2. CENTRAL BANKING

2.1 The role and functions:

Central Bank of a country is the nerve centre of the monetary system and occupies a dominant position in the financial system. As apex banking institutions, central banks regulate, direct, monitor as well as foster their respective country’s financial system. While individual central banks may have unique and well-defined functional framework assigned to them, by and large, following are their core functions.

2.1.1 Issue and management of currency:

In most countries, it is the central bank that is vested with the power to issue currencies and coins. In the past, some of the central banks used to have backup reserve in terms of gold/convertible currencies for the currencies/coins they issued. Presently very few central banks go for a 100% asset backup for its currency issues.

2.1.2 Bankers to the Government

Traditionally, it is the central banks that act as bankers to their respective Governments. In role as bankers to the Government, central banks effect payments and receive revenues on behalf of the Government. Besides, in most countries, central banks act as debt managers for the Government. Thus, it is the central bank that issues sovereign securities, taking care of their servicing and ultimate redemption.

2.1.3 Banker’s Bank

The central bank maintains accounts of all commercial banks. The statutory reserves are to be kept with the central bank. These accounts are used for inter-bank settlements and for foreign exchange transactions by commercial banks with the central bank.

The central bank also acts as the ‘lender of last resort’ to the commercial banks. During critical situations banks may run out of reserves and may require selling assets to meet their commitments. In such situations, Central Bank may come to the rescue of these banks, by providing funds so that they can overcome the immediate problem.

For example, on October 19, 1987 (Black Monday), the US stock market suffered the worst one-day decline in its history with a wipe out of about 25% of the value of stocks. This forced the banks, which were holding stocks as collateral securities, to sell the stocks to avoid further loss. A large number of individuals and pension funds had invested in stocks, and a huge financial collapse looked imminent. Early next day, the Federal Reserve (Central Banking System of US) pledged to provide emergency loans to banks to obviate dumping of stocks in the market. Thus, a serious economic disaster was averted by the timely action of the country’s central bank.

1. WHO IS A BANK’S CUSTOMER?

Normally we would describe a customer as one who uses any of the services offered by a bank. However in the way banking has evolved over the years it has taken a legal flavor. The relationship of banker and customer does not come into existence unless both parties intend to enter into it. How does this happen? If someone opens some sort of an account, - a current, savings or deposit account, then he becomes a customer of the bank. Customer signifies the relationship, in which duration is not essential. He does not need to have habitual dealings with the banker in order to rank as a customer. Just opening an account with a bank is sufficient to become a customer.

2. ACCOUNT OPENING

A bank exercises caution before opening an account and providing full banking facilities. Normally, a banker will not open an account on mere request from a stranger. Banks call for a satisfactory introduction of new customers and this is commonly obtained by asking the prospective customer to get a reference from an existing customer of the bank. But this practice, under competitive pressure is being largely done away with and other methods of verifying the bona fides are being used.

An individual can produce passport, government identity card, citizenship card, driving license, etc., as proof of his/her identity. Companies can use their certificates of incorporation/tax returns and get their account opened on “self introduction” basis. At times an introductory letter from existing bankers is also accepted.

Banks obtain an account-opening request from the customer in a detailed format where a lot of details are called for along with an undertaking from the customer that he / she will abide by the regulations of the bank. The format provides for introduction along with a specimen signature of the customer. Specimen signatures of other persons who may be authorized to operate the account are also taken at the time of opening the account. Account opening stage is considered to be an important task for the bank, where the bank is supposed to take all precautions as per the laid down guidelines. The bank’s internal auditors carefully scrutinize this activity, as any negligence at this stage is a potential risk for banks.

A simple and most common account in a bank is that of resident individuals. Introduction to this type of account is simple and the mandate to operate the account is straightforward. Sometimes, a customer may desire that another person operate his account by giving a mandate to the bank to that effect. The powers that generally include are to operate the account in a normal way and not to overdraw the account. An account holder can nominate a person to whom, in the event of death, the payment of the balance in the account could be made. In India, nominations are available in all banks. In the case of accounts with nominations, the banker is discharged if payment is made to such nominee in the event of death of the account holder.

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3.2 Joint accounts:

Joint accounts may be run by two or more persons/entities, although most common type is that opened by two individuals. The choice to operate the account is given in the account opening form itself with various options like either or survivor, former or survivor or joint operations. The purpose of joint account is that, apart from joint operations, upon the death of one party, the balance in the account is paid to the survivor or the survivor can continue to operate the account with least formalities.

3.3 Minors:

In most countries, a minor is a person under the age of 18. The law reserves a treatment for minors and provides them with only limited contractual powers. More often than not, obligations arising out of contracts would not be binding on the minors. This means, those entering into contracts with minors would find themselves on a weak wicket when it comes to enforcing the obligations on the minors. Nonetheless, there is no legal bar as such, on any bank opening accounts in the name of minors. The bank would face no legal problems so long as there is sufficient balance in the account. However, for any banker, to allow overdraft in a minor’s account is not in their best interest.

A minor can operate an account i.e. sign cheques, etc. but the age that is considered suitable for operating a bank account depends upon the policy of the individual bank and the individual circumstances. It is usual for the banks to open minor’s account which is operated by the guardian i.e. father or mother of the minor. An important aspect of minor’s account is to note the date of birth of the minor and convert the same into a normal account on his/her attaining majority.

3.4 Partnership accounts:

Banks may or may not have separate account formats for partnership accounts and use the same formats used for individuals. But they generally examine the partnership deed to ascertain the nature of business, number of partners, their powers, etc. Bank records are suitably annotated with the names and signature of the partners who operate the account and their powers. Banks separately take a mandate signed by all the partners specifying that the partners are jointly and severally liable for any debts incurred by them to the bank.

Any change in the constitution of the firm by new partners joining the firm or old partners leaving the firm or death of a partner, the bank stops the account operations and gets a fresh mandate.

4. ACCOUNT TYPE AND OPERATIONS

4.1 Account Type

Deposit taking is the earliest known operation of a bank. A deposit is defined as a sum of money paid to the bank on specific terms under which it will be repaid with or without interest. It may be repaid on demand or after a specific period of time.

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For banking business, borrowing money is essential for the reason that a major part of their profit is earned by employment of funds deposited with them. Deposits are generally classified into three forms:

Current Deposit: Payable on demand Savings Deposit: Payable on demand Term / Time / Fixed Deposit: Payable at a fixed future date.

4.2 Transaction Accounts

Most common of transaction accounts in a bank are current and savings account.

4.2.1 Current Account:

Current Account is ideally suited for business or individuals who have large number of transactions to be put through the account. There are no restrictions on the number of transactions, or on cheques used by the customer. The balance standing in the customer’s account is repayable on demand. A customer may be even granted an overdraft i.e. he may be permitted to issue cheques up to an agreed limit, over and above the credit balance in the account. Banks provide statements to its current account customers detailing credit and debit entries in the account.

Normally interest is not paid on the credit balance in the customer’s account. However, there are exceptions. For example, building societies in UK offer interest on current accounts.

In US and in some other countries, current account is termed as ‘checking’ account for the reason that the account has unlimited cheque writing privilege.

A study of current account features in various countries discloses variance in the product. Some banks in UK and US offer a small interest on the credit balances in current accounts. Most of the banks have no limitation on issue of cheques and provide monthly statements. A sample of product variation is provided below.

Statement of account with cancelled cheques during that period.

Facilities to sweep the daily surplus in the current account, to a mutual fund account, to maximize the earnings on the idle funds.

Follow the principles of Islamic banking i.e. the relationship between the bank and the depositor is that of a custodian and the owner. The bank uses the deposits by investing the monies in permissible activities. The Bank is responsible is in the form of a guarantor and it is compulsory to return the funds to the customer as and when it is demanded for payment.

4.2.2 Savings Account:

Savings accounts are special type of deposit accounts that are intended primarily for small savers and individuals. In some banks, especially in the US, savings accounts are

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available for business firms also, with some conditions. Normally, stipulations on minimum balance requirements and issue of number of cheques are laid down.

Passbooks are still in vogue in some countries. Savings account holders update the passbooks across the counter. In some countries like Singapore, cheque book facilities are not available for savings bank account holders. Customers do the withdrawals personally. The rate of interest is little lower than that on term deposit accounts, but the rate is fairly static. Interest is calculated on minimum balances maintained during a calendar month.

Commercial banks in different countries offer savings accounts with variety of options.

Differential interest rates on savings accounts in slabs as the balance increases.

In a 30 days or 60 days savings a/c, where the customer has to give 30 days or 60 days notice for withdrawals. Stepped interest rates are provided for higher balances.

Multi-currency accounts with low initial deposit. Options like buying / selling foreign currencies, placing standing orders, enquiry about exchange rate and interest rate, etc. are available. Profits can be made against exchange rate spreads.

Interest rate is linked to money market interest rates.

4.3 Deposit Accounts

When an amount is placed in a bank by a customer with instructions to hold it for a specific period, say 6 months, 1 year, 5 years, etc., at a given rate of interest, it is known as a deposit account. The bank gives a receipt marked ‘not transferable’ and acknowledges the amount, period and interest terms. The deposit is payable usually only on maturity and on production of the receipt duly signed by the customer.

The rate of interest may be fixed for the full term, or may be variable. If variable, it is usually linked to a benchmark rate like LIBOR or London Interbank Offered Rate. The rates refixed a pre agreed intervals.

The customer is not entitled to draw cheques on deposit accounts. In some countries, to withdraw a deposit account, the customer should give a notice of 7 days before withdrawal. Some deposit products are available with a stipulation that the customer should give a notice of 30 days or 60 days before withdrawal. No doubt, the interest rates are higher for these deposits.

4.3.1 Short-term and Long-term deposits:

The rules and regulations for short and long-term deposits more or less are similar. Short-term generally means, the tenor of the deposit is from 7 days to 90 days. Anything more than that is treated as term deposits or long-term deposits. There is no specific demarcation of short and long-term deposits, and the differentiation is according to the

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market practice prevailing in each country. Similarly, the maximum term accepted for a deposit might be 5 years in one country and it may be 7 or 10 years in another.

4.3.2 Recurring deposits:

Recurring deposits are more popular in India than in other countries. This scheme inculcates a regular habit of savings among wage earners, businessmen, housewives and students to deposit a fixed sum periodically for a particular term. The installments are supposed to be remitted on an agreed date during the calendar month. Any delay in remittance will affect the calculation of interest and therefore the banks prefer to take a standing instruction for transfer from the customer’s current or savings account maintained with them. Interest rates are almost equal to the rates of fixed deposits. On recurring deposits, interest is compounded quarterly. Recurring deposits if discontinued in the middle, or prematurely withdrawn, may not be eligible for interest unless the deposit completes a certain minimum period.

Product variations are also possible. For example, a Malaysian bank offers recurring deposits for 24 months at interest rates prevailing on the savings account and also provides a bonus of 15% on the interest earned at the end of 12 months and 30% at the end of 24 months.

5 THE CLEARING SYSTEM

All crossed cheques drawn on other banks have to pass through the clearing system. It is mandatory in most countries that cheques have to be physically presented to the paying banker. The fundamentals of the clearing system are similar across countries. However, the technologies used, the arrangements put in place and the procedures to be followed could vary from country to country.

In India, clearing operation is the responsibility of RBI. Thus, wherever RBI has an office, it takes care of clearing. In other centres, mostly State Bank of India runs the clearinghouse. There are also a few centres where the clearing operation is conducted by a bank other than RBI or SBI.

A clearinghouse, in simple words, is a meeting place for all the member banks to exchange the cheques that are drawn on each other. In figure 2.2 below, each bank sends the instruments to the clearinghouse on a bank-wise basis. Thus, Standard Chartered Grindlays (SCG) will have cheques drawn on Bank of Baroda, Canara Bank, Dena Bank, etc. Similarly, Bank of Baroda on the others and so on.

In the clearinghouse, SCG will make a claim on each bank for the amount of cheques it has presented to them (outward clearing). At the same time, all the other banks will make a claim on SCG for cheques drawn on it (inward clearing). The net balance - either positive or negative - is either due to or due from SCG.

Figure 2.2 - Clearing House and Member Banks

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CLEARING

HOUSE

Bank of Baroda

Canara

Bank

SCG

Dena

Bank

Syndicate Bank

ICLG

OCLG

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ICLG - Inward clearing (cheques drawn on bank presented by various banks)OCLG - Outward clearing (cheques drawn on various banks by the presenting bank)

Wherever the volumes are heavy, the entire process illustrated above is automated. Under this, physical sorting, accounting and settlement are system-run. Irrespective of whether the clearing process is manual or automated, those banks with surplus clearing would get the money from the clearing, while banks with adverse clearing balances would be making payment within the stipulated time period. Such clearing balance adjustments are carried out through the accounts maintained by individual member banks with the bank running the clearing house.

5.1 Magnetic Ink Character Recognition (MICR):

In all-important cities in India, clearing is done through MICR process. The relevant information is printed / encoded on the bottom of the cheques in magnetic ink (MICR Band). The code signifies the place (Mumbai, Delhi, etc.), the bank, cheque number, type of account (current, savings, dividend warrant, etc.) etc. Along with these details, the presenting banker manually using magnetic encoders types the amount of cheque. Globally MICR is used and the code details may differ from country to country e.g. it may include currency, account number, etc.

5.2 MICR Clearing: Presenting Bank - Procedure

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Drawee bank collects the cheques statements and floppy from clearing house

Drawee bank downloads the floppy into their system & a statement generated

Cheques and statement details are cross verified 8a.m.

1 p.m.

11a.m

Cheques are posted to issuers accounts by the system

Excess report generated to check sufficiency of funds & simultaneously cheques physically verified for technical errors

Any cheques to be returned are included in the next outward clearing of the day

Clearing house processes & provides details of cheques drawn on each bank in a floppy to

Sent to clearing sectionBank acknowledges receipt & puts crossing stamp

Customer deposits the cheque at the counter 10 a.m-2 p.m

Cheques, statements and floppy given to

Clearing house

Sent to clearing house at the specified time

Cheques are manually encoded with the amount7 p.m.DAY

1

DAY 2

DRAWEE BANK

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Effectively, a customer depositing a cheque on day-1 will know the fate of the cheque on the next working day evening. Generally, banks allow withdrawals on the third working day.

For large value cheques amounting to more than Rs.50000, there is a facility for clearance on the same day (high-value clearing) provided the cheques are drawn on designated/specified branches, generally nearer to the clearing house. In high-value clearing, a cheque deposited within a specified time will be cleared on the same day before 4.00 p.m.

5.3 Outstation cheques:

In India, for outstation cheques drawn on metros like Calcutta, Mumbai, Delhi, etc., RBI has a separate clearing system known as ‘National Clearing’. Under this, cheques are deposited with the RBI along with a statement. RBI sends the cheques to their counterpart in other metros by courier. The destination branch of RBI clears it through local clearing and remits the proceeds electronically, which in turn is credited to the collecting banker’s account in the clearinghouse. The entire process is time bound. For e.g. a cheque drawn on Mumbai and deposited in Chennai should get credit on the 5th

working day from the date of deposit.

In many other countries the facilities for inter-city payments are advanced, and in some cases, the cheque need not travel physically from one place to the other.

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Retail Banking

INTRODUCTION

Most banks of the world are involved in retail banking to a large extent. Retail banking involves catering to the banking and other financial needs of individuals, and in some countries, small businesses like sole proprietorship and partnership companies. It is always profitable for banks to obtain retail deposits at cheaper rates and lend them to corporates with a good margin. Although retail business has high operating costs, it is also a high margin business for the banks. The growth of non-cash wage payment methods leading to banking habit in most developed countries has broadened the consumer base and influenced the demand for additional retail financial services.

Retail banking requirements vary from one age group to the other. Those who are 30-40 years old are spending and borrowing to buy houses, raise children and enjoy higher standard of living than their parents. Those little older are saving and investing for retirement. Those over 65 (in America for instance) are selling their houses and investing the proceeds to generate additional income. Obviously, age is not the only feature that can influence demand. Marital status, family structure, occupation, ethnic origin and sex all have a bearing on demand for retail services.

In retail banking, deposit taking is still the most important factor in maintaining customer relationship. Severe competition has led many banks to diversify into product areas like insurance broking, stock broking, travel agencies, estate agencies and offering mutual fund facilities. The result is that, there is an increasing tendency for people to receive banking services in a fashion they receive utilities such as water, piped gas or electricity. Physical location of supplier is irrelevant to the beneficiaries, perhaps it does not matter.

Having looked at the basic transaction and deposit accounts, in the previous module let us look at various other retail bank products.

1. RETAIL LENDING

One of the main functions of a banker is accepting deposits and lending them judiciously and profitably. A good banker therefore, is expected to know its borrowers well.

1.1 Appraisal Methodology:

1.1.1 Credit scoring:

Traditional method of appraisal is by looking into the purpose, credit worthiness and repaying capacity of the borrower. But when a bank is dealing with a large number of individuals, statistical method of appraisal is more popular and the main method used is called credit scoring.

The system followed in credit scoring is by allocating points for various aspects of applicant’s life. E.g. age, occupation, how long with the present employer, nature of property occupied, etc. It is a scientific analysis of risk factors applicable to various aspects of an individual borrower. By using computer based statistical analysis, the minimum profile of a borrower who is unlikely to default is arrived at, and the corresponding credit score is kept as the hurdle score over which, lending is approved. This score may also be related to the amount being lent i.e. the score required may be higher with larger amounts. In credit scoring, the chance to reduce lending risk, by

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removing subjectivity from the credit process, is high, as the computer has no personal biases. The drawback is that, in certain cases the score sheet may not divulge certain factors, as it may be out of the purview of the standard data being collected.

Statistical methods go by the principle that most borrowers of a certain basic profile and above, tend not to default. As the individual amount lent is small compared to the total lending to the individuals as a class by a bank, the methodology provides for a certain percentage of default, and builds the anticipated deficit in the interest and other charges of the product.

For example, a typical retail bank, say, has $100 million in retail loans. By statistical analysis, it may estimate that the bad loans may be 3% of lending. So if its normal pricing would have been say 18% p.a., it may charge 21% or 22% p.a. as interest to cover for the anticipated defaults. Retail lending rates are generally high to reflect the higher risk of default on such lending.

Individual loan size in retail lending is small when compared to the total size of lending in the retail segment. Moreover these are spread over various income, cultural, wealth profiles, etc., which in turn spreads the risk over a variety of individual backgrounds. The security it has taken also varies in nature from mortgage to pledge of stocks to clean loans. This approach to lending where individual account risk is small, and the total risk is spread over large number of accounts, is called portfolio approach to lending.

1.1.2 Credit rating - Individuals

In some advanced countries, credit ratings are available for individuals also. Banks appraisal process is simplified as they obtain the ratings of individuals from these agencies and use them as a basis for evaluating loan application. Example of such agency is TRW, Fair Isaac, and Equifax, of US.

2 Products:

2.1 Clean advances:

Historically, a large portion of overdrafts to individuals is granted without the backing of any security. This is known as unsecured advance or clean advance. Clean advances may be made available in the form of overdraft or demand loans like educational loan, personal loan or consumer loan. Clean advances are generally given to customers who are confident about their integrity and credit worthiness. This facility is usually made available for the depositors / existing clients of the branch.

A clean facility is normally associated with higher risk, as there is no control over the end-use of the loan and is also unsecured. Where credit scoring is used, the hurdle score will be higher. The rate of interest is therefore more for clean advances, despite lower administrative costs.

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3. ELECTRONIC BANKING

People use banks because they need to, not because they really want to. Recent surveys show that majority of the customers (nearly 50%) visit their bank only 5 times in a given period of 3 months. Nearly 20% of them have never visited the branch during that period. Nearly 80% of the customers do not know about the bank manager. Therefore age-old custom of symbolizing the bank and bank managers to the customers is gradually disappearing. Why? Electronic banking is making inroads into banking services at a swift pace eliminating human intermediation as far as possible. Moreover customers are becoming more demanding on the level of services they seek. As a response electronic banking services like ATMs, EFTPos, telephone banking, smart cards and others have emerged one after the other at uninterrupted pace.

3.1 Automated Teller Machines (ATM):

At present, in most of the developed countries and in many developing countries, any customer of a bank requiring cash may obtain it in one or more of the following ways:

By cashing a cheque over the counter of his branch Over the counter of another bank supported by a cheque card By using a cash card (ATM card) through the teller of a branch By using cash card at a cash point in a store By using cash card in ATM outside the branch By drawing cash on credit card

ATM or cash dispenser, as it was called, is one of the most significant developments in banking and perhaps the most revolutionary in recent years. ATMs can be used for withdrawal and deposit of cash, deposit of cheques, requesting a latest statement of account, requesting a cheque book, balance enquiry, etc.

3.1.2 Core functions of ATM: ATM’s usually provide the following services.

Cash withdrawal Balance enquiry Statement ordering facility Cheque book request facility Deposit (not available in shared network) Funds transfer facility Bill payment Mini statement facility Passbook updating facility (where pass book system exists) Travelers cheque dispensing (not common)

3.1.3 ATM operation:

Viewed from a technical perspective, an ATM is simply a safe electro-mechanical input and output system, which is itself controlled by a full electronic user interface. ATM manufacturers have taken considerable care to maximize the speed of the entire customer interaction process by making it as clear and as straightforward as feasible.

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ATMs are operated through a four-digit personal identification number (PIN) (see box). Some machines have an alarm that produces some kind of sound until the cash and the ATM card is removed, as some customers tend to forget to take their cards back.

PIN - Personal Identification NumberFour digits PIN given to customers for ATM transactions is an effective and simple way to authorize these transactions. PIN’s are so secret that even the staffs that operate the banks computer system do not have access to them. As soon as the customer inputs the PIN into the system, it is encrypted and therefore never occurs in the decrypted form in the system.

The most obvious security hazard could be at the time of despatch of ATM cards and PIN’s by the bank to the customer. For this reason, plastic cards and PIN’s are never posted together to a customer. Either the PIN’s are posted a few days later or the customers are requested to collect the PIN in person at the bank.

Biometrics is the other most effective authorization system that uses biological attributes to establish the bona fide of the person attempting to access the ATM. The process digitizes a thumbprint or an entire handprint and compares it with the stored record. The process may also make use of a voiceprint or it may scan the subject’s retina in one or both eyes. Advantage of biometrics method is, it cannot be lost, stolen or recreated.

Creation of PIN, its maintenance and management is laborious and expensive. Biometrics system is likely to overcome these difficulties and is expected to largely replace the PIN system.

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3.2 Telephone Banking:

Telephone banking is a convenient and time saving method of banking. Majority of important banking services can be delivered through telephone banking.

The typical ranges of services available are:

Balance enquiry Statement ordering Cheque book request Funds transfer between different accounts held by the customer of the bank Funds transfer to third parties (utility bills) General account queries and advice.

The range of services is bound to increase with increased competition between banks.

3.2.1 Types of Tele-banking system:

Telephone banking services require certain identification number to be keyed in to access the service, and another PIN to authorize the transaction if necessary. Where touch-tone telephone is not available or a non-routine banking transaction is to be performed, a telephone operator is made available to attend.

Another method of telebanking is automated voice response technology. This involves the customer using his tone-phone to send digitized data messages to the system in order to activate a particular service. Sometimes, the customer is required to say one or a number of particular words and the system software recognize the word and the voice. The system works on a similar principle to those using tone commands.

3.2.2 Some telephone banking system use a PC that interfaces with the system and the data communication is by telephone.

3.2.3 Advantage of telephone banking:

Telephone banking offers substantial cost savings to the bank for automating their expensive branch based operations. Banks even provide free call system from their branches with dedicated lines to encourage use of telephone banking.

Bank manager as a ‘delivery mechanism’ to offer a personal level of service is now available only for most important customers.

3.3 Internet Banking:

The Internet is the best-positioned delivery mechanism since the innovation of the telephone because of its power, properties and versatility as a communication system. It is not only about banks displaying information about their services on the web, but also

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about how many banks can use internet providing interactive services. As a payment system, the Internet is in its early stage. Considering the underlying risk in payment systems, it has to be seen how Internet is going to manage it, securely and efficiently.

The background of Internet banking is the concept of home banking pioneered by Citibank connecting customers PC to the banks computer through a modem. The bank provided the special software needed for online banking to the customer. Using this program, the customer can bank ‘off-line’ on the PC and complete the transaction through modem.

The advent of Internet has changed everything. For banks, there is a single connection to the net instead of thousands of telephones and modems across the country. The basic minimum services that a bank can provide through Internet are account balance checking, funds transfer among accounts and electronic bill payments. Some of the sophisticated internet banks allow for loan applications, download account details to PC, trade in stocks and mutual funds, and examine deposit slips / cancelled cheques of the customer. Internet banking is not the answer to all banking needs. For cash withdrawals and cheque deposits, the customer has to go to ATM / branch.

The initial public response to Internet banking cannot be termed as success. The main requirement for this service is that the user should have a PC and should have purchased Internet time.

However, on-line banking has many advantages. It turns a PC into a bank branch and therefore it is easy and convenient. It is instantly accessible from anywhere by just using bankcard number and PIN. It is cost effective in the sense that it saves time and travel costs to and fro from a branch.

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Corporate Banking

1. WHAT CONSTITUTES CORPORATE BANKING?

Corporate banking is a collection of services by banks to Industrial and Commercial Entities (ICEs) or corporates, encompassing wide range of products and services, including facilities like cash and portfolio management. This way, all banking services rendered to ICEs and corporates should be regarded as Corporate Banking. However, there are many products / services that investment banks or investment banking arms of commercial banks offer to corporates - new issue of stocks, bonds and debentures, raising foreign currency loans, etc. It then may be thought that all investment banking activity should also be considered a part of corporate banking.

The definition of corporate banking is further complicated by the rapid financial integration due to the growth of international or multinational banks that offer domestic and international services to corporates.

It is difficult to standardize the pattern of corporate funding even within a country. Greater usage is being made of new techniques like securitization, factoring and leasing. Rise of international bonds and credit markets has opened up new channels in corporate financing.

A profile of corporate borrowing in developed countries shows that Japan and West Germany are inclined to use bank borrowed funds for business unlike UK and US, where market based funding is more prevalent. A particularly high degree of bank closeness with corporate customers is practiced in West Germany and Japan.

Given the heterogeneity of the markets which these banks serve it is difficult to analyze and define corporate banking practiced in various markets. A flavor of some services offered under the banner of Corporate Banking by some banks is provided in the box below. Even entities other than banks have also entered certain part of the corporate business.

Corporate bank services rendered by banks and others

Societe Generale (France)

1. Sogecash: Open foreign currency accounts, handle purchase and sale of foreign currencies and international transfers. Allows companies to get detailed statement of accounts all over the world.

2. Progestel Tresorerei: Monitor overall cash position in all Societe Generale group accounts.

3. Sogecash International Netting: Offset invoices in any currency payable to, and receivable from subsidiaries of corporate clients.

CustomerSociete

GeneraleForeign Bank

Statement Statement

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4. Sogecash International Pooling: Centralize cash balances held by subsidiaries of corporate clients in various countries and currencies in accordance with local legislation.

5. Sogestel: Bank - to - business electronic communication service. Transmits instructions of transfers, standing orders, etc. PC to PC on line.

6. Equipment and Vehicle Finance: Provides hire purchase and leasing for vehicles. Also provides long-term rental and management.

4.1 Cash credit / Overdraft:

An overdraft is structured in a current account the bank agrees to allow a customer to draw over the credit balance i.e. the customer is permitted to issue cheques beyond the available credit balance up to a certain limit. Overdraft is granted only for short-term requirements of the borrower like working capital or temporary needs of funds shortfall in the business.

4.1.1 Process:

The bank assesses the working capital requirements of the customer and also the probable future cash flow pattern. A limit is fixed for the customer, say, Rs.25 lakhs, for a particular period. The customer can issue cheques, once the documentation is complete to the satisfaction of the bank. For example, the current account of a company ABC Ltd. is given below in table 4.3.

Table 4.3Date Particulars Dr. Cr. Balance2.1.99 By cash 10,000 10,000 Cr.3.1.99 To cheque 65,000 55,000 Dr. Overdraft is created10.1.99 To cheque 3,35,000 3,90,000 Dr.20.1.99 By cheque 2,00,000 1,90,000 Dr.25.1.99 To cheque 21,00,000 22,90,000 Dr.30.1.99 By cash 40,000 22,50,000 Dr.3.2.99 To cheque 4,10,000 26,60,000 Dr. Limit exceeded

On the enquiry screen, it will appear as: (3rd Feb’99)

Current Balance: Rs.26, 60,000Limit: Rs.25, 00,000Float: --Available Balance: Rs. 1,60,000 Dr.

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You may notice that the account is a running account i.e. the customer can deposit and withdraw according to his convenience. The interest is calculated on the actual amount overdrawn. The account has to be operated within the agreed limit. If it exceeds, the bank may dishonor the cheque (3rd Feb’99) or honor it by allowing excess. Penal interest will be charged for such excesses.

4.1.2 Features:

Overdraft may be granted clean i.e. without backing of any security or secured i.e. covered by securities like stocks, book debts, etc. Overdrafts are payable on demand and therefore the bank may request the borrower to repay the outstanding amount at any time.

4.3 Bills discounting:

When a company buys raw material for production, there are two ways of settling the payment. By cash or cheque or postpone the payment for a future date (credit). This credit sale may be done by documenting a Bill of Exchange as follows.

Format of Bill of Exchange: (£34,900)

Place: Bristol Date: May 2, 199830 days after date, pay to order or ourselves a sum of £34,900 for value received.

To General Motors Ltd. Star Steel Industries Ltd.(Midland, buyer) (Seller)

For claiming payment, the seller forwards invoice, delivery receipt and a bill of exchange (B/E) to the buyer. Bill of Exchange may be drawn at sight, if payment is to be made immediately or may be drawn for a certain period (tenor) say, 30 days, 60 days, etc. and is called ‘usance bill’. Usance bill therefore has a definite maturity date.

Figure 4.2 - Bill Discounting

BUYER B

SELLER A BANK4. Discounts

5. Receives credit

1. Sells goods

3. Accepts B/E6. Pays on the due date2. Draws B/E & forwards it

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Seller A sells goods to buyer B. A would like to have the money immediately, but B would like a credit period of 30 days. In such a situation, A draws a bill of exchange on B and sends it to B who acknowledges his responsibility (acceptance). When B accepts the bill, he has closed the transaction for A. A can now take the accepted bill to his bank and in exchange get money. This process is called discounting the bill of exchange. On the due date or maturity date, B pays the bank directly.

In real life situation, the transactions may not be as simple as above. The bill may pass many hands before its maturity.

In working capital framework, the debtors of a company can be realized by having them accept bill of exchange and then discount it with its bankers. A part of the working capital facility may therefore be structured this way.

5.1 Letter of Credit:

In an international trade transaction, a seller wants to receive his payment promptly at his own bank after despatch of goods. A buyer wants an assurance that he pays only after the seller fulfills his obligations correctly. Also the buyer may need bank finance and assistance in dealing with complex transactions.

5.1.1 Letter of Credit (LC) comes into picture to satisfy the requirements of both the buyer and the seller. LC is an arrangement by banks for settling international commercial transactions. LC provides a form of security for the parties involved and ensures that the terms and conditions of the transaction are fulfilled.

5.1.2 LC and parties to an LC:

An LC is a commitment by the buyers bank to the seller that it guarantees the payment as per the contract of sale, if the conditions stipulated in the document / letter issued by the bank (based on buyers requirements) is met by the seller. This document is called an LC or letter of credit.

The buyer/importer who applies for LC is called the applicant. Issuing bank is the bank that opens LC for the importer. Advising bank is the bank to which LC is sent by the issuing ban with a request to

inform seller/exporter.

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The bank to which the exporter presents the documents for settlement is known as settlement bank. This normally is routed through the exporter’s bank, if the bank settling the LC is not the exporter’s bank itself.

Thus, the importer by opening an LC through its bank is providing the backing of its banker to the seller to meet the payment commitment, if the documentary proofs stipulated therein are provided. Generally these documents are invoice, proof of despatch of goods (airway bill, bill of lading), insurance documents, quality inspection certificate, etc.

8.1 Cash Management Services:

A corporate customer, who maintains a current account with XYZ Bank has branches, has manufacturing or sales or administrative units in the four cities. Some centres are surplus with funds, as the sales activities are high. Others are short of funds principally, as their manufacturing and administrative units are situated there (Figure 4.8).

Figure 4.8 - Closing balance as on 31st July 1999

It may be noticed that at Delhi and Bangalore the company has surplus funds, whereas at Calcutta and Mumbai the accounts are overdrawn and the company may be required to pay interest on debit balances. The process of cash management service is to move all the funds to one centre - generally the place where the head office or corporate office is situated, and net the balances available in all centres.

In the above example, the net balance at the head office, say Mumbai, would be Rs.45 lacs and the balance at the other three centres would be nil. A situation may also arise when payments may have to be made from one of the centres, say Rs.5 lacs in Calcutta. In such a situation, if the netting is not done, then Calcutta may show a debit balance of Rs.20 lacs.

Cash management facilitates pooling all the balances into single account, thereby payments at all centres can be effected in time and overdrawn balances may be reduced or eliminated. The customer need not verify the balance and initiate the transfers from one centre to another.

MumbaiRs.7 lacs

Dr. CalcuttaRs.15 lacs

Dr.

Bangalore

Rs.39 lacs

Cr.

Delhi

Rs.28 lacs

Cr.

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The basic range of services under cash management could be balance reporting, sending transfers or payment orders, netting of balances for intra-group settlements and pooling the group cash balances. The other feature of cash management service could be collection services, where the bank pools all the collection items at one place and employs accelerated collection process.

Instead of making a whole series of payments in different currencies, the customer can make a single payment to the netting centre.

Cash Management service is technologically intensive. In an international basis, this may call for currency wise pooling and netting, dealing with various payment and clearing systems across the globe, co-ordinating with a network of own branches and those of correspondent banks, etc.

From a customer point of view, it may call for efficient on-line retrieval of paid items, cheque images and on-line account reconciliation. Information reporting on all the above services may have to be made available through a link to the customer’s computer or through the Internet.

Figure 4.11 - Cash Management

Germany-DEM

France-FrF US-$

UK-GBP

NETTING CENTER

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(vi) REPOS and Reverses:

Dealers in government securities use repurchase agreements also called ‘repos’ or ‘RPs’ as a form of short-term funding, many a times on an overnight basis, with an agreement to sell and buy back securities the next day at a slightly higher price. The increase in the price is the overnight interest. The dealer thus takes a one-day loan from the investor and the securities serve as collateral.

Longer-term repos, generally over 30 days are called term repos. The mechanism is the same. Repos are considered safe in terms of credit risk because loans are backed by government securities.

A ‘reverse repo’ is the mirror image of repo. Here the dealer finds an investor holding government securities and buys them, agreeing to sell them back at a specified higher price at a future date.

To provide or absorb short-term liquidity in the market, many central banks also provide two way repo quotes for various periods. This way the excess securities with a dealer or bank can be made to earn, and on the other hand, the lenders surplus can be invested in a useful and secured manner.

US has a very large repo market, while in UK it is limited. In Australia these are called ‘buy-backs’ and ‘reverse buy-backs’ and, are mainly used between the central bank and securities dealers. In Germany ‘pensionsgeschaft’ is a repo popular with insurance companies. In Japan these are called ‘gensaki’ agreements and are a major source of call money. The market is well established from overnight to six months.1. Forward sale contract2. Sale to inter-bank / international markets.

All foreign exchange transactions will have an effect on exchange position and cash position. Exchange position is affected at the time of booking the contract and cash position is affected at the time of delivery of funds i.e.

o for every purchase transaction ‘bought’ in exchange position, credit balance in nostro account increases - the point to note is that the timing may not coincide

o and for every sale transaction ‘sold’ in exchange position is increased and balance in nostro account decreases. Here too the timing of the too may not coincide.

When doing a spot buy USD for example, the USD exchange position is + on the contract or transaction date but, the USD nostro will get credit only on the value date i.e. two working days from the contract date. Hence while the exchange position has been affected on contract date there is nothing happening to the cash position. On the value date the cash position will get affected and will move to +. While the exchange position enables the bank to remain square and avoid exchange risk, the cash position enables the bank to keep just adequate funds in the nostro account to meet its commitments without incurring interest cost (towards borrowing to meet commitment).

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It may be noted that steps taken to correct an imbalance in exchange position may or may not affect cash position immediately. For example, if the bank has overbought position and corrects it by selling forward, it would not affect cash position on the same day. Whereas, steps taken to correct balance in cash position would affect the exchange position. For example, to rectify overdrawn position of nostro account, the bank has to buy spot cash that would affect exchange position.

4.5.1 Cover deals:

As a consequence of the bank’s dealings with its customers, the bank has to purchase or sell foreign exchange in the market to cover the exchange position. This is known as ‘cover deal’ and the purpose is to insure the bank against any fluctuation in the exchange rates.

The bank is not only particular in covering the position but to cover it immediately i.e. to sell immediately whatever it purchases and purchase immediately whatever it sells. In other words, the bank would like to keep its exchange position squared. In the case of spot deals, the transaction is simple. If the bank has purchased USD 20,000 spot, it would endeavor to find another customer to whom it can sell spot for a similar amount.

4.5.2 Trading:

Trading refers to purchase and sale of foreign exchange in the market other than to cover bank’s transactions with the customers. The purpose may be to gain on the expected changes in exchange rates. In India, the scope for trading, although still subject to controls, is getting wider due to relaxation being made in the exchange control.

However, the bank fixes a daylight limit and overnight limit for each currency. Daylight limit, for example, means, a bank fixes a limit of USD 5 million, then a dealer can purchase and sell USD so long as the balance outstanding at anytime during the day is not exceeding USD 5 million. Overnight limit means the extent to which the currency position can be kept open at the end of the day. Normally, the overnight limit would be much less than the daylight limit.

4.5.3 Exchange and Cash Position - Illustration:

Transactions reported say on 1st October are as follows:

1. Export Bill on New York for USD 50,000 purchased - payment due on 31st Dec.2. TT sent to London for GBP 20,0003. Draft issued for GBP 1,5004. TT remitted to Canada for USD 25,0005. Cheque for GBP 5,000 drawn on Manchester purchased

These transactions will result in:

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Exchange position: USDBought Sold Net50,000

25,000 +25,000

Exchange position: GBPBought Sold Net5,000 20,000

1,500 -16,500

Cash position: USDDr. Cr. Balance

(Dr.)25,000 25,000

Cash position: GBPDr. Cr. Balance

(Dr.)20,000 1,500

5,000 16,500

4.5.4 Swap Transactions:

It may be noticed in the above example that any imbalance in exchange position or cash position has to be rectified immediately by cover operations. A swap transaction is used as a mechanism for rectifying mismatch in the cash flows between two value dates.

In the above exchange position example for US dollars, if the net position of $ 25,000 is covered, it may result in cash flow mismatch i.e. export bill proceeds $ 50,000 will be received only after 3 months, whereas TT to Canada $ 25,000 has to be effected immediately.

Swap is an exchange transaction in which there is a simultaneous sale and purchase of specified foreign currency for different value dates. In a swap deal, exchange position of the bank does not get altered.

For example, an exporter books a forward contract for USD 50,000 for a bill drawn on New York for 60 days and his bank purchases the bill on submission of documents by the exporter. The forward contract is booked for 80 days (60 + 20 days transit). However the bill gets paid in 65 days from the date of booking the forward contract and USD 50,000 is credited to nostro account of the bank. The bank will hold this USD 50,000 idle for 15 days till the relative cover deal is taken up. Instead the bank can opt for a swap by

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effecting a ready/cash sale and buy forward for 15 days and earn a small income for the bank.

A swap is therefore a transaction between two counter parties to buy and sell a specified foreign currency simultaneously for different maturities.

The basic objective of a currency swap is to rectify the mismatch of cash flows. This may

be either shortage of currency balances to meet immediate requirements or utilization of

unproductive surplus balances.

A swap deal should fulfill the following conditions:

There should be simultaneous buying and selling of same foreign currencies of same value.

The maturity periods of buying and selling should be different. Both buying and selling transactions should be between the same counter parties. The deal should be concluded with a distinct understanding between the counter

parties that it is a swap deal.

For example, if Bank of Tokyo and Lloyds Bank enter into a swap deal, then Bank of Tokyo sells spot USD75, 000 and buys four months forward and Lloyds Bank buys spot and sells four months forward USD75, 000.

4.5.5 Need for Swap deals:

1. Adjustment of gaps:

Swap deals are undertaken to correct the mismatched position in cash flows. The mismatched position may arise due to various factors such as early or late deliveries under forward contract, cancellation of forward contracts, mismatch on account of cover operations, etc.

E.g. a bank has the following mismatched position in GBP.

(GBP In millions)Spot + 11 month + 1.52 months - 13 months + 24 months - 25 months - 1.5

The overall exchange position for GBP is square but there is a mismatch in cash flows. This can be corrected by the following swap deals.

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Adjustments of Funds /Funds Management

Purposes of swaps Adjustments of gaps

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a) sell spot and buy 2 months GBP 1 miob) sell 1 month and buy 5 months GBP 1.5 mioc) sell 3 months and buy 4 months GBP 2 mio

2. Funds Management:

Banks are interested to manage the funds in nostro account more profitably by utilizing the surplus balances judiciously and avoiding a overdrawn balance.

Balances held in nostro accounts of a bank have to be commensurate with its day-to-day requirements. Surplus balances may not earn any return. The bank has to decide as to whether surplus funds should be kept as overnight deposit with the correspondent bank or undertake a swap and raise rupee resources based on the interest rates at both the centers.

However, the management of banks has sufficient controls to prevent risk arising out of swaps employed for speculation.

Case study: Bank A enters into a forward purchase deal for CHF 2.5 million for 2 months with its customer. It may not always be possible to cover in the inter-bank market for this large amount for the same period. At the same time, the bank cannot wait till it finds one because the rate may change adversely. To cover the exchange risk, the bank will sell spot immediately. However, for the spot sale the bank has to arrange funds in their nostro for payment.

Probably, the next day, the bank will carry out a swap by buying spot and selling two months forward CHF 2.5 million to cover the cash position.

Let us assume that the rates dealt by the bank on

Day 1:

2 months forward purchase: Rs.28.43Spot sale: Rs.28.08

Day 2:

Spot purchase: Rs.27.832 months forward sale: Rs.28.20

Day 1: ____Day 2: …….

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Purchase

Sale

2 months

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The profit or loss for the bank in the swap deal may be worked out as under:

Purchases (Rs.) Sales (Rs.)Forward 28.43 Spot 28.08Spot 27.83 Forward 28.20

56.26 56.28

The net gain is 2 paise per CHF for the bank.

4.6 Forex Risks:

The Dealing Room is identified as a main profit center for a bank. It is also true that any scope for profits is associated with the risks of losing. The following are the major risks in foreign exchange dealings.

(i) Open position risk refers to the risk of change in exchange rates affecting the overbought or oversold position in foreign currency held by the bank.

(ii) Cash balance risk refers to actual balances maintained in nostro accounts at the end of each day. Any surplus balance does not earn interest, while any overdraft will incur interest payment.

(iii) Maturity mismatch risk also known as liquidity risk or gap risk. This risk arises on account of the maturity period of purchase and sale contracts in a foreign currency not coinciding. As a result of this, cash flows from purchases and sales will mismatch.

(iv) Credit risk arises when the failure of the counterparty to honor the contract. Limits are fixed on the aggregate outstanding commitments and separately for the amount of funds to be settled on a single day.

(v) Country risk known as sovereign risk and is related to the ability and willingness of a country to service its external liabilities.

(vi) Overtrading risk refers to the huge volume of transactions undertaken by a bank beyond its administrative and financial capacity.

(vii) Fraud risk: Frauds may be manipulated by the dealers or operational staff in order to conceal a mistake or for personal gains. E.g. dealing for own benefit without putting them through bank accounts, undertaking unnecessary deals to pass on brokerage for a kickback, sharing benefits by quoting unduly better rates to customers, etc.

(viii) Operational risk includes inadvertent mistakes in the rates, amounts, and misdirection of funds due to human errors, telecommunication mistakes.

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5. Dealing functions and control of dealing:

Increasing volatility in both the exchange rate movements and interest rate levels have on several occasions precipitated substantial loss for several banks. This has resulted in increased attention being placed on asset / liability management and the organization’s strategy to contain these exposures. It is now quite common for banks with extensive branch network to centralize the management and control of treasury divisions and dealing centers. The necessity for heightened controls, particularly to cover foreign exchange dealing operations of banks falls under the supervisory authority of the Central Bank in most countries.

5.1 Dealing room:

Bank trading rooms share common physical characteristics. All are equipped with the modern communications equipment, to keep in touch with other dealing banks, forex brokers, and corporate customers. Banks and brokers communicate their rates either through Reuters, Telerate or other similar automated media, or through telephone / telex. Although automated media is an important source of data, a dealer’s primary form of communication for keeping in touch with markets are direct telephone lines to brokers, banks, internal group dealing centers and other major users and suppliers of money. Most major dealing rooms have loudspeaker systems, which are fed from brokers’ office and facilitate an instant awareness of prices as communicated internally within those offices. Traders also subscribe to the major news services to keep current on financial and political developments that might influence exchange trading.

5.2 Back office:

Banks also maintain extensive “back office” support staffs to handle routine operations such as confirming exchange contracts, paying and receiving foreign currencies and general ledger accounting. These operations are generally kept separate from the trading room to assure proper management and control.

5.3 Trading policies:

The senior management sets the basic objectives of a bank’s trading policy. The policy depends up on factors such as the size of the bank, the scope of its international banking commitments and, the nature of its trading activities at its foreign branches. Further the management must also decide to what extent the trading function should be aimed at providing a service for the bank’s customers and to what extent it should be looked up on as a profit center. This purely depends on the banks’ attitudes toward risk and capacity to absorb risk.

5.4 Department structure:

Every bank has its own decision-making structures. Nevertheless some generalizations can be made. A chief dealer supervises the activities of the traders and in turn reports to the senior officer in charge of the bank’s international asset liability management area, which normally includes foreign currency trading and Eurocurrency activities.

Senior traders typically handle the most actively traded currencies, sometimes assisted by the junior traders, who might be responsible for less actively traded currency.

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Whatever the rank, actions of any trader commit the bank to potentially large sums of money.

Traders give quotations to customers and other banks, approach the brokers market, arrange swaps needed to balance daily payments and receipts resulting from maturing contracts, and alert corporate clients to significant market developments.

Senior traders may be authorized to “take a view” on potential short-term exchange rate movements and thus to establish long or short positions. Similarly they may be authorized to take a view on the potential interest rate movements and thus seek a particular maturity pattern. The chief dealer is responsible for the profit or loss of the whole operations as well as, for ensuring that deals are within the trading limits to control risks.

5.5 Trading Limits:

The establishment of limits is highly relevant to dealing staff, as thereafter they are held responsible and accountable for positions maintained. The following are considered while establishing trading limits:

Each dealer’s maximum outright position limit is clearly defined, differentiating between intra-day (or daylight) exposure and end of day positions.

Each dealer’s authority to operate within mis-matched limits for each dealing book, e.g., currency deposits, foreign exchange, or other portfolios, is also defined.

Stop-loss or the necessity to report adverse dealing positions at a particular level of loss is clearly defined and established.

Predefined bank and other counter party limits are established. Dealers undertake transaction with other market participants within approved counterparty limits and / or credit limits.

Where transactions are undertaken in respect of a customer, the concerned dealer is responsible to ensure that appropriate limits are available to accommodate such business.

Other forms of control over trading exposure are communicated as and when imposed.

5.6 Operational Policy:

Each bank may structure its own operational policies with regard to dealing and would broadly encompass the following:

Within the authority delegated to him each dealer is solely responsible and accountable for position maintained by him. It is the responsibility of the dealer to check with the broker, jobber, bank telex backing sheets or Reuters’ printout, all trades undertaken during the day. Each dealer should also ensure that all

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transactions are properly recorded on dealing slips or other initial record of trade and are submitted to the operations area for further processing.

The accuracy of all information recorded in the dealing slips and the legibility thereof are important factors to ensure misunderstandings do not occur in the accounting and processing areas.

Dealers annotate on dealing slips, the correct rates at which the deals were concluded. Fictitious rates must not be recorded on dealing slips for any reason.

5.7 Confirmations:

In the course of each business day, confirmations are produced and despatched by each principal to the other with whom trades were undertaken. If the trade involves a broker he confirms the deal with both the principals.

Upon receipt, all parties verify the details with their own accounting records. It is pertinent to mention here that there is an increasing tendency within the markets for unsigned computer produced confirmations to be utilized. Although unsigned confirmations are binding, it is customary to obtain suitable indemnity from the issuing bank for errors, omissions, etc. At the end of each day each dealer verifies that all transactions have been processed correctly. This is achieved by telephone confirmation, telex backing sheets or hard copies taken from computerized dealing system.

With in the context of telephone markets, the importance of confirmations and verification thereof, cannot be over-stressed. This is particularly so where forward value dates are concerned. Same day, one day and spot value transactions will frequently be settled prior to a confirmation being received. It is however necessary that confirmations to all deals are despatched immediately after the deal is concluded. Similarly immediate attention should be given to confirmations received which cannot be identified with recorded transactions.

All confirmation procedures and controls are undertaken by staffs who are not connected with nor have access to the dealers or dealing room. Under no circumstances should dealers be involved in procedures relating to incoming and outgoing confirmations.

5.8 Nostro / Correspondent bank reconciliation:

It is essential that correspondent statement of accounts in both currency and commodities are efficiently reconciled on a regular basis. Up on receipt of the statement it is first essential that items are immediately ‘marked off’ against the in-house nostro record, thereby identifying large outstanding which can then be immediately investigated.

5.9 Revaluation / Mark to market:

Procedures for revaluation and / or mark to market exercises must be established with attention being focussed on where precisely the rates used for this purpose originate. The rates used for revaluation must be checked or provided independently of the dealing room. If undertaken properly revaluation will highlight any substantial underlying losses

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that have not been reported or identified. Dealers usually maintain a running position of the profits as they estimate them to be, these should be compared with the result as reflected from a revaluation of the accounting records and any significant discrepancies investigated and monitored.

All accounting record must be properly and accurately maintained to ensure the accurate and timely reporting of all profit and loss figures at desired frequencies and in accordance with each bank’s accepted accounting policies.

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