Banking and Insurance _course lectue 2 20-Jul-13.pptx

8/14/2019 Banking and Insurance _course lectue 2 20-Jul-13.pptx

1/21

Banking & Insurance

Finance (Sem III)


2/21

Banking systems

Role of Bank Transfer of excess/surplus funds to the credit hungry activities

Efficient usage of money in the economy

Function of bank Deposit facilities

Cash credits (ODs) Advances Bill discounting by trade finance typically working capital finance

Rollover credits

Mortgages

Ebanking

Banking System

Commercial banking Basic banking activity thru borrowing of funds and lending it to business

with restriction on tenor/risk taken by the bank

Banking structure


3/21

Banking systems

Commercial banking (continued)

Branch Banking

Banks bigger in size

Presence across nation thru branches

Controlled by Head-office Pattern took shape in UK

Clearing banks with national level organization and commonality in

banking

Conduct business from Head Office

Occupies different regions with branch network Controlled by same Board of Directors and committees


4/21

Banking systems

Branch Banking

Preference for opening branches

Rural policy

Industry specific policy

In India RBI regulates branch licenses matching with governmentpolicy

Advantages/Strengths

Scale of economy i.e. size

Efficient use of saving

Division of labour Remittances facilities

Risk spread


5/21

Banking systems

Commercial banking

Branch Banking (continued ..)

Disadvantages / Challenges Delegation of power

Decision making delays

Loss of initiatives

Unit Banking

Localized banking structure typically got developed on account of constrainton communication and transport facility

Linked thru correspondent bank system

Concentration in particular region

Pattern took shape in USA (Texas, Illinois) Advantages/Strengths

Local needs

Friendly Image

Mobilization of local deposits


6/21

Banking systems

Commercial banking

Unit Banking

Advantages/Strengths (continued) Speed (decision making)

Customer Friendly

Disadvantages/Challenges

Inefficient usage of deposits Issues for remittance of funds

Risk Concentration

Group Banking Holding company for banking institutions as per bank holding company act (1956) USA

Owns commercial banking as well as NBFCs and other financial institutions

All group companies under holding company exerting control over all group entities

Advantages/Strenghts Low reserves as managed centrally

Economies of scale

Breaking of banking principal ->different sources of assets as well as liabilities

Disadvatages/Challenges Interconnectivity

Funding among group entities

Financial conglomerate may run higher risk for the system as a whole


7/21

Banking systems

Commercial banking

Retail banking

Retail operations

Mobilization of retail deposits from small customers

Retail loan portfolio (lending to small business) High Volume low value transactions

Whole Sale banking

Big Deals

Generally catering towards needs of big corporate

Typically seen in US for financing wall street in Pre War era

Tailor made nature of advances

Development of secondary banking systems

Innovation in banking assets/liabilities


8/21

Banking systems

Commercial banking

Whole Sale banking

Characteristics

Domestic and Foreign currency business

Size of deposits and lending at cheaper processing cost

Nature of advances making it suitable for customer

Growth of secondary market

Matching and Liquidity distribution

Matching principle

Liquidity distribution theory

Banks are liquidity brokers and converts primary securities into technicallydifferent products

Liquidity gets distributed without creating it

Reduce cost, more market information


9/21

Banking systems

Merchant Banking

Widely and loosely used term with major emphasis on following

Corporate financial adviceIssuance of bonds/shares, M&As

Loan Syndication

Holding and dealing in quoted and unquoted securities

Fund management on behalf of clients

Investment Banking

Originator + Underwriter + Retailer

Originator enters into primary negotiations with issuing corporations

Gathering and analyzing of all info regarding issuer intent ofissuance/markets/products/history etc.

Technical/financial and legal analyst to vet details

Agreement with issuer to bring out issue and public subscriptions

Long term capital/financing avenues thru IBs

Entrepreneur of Entrepreneurs


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11/21

Banking systems

Universal Banking (continued)

Disadvantages/Challenges

Size of banking institutions

Failure impact

Systemic Risk for the economy


12/21

Banking systems

Commercial Banking General commercial Principles Emphasis

on safety by regulator

Custodian of surplus funds

Guardian of delicate system doing business with funds of others

Banking Theory

Self Liquidity paper theory

Earning assets of banks limited to short term self liquidating loans

Includes Commercial papers, working capital loans (bill of Exchange drawn

on raw material) Liquidity Perspective

Economic cycle matching

Easy to gauge liquidity posiiton


13/21

Banking systems

Banking Theory (continued..)

Anticipated Income Theory SLP need not always guarantee liquidity for the portfolio (abnormal fall in

prices for the commodities held under loan)

Addition of Long Term Loans against only short term loans

Loans granted on specific agreed conditions between borrower and lender on

how to conduct business Tried to overcome limitations of SLP theory and opening door for new avenues

Liquidity Banks are thought of producers of liquid instruments

What is liquidity ? Shift ability without incurring losses

Measures for Liquidity -> Reserves such as cash reserve ratiosMaximize cash holding=> Increase liquidity

Minimize Cash holding=> Increase profitability

Trade off between Liquidity and profitability

Needs banking experience, customer banking mindedness/habits, locality


14/21

Banking systems

Employments of funds by commercial banks

Cash in hand

Cash reserves with central bank and demand deposits with other banks

Anticipation of cash requirement considering variables such as banking

awareness of customers, banking habits, seasonal demands, locality and rivals Earning assets

Call money/Notice money

Bills discounted automatically liquidating on sale of goods covered by such bill

InvestmentsLiquid instruments

Loans and advancesshort term v/s/ long term

For long term loan bank should consider margin on security, fluctuation and

shiftability

3 Cs cardinal principals for lending -> character, capacity and capital of

borrower


15/21

Banking systems

Fund generation or Liabilities for bank

Deposits

The most acceptable way for generating funds

Banks are licensed authority to create this liability

Helps creating pool of retail savings employed for activities helpingeconomy

Money market operations

Call money/Notice money

Issuance of Certificates of deposits (CDs)

Inter bank markets

Secondary markets

ADR/GDR issuance- Overseas borrowing

Liability side has undergone a change from typical depositgeneration to market borrowing


16/21

Banking systems

Mechanism of credit generation

Holding of idle cash at lowest level possible

This increases amount of money in circulation

Bank while lending money does not give out whole cash in one go

It creates credit for borrower and allows to draw cheques to fulfill

borrowers obligations

When cheques deposited by third party, their deposit amt go up

What about transacting securities-> it has also similar characteristics

One hypothetical example in which there is single bank with deposit ofINR 10,000 and required cash reserve ratio of 10%

B/s of bank will be shown as follows


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Banking systems

Mechanism of credit generation Hypothetical example (continues )

As per our assumption bank needs to maintain cash reserve ratio of 10%

i.e INR 1000 The bank is now eligible to make loans of INR 9000 which will be placed in

credit of the borrower giving right to them to operate their account usingcheques and creating obligation on bank to honour the payment

This INR 9,000 gives purchasing power to borrower and works as good asmoney

Liabilities Assets

Deposits 10,000 Cash in hand 10,000

Liabilities Assets


Credit to

borrower 9,000

Loans to

client 9,000


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Banking systems


The payees of this cheque will not require actual cash over the counter

and they will deposit this in their bank account

It cause merely transfer of credit balance from one account to other Thus legal tender money in the economy is INR 10000, through the

process of creating additional credit line for borrower the bank has added

9,000 more to money circulation

The continuation of process will increase money supply furtherLiabilities Assets


Credit to

borrower 9,000

Loans to client

Credit to

subsequent

custy 8,100

a) 9000

b) 8,100 17,100


19/21

Banking systems


Limitation to creation of credit

Cash reserve ratio

Money supply by central bank

Bankers are not just merely purveyors of money but the artist

manufacturing money

New age banking

Bank with single branch operating in many places

IT revolution -> Ebanking and online payments/transfer facilities

Does the Place among 5 Ps of marketing matter?


20/21

Banking systems


Limitation to creation of credit

Cash reserve ratio

Money supply by central bank

Bankers are not just merely purveyors of money but the artist

manufacturing money

New age banking

Bank with single branch operating in many places

IT revolution -> Ebanking and online payments/transfer facilities

Does the Place among 5 Ps of marketing matter?


21/21

Banking systems

India banking system

Scheduled banks

Scheduledcommercial banks

ScheduledCooperative banks

Private bankssPublic sector

bankss

Nationalized

bankss

SBI and

Associated banksOld private banks

New Private

Banks

Banking and Insurance _course lectue 2 20-Jul-13.pptx

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Transcript of Banking and Insurance _course lectue 2 20-Jul-13.pptx