Banking Foundation Course

8/12/2019 Banking Foundation Course

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Foundation Course in Banking


Version : 2.1

Date : 04-August-2005

Cognizant Technology Solutions500 Glenpointe Centre West

Teaneck, NJ 0!!!"h# $0%&'0%&0$((

)))*cognizant*co+


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Business & T -odel . Cards /%*0% "age ( o1 $0


1.1.1)+or'orate Actions.....................................................................................................................17%

1.1.125ncome -rocessing ....................................................................................................................17%

1.1.17-ro6y 8oting..............................................................................................................................179

1.1.1%Ta6 -rocessing..........................................................................................................................1%

15 2.1!.CORPORATE SER"ICES.......................................................................................................182

16 3.RECENT DE"ELOPMENTS.......................................................................................................188

17 4.GLOSSARY.....................................................................................................................................2!!

18 5.REFERENCES................................................................................................................................2!8


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Business & T -odel . Cards /%*0% "age 5 o1 $0


1.1. T#E COCE"T OF $OE%


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Business & T -odel . Cards /%*0% "age ! o1 $0


T#E COCE"T OF $OE%

DEF&&' $OE%

3-oney is a standardized unit o1 e4change* The practical 1or+ o1 +oney is currency* t /ariesacross countries )hereas +oney re+ains the sa+e* For e4a+ple, in ndia, the currency is thendian 6upee 7N68 and in the 9S, it is the 9S :ollar 79S:8*

:ue to /arious econo+ic 1actors, the /alue o1 each country;s currency is not e N6 2!*0,it i+plies that one 9*S dollar is e 5

1 they continued to recei/e 5A interest on the original %00 a+ount, o/er 1i/e years the gro)th intheir in/est+ent )ould look like this#

Dear %# 75A o1 %00 > 58 E %00 > %05

Dear $# 75A o1 %00 > 58 E %05 > %%0

Dear (# 75A o1 %00 > 58 E %%0 > %%5

Dear 2# 75A o1 %00 > 58 E %%5 > %$0

Dear 5# 75A o1 %00 > 58 E %$0 > %$5

Co*+ound interest
http://openwin%28%27/common/glossary.mv?simple_interest%27,%27term%27,%27%27,%27450%27,%27200%27)http://openwin%28%27/common/glossary.mv?compound_interest%27,%20%27term%27,%27%27,%27450%27,%27200%27)http://openwin%28%27/common/glossary.mv?compound_interest%27,%20%27term%27,%27%27,%27450%27,%27200%27)http://openwin%28%27/common/glossary.mv?simple_interest%27,%27term%27,%27%27,%27450%27,%27200%27)


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Business & T -odel . Cards /%*0% "age o1 $0


With co+pound interest, interest is calculated not only on the =eginning interest, =ut on anyinterest accu+ulated )ith the initial principal in the +eanti+e* Co+pound interest >"1r1003t "67)here# " is the "rincipal or the initial a+ount you are initially =orro)ing ordepositing, to earn or charge interest on, r is the interest rate and t is the ti+e period*

E/a*+,e

1 so+eone )ere to recei/e 5A co+pound interest on a =eginning /alue o1 %00, the 1irst yearthey )ould get the sa+e thing as i1 they )ere recei/ing si+ple interest on the %00, or 5* Thesecond year, though, their interest )ould =e calculated on the =eginning a+ount in year $, )hich)ould =e %05* So their interest )ould =e#

*05 4 %05 > 5*$5

1 this )ere to continue 1or 5 years, the gro)th in the in/est+ent )ould look like this#Dear %# 75A o1 %00*00 > 5*008 E %00*00 > %05*00

Dear $# 75A o1 %05*00 > 5*$58 E %05*00 > %%0*$5

Dear (# 75A o1 %%0*$5 > 5*5%8 E %%0*$5 > %%5*!

Dear 2# 75A o1 %%5*! > 5*8 E %%5*! > %$%*55

Dear 5# 75A o1 %$%*55 > !*0'8 E %$%*55 > %$*!(

Note that in co+paring gro)th graphs o1 si+ple and co+pound interest, in/est+ents )ith si+pleinterest gro) in a linear 1ashion and co+pound interest results in geo+etric gro)th* So )ithco+pound interest, the 1urther in ti+e and in/est+ent is held the +ore dra+atic the gro)th=eco+es*

&FLAT&O

n1lation captures the rise in the cost o1 goods and ser/ices o/er a period o1 ti+e* For e4a+ple, i16s*%00 today can =uy 5 kg o1 groceries, the sa+e a+ount o1 +oney can only =uy 57%E8 kgs* 1groceries ne4t year, )here re1ers to the rate o1 in1lation =eyond today*

Thus, i1 the in1lation rate is 5A, then e/erything else =eing e


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Business & T -odel . Cards /%*0% "age ' o1 $0


n1lation results in a decrease in the /alue o1 +oney o/er ti+e* The link =et)een the interestrates, no+inal and real, and in1lation ena=les you to identi1y this i+pact*

o*ina, &nterest

No+inal rate o1 interest 7N8 re1ers to the stated interest rate in the econo+y*For e4a+ple, i1counter&party de+ands %%0 rupees a1ter a year in return 1or %00 rupees lent today, the no+inalrate o1 interest is %0A* This, as you see, includes the in1lation rate*

E/a*+,e

Dou;/e lent out %00 rupees, at %0A, 1or one year* n +aturity, you get a pro1it, so you think, o1 %0rupees* But this su+ o1 %%0 rupees =uys less than %%0 rupees did a year ago, due to in1lationThus, the /alue o1 %%0 rupees today is actually, or really, less than the /alue o1 %%0 rupees a yearago, and it is less =y the in1lation rate* Thus the real interest you earned is less than %0A*

(ea, rate o8 &nterest

6eal rate o1 interest 768 re1ers to the in1lation&adKusted rate o1 interest* t is less than the no+inalrate o1 interest 1or econo+ies ha/ing positi/e rate o1 in1lation*

The relationship =et)een the 6 7real rate o1 interest8, N 7no+inal rate o1 interest8 and 7rate o1in1lation8 is as#

6> N&

7This is a )idely used appro4i+ation? the e4act 1or+ula takes into account ti+e /alue o1 in1lationetc*8

Why is it i+portant to kno) the real rate o1 returnL Take an e4a+ple )here a =usiness is earninga net pro1it o1 A per annu+* But, in1lation is also standing at A* So, real pro1it is actually atzero*

E/a*+,e

No+inal rate 7N8 > %0A, n1lation 78 > 5A

There1ore, real interest is#

6 > N . > 5A

There1ore, the real rate o1 return is not %0A =ut 5A*

T&$E VAL)E COCE"T OF $OE%

Ti+e /alue o1 +oney, )hich ser/es as the 1oundation 1or +any concepts in 1inance, arises 1ro+the concept o1 interest* Because o1 interest, +oney on hand no) is )orth +ore than the sa+e+oney a/aila=le at a later point o1 ti+e* To understand ti+e /alue o1 +oney and related concepts


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like "resent /alue and 1uture /alue, )e need to understand the =asic concepts o1 si+ple andco+pound interest descri=ed a=o/e*

Future Va,ue

Future Malue is the /alue that a su+ o1 +oney in/ested at co+pound interest )ill ha/e a1ter aspeci1ied period*

The 1or+ula 1or Future Malue is#

FV 9 "V1 i3n

Where#

FM # Future Malue at the end o1 n ti+e periods

"M # Beginning /alue 6 "resent Malue

i # nterest rate per unit ti+e period

n # Nu+=er o1 ti+e periods

E/a*+,e

1 one )ere to recei/e 5A per annu+ co+pounded interest on %00 1or 1i/e years,

FM > %007%*0585> %$*!(

&ntra-ear ;o*+ounding

1 a cash 1lo) is co+pounded +ore 1re


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Business & T -odel . Cards /%*0% "age %0 o1 $0


E/a*+,e

Suppose so+eone )ere to in/est %0,000 at 'A interest, co+pounded se+iannually, and hold it1or 1i/e years*,

nterest rate 1or co+pounding period > 'A$ > 2A

Nu+=er o1 co+pounding periods > 5$ > %0

Thus, the 1uture /alue FM > %0,0007%E0*028%0 > %2,'0$*22

"resent %0,0007%E0*058 > ,5$(*'%

et "resent Va,ue "V3

Net "resent Malue 7N"M8 is a concept o1ten used to e/aluate proKectsin/est+ents using the:iscounted Cash Flo) 7:CF8 +ethod* The :CF +ethod si+ply uses the ti+e /alue concept anddiscounts 1uture cash 1lo)s =y the applica=le interest rate 1actor to arri/e at the present /alue o1the cash 1lo)s* N"M 1or a proKect is calculated =y esti+ating net 1uture cash 1lo)s 1ro+ theproKect, discounting these cash 1lo)s at an appropriate discount rate to arri/e at the present /alueo1 1uture cash 1lo)s, and then su=tracting the initial outlay on the proKect*

N"M o1 a proKectin/est+ent > :iscounted /alue o1 net cash in1lo)s . nitial costin/est+ent* TheproKectin/est+ent is /ia=le i1 N"M is positi/e )hile it is not /ia=le i1 N"M is negati/e*
http://openwin%28%27/common/glossary.mv?present_value%27,%20%27term%27,%27%27,%27450%27,%27200%27)http://openwin%28%27/common/glossary.mv?present_value%27,%20%27term%27,%27%27,%27450%27,%27200%27)


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Business & T -odel . Cards /%*0% "age %% o1 $0


E/a*+,e

In in/estor has an opportunity to purchase a piece o1 property 1or 50,000 at the =eginning o1 theyear* The a1ter&ta4 net cash 1lo)s at the end o1 each year are 1orecast as 1ollo)s#

Dear Cash Flo)

% ,000

$ ',500

( ',000

2 ',000

5 ',000

! ',000

',000

' ,000

2,500

%0 5%,000 7property sold at the end o1 the %0th year8

Issu+e that the re & 50000 E 0007%E0*%!8%E '5007%E0*%!8$E O** E5%0007%E0*%!8%0 > 7%(!0*8

Thus, it can =e seen that the N"M is highly sensiti/e to re


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Business & T -odel . Cards /%*0% "age %$ o1 $0


n the pre/ious e4a+ple, the 66 is that /alue o1 re & 50000 E 0007%Er8%E '5007%Er8$E O** E5%0007%Er8%0 > 0*00

66 can =e calculated using trial and error +ethods =y using /arious /alues 1or r or using the 661or+ula directly in -S Q4cel* Pere, 66 > %5*(0A* n other ter+s, 66 is the rate o1 return at)hich the proKectin/est+ent =eco+es /ia=le*


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Business & T -odel . Cards /%*0% "age %( o1 $0


1.2. F&AC&AL &!T()$ET!


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F&AC&AL &!T()$ET!

(A&!&' CA"&TAL

Corporations need capital to 1inance =usiness operations* They raise +oney =y issuing Securitiesin the 1or+ o1 Equityand Debt* Q


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Bonds that are issued today are +ost likely to =e issued 1ully registered as to =oth interest andprincipal* The trans1er agent no) sends interest pay+ents to o)ners o1 record on the interest#ayable Date* Boo$ Entry=onds are still 1ully registered, =ut there is no physical certi1icate andthe trans1er agent keeps track o1 o)nership* 9*S* Go/ern+ent %egotiable securities 7i*e*,&reasury Bills, %otes and Bonds8 are issued =ook entry, )ith no certi1icate* The custo+er;sCon'ir(ationser/es as proo1 o1 o)nership*

"rin;i+a, and &nterest

Bondholders are pri+arily seeking inco+e in the 1or+ o1 a se+i&annual coupon pay+ent* Theannual rate o1 return 7also called Coupon, Fi)ed, *tatedor %o(inal +ield8 is noted on the =ondcerti1icate and is 1i4ed* The 1actors that in1luence the =ondRs initial coupon rate are pre/ailingecono+ic conditions 7e*g*, +arket interest rates8 and the issuerRs credit rating 7the higher thecredit rating, the lo)er the coupon8* Bonds that are In De'aultare not paying interest*

The principal or par or Facea+ount o1 the =ond is )hat the in/estor has loaned to the issuer* Therelati/e sa1ety o1 the principal depends on the issuer;s credit rating and the type o1 =ond that)as issued*

Cor+orate =ond

I =ond issued =y a corporation* Corporations generally issue three types o1 =onds# *ecuredBonds, !nsecured Bonds 7:e=entures8, and *ubordinated Debentures.

Ill corporate =onds are =acked =y the 1ull 1aith and credito1 the issuer, =ut a secured =ond is1urther =acked =y speci1ic assets that act as collateral 1or the =ond*

n contrast, unsecured =onds are =acked =y the general assets o1 the corporation only* There arethree =asic types o1 Secured Bonds#

"ortgage Bondsare secured =y real estate o)ned =y the issuer

Equip(ent &rust Certi'icates are secured =y e


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Business & T -odel . Cards /%*0% "age %! o1 $0


$uni;i+a, =ond $unis3

I =ond issued =y a +unicipality* These are generally ta4 1ree, =ut the interest rate is usuallylo)er than a ta4a=le =ond*

Treasur !e;urities

Treasury =ills, notes, and =onds are +arketa=le securities the 9*S* go/ern+ent sells in order topay o11 +aturing de=t and raise the cash needed to run the 1ederal go/ern+ent*When an in/estor=uys one o1 these securities, heshe is lending +oney to the 9*S* go/ern+ent*

Treasur =i,,sare short&ter+ o=ligations issued 1or one year or less*They are sold at a discount1ro+ 1ace /alue and donRt pay interest =e1ore +aturity * The interest is the di11erence =et)een thepurchase price o1 the =ill and the a+ount that is paid to the in/estor at *aturit 8a;e


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Business & T -odel . Cards /%*0% "age % o1 $0


corporate =onds )ill o11er a higher return than a go/ern+ent =ond* t is i+portant 1or in/estors toresearch a =ond Kust as they )ould a stock or +utual 1und* The =ond rating )ill help indeciphering the de1ault risk*

Co**er;ia, +a+er

In unsecured, short&ter+ loan issued =y a corporation, typically 1or 1inancing accounts recei/a=leand in/entories* t is usually issued at a discount to 1ace /alue, re1lecting pre/ailing +arketinterest rates* t is issued in the 1or+ o1 pro+issory notes, and sold =y 1inancial organizations asan alternati/e to =orro)ing 1ro+ =anks or other institutions* The paper is usually sold to otherco+panies )hich in/est in short&ter+ +oney +arket instru+ents*

Since co++ercial paper +aturities donRt e4ceed nine +onths and proceeds typically are usedonly 1or current transactions, the notes are e4e+pt 1ro+ registration as securities )ith the 9nitedStates Securities and Q4change Co++ission* Financial co+panies account 1or nearly 5 percento1 the co++ercial paper outstanding in the +arket*

There are t)o +ethods o1 +arketing co++ercial paper* The issuer can sell the paper directly tothe =uyer or sell the paper to a dealer 1ir+, )hich re&sells the paper in the +arket* The dealer+arket 1or co++ercial paper in/ol/es large securities 1ir+s and su=sidiaries o1 =ank holding

co+panies* :irect issuers o1 co++ercial paper usually are 1inancial co+panies )hich ha/e1re


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Business & T -odel . Cards /%*0% "age %' o1 $0


Co**on sto;k

Co++on stock represents an o)nership interest in a co+pany* )ners o1 stock also ha/eLi(ited Liability7i*e*8 the +a4i+u+ a shareholder can lose is their original in/est+ent* -ost o1 thestock traded in the +arkets today is co++on* In indi/idual )ith a +aKority shareholding or

controlling interest controls a co+panyRs decisions and can appoint anyone heshe )ishes to the=oard o1 directors or to the +anage+ent tea+*

Corporations seeking capital sell it to in/estors through a #ri(ary ''eringor an Initial #ublic''ering -I#. Be1ore shares can =e o11ered, or sold to the general pu=lic, they +ust 1irst =eregistered )ith the *ecurities and E)cange Co((ission -*EC* nce the shares ha/e =eensold to in/estors, the shareholders are usually 1ree to sell or trade their stock shares in theSecondary Markets su;@ as t@e e %ork !to;k E/;@ange NYSE3.Fro+ ti+e to ti+e, thessuer +ay choose to repurchase the stock they pre/iously issued* Such repurchased stockshares are re1erred to as &reasury *toc$,and the shares that re+ain trading in the secondary+arket are re1erred to as *ares utstanding* Treasury Stock does not ha/e /oting rights and isnot entitled to any declared di/idends* Corporations +ay use Treasury Stock to pay a stockdi/idend, to o11er to e+ployees*


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!to;k Ter*ino,og

#ublic ''ering #rice 7##8. The price at )hich shares are o11ered to the pu=lic in a #ri(ary''ering* This price is 1i4ed and +ust =e +aintained )hen !nderwriterssell to custo+ers*

Current "ar$et #rice. The price deter+ined =y Supply and :e+and in the Secondary -arkets*

Boo$ /alue 0 The theoretical li


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Business & T -odel . Cards /%*0% "age $0 o1 $0


A*eri;an De+ositor (e;ei+ts AD(3

The purpose o1 an I:6 is to 1acilitate the do+estic trading o1 a 1oreign stock* InI:6 is a receipt1or a speci1ied nu+=er o1 1oreign shares o)ned =y an I+erican =ank* I:6s trade like shares,either on a 9*S* Q4change or /er the Counter* The o)ner o1 an I:6 has /oting rights and also

has the right to recei/e any declared di/idends* In e4a+ple )ould =e n1osys I:6s that aretraded in NIS:IU*

#%B(&D!

Py=rids are securities, )hich co+=ine the characteristics o1 e


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Business & T -odel . Cards /%*0% "age $% o1 $0


I 1or)ard contract is an agree+ent to =uy or sell an asset 7o1 a speci1ied


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Business & T -odel . Cards /%*0% "age $$ o1 $0


Euro+ean o+tionscan only =e e4ercised at the end o1 their li1e*

Long-Ter* O+tionsare options )ith holding period o1 one or +ore years, and they are calledVQI"S 7Vong&Ter+ Q


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Business & T -odel . Cards /%*0% "age $( o1 $0


Forard !a+ agree+ents are created through the synthesis o1 t)o di11erent s)aps, di11ering induration, 1or the purpose o1 1ul1illing the speci1ic ti+e1ra+e needs o1 an in/estor* So+eti+ess)aps donRt per1ectly +atch the needs o1 in/estors )ishing to hedge certain risks* For e4a+ple, i1

an in/estor )ants to hedge 1or a 1i/e&year duration =eginning one year 1ro+ today, they can enterinto =oth a one&year and si4&year s)ap, creating the 1or)ard s)ap that +eets the re


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1.. F&AC&AL $A(ET!


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F&AC&AL $A(ET!

#AT A(E F&AC&AL $A(ET!

I 1inancial transaction is one )here a 1inancial asset or instru+ent, such as cash, check, stock,=ond, etc are =ought and sold* Financial -arket is a place )here the =uyers and sellers 1or the

1inancial instru+ents co+e together and 1inancial transactions take place*

T%"E! OF F&AC&AL $A(ET!

"ri*ar $arkets

"ri+ary +arket is one )here ne) 1inancial instru+ents are issued 1or the 1irst ti+e* They pro/idea standard institutionalized process to raise +oney* The pu=lic o11erings are done through aprospectus* I prospectus is a docu+ent that gi/es detailed in1or+ation a=out the co+pany, theirprospecti/e plans, potential risks associated )ith the =usiness plans and the 1inancial instru+ent*

!e;ondar *arkets

Secondary -arket is a place )here pri+ary +arket instru+ents, once issued, are =ought andsold*In in/estor +ay )ish to sell the 1inancial asset and encash the in/est+ent a1ter so+e ti+eor the in/estor +ay )ish to in/est +ore, =uy +ore o1 the sa+e asset instead, the decisionin1luenced =y a /ariety o1 possi=le reasons* They pro/ide the in/estor )ith an easy )ay to =uy orsell*

T@e Di88erent Finan;ia, $arkets

I 1inancial +arket is kno)n =y the type o1 1inancial asset or instru+ent traded in it* So there areas +any types o1 1inancial +arkets as there are o1 instru+ents* Typical e4a+ples o1 1inancial+arkets are#

Stock +arket

Bond 7or 1i4ed inco+e8 +arket -oney +arket

Foreign e4change 7Fore4 or F 1or short8 +arket 7also called thecurrency +arket8*

Stock and =ond +arkets constitute the capital +arkets* Inother =ig 1inancial +arket is thederi/ati/es +arket*

CA"&TAL $A(ET!

@ =usinesses need ;a+ita,

Ill =usinesses need capital, to in/est +oney up1ront to produce and deli/er the goods andser/ices* 11ice space, plant and +achinery, net)ork, ser/ers and "Cs, people, +arketing,licenses etc* are Kust so+e o1 the co++on ite+s in )hich a co+pany needs to in/est =e1ore the=usiness can take o11* Q/en a1ter the =usiness takes o11, the cash or +oney generated 1ro+ sales+ay not =e su11icient to 1inance e4pansion o1 capacity, in1rastructure, and products ser/icesrange or to di/ersi1y or e4pand geographically* So+e 1inancial ser/ices co+panies need to raiseadditional capital periodically in order to satis1y capital ade


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Business & T -odel . Cards /%*0% "age $! o1 $0


For =usinesses to thri/e and gro), presence o1 /i=rant and e11icient capital +arkets is e4tre+elyi+portant* Capital +arkets ha/e 1ollo)ing 1unctions#

%* Channeling 1unds 1ro+ 3sa/ings pool to 3in/est+ent pool & channeling 1unds 1ro+ 3those)ho ha/e +oney to 3those )ho need 1unds 1or =usiness purpose*

$* "ro/iding li


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Business & T -odel . Cards /%*0% "age $ o1 $0


State o1 the country;s econo+y )here it operates as )ell as theglo=al econo+y

-arket senti+ent or +ood relating to the stock and on the +arket asa )hole

Ipart 1ro+ these, +any other 1actors, including per1or+ance o1 other 1inancial +arkets, a11ect the

de+and and supply*

BOD $A(ET!

Is the na+e suggests, =onds are issued and traded in these +arkets* Go/ern+ent =ondsconstitute the =ulk o1 the =onds issued and traded in these +arkets* Bond +arkets are alsoso+eti+es called Fi4ed nco+e +arkets* While so+e o1 the =onds are traded in e4changes, +osto1 the =ond trading is conducted o/er&the&counter 7TC8, i*e* =y direct negotiations =et)eendealers*Vately there ha/e =een e11orts to create co+puter&=ased +arket place 1or certain type o1=onds*

"arti;i+ants in t@e Bond $arket

Since Go/ern+ent is the =iggest issuer o1 =onds, the central =ank o1 the country such as Federal6eser/e in 9S and 6eser/e Bank o1 ndia in ndia, is the =iggest player in the =ond +arket* Vikestock +arkets, one needs to =e an authorized dealer o1 Go/t* securities, to su=scri=e to the =ondissues* Typically, the Go/t* =ond issues are +ade =y )ay o1 auctions, )here the dealers =id 1orthe =onds and the price is 1i4ed =ased on the =ids recei/ed* The dealers then sell these =onds inthe secondary +arket or directly to third parties, typically institutions and co+panies*

&8 t@e interest rate is 8i/ed 8or ea;@ =ond7 @ do t@e =ond +ri;es 8,u;tuate

Bond prices 1luctuate =ecause the interest rates as )ell as the perceptions o1 in/estors on thedirection o1 interest rates change* 6e+e+=er, =ond pays interest at a 1i4ed coupon ratedeter+ined at the ti+e o1 issue, irrespecti/e o1 the pre/ailing +arket interest rate* -arket interestrates are =ench+ark interest rates, such as Treasury =ill rates, )hich are su=Kect to change

=ecause o1 /arious 1actors such as in1lation, +onetary policy change, etc* So )hen the pre/ailing+arket interest rates change, price o1 the =ond 7and not the coupon8 adKusts, so that the e11ecti/eyield 1or a =uyer at the ti+e 7i1 the =ond is held to +aturity8 +atches the +arket interest rate onother =onds o1 e


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Business & T -odel . Cards /%*0% "age $' o1 $0


FO(E&' EC#A'E $A(ET

Foreign e4change +arkets are )here the 1oreign currencies are =ought and sold * For e4a+ple,i+porters need 1oreign currency to pay 1or their i+ports* Go/ern+ent needs 1oreign currency topay 1or its i+ports such as de1ense e ndian 6upee 7N68 2!, 9S: % > Great Britain "ound7GB"8 0*!%$5, 9S: % > Quro 0*''0 etc* n this e4a+ple, 9S: is the 1i4ed currency and N6,GB", Quro are the /aria=le currencies*

9S :ollar, British Sterling 7"ound8, Quro and Japanese Den are the +ost traded currencies)orld)ide, since +a4i+u+ =usiness transactions are carried out in these currencies*

The e4change rate at any ti+e depends upon the de+and . supply e


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pro1ita=ility o1 in/est+ents +ade =y 1oreign co+panies in that country* 6egulators try to ensurethat the 1luctuations are not caused =y any 1actor other than the +arket 1orces*

$OE% $A(ET

-oney +arket is 1or short ter+ 1inancial instru+ents,usually a day to less than a year* The +ostco++on instru+ent is a 3repo, short 1or repurchase agree+ent* I repo is a contract in )hich theseller o1 securities, such as Treasury Bills, agrees to =uy the+ =ack at a speci1ied ti+e and price*Treasury =ills o1 /ery short tenure, co++ercial paper, certi1icates o1 deposits etc* are also

considered as +oney +arket instru+ents*Since the tenure o1 the +oney +arket instru+ents is /ery short, they are generally consideredsa1e* n 1act they are also called cash instru+ents* 6epos especially, since they are =acked =y aGo/t* security, are considered /irtually the sa1est instru+ent* There1ore the interest rates onrepos are the lo)est a+ong all 1inancial instru+ents*

$one *arket instru*entsare typically used =y =anks, institutions and co+panies to park e4tracash 1or a short period or to *eet t@e regu,ator reser


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Business & T -odel . Cards /%*0% "age (0 o1 $0


Typically the go/ern+ent designates one or +ore agencies as regulator7s8 and super/isor7s8 1orthe 1inancial +arkets* Thus ndia has !e;urities and E/;@ange Board o8 &ndia !EB&3and the9S has Securities and Q4change Co++ission 7SQC8* These regulatory =odies 1or+ulate rulesand nor+s 1or each acti/ity and each category o1 participant* For e4a+ple,

Qligi=ility nor+s 1or a co+pany to =e allo)ed to issue stock or =onds,

6ules regarding the a+ount o1 in1or+ation that +ust =e +adea/aila=le to prospecti/e in/estors,

6ules regarding the issue process,

6ules regarding periodic declaration o1 1inancial state+ents, etc*

6egulators also +onitor the capital +arket acti/ity continuously to ensure that any =reach o1 la)sor rules does not go unnoticed* To help this 1unction, all +e+=ers and issuers ha/e to su=+itcertain periodic reports to the regulator disclosing all rele/ant details on the transactionsundertaken*

F&AC&AL $A(ET !%!TE$!

The de+ands o1 the capital +arket transactions, the need 1or tracking and +anaging risks, the

pressure to reduce total transaction costs and the o=ligation to +eet co+pliance re


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Business & T -odel . Cards /%*0% "age (% o1 $0


A;;ounting !ste*s

The accounting syste+s take care o1 present /alue calculations, pro1it H loss etc*& o1 in/est+entsand 1unds and not the 1inancial accounts o1 the 1ir+s*


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Business & T -odel . Cards /%*0% "age ($ o1 $0


!)$$A(%

Financial +arkets 1acilitate 1inancial transactions, i*e* e4change o11inancial assets such stocks, =onds, etc*

Financial +arkets =ring =uyers and sellers in a 1inancial instru+enttogether, thus reducing transaction costs, channeling 1unds,

i+pro/ing li


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Business & T -odel . Cards /%*0% "age (( o1 $0


2. BA&'


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2.1. &T(OD)CT&O TO BA&'


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&T(OD)CT&O TO BA&'

#AT &! A BA

The ter+ @Bank1 is used generically to re1er to any 1inancial institution that is licensed to a;;e+tde+osits and issue ;redit t@roug@ ,oans.

Banks are the =ack=one o1 any econo+y, as all +onetary transactions end up touching =anks*The +ain 1unctions o1 =anks are to#

Channelize Sa/ings

"ro/ide credit 1acilities to =orro)er

"ro/ide in/est+ent a/enues to in/estors

Facilitate the trade and co++erce dealings

"ro/ide 1inancial =ack=one to support econo+ic gro)th o1 thecountry

-ini+ize Cash Transactions

"ro/ide Ser/ices

#% DO E EED A BA

They pro/ide a return 7pay interest8 on our sa/ing

Sa1ety o1 principal and interest

Con/enience o1 =eing a=le to )rite checks and use de=it cards

6aising 1unds )hen )e need

Fro+ the =usiness or econo+ic point o1 /ie), ho)e/er, =anks are the pri+ary source o1 1inance*Since the deposits o1 the s+all in/estors are protected, =ank deposits are considered a lo) riskin/est+ent a/enue* :ue to their access to a large source o1 1unds at /ery lo) cost, o)ing largelyto the lo) interest rate on sa/ings and ter+ deposits, =anks are in the =est position to lend to=usinesses and indi/iduals at co+petiti/e interest rates*

#AT &! T#E CET(AL BA AD #AT A(E &T! (OLE!

The Central =ank o1 any country can =e called the =anker;s =ank* t acts as a regulator 1or other=anks, )hile pro/iding /arious 1acilities to 1acilitate their 1unctioning* t also acts as theGo/ern+ent;s =ank* The Federal 6eser/e is the central =ank o1 the 9nited States, )hile 6eser/eBank o1 ndia is the central =ank in ndia*

The +ain o=Kecti/e o1 a central =ank is to pro/ide the nation )ith a sa1er, +ore 1le4i=le, and +oresta=le +onetary and 1inancial syste+* They ha/e the 1ollo)ing responsi=ilities#

Conducting the nationRs +onetary policy* Central =anks de1ine the+onetary policy and then take necessary actions to create anen/iron+ent to +ake those policies 1easi=le* Q*g* i1 the central =ank

)ants to +aintain so1t interest rate, they can reduce the C66 topu+p in +ore +oney in the econo+y*

Super/ising and regulating =anking institutions and protecting therights o1 consu+ers

-aintaining the sta=ility o1 the 1inancial syste+, i*e* sta=ility o1interest rates and 1oreign e4change rate*

Qnsuring that the interest rates re+ain at such a le/el as to +ake=usiness /ia=le


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Business & T -odel . Cards /%*0% "age (! o1 $0


Qnsuring that su11icient 1unds are a/aila=le 1or long ter+ in/est+entto =usinesses as )ell as go/ern+ent, )ithout causing in1lation to rise

"ro/iding certain 1inancial ser/ices to the go/ern+ent, the pu=lic,1inancial institutions, and 1oreign o11icial institutions

-onitoring the 1oreign currency assets and lia=ilities and +onitoring

the in1lo) and out1lo) o1 1oreign currency

BA!7 ECOO$% AD A$O)T OF $OE%

Banks 1acilitate the creation o1 +oney in the econo+y* The pri+ary 1unction o1 =anks is to putaccount holdersR +oney to use =y lending it out to others )ho can then use it to =uy ho+es,=usinesses etc*

Vet;s look at an e4a+ple as ho) =anks do this* The a+ount o1 +oney that =anks can lend isdirectly a11ected =y the reser/e re


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#O DO BA! $AE $OE%

Banks are like any other regulated =usiness? the product they deal )ith is 3-oney* So they=orro) +oney 1ro+ indi/idual or =usinesses 3)ho ha/e +oney, and lend it to those 3)ho need+oney, =y adding a +ark up, to pay 1or e4penses and pro1it* The di11erence =et)een the rates,)hich =anks o11er to depositors and lenders, is generally re1erred to as 3Spread* 9nderstanda=ly,the spread in this =usiness is lo)? hence increasing the turno/er 7/olu+e8 is the key to +akingpro1it* Pence, in practice, =anks o11er a nu+=er o1 options . o1ten ter+ed as 3products & to =othin/estors and =orro)ers to +eet their di11erent re


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Business & T -odel . Cards /%*0% "age (' o1 $0


o Sales, Trading H 6esearch

Q


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!i no. Co*+an a*e Tota, Assets Tota, De+ositsK Co++erce Bancorp, nc* $2,55 $$,''( Capital ne Bank $2,5%5 %$,$%(40 Syno/us Financial Corp* $$,$'! %!,$%241 I+erican Q4press Centurion

Bank $0,2%( ','5'42 Issociated Banc&Corp %,$52 %$,(54 6BC Centura Banks, nc* %,$($ ,(244 :isco/er Bank %,%0 %(,2045 Pi=ernia Corporation %',% %2,''$4I T: Waterhouse Group, nc* %,00 ,!(04J Colonial BancGroup, nc* %!,2 %0,0504K We=ster Financial Corporation %5,00 ',!('4 Co++erce Bancshares, nc* %2,2'5 %0,$5(50 -errill Vynch Bank H Trust

Co+pany %2,( %$,$5$


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)&VE(!AL BA&'

The uni/ersal =anking concept per+its =anks to pro/ide co++ercial =ank ser/ices, as )ell asin/est+ent =ank ser/ices at the sa+e ti+e*

',ass-!teaga,,Ict o1 %((, created a Chinese )all =et)een co++ercial =anking and securities=usinesses in 9S* That act )as intended to address the percei/ed causes o1 =ank 1ailures during

the Great :epression o1 %$*Today, Glass&Steagall restrictions ha/e =eco+e outdated and unnecessary* t has =eco+e clearthat pro+oting sta=ility and =est practices cannot =e done through arti1icially separating these=usiness areas* /er the years, =anks and securities 1ir+s ha/e =een 1orced to 1ind /ariousloopholes in the Glass&Steagall =arriers* The restrictions under+ined the a=ility o1 I+erican=anks to co+pete )ith the other glo=al =anks )hich )ere not co/ered =y such legislation*

-ost o1 Glass&Steagall pro/isions ha/e =een repealed in the 9S in %0s ena=ling the =anks too11er a 1ull range o1 co++ercial and in/est+ent =anking ser/ices to their custo+ers*

E/a*+,e

n the late %0s, =e1ore legislation o11icially eradicated the Glass&Steagall Ict;s restrictions,the in/est+ent and co++ercial =anking industries )itnessed an a=undance o1 co++ercial=anking 1ir+s +aking 1orays into the &=anking )orld* The +ania reached a height in thespring o1 %'* n %', NationsBank =ought -ontgo+ery Securities, SociYtY GYnerale=ought Co)en H Co*, First 9nion =ought Wheat First and Bo)les Pollo)ell Connor, Bank o1

I+erica =ought 6o=ertson Stephens 7and then sold it to BankBoston8, :eutsche Bank =oughtBankers Trust 7)hich had =ought Ile4* Bro)n +onths =e1ore8, and Citigroup )as created in a+erger o1 Tra/elers nsurance and Citi=ank*

While so+e co++ercial =anks ha/e chosen to add &=anking capa=ilities through ac


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Business & T -odel . Cards /%*0% "age 2% o1 $0


!)$$A(%

Banks are an integral part o1 any econo+y channelizing sa/ings 1ro+lenders to =orro)ers

Bank deposits are lo) risk in/est+ents

The Central =ank is the 3Bankers; Bank and it regulates other =anks

in an econo+y* Central =anks de1ine a nation;s +onetary policy

I =ank +akes a pro1it =y in/esting or lending +oney that is earning ahigher rate o1 interest than it pays to its depositors*

I =ank is re


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Business & T -odel . Cards /%*0% "age 2$ o1 $0


2.2. (ETA&L BA&'


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Business & T -odel . Cards /%*0% "age 2( o1 $0


(ETA&L BA&'

(ETA&L !E(V&CE

Banking A;;ounts

Banking account can classi1ied as =elo) =ased on their 1eatures, cost and use1ulness*

C@e;king A;;ounts

Uuick, con/enient and, 1re


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Guaranteed rate o1 interest 1or a ter+ or length o1 ti+e speci1ied =ythe account holder*

nce the ter+ speci1ied, one cannot )ithdra) the principal )ithoutattracting penalties*

ne can )ithdra) the interest earned on the principal*

The rate o1 interest is o1ten higher than sa/ings or any other account C:s rene) auto+atically, so i1 not noti1ied =e1ore +aturity, C:s )ill

roll o/er 1or another ter+* -ost o1 the institutions noti1y the accountholder =e1ore +aturity*

Basi; or o Fri,, Banking A;;ounts

Checking accounts, =ut )ith a li+it on the nu+=er o1 checks one can)rite and the nu+=er o1 deposits and )ithdra)als one can +ake

nterest is generally not paid*

Fees is generally lo)er than checking accounts

Bran;@ Banking

I =anking syste+ in )hich there is a head o11ice and interconnected=ranches pro/iding 1inancial ser/ices in di11erent parts o1 the country

Today 0A o1 custo+ers use +ore than one contact channel

o Po)e/er, 5%A o1 custo+ers still pre1er =ranch =anking . =ranch loyalty

Q/idence 1ro+ the trends o1 ne) =ranch openings

o 550 o/er three years at Bank o1 I+erica

o %00 o/er 1i/e years at J"-organ Chase

o $50 this year alone at Washington -utual Branch net)orks ha/e re&e+erged as co+=ined centers 1or ad/ice&

=ased product sales and ser/ice, as )ell as +ore traditional =ankingtransactions

Custo+ers are looking 1or a 1ull&ser/ice center 1or all their needs &&1ro+ =anking products to =rokerage ser/ices

Branches are =eing trans1or+ed 1ro+ transaction processing centersinto custo+er&centric, 1inancial sales and ser/ice centers

This trans1or+ation is helping Banks to achie/e =otto+ line =usiness=ene1its like

o ncreased custo+er pro1ita=ility

o 6etention o1 +ost pro1ita=le custo+erso ncreased =ranch re/enue

o ncreased sta11 producti/ity

o 6educed operational costs

I typical 6etail =ranch at a Bank pro/ides t)o pri+ary 1unctions

o Teller perations & Iccept and process custo+er transactions at the teller)indo)


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o Sales and custo+er ser/ice perations & Tasks, such as ne) account opening,account +aintenance and product sales

Te,,er O+erations

Teller 1unctionality

o Cash ad/ances

o Consu+er +ortgage loan pay+ents

o Currency and coin orders

o :eposits, including co++ercial deposits

o Fee collection

o Foreign currency e4change

o "ay+ents

o Stop pay+ents

o Trans1ers

o Wire trans1ers

o Withdra)als

!a,es and Custo*er !er


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Business & T -odel . Cards /%*0% "age 2! o1 $0


o -arking Stop "ay+ent o1 a Check

AT$ Banking

Banking ena=led through a ter+inal used to +ake transactions)ithout a hu+an teller* n recent years it has =eco+e one o1 the+ost popular =anking +edia*

IT- gro)th )as *( percent per year 1ro+ %'( to %5 =utincreased to %5*5 percent 1ro+ %! to $00$

o 11&pre+ise IT-s account 1or nearly !0 percent o1 total 9*S* IT-s

Iccess to IT- =y +eans o1 a card, typically a dual IT-de=it card

Transaction directly linked to the consu+er;s =ank account & a+ountde=ited against the 1unds in that account

Typical Ser/ices

o Cash )ithdra)al . Vi+it per day restricted =y respecti/e =ank guidelines

o -oney Trans1er =et)een accounts

o Cash Check :eposits

o 9tility Bill "ay+entso Balance en


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:e+and :ra1ts

Iuto+ated Clearing Pouse 7ICP8

Standing nstructions

Qlectronic Trans1er


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Business & T -odel . Cards /%*0% "age 2' o1 $0


ELECT(O&C BA&'

Qlectronic =anking, also kno)n as electronic 1und trans1er 7QFT8, uses co+puter and electronictechnology as a su=stitute 1or checks and other paper transactions* QFTs are initiated throughde/ices like IT- cards or codes that let one to access your account* -any 1inancial institutionsuse IT- or de=it cards and "ersonal denti1ication Nu+=ers 7"Ns8 1or this purpose*

The 1ederal Qlectronic Fund Trans1er Ict 7QFT Ict8 co/ers +ost 7not all8 electronic custo+ertransactions* The Ict does not co/er 3stored /alue cards like prepaid telephone cards, +asstransit passes, and so+e gi1t cards* These stored&/alue cards, as )ell as transactions usingthe+, +ay not =e co/ered =y the QFT Ict*

ELECT(O&C F)D T(A!FE(!

QFT o11ers the 1ollo)ing ser/ices to the custo+ers#

Auto*ated Te,,er $a;@ines AT$s3

IT-s are electronic ter+inals that let custo+ers =ank al+ost any ti+e* The custo+er generallyinserts an IT- card and enters hisher "N to )ithdra) cash, +ake deposits, or trans1er 1unds=et)een accounts, So+e 1inancial institutions and IT- o)ners charge a 1ee, particularly tocusto+ers )ho donRt ha/e accounts )ith the+ or on transactions at re+ote locations*

Dire;t De+osit

Custo+ers can authorize speci1ic deposits, such as paychecks and Social Security checks, totheir account on a regular =asis*

Dire;t De=itsE,e;troni; Bi,,s "resent*ent

Custo+ers can pre&authorize direct )ithdra)als 7QCS under ndian conte4t8 so that recurring=ills, such as insurance pre+iu+s, +ortgages, and utility =ills, are paid auto+atically*

"a-=-"@one !ste*s

They let custo+ers call their 1inancial institution )ith instructions to pay certain =ills or to trans1er1unds =et)een accounts* For such transactions, custo+ers need to ha/e an e4plicit agree+ent)ith their =anks*

"ersona, Co*+uter Banking

Custo+ers do +any =anking transactions through their personal co+puter* For e4a+ple,custo+ers can /ie) their account =alance, re


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"oint-o8-!a,e Trans8ers

Custo+ers can pay 1or their purchases )ith a de=it card,)hich also +ay also dou=le up as theIT- card* :e=it card purchase trans1ers +oney & 1airly


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No ter+inal receipts )ould =e issued 1or regularly occurring electronic pay+ents that are pre&authorized, like insurance pre+iu+s, +ortgages, or utility =ills* nstead, these trans1ers )illappear on your periodic state+ent*

Custo+ers are also entitled to a periodic state+ent 1or each state+ent cycle in )hich anelectronic trans1er is +ade* The state+ent +ust sho) the a+ount o1 any trans1er, the date o1credit or de=it to their account, the type o1 trans1er and type o1 account7s8 to or 1ro+ )hich 1unds)ere trans1erred, and the address and telephone nu+=er 1or in


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Business & T -odel . Cards /%*0% "age 5% o1 $0


ELECT(O&C B&LL&' "(E!ETAT&O AD "A%$ET

&ntrodu;tion

Qlectronic Billing "resentation and "ay+ent 7QB""8 is the use o1 electronic +eans, such as e+ailor a short +essage, 1or rending a =ill*

Ad


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Business & T -odel . Cards /%*0% "age 5$ o1 $0


FED&(E

Fed)ire is an electronic trans1er syste+ de/eloped and +aintained =y the Federal 6eser/eSyste+*The syste+ connects Federal 6eser/e Banks and Branches, the Treasury and othergo/ern+ent agencies, and +ore than ,000 on&line and o11&line depository institutions and thusplays a key role in 9S pay+ents +echanis+* The syste+ is a/aila=le on&line depositoryinstitutions )ith co+puters or ter+inals that co++unicate directly )ith the Fed)ire net)ork*These users originate o/er percent o1 total 1unds trans1ers* The re+aining custo+ers ha/e o11&line access to Fed)ire 1or a li+ited nu+=er o1 transactions*

Fed)ire trans1ers 9*S* go/ern+ent and agency securities in =ook&entry 1or+* t plays a signi1icantrole in the conduct o1 +onetary policy and the go/ern+ent securities +arket =y increasing thee11iciency o1 Federal 6eser/e open +arket operations and helping to keep the +arket 1orgo/ern+ent securities li


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Business & T -odel . Cards /%*0% "age 5( o1 $0


n addition to Fed)ire, the Federal 6eser/e Banks pro/ide net settle+ent ser/ices 1or participantsin pri/ate&sector pay+ents syste+s, such as check clearing houses, auto+ated clearing houseassociations 7ICP8,and pri/ate electronic 1unds trans1er syste+s that nor+ally process a largenu+=er o1 transactions a+ong +e+=er institutions* et sett,e*ent in


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!)$$A(%

6etail =anking is =anking ser/ices pro/ided 1or indi/iduals* Co++onser/ices include .

o Branch Banking

o Custo+er Care

o Teller Ser/iceso :eposit and Voan "roducts

o nline Banking

o Financial Id/isory

IT- =anking has =eco+e increasingly popular o/er the last 1e)decades

There are +any types o1 Banking Iccounts

o Checking Iccounts

o -oney -arket :eposit Iccounts

o Sa/ings Iccount

o Ti+e :eposits 7Certi1icates o1 :eposit8o Basic or No Frill Banking Iccounts

Qlectronic =anking, also kno)n as electronic 1und trans1er 7QFT8,uses co+puter and electronic technology as a su=stitute 1or checksand other paper transactions*

QFT;s are initiated through de/ices like IT- cards or codes that letone to access your account* -any 1inancial institutions use IT- orde=it cards and "ersona, &denti8i;ation u*=ers "&s3 8or t@is+ur+ose.

The 1ederal Qlectronic Fund Trans1er Ict 7QFT Ict8 co/ers +ost 7notall8 electronic custo+er transactions*

QFT o11ers the 1ollo)ing ser/ices to the custo+ers#

o Auto*ated Te,,er $a;@ines AT$s3

o :irect :eposit

o :irect :e=itsQlectronic Bills "resent+ent

o "ay&=y&"hone Syste+s

o "ersonal Co+puter Banking

o "oint&o1&Sale Trans1ers

o Qlectronic Check Con/ersion

QB"" is an upco+ing +ode o1 transaction in/ol/ing the use o1electronic +eans, such as e+ail or a short +essage, 1or rending a=ill*

FedWire is an electronic trans1er syste+ de/eloped and +aintained=y the Federal 6eser/e Syste+* The syste+ connects Federal6eser/e Banks and Branches, the Treasury and other go/ern+entagencies, and depository institutions and thus plays a key role in 9Spay+ents +echanis+

C,earing #ouse &nter=ank "a*ent !ste* C#&"!8 is a pri/atesector 1unds trans1er net)ork +ainly 1or international transactions.C#&"! trans8ers are sett,ed on a net =asis at t@e end o8 t@e da7


55/209



using Fed)ire 1unds trans1ers to and 1ro+ a special settle+entaccount on the =ooks o1 the e %ork Fed.


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Business & T -odel . Cards /%*0% "age 5! o1 $0


2.. CO!)$E( LED&'


57/209



(ETA&L LED&'

6etail Vending is one o1 the +ost i+portant 1unctions per1or+ed =y a =ank* t enco+passes the1ollo)ing#

"ersona, ,oans7 ;onsu*er ,oans

Asset =ased ,oans - auto ,oans7 @o*e ,oans O+en ended ,oans

Lease7 #ire "ur;@ase

Credit ;ards

"ersona, Loans Consu*er Loans

"ersonal loans are a+ount =orro)ed =y indi/iduals to co/er their personal e4penses * The detailso1 such e4penses are ne/er o1 any interest to the lenders*

The 1inancer is not interested in the intention o1 the loan*

No security

Short ter+ loans 6ate o1 interest is /ery steep*

deally should =e used only in case o1 an e+ergency

Ill =anks1inance co+panies o11er these loans

Voan a+ount is directly linked to =orro)er;s repay+ent capacity*

Asset Based Loans

Such loans are a+ount =orro)ed =y indi/iduals to =uy so+e asset, )hich is hypothecated to thelender* Thus the lender is 1ully a)are o1 the purpose o1 the loan* The interest rate charged islo)er than personal loans =ecause the loan is secured =y the hypothecation o1 the asset to thelender*

To *ain t+es auto ,oans7 @ousing ,oans

nterest rate is lo)er as co+pared to "ersonal loans

Pypothecation o1 the Isset to the 1inancer*

6epay+ent through Q-;s*

Thu+= rules 1or calculation o1 -a4i+u+ loan a+ount

a* Not greater than ( ti+es the yearly inco+e 6

=* The Q- should =e less than !0 pct o1 the gross +onthly inco+e*

Loan against !e;urities /erdra1t 1acility can =e a/ailed against pledge o1 e


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Business & T -odel . Cards /%*0% "age 5' o1 $0


pen ended loan allo) the =orro)er to =orro) additional a+ount su=Kect to the +a4i+u+ a+ountless then a set /alue*

Si+ilar to o/erdra1t 1acilities pro/ided =y =anks*

nterest is calculated on the daily outstanding =alance*

9sually a card 7si+ilar to a Credit Card8 is issued =y the lending

institution* The lending institution has tie&ups )ith /arious +erchant

esta=lish+ents*

Ilso allo) you to )ithdra) Cash*

+portant Ter+s?

;. Li*it L3 *a/ outstanding a,,oed

d. $argin $3 +er;entage o8 ,i*it t@at ;an =e dran

e. Asset (0A? Isset Malue 7initial8 > %000

Date Asset Va,ue AV3 Draing "oer D"3

%st Jan $002 %000 00

%st Fe= $002 %!00 %000

%st -ar $002 $000 %000

%st Ipr $002 500 (50

Lease #ire "ur;@ase

Vease is a long&ter+ rental agree+ent 1or the asset, )hile Pire "urchase is allo)s the user too)n the asset a1ter all the pay+ents ha/e =een +ade to the lender*

Lease

T)o +ain types . operating, 1inancial

The Financier o)ns the asset*

:epreciation is clai+ed =y the 1inancier* Ta4 deduction can =e clai+ed 1or the 1ull /alue o1 the rental paid*

Financier takes care o1 +aintenance, insurance etc*

#ire "ur;@ase

The asset is o)ned =y the 1inancier*


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:epreciation can =e clai+ed =y the =orro)er*

Ta4 deduction can =e clai+ed only to the e4tent o1 the interestrepay+ent*

(etai, Lending C;,e

%* Voan application +anage+ent and processing

6eceipt o1 loancard application

Ipplication "rocessing

o :uplicate check

o Negati/e list check

o :ocu+ent Meri1ication

o Calculate loan eligi=ility, 66, processing 1ees

o Credit scoring

o Field n/estigationo Credit Ippro/al

Dis=urse*ent

o Che


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Business & T -odel . Cards /%*0% "age !0 o1 $0


o !te+-don +rin;i+a, a*ount de;reases in ste+s

o Ba,,oon notiona, a*ount initia,,7 ,arge ,ast +a*ent

o Bu,,et interest +a*ent initia,,7 entire +rin;i+a, at one s@ot

o (ando* s;@edu,e N a*ount o8 insta,,*ents unde;ided

o !+e;ia, +rodu;ts ;o*=ination o8 a=o


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Business & T -odel . Cards /%*0% "age !% o1 $0


Co,,atera,

In asset than can =e repossessed =y the lender i1 the =orro)er de1aults* They are o1 the1ollo)ing types

"ri+ary 7sa+e asset 1or )hich 1inance is taken8

Secondary 7asset =acking the loan di11erent8

C@arge T+es

"ledge . gold, =ank has possession Pypothecation . /ehicle, =orro)er has possession

Vien . against =ank deposits

Issign+ent . insurance policies, rights get trans1erred to =ank

Shares & periodic dra)ing po)er calculation

-ortgage . i++o/a=le property

$O(T'A'E!

I loan secured =y the collateral o1 so+e speci1ied real estate propertythat o=liges the =orro)erto +ake a predeter+ined series o1 pay+ents* 1 the =orro)er doesn;t keep up the loan

repay+ents, the lender can repossess the real estate property and sell it in order to get the+oney =ack*

The rate o1 interest applica=le is lo)er than personal loans and co+para=le to other asset =asedloans*

To co+pare the cost o1 di11erent -ortgages deals one should look at the A"( Annua,"er;entage (ates.Ill 1ir+s that


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Business & T -odel . Cards /%*0% "age !$ o1 $0


When and ho) o1ten the interest +ust =e paid

ther charges . 1or e4a+ple, an arrange+ent 1ee or co+pulsorypay+ent protection insurance . i1 they +ust =e =ought 1ro+ thelender as a condition o1 the loan

When and ho) o1ten these charges +ust =e paid

inds o8 $ortgages

-ortgages can =e classi1ied =ased on the interest rates deals#

&nterest (ate Dea, #o it orks

Standard /aria=lerate

The pay+ents go up and do)n as the +ortgage rate changes*

Standard /aria=lerate )ith cash =ack

Sa+e as a standard /aria=le rate loan & =ut one recei/e a su=stantialcash su+ 7Q4a+ple (.5A o1 the a+ount =orro)ed8 )hen you take upthe loan*

Base rate trackerSi+ilar to a standard /aria=le rate +ortgage =ut the interest rate isguaranteed to =e a set a+ount a=o/e the =ase rate and alters in line)ith changes in that rate*

Fi4ed interest rate

The pay+ents are set at a certain le/el 1or a set period o1 ti+e . 1ore4a+ple, one year, t)o years, or 1i/e years* It the end o1 the period,one is usually charged the lender;s standard /aria=le rate 7orso+eti+es a ne) 1i4ed rate is o11ered8*

:iscounted interestrate

The pay+ents are /aria=le, =ut they are set at less than that lender;sgoing rate 1or a 1i4ed period o1 ti+e* It the end o1 the period, one ischarged the lender;s standard /aria=le rate*

Capped rate

The pay+ents go up and do)n as the +ortgage rate changes =ut areguaranteed not to go a=o/e a set le/el 7the @cap;8 during the period o1the deal*

So+eti+es, they cannot 1all =elo) a set +ini+u+ le/el either 7the@collar; or @1loor;8* It the end o1 the period, one is charged the lender;s

standard /aria=le rate*

(e+a*ent $et@ods

(e+a*ent *ortgage

-onthly pay+ents o/er the agreed nu+=er o1 years 7Called the+ortgage @ter+;8 goes partly to)ards the interest and partly to)ardsthe principal*


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To repay an interest&only loan, one can take an endo)+ent policy,)hich is designed to end at the sa+e ti+e as the +ortgage*

The +oney one pays into an endo)+ent policy is in/ested in stocksand shares and other in/est+ents* It the end o1 a set nu+=er o1years 7the policy @ter+;8, the policy @+atures; and one gets a lu+psu+, )hich is used to repay the +ortgage loan*

In endo)+ent policy pro/ides li1e insurance and so+eti+es otherinsurance =ene1its too*

&nterest-on, *ortgage ;o*=ined it@ stake@o,der +ension

Ilongside an interest&only loan, one can +ake pay+ents into apersonal or stakeholder pension* When one start to take the pension7=et)een age 50 and 58, one can take part o1 the pension 1und as ata4&1ree lu+p su+, )hich is used to pay o11 the +ortgage loan*

&*+ortant )! &nstitutions in $ortgage $arket

Freddie $a;7 'innie $aes N Fannie $ae

Federa, ationa, $ortgage Asso;iation F$A or Fannie $ae37 'o


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Dea,er 8inan;ing# This is a type o1 loan a/aila=le through the dealer*The lending and repay+ents are done =yto the dealer* Basically thedealer tells the custo+er ho) +uch do)n pay+ent and +onthlynstall+ent is to =e paid against the /ehicle* The e11ecti/e cost to thecusto+er +ost o1 the ti+es is generally +ore than the original price*

Veasing # Mehicle Iuto lease is a contract =et)een the =orro)er and

a auto leasing co+pany* The =orro)er agrees to pay the leasingco+pany 1or the use o1 the /ehicle 1or a certain a+ount o1 ti+e,usually $2 to (! +onths* :uring that ti+e the =orro)er agrees to+ake +onthly lease pay+ents, keep the car in good repair, insurethe car and not dri/e the car +ore +iles that stipulated in thecontract*

T@e e entities in a ,ease agree*ent are t@e ,essee or t@e ,essor.

Vessee or the =orro)er# The party to )ho+ the /ehicle is leased* n a consu+er lease, the lesseeis the consu+er* The lessee is re


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Business & T -odel . Cards /%*0% "age !! o1 $0


Credit =ureau# Tracks and +aintains credit history o1 =orro)ers and1or)ard it to lenders during ne) application processing* This is used1or deciding )hether the loan should =e pro/ided to a custo+er ornot*

Ippraiser# Issesses and esta=lishes the 1air +arket /alue o1 acollateral o11ered as underlying security to the credit asked 1or*

nsurer# The nsurance co+pany insures the /ehicle o)ner againstspeci1ic lia=ilities caused to and 1ro+ the /ehicle during the course o1its use upon the pay+ent o1 a pre+iu+ and signing o1 a contract

Voan ser/icer# is the one )ho pro/ides /arious ser/ices during theli1e cycle o1 a loan starting 1ro+ loan origination to loan closure*

!T)DET LOA!

Student Voans are Voans a/ailed =y eligi=le students to pursue graduate and post graduatestudies in 9S SchoolsColleges9ni/ersities*These loans are usually pro/ided =y =anks, Credit9nions and other 1inancial institutions )hich are guaranteed =y state sponsored Guarantors

T+es o8 !tudent Loans

Students Voans o11ered can =e categorized =roadly into t)o types#

Federally sponsored loans. These loans are 1ederally insured andpro/ide protection against de1ault* The depart+ent o1 Qducationguarantees upto 'A and e/en %00A in so+e cases

Non&1ederally sponsored loans. These are insured =y the pri/atesector and ha/e no go/ern+ent =acking* The guarantee in this caseis only 1ro+ the pri/ate insurers or 1ro+ the reser/es pledged tosecuritization

Federally sponsored loans are o1 t)o types Federal Fa+ily Qducation Voan "rogra+ 7FFQV"8&These loans are

+ade =y 1inancial institutions pri+arily )ith a 1loating rate that isadKusted once a year* The interest rate is capped at '*$5A and theFed su=sidizes the di11erence =et)een the actual loan rate and therate cap through Special Illo)ance "ay+ents7SI"8* The rates areusually speci1ied =y inde4ing the+ to the 9S Treasury =ill rates*

Federal :irect Voan 7F:V"8& )here the depart+ent o1 Qducationdirectly pro/ides the loans

FFQV" or the Federal Fa+ily Qducation Voan "rogra+ can 1urther =e di/ided into three types

Federal Sta11ord .Federal Sta11ord loans are the +ost co++on

source o1 education loan 1unds in the 9S* This is a/aila=le to =othgraduate and undergraduate students* This loan could =e eithersu=sidized or unsu=sidized=y the 1ederal go/ern+ent* The interestrate is a 1loating rate that is inde4ed to the % day T&Bill and iscapped at '*$5A* Sa+ple rates o1 during the year $00(&02 )ere

o $*'$A in school, grace and de1er+ent

o (*2$A in repay+ent and 1or=earance


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Federal "V9S & "V9S loans are a/ailed =y the parents o1 a 1ull& orhal1&ti+e undergraduate student *This re


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Business & T -odel . Cards /%*0% "age !' o1 $0


Ser/icer# is an entity )ho collects pay+ents on a loan and per1or+sother ad+inistrati/e tasks associated )ith +aintaining a loanport1olio* The nor+al 1unctions include dis=urse loans 1unds, +onitorloans )hile the =orro)ers are in school, collect pay+ents, processde1er+ents and 1or=earances, respond to =orro)er in


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!)$$A(%

The loans gi/en to retail custo+er co+e under Consu+er Vending*There are 1our +aKor types o1 Consu+er Vending .

o "ersonal loans

o -ortgages

o Iuto Voanso Student Voans

"ersonal loans nor+ally ha/e the highest interest rates charge )hile+ortgages ha/e the lo)est*

6etail lending cycle includes &

o Voan application +anage+ent and processing

o Voan repay+ents and ter+ination

o :elin


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2.4. CO$$E(C&AL AD #OLE!ALE BA&'


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CO("O(ATE LED&'

CO("O(ATE LED&'

Corporate Vending re1ers to /arious 1or+s o1 loans e4tended =y =anks to corporate =odies like

proprietorship, partnership, pri/ate li+ited co+panies or pu=lic li+ited co+panies* Banks lend tosuch entities on the strength o1 their =alance sheet and =usiness cash 1lo)s* Corporate loans arepro/ided =y =anks 1or /arious purposes like ne) proKects, capacity e4pansion or plant+odernization, daily cash 1lo) re


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nterest is usually paid on the dis=ursed a+ount o1 the loan* n so+e cases, a no+inal interest i1also paya=le on the co++itted a+ount o1 the loan* Ilso, in +ost cases, the corporate )ould ha/eto pay a certain a+ount as processing 1ees 1or the loan* This )ould co/er the =ank;s o/erheadcosts in the loan process*

CO("O(ATE C(ED&T (AT&'Be1ore sanctioning a loan to a corporate, the =ank does a detailed assess+ent o1 its 1inancialsand =usiness strength as discussed in the earlier section* This process ends )ith the =ankassigning a rating to the corporate 1or the loan 1acility*

6atings are usually speci1ied in alphanu+eric ter+inologies* 6ating le/els +ight /ary 1ro+ III7highest8, IIE, II& to de1ault ratings like :* 6ating ter+inologies +ight /ary across =anks andacross /arious loan tenures* The rating le/el speci1ies a certain pro=a=ility o1 de1ault o1 the loan* talso takes in to account the protection o11ered =y the security o1 the loan*

For corporates )ith higher ratings, =anks pro/ide loans at lo)er interest rates and /ice /ersa* n+ost cases, =anks do a rating process 1or each o1 its corporate clients at the end o1 say, e/eryyear or e/ery


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+aa=,e ou,d =e L&BO(0.5S +aa=,e Guarter,. T@e ,oans ou,d =e se;ured = ATNT

eGui+*ent at t@eir #?7 ort@ )!D 00 *n.

Short ter+ loans are e4tended usually 1or +eeting )orking capital re


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E/a*+,e

Citi=ank sanctions a line o1 credit o1 9S: %0*0 +n to ITHT, /alid 1or a period o1 ( years* Withinthe ( year period, ITHT can =orro) any a+ount at any point o1 ti+e, such that the cu+ulati/eoutstanding is =elo) 9S: %0*0 +n on any date* Qach o1 these =orro)als are repaya=le )ith

interest at the end o1 (0 days 1ro+ the date o1 =orro)al* Since ITHT can thus @re/ol/e; the li+itany nu+=er o1 ti+es )ithin the speci1ied li+it and /alidity period, these are called re/ol/ing lineso1 credit*

Bi,, dis;ounting

Bill discounting is another 1or+ o1 )orking capital 1inancing*I =ill 7Bill o1 Q4change8 is a 1inancialinstru+ent =y )hich one party pro+ises to pay the other party a certain a+ount o1 +oney on aspeci1ied due date*This is trans1era=le and the 1inal holder o1 the =ill holds the right to recei/e thepay+ent 1ro+ the concerned party* The corporate )ould ha/e =ills o1 e4change )hich are dra)non their dealers, )hich entitle the corporate to recei/e certain a+ounts o1 +oney 1ro+ the dealera1ter a pre&de1ined credit period* The corporate can then trans1er the =ill to the =ank and get adiscounted a+ount up1ront* The =ank collects the interest on the =ill a+ount 1or the speci1ied

period up1ront in this process called =ill discounting* n the due date, the =ank collects thepay+ent 1ro+ the concerned party directly*

Co**er;ia, "a+er

Co++ercial "aper 7C"s as co++only kno)n8 is an instru+ent =y )hich a corporate =orro)s+oney 1ro+ =anks 1or short periods o1 ti+e* I C" =inds the corporate to +ake a pay+ent e


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Asset !e;uritisation ,oans

Isset Securitisation loans are loans )hich are =acked =y speci1ied 1uture cash 1lo)s or otherassets o1 the corporate*These loans help corporates to release e4cess cash 1lo)s 1ro+ e4istingrecei/a=les or 1uture recei/a=les*

E/a*+,e

Citi=ank pro/ides a loan o1 9S: $50*0 +n to 6oyal :utch Shell, securitizing cash 1lo)s 1ro+1uture +onthly sale o1 oil e4plored 1ro+ its speci1ied o11shore rig* n this case, there )ould =e a+echanis+ to ensure that +oney 1ro+ +onthly sale o1 oil e4plored 1ro+ the speci1ied rig 1or theperiod o1 the loan )ould =e used to ser/ice pay+ent o1 interest and principal o1 the loan toCiti=ank* Citi=ank )ould do a detailed assess+ent o1 oil e4ploration potential, study oil prices andensure proper cash 1lo) trapping +echanis+s =e1ore dis=ursing the loan to 6oyal :utch Shell*

CLA!!&F&CAT&O OF LOA! B% T#E BA

1. C,assi8i;ation o8 Dran Loans

Voans are classi1ied and accounted 1or as 1ollo)s#

A;;rua,Loansthat +anage+ent has the intent and the a=ility to hold 1or the 1oreseea=le 1utureor until +aturityloan payo11*Iccrual loans are reported on the =alance sheet at the principala+ount outstanding, net o1 charge&o11s, allo)ance 1or loan losses, unearned inco+e, and any netde1erred loan 1ees*

#e,d-8or-sa,eZVoan or loan port1olios that +anage+ent intends to sell or securitize*

TradingZVoans )here +anage+ent has the a=ility and intent to trade or +ake +arkets 7i*e*,sellhedge the credit risk*8 Voans held 1or trading purposes are included in Trading Issets and arecarried at 1air /alue, )ith the gains and losses included in Trading 6e/enue pro/ided that the

criteria outlined in this policy are +et*

2. C,assi8i;ation o8 )ndran Loan Co**it*ents

Voan co++it+ents are generally classi1ied as accrual and recorded o11&=alance sheet*

:i11erences =et)een loan and co++it+ent are as 1ollo)s? &

Loans are re8,e;ted in t@e asset side o8 t@e =ankQs =a,an;e s@eet. Co**it*ents are

Uo88-=a,an;e s@eetQ ite*s and are re8,e;ted in t@e ;ontingent asset side o8 t@e =a,an;es@eet.

The a+ount o1 the loan that is dis=ursed is credited to the account o1 the =orro)er* ncase o1 a co++it+ent, there is no dis=urse+ent or credit to a =orro)er;s account*

The 1ee charged on a loan is a 1unction o1 the dis=ursed a+ount* The 1ee charged onco++it+ent is a 1unction o1 the a+ount o1 co++it+ent that is not utilized*


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C(ED&T DE(&VAT&VE!

Credit deri/ati/es are 1inancial contracts that trans1er credit risk 1ro+ one party to another,

1acilitating greater e11iciency in the pricing and distri=ution o1 credit risk a+ong +arket players*

E/a*+,e

The holder o1 a de=t security issued =y D Corp* enters into a contract )ith a deri/ati/es dealer)here=y he )ill +ake periodic pay+ents to the dealer in e4change 1or a lu+p su+ pay+ent in thee/ent o1 de1ault =y D Corp* during the ter+ o1 the deri/ati/es contract* Is a result o1 such acontract, the in/estor has e11ecti/ely trans1erred the risk o1 de1ault =y D Corp* to the dealer* n+arket parlance, the corporate =ond in/estor in this e4a+ple is the =uyer o1 protection, the dealeris the protection seller, and the issuer o1 the corporate =ond is called the re1erence entity*

)ses o8 Credit Deri


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T+es o8 Credit Deri


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T(EA!)(% !E(V&CE!

T@e Treasur !er


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OTC Deri


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Business & T -odel . Cards /%*0% "age '0 o1 $0


o nterest rate . 6isk due to /olatility o1 interest rates* I =ank +ay ha/e =orro)ed at1loating rates o1 interest and lent at 1i4ed rate o1 interest and the interest rates +o/es up

o Currency . 6isk due to /olatility in e4change rates* I =ank +ay ha/e its pay+ento=ligations in a currency say 9S: and the rate to purchase the said currency goes up

Co++odity . 6isk due to /olatility in co++odity prices* I =ank +ay

ha/e an o=ligation to deli/er a co++odity in the 1uture and the priceo1 the co++odity +o/es up

Cash -anage+ent Ser/ices& C-S is a ser/ice pro/ided =y =anks toits corporate clients 1or a 1ee to reduce the 1loat on collections and toease the =ulk pay+ent transactions o1 the client* The three ele+entso1 C-S are#

o 6ecei/a=les -anage+ent .Pelps the co+pany to +anage collection o1 its sale proceeds1ro+ re+ote upcountry regions

o "aya=les -anage+ent . Pelps the co+pany to +anage its pay+ents to its regularsuppliers )ithout keeping nu+erous =ank accounts 1or /arious locations and thenreconciles the+ periodically in a highly +anual paper&=ased en/iron+ent

o Vi


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Business & T -odel . Cards /%*0% "age '% o1 $0


The treasury asset-,ia=i,it *anage*ent AL$3group assesses asset&lia=ility risk and all =anksha/e IV- co++ittees co+prised o1 senior +anagers to address the risk* Techni


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Business & T -odel . Cards /%*0% "age '$ o1 $0


instru+ents such as e4change&traded options and o/er&the&counter7TC8 contracts, or they +ay =e e+=edded )ithin other)isestandard instru+ents* They include /arious types o1 =onds and notes)ith call or put pro/isions, loans )hich gi/e =orro)ers the right toprepay =alances, and /arious types o1 non&+aturity depositinstru+ents )hich gi/e depositors the right to )ithdra) 1unds at any

ti+e, o1ten )ithout any penalties* 1 not ade


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Business & T -odel . Cards /%*0% "age '( o1 $0


Foreign e4change is essentially a=out e4changing one currency 1or another* Fore4 rates =et)eent)o currencies at any point o1 ti+e are in1luenced =y a /ariety o1 1actors like state o1 the econo+y,interest rates H in1lation rate, e4change rate syste+s 71i4ed1loating8, te+porary de+and&supply+is+atches, 1oreign trade position etc*

Foreign e4change e4posures 1or a 1inancial entity arise 1ro+ +any di11erent acti/ities* I co+pany)hich =orro)s +oney in a 1oreign currency is at risk )hen the local currency depreciates /is&[&/isthe 1oreign currency* In e4porter )ho sells its product in 1oreign currency has the risk that i1 the/alue o1 that 1oreign currency 1alls then the re/enues in the e4porterRs ho+e currency )ill =elo)er* In i+porter )ho =uys goods priced in 1oreign currency has the risk that the 1oreigncurrency )ill appreciate there=y +aking the cost in local currency greater than e4pected*Generally the ai+ o1 1oreign e4change risk +anage+ent is to sta=ilise the cash 1lo)s and reduceuncertainty 1ro+ 1inancial 1orecasts*

Since a =ank is usually a counter party to the a=o/e transactions, it 1aces si+ilar 1ore4 6isk )henthe re/erse happens*

Basi;s o8 8ore/

Currencies are N6 25*$!8 H

ndirect Uuotation 7N6 %00 > 9S: $*$%8*

@:irect; or @ndirect; are al)ays /is&[&/is the 9S dollar percepti/e* n practice, all currencies e4ceptthe British "ound are


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The +ost =asics tools o1 1ore4 risk +anage+ent are RspotR and R1or)ardR contracts* These arecontracts =et)een end users and 1inancial institutions that speci1y the ter+s o1 an e4change o1t)o currencies* n any 1ore4 contract there are a nu+=er o1 /aria=les that need to =e agreed uponand they are#

The currencies to =e =ought and sold & in e/ery contract there aret)o currencies the one that is =ought and the one that is sold

The a+ount o1 currency to =e =ought or sold

The date at )hich the contract +atures

The rate at )hich the e4change o1 currencies )ill occur

The e4change rates ad/ertised either in the ne)spapers 7and that +entioned a=o/e8 or on the/arious in1or+ation ser/ices assu+e a deal )ith a +aturity o1 t)o =usiness days ahead & a dealdone on this =asis is called a spot deal* n a spot transaction the currency that is =ought )ill =erecei/a=le in t)o days )hilst the currency that is sold )ill =e paya=le in t)o days* This applies toall +aKor currencies )ith the e4ception o1 the Canadian :ollar*

-ost +arket participants )ant to e4change the currencies at a ti+e other than t)o days inad/ance =ut )ould like to kno) the rate o1 e4change no)* This is done through a 1or)ardcontract to e4change the currencies at a speci1ied e4change rate at a speci1ied date* n

deter+ining the rate o1 e4change in si4 +onths ti+e there are t)o co+ponents#

the current spot rate

the 1or)ard rate adKust+ent

The spot rate is si+ply the current +arket rate as deter+ined =y supply and de+and* The1or)ard rate adKust+ent is a slightly +ore co+plicated calculation that in/ol/es the interest rateso1 the currencies in/ol/ed*

Forard rate Lo;a, ;urren;)!D3 9 !+ot rate 1 interest rate in )!3 1 ,o;a, interestrate37)ith interest rates adKusted 1or the period o1 the 1or)ard rate* The concept =ehind thise


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Treasur a++,i;ations seg*ents N


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Business & T -odel . Cards /%*0% "age '! o1 $0


CA!# $AA'E$ET

Cas@ $anage*ent !er


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This is a typical case )here the co+pany needs the ser/ices o1 a =ank to +anage its cashcollections and pay+ents* The co+pany needs =oth cash +anage+ent 1acilities and -S o1collections and pay+ents that can allo) it to track re/enue and e4penses in the +anner re


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Business & T -odel . Cards /%*0% "age '' o1 $0


Banks ha/e responded to the call 1or e/ol/ed cash +anage+ent concepts* Iccelerating accountsrecei/a=le and strea+lining accounts paya=le /ia a single =anking syste+ inter1ace pro/ide thestepping stone to achie/e opti+al cash 1lo) +anage+ent* So+e =anks also pro/ide aligned cash+anage+ent )ith li


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account* Thus the participating accounts )ill not =ear any credit or de=it interest, and all =alancesare concentrated in the central account ena=ling opti+al +anage+ent o1 your cash position*

etting

Netting is the 1unda+ental +ethod 1or centralising and o11setting intra co+pany and third party

pay+ents* Netting not only signi1icantly reduces pay+ent 1lo)s and costs, =ut also pro/idesin/alua=le +anage+ent in1or+ation* Banks o11er =oth do+estic and cross&=order nettingsolutions*

C,earing ser


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Ill these entities need not =e present in e/ery transaction* The nu+=er o1 entities depends on theco+ple4ity o1 the transaction* In e4a+ple )ould help understand the concept =etter*

E/a*+,e

Bank o1 I+erica 7riginator8 has 5000 ho+e loans totaling +ore than !00 +illion* The indi/idualloans are o1 /arious credit pro1iles and /arious repay+ent periods* Bank o1 I+erica isconstrained =y lack o1 1unds and )ishes to sell o11 its loans to raise +oney* Thus, it decides to@sell; a=out $000 ho+e loans totaling $00 +illion* The steps 1ollo)ed are sho)n =elo)#

Bank o1 I+erica conducts an internal study o1 the port1olio and ascertains that the a/erage+aturity o1 the pool o1 loans is a=out %$ years and the a/erage credit rating )ould =e II&* trealizes that historically %0A o1 the total ho+e loan o)ners de1ault* So it )ould only realize%'0 +illion instead o1 $00 +illion*

Bank o1 I+erica )ants to enhance the rating so that it can @sell; the loans at a =etter price* t

decides to pro/ide a cash security o1 %0 +illion 7Credit enhance+ent8 in the scenario o1 anyrepay+ent de1ault =y ho+e loan =orro)ers*

Bank o1 I+erica appoints Credit rating agency )hich analyses the pool o1 loans, and takinginto account the cash security pro/ided rates it IIE*

Bank o1 I+erica @sells; the pool o1 housing loans a+ounting to $00 +illion to a independent1ir+, "le4us S"M Vtd*

Backed =y these ho+e loan;s 1uture cash 1lo)s, "le4us S"M Vtd* issues de=t certi1icates 1or$00 +illion to in/estors* "le4us pays =ack the in/estors the +oney 1ro+ the repay+entsdone =y the ho+e loan =orro)ers*

"le4us S"M Vtd* pays %' +illion to Bank o1 I+erica a1ter deducting ser/ice charges toco/er operational costs*

Fro+ no) on, all Q- repay+ents on these ho+e loans +ade =y retail in/estors )ould 1lo)through "le4us S"M Vtd and then reaches the in/estors*

The a=o/e e4a+ple captures the gist o1 any securitisation transaction, =ut there are a lot o1structuring issues and legal and regulatory challenges in/ol/ed in any such transaction*


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Fannie -ae and Ginnie -ae are e4a+ples o1 institutions specializing in securitisationtransactions o1 +ortgage loans 1or 9S =anks* They help 9S =anks in ha/ing enough 1resh 1unds1or ho+e loan dis=urse+ents*

(ea, Ti*e 'ross !ett,e*ent (T'!3

The current pay+ent syste+ in/ol/es settle+ent o1 pay+ents on a @settle+ent day; and interest isin/aria=ly co+puted to accrue on a daily =asis* Q/en in the )holesale +arkets 1or 1oreigne4change and +oney +arkets contracts, @spot; transactions +ean t)o&=usiness days* Settle+ent1or clearing che


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)ser $e*=ers:9ser -e+=ers can su=+it settle+ent instructions1or the+sel/es and their custo+ers* Po)e/er, 9ser -e+=ers do notha/e an account )ith CVS Bank* nstead they are sponsored =y aSettle+ent -e+=er )ho acts on their =ehal1* Qach instructionsu=+itted =y a user +e+=er +ust =e authorized =y a designatedSettle+ent -e+=er* The instruction is then eligi=le 1or settle+ent

through the Settle+ent -e+=erRs account*

T@ird +arties:Third parties are custo+ers o1 settle+ent and user+e+=ers and ha/e no direct access to CVS* Settle+ent or user+e+=ers +ust handle all instructions and 1inancial 1lo)s, )hich areconsolidated in CVS*

ostro agents: These agents recei/e pay+ent instructions 1ro+Settle+ent -e+=ers and pro/ide ti+e&sensiti/e 1und trans1ers toSettle+ent -e+=ersR accounts at CVS Bank* They recei/e 1unds1ro+ CVS Bank, 9ser -e+=ers, third parties and others 1or credit tothe Settle+ent -e+=er account*

The =ene1its o1 the CVS syste+ are +any#

Traders can e4pand their F =usiness )ith counterparty =anks)ithout increasing li+its*

Treasury +anagers ha/e +ore certainty a=out intraday and end&o1&day cash positions*

Glo=al settle+ent can rationalize nostro accounts and le/erage+ulti&currency accounts*

The /olu+e and o/erall /alue o1 pay+ents is reduced, as are cash&clearing costs*

Costly errors are +ini+ized and any pro=le+s can =e resol/ed 1ast*

Auto*ated C,earing #ouse 8a;i,ities AC#3

ICP transactions are electronic clearing transactions in )hich in1or+ation a=out de=its andcredits are passed across the clearing syste+ through electronic data 1iles rather than physicalinstru+ents like che


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ICP Iccounts 6ecei/a=le Check Con/ersion ena=les con/ertingchecks collected at a lock=o4 or re+ittance&processing center to

ICP electronic de=its, speeding pay+ent collections and i+pro/ing1unds a/aila=ility*

These ser/ices allo) the custo+er to increase transaction speed and i+pro/e accuracy and easeo1 reconciliation =y electronic +eans and a/oidance o1 physical instru+ents and clearing delays*

ICP has =een an area o1 /ery strong gro)th, )ith o/er '*5 =illion transactions =eing e11ectedthrough this route in $00$* Po)e/er, se/eral security issues re+ain to =e resol/ed in this area*


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T(ADE F&ACE

The +ain o=Kecti/e o1 trade 1inance is to 1acilitate transactions* There are +any 1inancing optionsa/aila=le to 1acilitate international trade such as pre&ship+ent 1inance to produce or purchase aproduct, and post&ship+ent 1inance o1 the recei/a=les*

"(E !#&"$ET LOA!

Banks pro/ide "re&ship+ent 1inance & )orking capital 1or purchase o1 ra) +aterials, processingand packaging o1 the e4port co++odities*

"O!T !#&"$ET LOA!

"ost&ship+ent 1inancing assists e4porters to =ridge their li


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nor+ally +ake the 1unding o1 a particular transaction, harder too=tain

'o


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CA!# & ADVACE

Cash in ad/ance is risk&1ree e4cept 1or potential non&deli/ery o1 the goods =y the seller* t isusually a )ire trans1er or a check* Ilthough an international )ire trans1er is +ore e4pensi/e, it iso1ten pre1erred =ecause it is speedy and does not =ear the danger o1 the check not =eing

honored* The check can =e at a disad/antage i1 the e4change rate has changed signi1icantly =ythe ti+e it arri/es, clears and is credited* n the other hand, the check can +ake it easier to shop1or a =etter e4change rate =et)een di11erent 1inancial institutions*

For )ire trans1ers the seller +ust pro/ide clear routing instructions in )riting to the =uyer or the=uyer;s agent* These include#

Full na+e, address, telephone, and tele4 o1 the seller;s =ank

Bank;s SWFT andor IBI nu+=ers

Seller;s 1ull na+e, address, telephone, type o1 =ank account, andaccount nu+=er*

CO$$E(C&AL LETTE( OF C(ED&TThe letter o1 credit 7VC8allo)s the =uyer and Seller to contract a trusted inter+ediary 7a =ank8that )ill guarantee 1ull pay+ent to the seller pro/ided that he has shipped the goods andco+plied )ith the ter+s o1 the agree+ent*

Features

The VC ser/es to e/enly distri=ute risk =et)een =uyer and seller*The seller is assured o1 pay+ent )hen the conditions o1 the VC are+et and the =uyer is reasona=ly assured o1 recei/ing the goodsordered* This is a co++on 1or+ o1 pay+ent, especially )hen thecontracting parties are un1a+iliar )ith each other*

Since =anks deal )ith docu+ents and not )ith products, they +ustpay an VC i1 the docu+ents are presented =y the seller in 1ullco+pliance )ith the ter+s, e/en i1 the =uyer ne/er recei/es thegoods* Goods lost during ship+ent or e+=argoed are so+ee4a+ples* ra< 1or e4a+ple, ne/er recei/ed goods that )ere shipped=e1ore its e+=argo =ut the VCs had to =e paid any)ay*

VCs are typically irre/oca=le, )hich +eans that once the VC isesta=lished it cannot =e changed )ithout the consent o1 =oth parties*There1ore t

Banking Foundation Course

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