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MANAGEMENT
Evolution of Banking
The Reserve Bank of India was established on April 1, 1935 in accordance with
the provisions of the Reserve Bank of India Act, 1934. The Indian Banking
Regulation Act 1949 was formulated to govern the financial sector.
In 1921 the presidency Banks of Bengal, Bombay and Madras with their 70
branches were merged in 1921 to form the Imperial Bank of India. During the
First 5 year plan in 1951, an act was passed in Parliament in May 1955
nationalizing the Imperial Bank and the State Bank of India was constituted on 1
July 1955
During the period 1906-1911, several Commercial banks such as BOI, Central
Bank of India, BoB, Bank of Mysore etc were established which were all Joint
Stock Banks
Definition of a Bank
Nationalization of Banks
First only State Bank of India (SBI) was nationalized in July 1955 under the SBI
Act of 1955. Nationalization of Seven State Banks of India (formed subsidiary)
took place on 19th July, 1960.
In 1969, Mrs. Indira Gandhi the then prime minister nationalized 14 banks then.
These banks were mostly owned by businessmen and even managed by them.
1. Central Bank
4. Co operative Banking
5. Retail Banking
6. Private Banking
7. Investment Banking
8. Corporate Banking
1. CENTRAL BANK: RBI
1. A Central bank has the sole right of note issuance i.e. legal tender currency
2. It should be the channel, and the sole channel for the output and intake of
legal tender currency.
3. It should be the holder of all the government balances, and the holder of all
the reserves of the other banks and branches of banks in the country.
5. Based on its Monetary Policy It should further be the duty of the central bank
to effect so far as it could , suitable contraction and suitable expansion on money
supply, aiming generally at stability, bby using the following tools: OMO- Open
Market Operation, sterilization, CRR, SLR, Bank Rate etc- (Discussed in class,
notes given)
7. It does not deal directly with the public. It indirectly helps agriculture, industry
by augmenting resources of other banks, channeled through agencies such
NABARD, SIDBI, NHB ie priority sector targets
8. Maintains the foreign exchange reserves and gold reserves for the country
(Discussed in class-notes given)
11. Moral Suasion- Mild persuasion to banks and financial institutions to follow
RBI requirements based on market situations
The State Bank of India acts as an agent of the Reserve Bank of India and
performs the following functions:
(1) Borrows money:- The Bank borrows money from the public by accepting
deposits such as current account deposits, fixed deposits and demand deposits.
(2) Lends money:- It lends money to merchants , industries and manufacturers. It
also lends to farmers and co-operative institutions. It lends mostly on the
security of easily realizable commodities like rice, wheat, cotton, oil-seeds, cloth,
gold and government securities. The Bank can lend against agricultural bills upto
a maximum period of fifteen months and incase of other bills upto a maximum
period of six months.
(3) Banker’s Bank:-The State Bank of India acts as the banker’s bank. In
discharging this responsibility, the bank provides loans to commercial bank when
required and also rediscount their bill.
(4) It also acts as the clearing house of the commercial bank where RBI doesnot
have its branches (CLEARING FUNCTIONS DISCUSSED IN CLASS). SBI and its
Associate banks are responsible for clearing: SBBJ – State Bank of Bikaner &
Jaipur, SBH – State Bank of Hyderabad, SBM – State Bank of Mysore, SBIN – State
Bank of Indore, SBP – State Bank of Patiala, SBT – State Bank of Travancore.
(4) Government’s Bank:- The State Bank of India also acts as the agent of the
Reserve Bank of India. As an agent, the State Bank of India maintains the
treasuries of the State Government. The Bank also manages the debts (buying or
selling of Bonds and Treasury Bills) floated by the State Governments.
(5) Remittance:- The State Bank of India facilitates remittance of money from
one place to another. It also helps in the transfer on the funds of the State and
Central Government.
(6) Functions as Central Bank:- The State Bank of India performs the functions of
a Central Bank where RBI does not have its presence.
(7) Subsidiary service functions:- The State Bank performs various subsidiary
services also. It collects checks, drafts, bill of exchange, dividends interest,
salaries and pensions on behalf of its customers.. It receives valuables and
documents for safe custody and maintains safe deposit vaults
In the RBI ACT OF 1934, all banks listed in the second schedule is
known as Scheduled banks
All Scheduled bank operations are under strict surveillance of RBI. All
nationalised banks, most private sector banks, foreign banks are scheduled. Most
cooperative banks are non- scheduled (not subjected to strict financial
discipline).
2.Their drafts, bank guarantee, letter of credit accepted in all government offices
3.RBI acts as lender of last resort
4. COOPERATIVE BANKING
5. RETAIL BANKING
Basic Functions
1. Acceptance of Deposits:
Classification of Deposits:
The deposit is placed for a fix time period and fixed interest rate/ instructions
needed for premature withdrawal. In exchange for the lack of liquidity, banks
offer a higher yield on time deposits than they offer on regular savings accounts.
2. Loans & Advances: Accepts funds so that they can lend out credit to
customers for consumption towards cars, houses, consumer goods, construction
etc
3. Use of Cheques: Since the deposits with banks are withdrawable by cheques it
elevates bank deposits to the position of money
a. Acting as an Intermediary: Collects Savings from those who have them and
give to those who need them.
b. Distribution of third party products such as mutual funds, insurance, RBI bonds
etc
c. General Utility services such as Bill payments, safety lockers, tax payments,
issuing travellers’ cheques etc
d. Non Traditional financial services in the recent times: Wealth Management and
Relationship Management Services, selling gold coins
interest paid to depositors, and the rate of interest the bank charges to debtors
on bank loans.
FEE BASED INCOMES: Third party incomes as Distributors of mutual funds, life
insurance, general
Insurance i.e. mediclaims & Property insurance, RBI Bonds, equity trading
brokerage , portfolio management schemes, merchant outlets: swipe machines,
issuing bank guarantees, letter of credit etc
5. Multi currency accounts (2007) for exporters with inter project fund transferability in
any currency and country
INVESTMENT INCOME
Income from investment in interbank call money market, Liquid plus & ultra
short term mutual funds, government securities, Treasury bills, Certificate of
Deposits, commercial papers
Negotiable Instruments
Primary deposits: hard cash, cheque, drafts etc, total supply of money does not
increase from that when people come and open the account with these.
When banks loan out these primary deposits Derivative deposits are created
which add to the money supply. Banks advance loans to Brokers, financial
institutions, individuals etc and Discount Bill of exchange, promissory notes etc
thereby increasing credit money supply.
The loan amounts are credited to the respective borrower’s accounts and they
are authorised to draw cheques up to the sanctioned amounts. Therefore debt
gets converted to money. Therefore the deposits of the respective borrowers
bank increases. Incase the borrower is an account holder in the same bank that
has advanced the loan; the deposits of the same bank will increase.
Where the bank had lent out via the cheque route, the borrower will credit the
cheque into his respective bank account, whether in a different bank or the same
one. This will increase that banks deposit base by the equivalent amount. Thus
money available for credit increases.
Whenever any bank purchases an income earning asset, it credits that amount
to the account of the seller, thereby indirectly creating a new deposit, which the
respective borrower/seller can withdraw using cheques. Thus banks convert debt
into money
Let us assume a Deposit of INR 2000, of which the bank has to keep 20% as cash
reserves and may lend the rest
Step 1: Bank A
Liability Asset
Step 2: bank A
Liability Asset
Loan to X: 1600
Liability Asset
Step 4: bank B
Liability Asset
Deposit:
Loan to Y: 1280
Liability Asset
Therefore K=1/5.75% which is around 18 times. Thus Credit creation can take
place up to 20 times the initial deposit amount.
2. Judge the potential of customers for cross sale of banking products based on
their perceived net worth and thereby directing them to Branch Banking or
Priority banking for either starting a new relationship or deepening existing
relationship.
1. Operational aspect of physically opening customer Accounts post checking the accuracy of
all documents and resolution of any discrepancy . Marking them according to the customer
type as Special Category Client or high risk client in case he’s a politician, police official etc
who has enough influence to damage the bank’s reputation in case of any customer issue.
2. Ensuring that all KYC norms (Address proof, photo ID, photograph etc) are followed and
collected during account opening
3. Follow AML guidelines diligently. Track accounts with heavy inflow/outflow and report to
the relevant authorities to safeguard the interest of the bank. Raise STRs i.e. Suspicious
Transaction Report based on these heavy irregular fund flows
4. Keep a tab on clients whose cash flows highly exceed their mentioned profession or
business.
5. Resolve queries pertaining to Credit cards, personal loans and home loans, assisting clients
in their payments, change of EMI structure or part or full foreclosure and services related to
accounts.
6. Responsible for service and resolution of queries pertaining to products such as interest
calculation on deposits, placing fresh deposits and renewing the ones which have maturing
selecting the optimum interest rates and time periods as per client specifications
8. Generating leads or Cross Sale of investments and other banking products by selling some
of the products themselves like credit cards, deposits which are low involvement product or
else directing the customer to the Relationship Manager for the respective product or
department by generating ‘warm leads’.
9. All services pertaining to Locker opening, maintenance and collecting the charges are their
responsibility
10. Maintaining Branch inventories of credit cards, debit cards, Sealed passwords for
Accounts, internet banking, phone banking, account opening kits and cards. These are all
held by them confidentially in fire proof lockers etc
11. Ensuring all transactions, documentation, accounts opening formalities, service standards
are followed as per rules laid down by group compliance, country risk and reputation analysis
before opening Non Resident accounts (CRRT-Country Risk and Reputational Table), which
has a list of countries which are high risk for money laundering, terrorism financing etc. They
are responsible for meeting branch audit requirements
3. TELLERS (CASHIERS)
1. Receipt and payment of cash over the counter and following certain security norms in
case the amounts are very large i.e. letter from customer stating source of funds or its
usage/Pan Card copy etc
5. Encashment and also issuance of traveller’s cheques, gift cheques, and demand drafts.
RTGS: The acronym 'RTGS' stands for Real Time Gross Settlement. RTGS
system is a funds transfer mechanism where transfer of money takes place
from one bank to another on a 'real time' and on 'gross' basis. This is the
fastest possible money transfer system through the banking channel.
Settlement in 'real time' means payment transaction is not subjected to any
waiting period. The transactions are settled as soon as they are processed.
'Gross settlement' means the transaction is settled on one to one basis
without bunching with any other transaction.
NEFT settlement takes place 6 times a day during the week days (9.00 am,
11.00 am, 12.00 noon. 13.00 hours, 15.00 hours and 17.00 hours) and 3
times during Saturdays (9.00 am, 11.00 am and 12.00 noon). Any transaction
initiated after a designated settlement time would have to wait till the next
designated settlement time. Contrary to this, in RTGS, transactions are
processed continuously throughout the RTGS business hours. The minimum
amount to be remitted through RTGS is Rs.1 lakh. There is no upper ceiling
for RTGS transactions. No minimum or maximum stipulation has been fixed
for EFT and NEFT transactions.
Mid market and Mass market Customers. The account opening cheques range
from Rs.5000 for Mass market, while 1 Lac for Mid market, especially in
multinationals
5. PRIORITY BANKING
3. High focus on Structured investment products using derivatives etc are designed
especially for these clients
4. Higher Deposit rates are offered, while fees are waived off in mostly all banking
transactions and products
5. Very high limits offered on debit and credit cards with international service facilities
included which are either free or heavily subsidised. All annual charges on cards are
waived.
7. Multiple account facilities in different countries offered to High Net worth clients with
business interest across the globe. In one country the priority account minimum balance
needs to be maintained, while in other countries it can be a zero balance account.
8. Interest Rates charged on Home loans and personal loans are at a significant discount to
Branch banking customers, and also with much lesser documentation requirements
6. RELATIONSHIP MANAGEMENT
3. Retention of customers, deepen the relationship with constant interaction and ensure quality
service and resolution of queries within given TAT (Turn around time)
4. Acquire new relationships and grow their balances through investments in various products.
Maintain and grow CASA balances.
5. Sales of all categories of Life Insurance products i.e. market linked plans
(ULIPs), term policies and Endowment Plans
9. Track foreign currency markets to enable Non Resident customers profit from exchange rate
fluctuations
10. Also focus on the corporate relationship segment (company accounts) as an avenue for
high revenue from large company investments, by liaising with the corporate banking
channel
11. Ensuring all audit and compliance norms are followed. Cross border investment and
insurance norms have been followed. All investments have to be documented extensively
capturing the minutest of investor/investment details. Anti Money Laundering measures have
to be followed and country specific risk measures have to be taken as per CRRT (Country
Risk Reputational Table) i.e. investments coming from Iraq, Nigeria, Zambia etc which are of
risky nature
12. Conduct regular market research to review, assess, analyze, report on competitor activities
of other banks and financial institutions ,and capturing changing consumer behavior and
general industry trends
7. RETAIL ASSETS
1 Selling Home loans, car loans and Personal loans to existing and new
customers
2. For home loans, liaison with designated lawyers and property valuers to
ensure that the property to be kept as mortgage is secure with clear title,
no encumbrances and with required market valuation for ensuring the
security of the loan.
5. The final Disbursal of loan ie. Cheque handed out to borrower, takes
place post a clear legal report of the property papers from lawyers and
based on the technical valuation report by property valuer of the current
market value of property
8. RETAIL LIABILITIES
1. Ensure all mandatory certifications are completed by the sales and service staff and provide
training for the same
2. Develop Learning & management modules covering a wide range of banking, finance and
investment topics with online tests for getting a formal qualification
3. Extensive training provided on identifying money laundering trails and investments routed
from high risk countries.
4. Provide training on new product launches, changes in bank policies, new technologies,
rebranding and re launching existing products
6. Create talent pools by identifying and segregating employees based on various skill sets
ranging from team management, selling skills, knowledge quotient, customer handling
techniques etc by conducting regular workshops
7. Update staff on new legislations, competitor strategies and prevailing market opportunities
1. Oversee that all branch operations are conducted based on Group compliance norms
and legalities laid down by external entities such as the central bank, IRDA, AMFI
etc
2. Ensure Sales Quality is maintained on all banking product sales. Checking that there
is no wrong selling due to target pressure, forgery of documents while selling
banking products, mismatch of signatures, product not matching the clients risk
profile, investment tenure and age.
3. Conduct regular audit on all investment & insurance sales making sure that cross
border investment norms are maintained (US, Canada Australia etc) Anti Money
Laundering guidelines are followed, CRRT (Country Risk and Reputations Table)
countries such as African countries etc are highlighted, documentation and records
are all in order, the Sales person had all the mandatory licenses and customer interest
has been met
1. Daily updates, mails & messages on market trends and occurrences spread over all
investment types
2. Compile extensive and detailed studies about markets, economics, new & existing funds,
equity, global and local trends, sectors etc.
3. Track and research all mutual funds based over many parameters and compile a ‘White
list’ or ‘Choice list’ which streamlines the best mutual funds in every sector and category
based on their research which are recommended by the bank
4. Assist the sales team in closing large investment deals with their value added inputs
based on views and market direction
Back office functions. Issuance of cheque books, debit and credit cards and their
respective passwords, placement and withdrawal of deposits, generating internet
& phone banking passwords, generating account opening kits, bank statement
etc
14. COLLECTIONS
PLR-PRIME LENDING RATE: RBI: 11-12%/ 5 top Commercial Banks 11-15%- Prime
Lending Rate (PLR) is that rate of interest at which a bank lends to its best
customers with highest credit worthiness
CASH RESERVE RATIO: 6%- liquid cash that banks have to maintain with the
Reserve Bank of India (RBI) as a percentage of their demand and time liabilities
and borrowing from CBLO market
STATUTORY LIQUIDITY RATIO: 25% - SLR refers to the amount that all banks
require to maintain in form of approved government securities.
BANK RATE: 6%- Longer term borrowing rate from RBI, bill re discounting rate
REPO RATE: 5.75%- Short term Bank borrowing from RBI by pledging
government bonds as security when banks have to meet temporary shortfalls.
The banks then repay the loan by repurchasing the securities from RBI by paying
the principle and the applicable rate
REVERSE REPO RATE: 4.5%- Short term lending to RBI when banks have surplus
liquidity
CAR- Capital Adequacy Ratio- As per Basel 2 norms the minimum is 8% while RBI
has fixed 9% as CAR -It is amount of a bank's own z (Tier 1 and Tier 2 capital)
expressed as a percentage of its risk weighted credit exposures i.e. (Capital/Risk)
determines the capacity of the bank in terms of honoring deposit withdrawals
and managing other risk such as credit default risk, operational risk.
LAF: Liquidity Adjustment facility- The RBI uses Repo and Reverse Repo to aid
banks in adjusting their liquidity requirements and help in meeting Monetary
policy measures. The difference between the two rates is called the Interest Rate
Corridor (Explained in class)
6. PRIVATE BANKING
Caters to Super High Net worth customers- minimum account opening cheques:
4 crores (HSBC), 1 Crore (ICICI). Aim is to make fee based incomes by offering
structured Products and specialized investment services from which bank earns
commissions. Stress is mainly on customized investment products which are
specifically designed for them using derivatives, Equity linked note, capital
protection equity plans using Constant Proportionate portfolio investment (CPPI
model) (Explained in class)etc. Lending functions are secondary and a part of
the service functions. Customer service being rendered on a more personal
basis, dedicated Relationship Managers with 8 to 10 years of investment
experience. All products and services are offered at discounted or special rates.
Deposit rates better, remittance charges waived, foreign exchange conversion
rate few paises plus minus the interbank rate, loan rates discounted,
documentation waived (fundamentally similar services given to HNIs in Retail
banking except Investment products which are personally customized for these
individual clients while in Retail HNI banking, products are customized for the
entire group of customers)