessment, Administration & Management, Credit Evaluation, Approval /Granting Process – Know your borrower/borrower’s due diligence, Credit Filter/Screening/Selection, Pre-sanction Inspection, Credit Information Companies – CIBIL : The ex-ante approach to credit risk management. Bank’s Loan Policy Document. General Appraisal Criteria for Commercial & Industrial Lending, Sole Financing, Consortium Financing & Multiple Banking arrangements, Loan Syndication. Prudential Credit Exposure Norms : Single Borrower & Group Borrower limits.

MOBFS – Ch.05, 06Lecture NotesCN – pgs 319 – 340, 376 – 389,

8 Legal Aspects of Bank Lending : Different modes of Creating Charge/Charging Securities for Bank Loans – Lien, Right of Set-off, Negative Lien, Hypothecation, Pledge, Assignment & Mortgage.

Loan Documentation : Salient features of Indian Contract Act, Stamp Act, Registration Act, Limitation Act essential for a lending banker

MOBFS – Ch. O7Lecture NotesCN – pgs 370 – 375, 365 – 369

9 & 10 Credit Assessment – Fund based Limits : Requirements for submission of audited Financials, Re-Classification of Balance sheet items by a lending Banker for loan appraisal. Techniques of Working Capital Appraisal/Assessment : Operating Cycle Method, Turnover method, Holding Period Method (MPBF II) & Cash flow/Cash budgeting method.

Bill Financing : Demand Bills Purchased (DBP) & Usance Bills Discounted (UBD)

MOBFS – Ch. 05, 06Lecture NotesCN – pgs 349 – 358, 398 – 413, 359 - 364

Appraisal of a Term Loan Proposal/Project Appraisal & Finance : Projected Balance sheet, income statements and Projected cash flow/profitability statements. Using analytical tools like BEP, MoS, Coverage ratios/DSCR, Sensitivity Analysis etc. Project appraisal/analysis of CAPEX Proposals using NPV, IRR & Pay back methods. Appraisal of Infrastructure Projects. Financing of MSMEs – Problems & Prospects.

11 Credit Assessment – Non-fund based Limits : Letter of Guarantee/Bank Guarantee (LG/BG), Letter of Credit (LC), Co-acceptance & DPG. International Banking Operations, Correspondent Banking, Forex Operations etc., International Trade Finance (Export – Import Finance) & Financing International Projects. Loan Syndication/Syndicated Loan Mechanism.

Lecture NotesCN – pgs 287 – 312

12 Credit Assessment – Personal Segment Borrowers : General Appraisal Criteria for Consumer Loans like Car/Two-wheeler Loans, Educational Loans, Credit Card Loans and Personal Loans. Loans against various securities like Bank FDs, Shares/ Debentures, MF Units, NSCs/KVPs & Gold Jewellery etc.

General Appraisal Criteria for a Home/Mortgage Loan Proposal.

Lecture Notes

13 Credit Rating & Loan Pricing : Concepts of Fixed and Floating Rate Loans. Concepts of BPLR (old) & Base Rate (new), Bank Loan rating/Rating of Borrowers : Internal Rating & External Rating Methodology – Quantitative & Qualitative factors. Credit Rating of Individual/Personal Segment borrowers and Industrial & Commercial Borrowers. Loan pricing using Credit risk Premium & Term Premium over the BPLR or Base Rate. Credit Disbursal & Monitoring, Follow up and Supervision to ensure Proper end use of bank credit and continual good health of the borrowers and to detect early warning signals for preventive & curative measures. Different causes/factors of a loan becoming NPA/Sickness of loans – Internal & External factors, Rehabilitation, Corporate Debt Restructuring (CDR) Mechanism

MOBFS – Ch. 07Lecture Notes

14 Problems of Non-Performing Loan Assets (NPA) – Prudential Accounting Norms on Income Recognition, Asset Classification & Provisioning. Loan Recovery Management : Legal methods like Civil Courts, DRT, SARFAESI Act, Lok Adalat, Loan Sales & Securitisation/ ARCs/Sale & Purchase of NPA loans among Banks etc. Non-Legal Methods of Recovery : Compromise/Scaling down of Debt, Negotiated Settlements : OCS/OTS & Write-offs.

MOBFS – Ch. O7Lecture NotesCN – pgs 390 – 397

15 Risk Management in Banks : Understanding Banking Risks and their regulations – What is Risk ? Understanding the primary activities of a bank as a financial intermediary and various types of risks undertaken by a bank in such business. Different types of financial intermediation and various risks of financial intermediation.

MOBFS – Ch. 12Lecture Notes

16 Management of Risks on Bank’s Balance Sheet : Credit Risk, Liquidity Risk, Liability & Liquidity Risk Management.

Interest Rate Risk & Insolvency Risk – Asset Liability Management (ALM) in Banks & Profit Planning.

MOBFS – Ch. 08Lecture NotesCN – pgs 132 – 180, 205 – 231

17 Bank Capital Management & Basel II : Role of RBI in Banking Supervision & Regulation, CAMELS Rating of Banks. Basel Capital accord and new paradigm in risk management in banks. Need for adequate Risk based or Regulatory/Economic Capital as a cushion – CAR/CRAR. Basel I Capital Adequacy frame work, Basel II New Capital Adequacy frame work – Three Pillars. Credit Risk, Market Risk & Operational Risk. How Basel II is different from Basel I. Basel II Capital requirements and its impact on and challenges for the Indian Banking Sector. Basel III discussions.

MOBFS – Ch. 11Lecture NotesCN – pgs 414 – 431

18 Treasury Management Functions in Banks/Management of Bank’s Investment Portfolio.

MOBFS – Ch. 10Lecture Notes

19 & 20 Group Project Presentation