BANKING AND INSURANCE

Session I
BASICS OF BANKING
The bfsi Landscape
WHAT IS A BANK?
A bank is an institution that provides financial service,
particularly taking deposits and extending credit
Generally understood as an institution that holds a
banking license
Most importantly provide collection and clearing
services
EVOLUTION OF BANKING
Mid to late 1700s General Bank of India
Early 1800s Establishment of the Presidency Banks Bank of Bengal, Bank of
Madras and Bank of Bombay
Mid to late 1800s entry of European Banks BNP and Credit Lyonnais
1921 Amalgamation of all Presidency Banks birth of Imperial Bank of India
(later changed to State Bank of India)
Establishment of Reserve Bank of India Apr 1, 1935
Nationalization of banks 1969 and 1980
1994-95 entry of new-age private sector banks
1995 to date: banking transformation
2000 to date: IT as a change catalyst
INDIA
THE INTERMEDIARY ROLE
Economy
Surplus Deficit
B
A
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K
I
N
G
Households
Businesses
Insurance Companies
Mutual Funds
Households
Businesses
_ _ _ _ _ _ _ _ _ _
Channelising Funds
THE TRANSFORMATIONAL ROLE
Key Requirements
Safety & Security
Growth
Liquidity
Key Requirements
Time/Schedule
Risk
Transforming Needs & Profile
Economy
Surplus Deficit
B
A
N
K
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G
THE TRANSACTIONAL ROLE
Banks move money
They help complete transactions
They act as agents
They provide other services that enable transactions
Importer / Buyer
(USA-based)
Exporter / Seller
(India-based)
Quantity/Quality Payment/Timeliness
BANKING
Move money and complete transactions
THE STABILIZING ROLE
Provide stability to an economys financial system
Stability achieved by identifying and managing risks
OTHER ROLES
Guarantor Role
Advisor Role
Custodian Role
Policy Role

Not all roles are played by all banks there are many
different types of banks some perform all roles, while
others focus on a few of these roles
TYPES OF BANKS IN INDIA
Public Sector
Banks
Foreign
Banks
Regional Rural
Banks
Private Sector
Banks
Predominantly
Government of
India owned
Limited autonomy
in operations
Directed lending to
a certain extent
Vast branch
network
Laggards in
technology
adoption
Two sub-groups
new age
private sector
and old age
private sector
Tech savvy,
aggressive,
innovative new
age banks
broad basket of
products
Relationship
oriented,
localized old age
banks
Established for
meeting
banking
requirements
of specific
groups
Prominent in
Maharashtra
and Gujarat
Limited
product
offerings
Limited presence
Growing interest
Expanding
operations
Typically catered
to the
requirements of
MNCs and blue-
chip Indian
corporates
A few in consumer
lending
Cooperative
Banks
Focused on rural
markets
Focused on
financial inclusion
Promoted by any
one of the Public
Sector Banks
Products and
Services geared
to meet rural
requirements
BANKING SECTOR REFORMS

Several committees constituted to resolve problems of
Commercial Banking in India, two most important are-
a) Narasimham Committee I (1991)- aimed at bringing
operational flexibility and functional autonomy so as
to enhance efficiency, productivity and profitability

b) Narasimham Committee II (1998)- bringing structural
changes so as to strengthen banking system to make it
more stable

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MAJOR RECOMMENDATIONS
NARISHIMAM COMMITTEE REPORT I
Four-tier hierarchy for banking structure - three to four large
banks with SBI at top
Parity in treatment of Private sector banks lic sector banks
Follow BIS/Basel norms
Lifting of ban - setting new banks in Private sector
Liberal Governmental policies for expansion of foreign bank
branches and rationalization of foreign operations of Indian
banks
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MAJOR RECOMMENDATIONS (CONTD.)
Progressively bring down - Statutory Liquidity Ratio (SLR) and Cash
Reserve Ratio (CRR)
Tighten prudential norms for the commercial banks
Deregulate interest rates
Redefine priority sector - to comprise SME and marginal farmers,
and EWS
Increase competition in lending between DFIs and banks
Disinvest in PS banks
Each public sector bank - set up at least one RBS and treated at par
with RRBs



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MAJOR RECOMMENDATIONS (CONTD.)
Narasimham Committee Report II

Merger of strong PS banks and closure of some weaker banks
Amicable golden handshake scheme for surplus banking sector
staff
Setting up ARC to tackle NPAs in banks
Enhancement of capital adequacy norms
Healthy competition between PS banks and private sector banks
essential.




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PRE-GLOBALIZED SCENARIO OF
SERVICE CULTURE IN THE INDIAN BANKS
SERVICE CULTURE
WAS EXTREMELY
DEMOTIVATED & NON INTERESTED
EMPLOYER& EMPLOYEE.
NON COMPETETIVE
ATTITUDE.
PRODUCT FOCUSED & NOT
CUSTOMERSERVICE FOCUSED.
CUSTOMER UNFRIENDLY
FORMALIZED
THE BANKING SECTOR TODAY
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Depth

Countrywide coverage
Large number of players
Increasingly
sophisticated financial
markets


Technology

Increasing use of
technology in operations
Poised to expand and
deepen technology usage


Diversification
Emergence of integrated
players
Diversifying capital
deployment
Leveraging synergies

Regulation
Robust regulatory system
aligned to international
standards
Efficient monetary
management
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A New orientation among banks

Sell products
Product research: what
will sell?
Product sales and
profitability targets
Product specialist
groups
Introduce new
offerings every few
years/months
Branch banking
Focus - customer
acquisition

Meet customers needs
Customer research:
what does the customer
want?
Customer segment
sales and profitability
targets
Customer owners
Customer specific new
offerings every
week/day
Customer convenience
Deepen relationships
Traditional/ public sector
New/ private sector
Mobile
&
Internet
banking
Good Waiting room
Low
interest
rates
Change in
Product line
Financial
service
Flower of
banking service
Technological Innovations
in Banking sector.
Data Mining.
Tie up Arrangements
Plastic money.
Virtual banking-
dont visit the branch

ATM
Insurance Product

Marketing Agents for
Distribution of Products
Mobile Banking

Phone Banking


Additional Banking Services

Merchant Banking
Loan Syndication.
Mutual Fund
Factoring.

Forfeiting.
Venture Capital.
YOU ARE A CORPORATE BANKER IF
Understanding Role of Central Banks
RESERVE BANK OF INDIA
CENTRAL BANK IN INDIA THE RBI
Govt. of India
Reserve Bank of India
Powerful authorized
to enact banking laws
Central Banker or
Bankers Banker
Banking Regulation
Act
Negotiable
Instruments Act
Monetary
Policy
Banking
Regulation
Financial
Ind. Health
Devpt.
Role
Payment
Systems
INTRODUCTION
Regulatory framework of the country.
Degrees of Imperfections cannot be denied
Financial system deals in other peoples
money
Trust ,confidence and faith in it is crucially
important for its smooth functioning


CONTD..
Centre of the Indian Financial and Monetary
System
Apex Institution Guiding, Monitoring and
Controlling.
Started functioning from 1
st
April 1935 , on
the terms of Reserve Bank of India Act,1934
Was a Private Shareholders Institution till Jan
1949 after which it became a state-owned
institution under the RBI Act.

FUNCTIONS OF RBI
To maintain Monetary Stability
To maintain Financial Stability
To maintain stable payment system
To promote the development of financial
infrastructure of markets and systems
credit allocation
To regulate the overall volume of money
ROLES OF RBI
Note Issuing Authority
Governments Banker
Bankers Bank
Supervising Authority
Exchange
control authority


NOTE ISSUING AUTHORITY
Since its inception, RBI has the sole right or
authority or monopoly of issuing currency
notes other than one rupee notes and coins,
and coins of smaller denominations.
Although one rupee notes and coins, and
coins of smaller denominations are issued by
Government of India, they are put into
circulation by RBI
All affairs of the bank relating to note issue
are conducted by its Issue Department

CONTD
BANKER TO THE GOVERNMENT
Maintaining Accounts
Receiving the Revenue
of the governments
Making Payments of the
governments
Providing Remittance
Facilities
Issuing Treasury Bills
Providing Ways & Means
Finance
Advisor to the
Government
Representing the
Government
BANKERS BANK
The bank controls the
volume of reserves of
commercial banks and
thereby determines the
deposits/credit creating
ability of the banks.
The banks hold a part of
their reserves with the RBI
In times of need, the
banks borrow funds from
RBI
It is, therefore, called the
bank of last resort or the
lender of the last resort.

CONTD
Clearing House & Remittance Facilities
Real Time Gross Settlement: Introduced in
2004, it is the beginning of a clearing system
at the national level
On the whole, the RBI is the ultimate source
of money and credit in India
SUPERVISING AUTHORITY
Supervise and control commercial and co-
operative banks.
To issue the licenses for the establishments
of new banks
To issue licenses for setting up of bank
branches
To prescribe minimum requirements
regarding paid-up capital and reserves,
maintenance of cash and other liquid assets.


CONTD
To inspect the working of banks in India as
well as abroad in respect of their
Organizational set- up
To conduct the investigations , from time to
time , regarding irregularities, frauds,
complaints, etc
To control methods of operations of banks
To control appointment, re-appointment,
termination of appointment of the chairman
and CEOs of Private sector banks
EXCHANGE CONTROL AUTHORITY
It manages the exchange rate between the
rupee and other currencies
To negotiate with the monetary authorities and
financial institutions like IMF, World Bank and
Asian Development Bank.
The RBI is the custodian of the countrys foreign
exchange reserves, and it is vested with the
responsibility of managing the investment and
utilization of the reserves in the most
advantageous manner.


MONETARY POLICY

TECHNIQUES USED BY RBI
OMO - Open market operations.
Bank Rate - The rate at which RBI rediscounts
the bills.
Cash Reserve Ratio The CRR refers to the
cash which banks have to maintain with the
RBI as a percentage of their demand liabilities.
Statutory Liquidity Ratio The SLR is the ratio
of cash in hand exclusive of cash balances
maintained by banks for CRR.

PAYMENT SYSTEM
Paper-based Payments
Use of paper-based instruments (like cheques, drafts, and the like)
accounts for nearly 60% of the volume of total non-cash transactions in
the country.
In value terms, the share is presently around 11%. This share has been
steadily decreasing over a period of time and electronic mode gained
popularity due to the concerted efforts of Reserve Bank of India to
popularize the electronic payment products in preference to cash and
cheques.
Since paper based payments occupy an important place in the country,
Reserve Bank had introduced Magnetic Ink Character Recognition
(MICR) technology for speeding up and bringing in efficiency in
processing of cheques.

ELECTRONIC PAYMENTS

Electronic Clearing Service (ECS) Credit
The Bank introduced the ECS (Credit) scheme during the 1990s to handle bulk and
repetitive payment requirements (like salary, interest, dividend payments) of
corporates and other institutions. ECS (Credit) facilitates customer accounts to be
credited on the specified value date and is presently available at all major cities in the
country.
National Electronic Funds Transfer (NEFT) System
In November 2005, a more secure system was introduced for facilitating one-to-one
funds transfer requirements of individuals / corporates. Available across a longer time
window, the NEFT system provides for batch settlements at hourly intervals, thus
enabling near real-time transfer of funds. Certain other unique features viz. accepting
cash for originating transactions, initiating transfer requests without any minimum or
maximum amount limitations, facilitating one-way transfers to Nepal, receiving
confirmation of the date / time of credit to the account of the beneficiaries, etc., are
available in the system.
Real Time Gross Settlement (RTGS) System
RTGS is a funds transfer systems where transfer of money takes place from one bank
to another on a "real time" and on "gross" basis. Settlement in "real time" means
payment transaction is not subjected to any waiting period. "Gross settlement" means
the transaction is settled on one to one basis without bunching or netting with any
other transaction. Once processed, payments are final and irrevocable. This was
introduced in in 2004 and settles all inter-bank payments and customer transactions
above ` 2 lakh.


KYC
KNOW YOUR CUSTOMER
INTRODUCTION
Based on the RBI guidelines,our Banks Board has
approved the new Know Your Customer (KYC) Policy and
Anti Money Laundering (AML) Policy in November 2004
for implementation across the bank based on the Basel
Committee recommendation on Customer Due Diligence
and suggestion made by the Financial Action Task
Force(FATF) on Anti Money Laundering(AML) standards
for combating Financing of Terrorism (CFT)



OBJECTIVES OF KYC & AML
To enable the Bank to know/understand its customers
and their financial dealings better.
To protect the Banks reputation
To protect banks channels, products, services form
being used as a channel for misuse/money laundering
To protect the bank, its employees & customers from
this menace
To adhere to KYC policies and procedures
To take appropriate action & report the same once
suspicious activity is detected
To comply with applicable local & international laws
adopted by banks
OBJECTIVES OF KYC
KYC_AML standards will help banks in weeding out unwanted
customers and serving genuine customers. This way, banks
will help themselves in better control over business. This will
protect reputation risk / operational risk and integrity of
banking industry.
Money laundering doesnt affect individuals directly but it do
affects entire society / economy across the world. It do affects
genuine customers. Money Laundering affects demand /
supply for money / exchange rates in money market / capital
flows.

BANKING CONCEPTS

PLR or prime lending rate - rate of interest at which banks lend to their
credit-worthy or favored customers.
It is treated as a benchmark rate for most retail and term loans.
influenced by RBIs policy rates the repo rate and cash reserve ratio

Deposit Rates - Interest rate paid on deposit accounts by commercial
banks and other Fis

Bank rate - rate of interest which RBI charges on loans and advances that
it extends to commercial banks and other financial intermediaries.
Changes in the bank rate are often used by RBI to control money supply
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Repo Rate - rate at which banks borrow from RBI. A reduction in repo
rate will help banks to get money at a cheaper rate.


Reverse Repo rate - rate at which RBI borrows money from banks. An
increase in Reverse repo rate can cause banks to transfer more funds to
RBI due to this attractive interest rates. It can cause the money to be
drawn out of the banking system.
Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo
Rate and Reverse Repo rate our banks adjust their lending or investment
rates for common man.


Difference between Bank Rate and Repo Rate
While repo rate - applicable to short-term loans and used for controlling
amount of money in market, bank rate - a long-term measure and
governed by long-term monetary policies
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STATUTORY LIQUIDITY RATIO (SLR)

OBJECTIVE
1) To restrict expansion of bank credit.
2) To augment investment of the banks in Government securities.
3) To ensure solvency of banks.
Commonly used to contain inflation and fuel growth, by increasing or
decreasing it respectively

MAINTAINED IN THE FORM OF :
a) Cash
b) Gold marked to market
c) Unencumbered approved securities or Gilts - valued at a price as
specified by RBI

CURRENT SLR

SLR RATE = Total Demand/Time Liabilities x 100%

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CASH RESERVE RATIO (CRR)


OBJECTIVE
Banks required to hold a certain proportion of their deposits in the form of
cash, deposited with RBI/currency chests, considered as equivalent to
holding cash with themselves
This minimum ratio (that is the part of the total deposits to be held as
cash) is stipulated by RBI - CRR or Cash Reserve Ratio
Also known as - Cash Asset Ratio or Liquidity Ratio

PURPOSE
Higher the ratio (i.e. CRR), lower is amount that banks will be able to use
for lending and investment.

EXISTING CRR




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