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Corporate Banking
What are the various critical functions managed by a bank at whole bank level? --lending --product innovation --ALM and treasury functions --Cross selling --foreign exchange business --risk management --Government business --personnel, HR and training --compliance --technology --audit and inspection of branches --public relations --international operations
Corporate Banking
Board of Directors is centrical to the operations of any bank.
In Public Sector Banks, the Board is comprised of nominees of GOI and RBI, representatives from industry, representatives from employee organisations and elected members. The chairman of a PSB is appointed by the GOI. In respect of private sector banks, while the chairman are elected, the chairman appointment is cleared by RBI. The Board functions under the overall regulations of Banking Companies Regulation Act, Indian Companies Act and all other regulations. All policies and internal regulations are approved by the Board.
Corporate Banking
As per RBI regulations, for certain important functions, the Board has to constitute various committees with membership from the Board members. The following are the important committees: 1. 2. 3. 4. ALCO (Asset Liability Management) Credit Committee Audit Committee Risk Management Committee
What is the advantage of committee approach? Why RBI is suggesting this approach for certain functions of the bank? In a committee approach, any major decision will have the benefit of being analysed by various members of the committee and the use of their expertise. What are the various important departments at HO and their functions?
Corporate Banking
Normally in any bank the (SBI) chairman will be the CEO of the bank. In some banks the (ICICI) MD may the CEO.
The chairman or MD will be the executive of the bank and other members of the Board will be non executive members. While the policy decisions and periodical high level credit decisions are taken at Board level, their implementation is done by various departments at HO.
Corporate Banking
Credit Department International Banking Treasury Products Development Various segments of business --Retail Banking --SME --Corporate Banking --Agri and Rural Banking Compliance Department Audit and Inspection Department Human Resources Department IT Department
External can be geographic, systemic or instrument specific What are the various types of liquidity risks?
How is it managed?
Developing a structure for measuring liquidity risk Setting tolerance level Measuring and managing risk
Maturing loans Interest receivable Asset sales Draw down on credit lines Total
Find out the risk involved. What do you suggest for risk management to the Bank?
Treasury Management
Treasury Management post globalisation What are the other aiding factors?
-- new Institutional structures like CCIL, FIMMDA, NSDL -- new technology platforms for faster transmission of funds and communication of message as INFINET, SFMS, ECS, EFT, RTGS -- liberalisations under FEMA -- Foreign Trade Policy -- Opening up of derivative market=
Features
-- liquid -- can be turned over quickly at low cost -- provides an avenue for equalizing the short term funds between lenders and borrowers What is a call money market?
Securities market
Government Securities -- regulated under Government Securities Act 2006 -- issued by both Central and State Governements -- On behalf of the Government, RBI is issuing the securities -- tenor- above 1 year, up to 30 years -- State Government securities normally for 10 years -- minimum Rs10,000/- and multiples of Rs10,000/-- sold under auction
It is used for --Managing risk and for ALM --Catering to corporates --Trading purpose A derivative product is a financial contract, whose value is derived from the spot price of an underlying contract.
It can be in money market, forex market, share market or commodities market==
Treasury activities and Products Derivative market Various Products Forwards Options Swaps Futures Forward rate Agreements (FRA)==
Risk Management Various risks faced by treasury are: Counter party risk Exchange risk Gap risk Settlement risk Country risk Legal risk Price risk Liquidity risk Interest rate risk Treasury also sells risk management products to customers How risks are managed?
Risk Management
Organisational control Exposure ceiling Limits on trading positions, cut loss limits Asset Liability Management
Investment activity
As we saw earlier, next to loans and advances, the major portion of funds are deployed in investments.
Basic objectives of investment are: --safety of capital --liquidity --yield --diversification of credit risk --managing interest rate risk
The entire investment activity should conform to RBI guidelines=
Investment activity Certain important guidelines of RBI --all investments should be approved by Investment committee
-- the bank must have investment policy approved by the Board -- there should be well laid system for monitoring and control -- the three divisions namely front office, mid office and back office well laid out segregation of duties -- investments to be classified under HTM held to maturity HFT held for trading AFS available for sale -- HTM securities can be held up to 25% of total investments -- banks are free to decide on the quantum of HFT and AFS categories -- HFT investment to be sold within 90 days -- shifting of securities from/to HTM can be done once in a year with the approval of the Board=
Foreign trade is regulated through Foreign Trade Policy and flow of foreign currency through Foreign Exchange Management Act (FEMA)
AD II category
Full fledged money changers who satisfy certain conditions stipulated by RBI can make available certain transactions, in addition to the money changing activity.
B category branches are authorized to handle all types of foreign exchange transactions. They are authorized to operate on Banks' Foreign Currency accounts (Nostro accounts). They can not open Nostro account in their name. Ccategory branches are authorized to handle trade related and service related transactions denominated in foreign currencies and Indian rupees through another designated Office, B category branch which is called as Link Office (LO). LO in turn would report the transactions to RBI and Foreign Department .
When a foreign Bank is maintaining an account with a domestic Bank in the domestic currency for the above purpose, such account is called as Vostro Account (your account with us).
What are the various types of foreign exchange transactions done at branch level?
The rates quoted in the market will be as under: 1 USD= 49.31/32 This means that market is prepared to buy one USD at Rs.49.31 and sell at Rs49.32. The rate on the left side is called as buy rate and the rate on the right side is called as sell rate. This is also called as bid/ask rate This is also a market practice. This practice of quoting simultaneously a price for buying and selling is called as two way quote. In the above example, Indian Rupee is quoted for one unit of foreign currency. This type of keeping foreign currency as constant and making the domestic currency as variable is called as direct quote.
There are two different rates for customers: 1. Card rate: fixed by Treasury every day morning which will be valid for the whole day irrespective of any market movements. This is generally for low value transactions 2. On line rate: the rate quoted by Treasury based on the current market movement. This will naturally vary from time to time.
Instead of each branch submitting the returns directly to RBI, they will submit to their respective Head Office. The HO will submit one consolidated R return for Bank as a whole. RBI expects that the new system will ensure timely submission and also accuracy of the data.
Let us now understand certain important institutions connected with foreign exchange business.
In tune with the liberalised policy of RBI, FEDAI also is making liberalisation in a number of its rules.
It provides insurance cover to exporters and guarantee cover for the advance extended by banks to exporters
Operating functionaries working in export credit related desks should have a fair understanding of ECGC guidelines.
Foreign direct investment (FDI) is the investment made by non-residents in the business and industry in India.
With a view to regulate the flow of foreign funds to certain specific sectors in the industry, Government of India and RBI place certain regulations and fix ceiling for such investments. This has to be taken in to account while handling such remittances.
They are issued as evidence that the remittance has been received or encashment made through an authorized dealer in an approved manner.
It is a valid proof that the currency or travelers cheques have been brought in to the country in a genuine manner.
Corporate lending
Corporate lending
Corporates need products from banking system as under:
a) parking surplus funds b) cash management c) managing financial requirements both short term and long term d) non fund based requirements e) merchant banking needs f) managing foreign exchange business needs
Corporate lending
Corporates are generally coming under:
1. SME 2. Mid-corporates 3. Large corporates
Corporate lending
Financial needs of corporates:
Working capital Term finance Non fund based advance
Export finance Bridge loans and take out financing are other two methods of financing corporates.
Corporate lending
Corporates are extended finance under
a) b) c) d) e) Single bank borrowing Multiple banking Consortium lending Syndicated lending Take out financing
Corporate lending
Since corporate advances are generally of high value, they are processed in a centralised processing cells. What is a centralised processing cell? Some banks have the system of Asset Management Teams (AMTs). What is AMT? what is its role? Most of the advances will be sanctioned under committee approach. What are its advantages? How does it function? Every bank has a well documented loan policy and credit policy and procedures. They also have delegation of power structure for sanction and reporting of advances. All advances sanctioned by a particular authority are to be reported to next higher authority for control purpose. All corporate advances will be subject to the prudential norms suggested under RBI guidelines
Corporate lending
What are prudential guidelines?
The prudential guidelines help the bank to take balanced exposure in advances. Its aim is to ensure that bank does not assume undue exposure to any one individual, group, or to a particular activity or industry thereby exposing the bank to higher risk. The prudential guidelines generally relate to: a) Ratio of term loan to total advances b) Exposure to individual borrower c) Exposure to group companies d) Exposure to particular industry e) Stock market exposure f) Unsecured advances g) Documentation standards h) Financing infrastructure projects i) Bridge loans
Corporate lending
The entire credit activity is divided in to two parts, pre sanction and post sanction.
Pre sanction activity consists of: a) Visit to company and holding discussions with company officials b) Scrutiny of MOA and AOA in the case of companies, the respective deeds in respect of others c) Search in ROC records in case of companies d) Getting CIBIL reports and referring to RBI caution list and defaulters list e) Analysis of financial statements and project reports f) Submission of proposal to the sanctioning authority and obtention of sanction
Corporate lending
Post sanction activity consists of
a) Conveying sanction of advance along with the terms and conditions and obtention of Board acceptance in the case of companies and borrowers the case of others. The letter conveying sanction of advance will be acknowledged by the guarantors also. Security documentation Creation of securities Registration of charge with ROC Disbursement Satisfaction of end use of funds Physical inspection as per the stipulated periodicity Scrutiny of periodical stock statements and FFR statements Review Renewal
b) c) d) e) f) g) h) i) j)
Corporate lending
Of the whole activity, making assessment of the financial requirements, obtention of sanction, making review and renewal assume major importance. The assessment of financial requirements will cover the following areas.
Corporate lending
1. Borrower profile
Name , Address, Manufacturing activity/Locations, Date of incorporation, Banking arrangement etc of Brief Background(Company/ Group/ Promoters/ Management including shareholding pattern ) Brief write up on Industry/Sector and Companys standing RMD Advisory/qualitative approach/Quantitative approach/Comments Indebtedness/Exposure & capital charge
2. Present Proposal
Proposal : For sanction/approval/confirmation Credit limits (existing and proposed) Sharing pattern
Corporate lending
3. Performance Details
Performance and Financial indicators Movement in TNW Synopsis of balance sheet
4. Risk assessment
Credit Rating Risk and mitigating factors Warning signals/Major irregularities in Inspection Audit/Credit Audit/Other Reports Security Changes in Security if any, justification
Corporate lending
5. Pricing
Conduct of account Income analysis Other Banks/FIs pricing Proposed pricing
Corporate lending
7. a) Future plans & Business Potential including cross selling/retail marketing b) Environmental and sustainability implications c) Earlier terms of Sanction: Compliance status d) Statutory dues /Contingent Liabilities 8. Justification for the Proposal & Recommendations Appraisal Memorandum for Term Loan Assessment of Working Capital Facilities Terms and Conditions
Corporate lending
Important aspects seen while considering a term loan
a) b) c) d) e) Cost and means of the project Present status of the project Factors of production and production process If plant and machinery are involved, quality of supply If large construction activity is involved, comments on the credibility of the contractors f) Whether all regulatory approvals are obtained g) Technical feasibility h) Marketing i) Financial viability --projected profitability --D/E --DSCR --Security Margin --Sensitivity
Corporate lending
Assessment of working capital
What are the important points seen? --projected turn over, its comparison to the past actual --holding of current assetsjustification for holding --projected level of current liabilities --how much bank can finance and what is the deficit --if deficit is identified, how the company is going to bridge the gap
Corporate lending
Follow up of advances, review and renewal
Follow up mainly involves: a) Obtention and scrutiny of periodical stock and receivable statements and select operational data b) Periodic visits to factory and company office c) Holding discussions with company officials d) Monitoring the operations of accounts e) In respect of vary large advances having National significance, observing the developments and quoted in the Press, stock market perception, analysts views etc f) Obtention and scrutiny of FFR I and II forms g) Follow up of bank exposure under LC and BG issued on behalf of the company
Corporate lending
All large term loans are subject to half yearly review. The review will cover the following: a) What is the present stage of completion of the project? b) Whether the project is being implemented as per plan? c) If there is a deviation from original plan, whether this has been properly processed and approvals obtained? d) Whether the time schedule is being adhered to? If there is any delay, what are the reasons? What is the likely impact? e) End use of funds f) Obtetnion of necessary Government clearances g) Likely date of completion and commencement of commercial production h) Whether periodic interest is being serviced
Corporate lending
Renewal of loan limits
Working capital and non fund based advances are generally sanctioned for 12 months only subject to review. Based on the review bank will reduce or renew at the existing level or enhance the loan limits. While renewing the limits, bank will mainly focus on the following: a) Whether the estimated turnover and profits have been achieved. b) Whether the financials have been achieved as per projections. c) Whether the securities as per sanction have been created. d) Whether the terms and conditions stipulated have been satisfied e) Whether any diversion of funds have taken place f) Whether the entire turn over achieved by the company has been routed through the account g) Whether the industry in which the company is engaged is performing well h) Whether any negative comments have been made by the inspection and audit.