BANKING MANAGEMENT

[Document subtitle]

(1). WRITE THE POST BUDGET IMPACT ON FINANCIAL

SERVICES INDUSTRY WITH SPECIAL FOCUS ON BANKING??
Indias financial sector is diversified and expanding rapidly. It comprises
commercial banks, insurance companies, non-banking financial
companies, cooperatives, pensions funds, mutual funds and other smaller
financial entities.
The Finance Minister has announced significant policy initiatives in his
budget speech. Some of the key policy initiatives have been summarised
below:
It is proposed to set up a Public Debt Management Agency (PDMA), which
will
bring both external and domestic borrowings under one roof

Distinction between foreign investment (FII and FDI) eased, which

raises scope for investment in private banks

Encouragement of debit and credit card transactions will benefit

banks having higher cards transactions

Capital infusion of Rs7,940 crore in public banks much lower than

required and negative for capital-starved banks

Increase in fiscal deficit targets could increase bond yields and may
influence RBI on rate cuts

Creation of Autonomous Banks Board Bureau for public banks and

Bankruptcy Code will improve governance in long term

It is proposed to amend the Constitution of India by inserting the

enabling provisions to amend the Government Securities Act and
the Reserve Bank of India (RBI) Act

The Forward Markets commission is proposed to be merged with the

Securities and Exchange Board of India (SEBI)

Section 6 of Foreign Exchange Management Act (FEMA) is proposed

to be amended to provide control to the Central government, which
would specify regulations in respect of capital account transactions,
in consultation with the RBI.

It is proposed to create a Task Force which will establish a sectorneutral financial

redressal agency to address grievance against all financial services
providers'

The India Financial Code will be introduced shortly for consideration

in the Parliament

It is proposed to allow an option to the employee to opt for

Employee Provident Fund or New Pension Scheme

Gold monetisation scheme to allow depositors of gold to earn

interest in their metal accounts and jewellers to obtain loans in their
metal account to be introduced; Sovereign Gold Bond, as an
alternative to purchasing metal gold scheme to be developed

An autonomous Bank Board Bureau to be set up to improve the

governance of public sector banks

A new and more comprehensive Benami Transactions (Prohibition)

Bill will be introduced, which will enable confiscation of benami
property and provide for
prosecution. This will block a major avenue for generation and
holding of black money in the form of benami property, especially in
the real estate sector Banking

Micro Units Development Refinance Agency (MUDRA) Bank to be

created with a corpus of Rs 20,000 crores and credit guarantee
corpus of Rs 3,000 crore

MUDRA Bank will be responsible for refinancing all micro-finance

institutions, which are in the business of lending to such small
business entities through the Pradhan Mantri Mudra Yojana

A Trade Receivables Discounting System (TReDS), which will be

electronic platform for facilitating financing of trade receivables of
MSMEs, to be established

Comprehensive Bankruptcy Code of global standards to be brought

in during the fiscal 2015-16 to improve the ease of doing business in
India

Write Short notes on:1) ANALYSIS OF BANKING RISK (MARKET RISK, CREDIT RISK
& OPERATIONAL RISK)??

MARKET RISK
Market risk is the risk of losses in positions arising from movements
in market prices.

TYPES OF MARKET RISK:

Some market risks include:
i.

EQUITY RISK:
The risk that stock or stock indices prices
and/or their implied volatility will change.

ii.

INTEREST RATE RISK: The risk that interest rates and/or their
implied volatility will change.

iii.

CURRENCY RISK: The risk that foreign exchange rates and/or

their implied volatility will change.

MEASURING THE POTENTIAL LOSS AMOUNT DUE TO MARKET

RISK
As with other forms of risk, the potential loss amount due to market
risk may be measured in a number of ways or conventions.
Traditionally, one convention is to use value at risk (VAR). The
conventions of using VAR are well established and accepted in the
short-term risk management practice.

CREDIT RISK

Credit risk refers to the risk that a borrower will default on any type
of debt by failing to make required payments. The risk is primarily
that of the lender and includes lost principal and interest, disruption
to cash flows, and increased collection costs. The loss may be
complete or partial and can arise in a number of circumstances
For example:

A consumer may fail to make a payment due on a mortgage

loan, credit card, line of credit, or other loan

TYPES OF CREDIT RISK

Credit risk can be classified as follows:

CREDIT DEFAULT RISK

The risk of loss arising from a debtor being unlikely to pay its loan
obligations in full or the debtor is more than 90 days past due on
any material credit obligation; default risk may impact all creditsensitive transactions, including loans, securities and derivatives.

CONCENTRATION RISK
The risk associated with any single exposure or group of
exposures with the potential to produce large enough losses to
threaten a bank's core operations. It may arise in the form of
single name concentration or industry concentration.

To reduce the lender's credit risk, the lender may perform a credit
check on the prospective borrower, may require the borrower to take
out appropriate insurance, such as mortgage insurance or
seek security or guarantees of third parties. In general, the higher
the risk, the higher will be the interest rate that the debtor will be
asked to pay on the debt.

OPERATIONAL RISK
Operational risk is "the risk of a change in value caused by the fact
that actual losses, incurred for inadequate or failed internal
processes, people and systems, or from external events (including
legal risk), differ from the expected losses".
This definition from the Basel II regulations was also adopted by the
European Union Solvency II Directive.
It can also include other classes of risk, such as fraud, security,
privacy protection, legal risks, physical (e.g. infrastructure
shutdown) or environmental risks.

Operational risk is a broad discipline, close to good management

and quality management. In similar fashion, operational risks affect
client satisfaction, reputation and shareholder value, all while
increasing business volatility.
Contrary to other risks (e.g. credit risk, market risk, and insurance
risk) operational risks are usually not willingly incurred nor are they
revenue driven. Moreover, they are not diversifiable and cannot be
laid off, meaning that, as long as people, systems and processes
remain imperfect, operational risk cannot be fully eliminated.
The Operational Risk Management framework should include
identification, measurement, and monitoring, reporting, control and
mitigation frameworks for Operational Risk.
(2) CORPORATE BANKING SERVICES (FEE BASED, NONCOMMON FEE BASED, CASH MANAGEMENT SERVICES &
WORKING CAPITAL LOANS)??
A corporate bank is also known in some contexts as a commercial
bank. This is a bank that provides a number of financial services,
normally to larger corporations and businesses. Among these
services, one might expect to find loans, lines of credit, cash
or treasury management, and the safekeeping of documents and
other valuables.
FEE BASED LOANS
Term Loans: Term loan is an instalment credit repayable over a
period of time in monthly/quarterly/half yearly/yearly instalments.
Term loan is generally granted for creation of fixed assets required
for long-term use by the unit.
Term loans are further classified in three categories depending upon
the period of repayment as under:

Short term repayable in less than 3 years.

Medium term loans repayable in a period ranging from 3 years
to 7 years.

Long term loans repayable in a period over 7 years.

NON FEE BASED LOANS

The non-fund based income comprises of revenues from both
financial commitment and services rendered. Financial commitment
includes guarantees, letters of credit and bankers acceptances etc.
The fees charged may vary from bank to bank and is dependent on
the relationship of the bank with the client and the size of the
transaction.
On the other hand, the revenues from services rendered include fees
from funds transfer and enabling services like ATM, internet banking
etc.
CASH MANAGEMENT SERVICE
Cash management refers to a broad area of finance involving the
collection, handling, and usage of cash. It involves assessing market
liquidity, cash flow, and investments. Cash Management Services
(CMS) is one of our thrust areas. Today, we have large number of
satisfied CMS customers, many of whom are in the top segment of
the Indian Corporate and Public Sectors. This has been a result of a
robust, end to end cash management product which offers
innovative and reliable solutions by combining an efficient
collections and disbursements product, backed by state-of-the-art
systems to ensure customised delivery.
Cash management helps the organisation in:
o Monitoring exposure and reducing risks.
o Ensuring the timely deposit of collections.
o Proper timing of the disbursements.
WORKING CAPITAL LOANS:
A firm's working capital is the money available to meet current
obligations (those due in less than a year) and to acquire earning
assets.
KEY BENEFITS:

Funded facilities, i.e. the bank provides funding and assistance

to actually purchase business assets or to meet business expenses.

Non-Funded facilities, i.e. the bank can issue letters of credit or

can give a guarantee on behalf of the customer to the suppliers,
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Government Departments for the procurement of goods and

services on credit.

3) BASEL 1, BASEL 2 & BASEL 3 NORMS OF BANKING??

Basel I
Basel I is the round of deliberations by central bankers from around the
world, and in 1988, the Basel Committee on Banking Supervision (BCBS)
in Basel, Switzerland, published a set of minimum capital requirements for
banks. This is also known as the 1988 Basel Accord, and was enforced by
law in the Group of Ten (G-10) countries in 1992. A new set of rules known
as Basel II was later developed with the intent to supersede the Basel I
accords.
Basel I, that is, the 1988, Basel Accord, is primarily focused on credit
risk and appropriate risk-weighting of assets. Assets of banks were
classified and grouped in five categories according to credit risk, carrying
risk weights of 0% (for example cash, bullion, home country debt like
Treasuries), 20% (securitizations such as mortgage-backed
securities (MBS) with the highest AAA rating), 50% (municipal revenue
bonds, residential mortgages), 100% (for example, most corporate debt),
and some assets given No rating. Banks with an international presence
are required to hold capital equal to 8% of their risk-weighted assets
(RWA).
The tier 1 capital ratio = tier 1 capital / all RWA
The total capital ratio = (tier 1 + tier 2 + tier 3 capital) / all RWA
Leverage ratio = total capital/average total assets
Banks are also required to report off-balance-sheet items such as letters of
credit, unused commitments, and derivatives. These all factor into the risk
weighted assets. The report is typically submitted to the Federal Reserve
Bank as HC-R for the bank-holding company and submitted to the Office of
the Comptroller of the Currency (OCC) as RC-R for just the bank.
From 1988 this framework was progressively introduced in member
countries of G-10, comprising 13 countries as of
2013: Belgium, Canada, France, Germany, Italy,
Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, United
Kingdom and the United States of America.
Over 100 other countries also adopted, at least in name, the principles
prescribed under Basel I. The efficacy with which the principles are
enforced varies, even within nations of the Group.
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Basel II
Basel II is the second of the Basel Accords, (now extended and
partially superseded by Basel III), which are recommendations on
banking laws and regulations issued by the Basel Committee on
Banking Supervision.
Basel II, initially published in June 2004, was intended to amend
international standards that controlled how much capital banks need
to hold to guard against the financial and operational risks banks
face. These rules sought to ensure that the greater the risk to which
a bank is exposed, the greater the amount of capital the bank needs
to hold to safeguard its solvency and economic stability. Basel II
attempted to accomplish this by establishing risk and capital
management requirements to ensure that a bank has adequate
capital for the risk the bank exposes itself to through its lending,
investment and trading activities.
Basel III
Basel III (or the Third Basel Accord) is a global, voluntary regulatory
framework on bank capital adequacy, stress testing and market
liquidity risk. It was agreed upon by the members of the Basel
Committee on Banking Supervision in 201011, and was scheduled
to be introduced from 2013 until 2015; however, changes from 1
April 2013 extended implementation until 31 March 2018 and again
extended to 31 March 2019. The third installment of the Basel
Accords (see Basel I, Basel II) was developed in response to the
deficiencies in financial regulation revealed by the financial crisis of
200708. Basel III was supposed to strengthen bank capital
requirements by
increasing
bank
liquidity
and
decreasing
bank leverage.
Unlike Basel I and Basel II, which focus primarily on the level of bank
loss reserves that banks are required to hold, Basel III focuses
primarily on the risk of a run on the bank by requiring differing levels
of reserves for different forms of bank deposits and other
borrowings.

(4)CAPITAL ADEQUACY NORMS OF BANKS??

Capital adequacy is an important parameter for judging the strength
and soundness of banking system. Banks with reasonable CRAR can
absorb the unexpected losses easily and their cost of funding is also
reduced which ultimately improve the profitability of banks.
The Committee on Banking Regulations and Supervisory Practices
(Basel Committee) had released the guidelines on capital measures
and capital standards in July 1988 which were been accepted by
Central Banks in various countries including RBI. In India it has been
implemented by RBI w.e.f. 1.4.92
CAPITAL ADEQUACY IN INDIA
introduced in 1992 93 and made applicable
Foreign banks operating in India were required to achieve crar of
8% by 31-3-93.
All Indian banks were required to achieve crar of 4% by 31-31993.
Minimum requirements of capital fund in India:
* Existing Banks 09 %
* New Private Sector Banks 10 %
* Banks undertaking Insurance business 10 %
STATUTORY REQUIREMENT
In terms of section 11 of br act 1949 banks require certain amount
of capital & reserve for carrying on their operations in India.
The amount of capital depends on Country of incorporation
Area of operation (states, uts)

Geographical spread of branches (In metropolitan cities

Mumbai/ Kolkata or other cities etc.).

5) FUND BASED & NON FUND BASED SERVICES OF BANKS??

Non-Fund Based Services

Non fund services of banks include the following services:

1. LETTERS OF CREDIT
Letter of credit is a legal document issued by a buyers bank that
upon presentation of required documents payment would be made.
Usually confirmed by the seller's bank, protection is given to the
seller that payment will be made if the goods are shipped correctly,
following the conditions laid down when the LC is opened or based
on subsequent amendments and protection is given to the buyer
that the goods will be shipped before payment is made.
2. BANK GUARANTEES
Bank Guarantee is a contract to perform the promise or discharge
the liability of a third person in case of his default. Various types of
guarantees offered are financial, performance, bid bond, tenders,
customs, etc..
3. COLLECTION OF DOCUMENTS
A full-fledged trade finance set-up catering to all your trade related
requirements, which offers the following advantages:
Better turnaround time through timely processing of your
documents
Facilitating faster payments
Excellent trade support
Arrangement of credit reports of overseas parties
Fund Based Services
Fund based services of banks includes the following services:
1. WORKING CAPITAL FINANCING
A firm's working capital is the money available to meet current
obligations (those due in less than a year) and to acquire earning
assets. Bank offers corporations Working Capital Finance to meet
their operating expenses, purchasing inventory, receivables
financing, either by direct funding or by issuing letter of credit.
Key Benefits10

 Funded facilities, i.e. the bank provides funding and assistance

to actually purchase business assets or to meet business
expenses.
Non-Funded facilities, i.e. the bank can issue letters of credit or
can give a guarantee on behalf of the customer to the
suppliers, Government Departments for the procurement of
goods and services on credit.

2. SHORT TERM FINANCING

The bank can structure low cost credit programmes and cash flow
financing to meet your specific short-term cash requirements. The
loans are structured to enhance your profitability by scheduling the
repayment to match the cash flow available to repay the debt.

3. BILL DISCOUNTING
Bill discounting is a short tenure financing instrument for companies
willing to discount their purchase / sales bills to get funds for the
short run and as for the investors in them. These are customized to
suit your requirement for short-term finance, from the date of sale to
the date of receipt of payment there on.
4. EXPORT CREDIT
We offer short-term working capital finance both at the pre-shipment
and post-shipment stages .Pre-shipment finance facility provides
liquidity for procuring raw materials, processing, packing,
transporting, meant for export.
Post-shipment finance is a credit facility extended from the date of
shipment of goods till the realization of the export proceeds.
Exporters have the option of availing Post-Shipment finance either in
rupees or in foreign currency.
5. STRUCTURED FINANCE

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Structured Finance describes any "non-standard" way of raising

money. These tailor-made securities go beyond "standard" securities
like conventional loans, debentures, debt, and equity. The reason to
structure a more advanced security may be that conventional
securities may be unattractive, unavailable or too expensive. These
products are structured for both long and short tenor with exit
options at intervals for both parties.

AN ANALYSIS OF RESENT POLICY RATE CUTS OF RBI??

Reserve Bank of India (RBI) surprised everyone with a 25 basis
points repo rate cut. The industry has been demanding a rate cut by
the RBI to boost investment and demand growth.

They have clearly indicated that this repo rate cut is a shift in the
policy stance of the RBI and the Bank will continue on this path.
Corporate loans, too, are set to get cheaper and hence the expected
disbursement of those will increase.
Moreover, as the Narendra Modi government withdrew excise duty
benefit from the auto sector forcing car and two-wheeler makers to
increases prices by 1-5%, this rate cut will help bolster sales as
consumer loans are set to get cheaper.
Rate cuts will also prove to be boon for the Real estate and
Infrastructure sector. Controlling the inflation and reducing the loan
amount will encourage the customers to invest in the sector and
higher participation will increase the volumes.
The World Bank has already indicated that it expects India's GDP to
grow at 6.4% in 2015 and likely to catch up with China in 2016 and
2017. With wholesale inflation at 0.11% in December and retail
inflation at 5%, the RBI has the room to give more cheer to the
market in the coming days.
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However, some bankers said the RBI may go for a status quo and
would like to wait for cues from the Budget presentation before
undertaking any rate cut.
With inflation under control, bankers believe that macroeconomic
indicators are conducive for a further rate cut of 0.25% by RBI, even
as some expect the central bank to maintain a status quo.

United Bank of India has already announced a similar 25 basis points

drop in its base rate. The base interest rate of the Bank now stands
at 10%. The improving fiscal situation, in the wake of a record Rs
22,577 crore garnered from CIL stake sale and weakness in
manufacturing sector are among pointers towards a possible cut in
rates, While lowering the policy repo rate to 7.75% from 8%, RBI had
also said that further rate cuts would depend on inflationary
expectations and improvement in the fiscal situation.

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