Basic Banking

January 19, 2010

_experience the commitment TM

By: Vijaya Bhaskar V

 Agenda

• Introduction to Basics of Banking

• Definition of Banking

• Key Areas of Banking

• Delivery Channels

• Glossary Terms one should know

• Questions

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Banking Overview

3
What is a Bank?

A financial institution that accepts deposits and

channels the money into profitable lending activities

4
What is Banking ?

Banking Regulation Act of India, 1949 defines

Banking as

"accepting, for the purpose of

lending or investment of deposits of
money from the public, repayable on
demand or otherwise and withdrawable
by cheques, draft, order or otherwise."

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Banking - Key Areas

Retail Banking

Corporate/Wholesale Banking

House Keeping

Delivery Channels

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Retail Banking

Segments Product & Services

Resident Individuals Deposits

NRIs (Non Resident Individuals) Cash Credit/Overdraft
HNIs (High Net Worth Individuals) Remittances
HUFs (Hindu Undivided Family) Forex
Trusts/Clubs Collections
Proprietors/ Partnerships Retail Loans
Cards
Gold
Safe Custody
Government Business

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Corporate/Wholesale Banking
Segments Product & Services

SME (Small and Medium Deposits

Entrp) Current A/c
SBSI (Small Biz & Small Ind) Cash Management
Mid Corporates Trade Finance
Large Corporates Forex
(C&I -Corporate and Remittances
Institutional) Corporate Loans
Investment Banking
Wealth Management

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House Keeping
Treasury Management
ALM (Asset Liability Management)

Funding

Trading

Forex

Reconciliation
Risk Management

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Delivery Channels

Branch Banking (Brick and Mortar)

ATM

Debit/Credit Cards

Internet Banking (Click and Portal)

Phone Banking (Ring and Sing)

Mobile Banking

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Terms in Banking ….
Assets
Items of monetary value (e.g., house, land, car) owned by an individual or
company. In banking advances are called assets.
Current Assets
these assets can be easily liquidated in case the company goes
bankrupt (cash, receivables, inventory, etc)

Liability
A financial obligation, debt, claim, or potential loss. In
banking deposits are called liabilities.
Current Liability
the sum of all money owed by a company and due within
one year (payables , salary, etc)

Working Capital
Current assets minus Current liabilities. A measure of the liquid assets held by
a company to build its business

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Terms in Banking ….
Cash Credit /Overdraft

A loan account having a set withdrawal limit

Cash credit is Working Capital given to traders /

manufacturers for asset creation.
Assets are Hypothecated / Pledged to a Bank
Overdraft is used by an individual and may be secured /
unsecured

Interest - Money paid for the use of money

Simple Interest
Compound Interest

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Terms in Banking ….
Advances/Credit/Loans
Personal Loan : For any personal use of the individual e.g.
marriage, furniture, etc. Consumption loan where no assets are created

Consumer Loan : For purchase of any white goods e.g. refrigerator,

television, washing machine, etc. Assets are created

Auto Loan : For purchase of any vehicle.

Vehicle is hypothecated to Bank security for loan

Home Loan : For purchase of house.

House is mortgaged to Bank as security for loan

Credit Card
A card that allows you to buy goods, services and obtain cash
advances on credit with a pre-defined limit

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Terms in Banking ….
Lien
A charge marked on deposit for loan

Hypothecation
Floating charge created on moveable assets as security for a loan.
Possession of asset remains with the borrower

Pledge
Fixed charge created on moveable assets as security for a loan.
Possession of asset is with the lender

Mortgage
Charge created on immoveable property till the
re-payment of the loan. Handover of Title deeds to lender

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Terms in Banking ….
Time Deposit – An interest bearing deposit which has a fixed tenure.

Traditional Fixed Deposits, Cumulative Fixed Deposits,

Recurring Deposits
Tenure from 15 days to 10 yrs for Fixed Deposits
Tenure from 6 months to 10 yrs for Recurring Deposits

Demand Deposit – A deposit which can be withdrawn on

demand any time. It does not have any fixed tenure.

Savings Account, Current Account , Checking Account

Savings account pays interest with restrictions on
number of transactions
Current account does not pay any interest and has no
limitations on transactions

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Terms in Banking ….
Remittances
Outward Remittance : Funds going out of a Bank
Inward Remittance : Funds coming into a Bank

Types of Remittances
Cash
Cheque
Demand Draft / Pay Order
ECS (Electronic Clearing System)
EFT (Electronic Funds Transfer)
Wire Transfer (SWIFT- Society for Worldwide Interbank
Financial Telecommunication )

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Clearing and Collections
Clearing (Local Checks)
Step 1      Check is deposited into checking account
Step 2      Receiving Bank routes the check to the clearing house
Step 3 Clearing house forwards the check to the drawee bank,
which makes sure that the money is there and that the
check is legitimate
Step 4      The money is made available

Collections (Outstation Checks)

When a check is payable at any outstation location, it is sent on
collection to that particular location
Clearing will happen as mentioned above
Money is available through inter branch transfer or demand draft
It involves additional time and charges

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Safe Custody / Lockers
Safe Custody

Bank is in the business of providing safe custody of

documents

Safe Deposit Lockers

Bank provides a secure space on hire to its

customers
Lockers can neither be opened by the hirer or the
Bank individually
Both must come together and use their respective
keys to open the locker

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Government Business
Involves payments/collections on behalf of various central/state governments

Payments
Pension Payments of employees of
central government
railways
defence, etc.
Payment of government bills / salaries

Collections
Collection of Income tax, customs and excise duties
PPF Deposits

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FOREX

FX/Forex/Foreign Exchange
A currency other than home currency is a foreign currency
It deals with exchange of foreign currency with home currency or any other
foreign currency
It means simultaneous buying of one currency and selling of another in an
over-the-counter market, just like any commodity, through an authorized dealer

Exchange rate
It is a market determined rate
The price of one currency stated in terms of another currency. Example: $1
US Dollar (USD) = Rs. 43.91 (INR)

Base currency : It is the first currency in a currency pair, and the currency
that remains constant when determining a currency pair's price.
Here USD is the base currency. Denoted as USD/INR
Generally USD,EUR,GBP are dominant base currency

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Why FOREX?
Client Requirements
Foreign Currency conversion
Foreign Currency Remittances (Fund
transfers)
Trade Finance (import / export)

External Commercial Borrowings

Lower interest rates

Managing Risk
Hedging of Funds to minimize exchange
risk involved in trade

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International Trade Finance
Trade Finance
Enabling the purchase and sale of goods and services across
borders to take place on terms that best service the interests of
both buyers and sellers

Trade Finance involves

Open Account Remittances
Payment is made after goods are received – Advantage Buyer

Advance Payments
Payment is made before goods are received – Advantage Seller

Bills on Collection
Both Buyer and Seller interests are safeguarded

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International Trade Finance ….
Documentary Letter of Credit

Written undertaking by bank to make payment on receipt of

documents as per LC, within prescribed time limit, of a defined
amount of money to seller according to the terms and conditions
specified by the buyer

Bank Guarantee

Written undertaking by bank to make payment on demand within

prescribed time limit, of a defined amount of money to seller,
contingent upon default by the applicant

Banks’ deal in Documents, not in Goods

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Cash Management

Business consists of “cash flows”. The management of these cash

flows is a central function for any business.

Cash & time combined form a powerful combination

to generate additional revenue.
Quicker realisation of receivables result in maximising profits
even without any increase in sales

Corporations are anxious to manage cash effectively to :

Perform centralised business functions in an efficient manner
Maximise benefits/reduce costs from their available cash
position

Corporations hire banks to perform these functions for them.

This service is called cash management.
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 Cash Management Services (CMS)
Receivables
Funds accrued but not realized,
timely collection of business dues and follow-up
Collections
Check collections from various locations
Payments
Funds accrued but not paid,
payment allowing maximum float
Liquidity
Timely availability of clear funds
Investment of surplus funds with maximum
returns

All four above mentioned services, when effectively managed, is

Cash Management

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Treasury
Treasury

Treasury Department of the bank manages the fund

position of the bank
Borrowing funds when short
Investing surplus funds in profitable and secure avenues
(Treasury Bills)
Trading in foreign currencies for funding and profit

Matching of deposits and loaned funds to

Maintain Liquidity
Maximize Banks’ profits

Such co-ordination and management of funds is done by the

Treasury Department of a Bank

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Treasury…
Key Functions of Treasury

Liquidity Management
Foreign Currency Trading
Domestic currency borrowing and placement

Gap Management
Tenor Gap
Interest Rate Gap

Risk Management
Liquidity Risk
Price Risk
Counter party Risk
Country Risk

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Asset Liability Management
ALM (Asset Liability Management)

Assets
Loans, Bonds, etc

Liabilities
Deposits, etc

Managing Proper Balance

Match Interest Rates
Match Maturities
Manage Risk

ALM is a part of Treasury Management

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 ALM….
Consider a bank that borrows USD 100Mn at 3.00% for a year and lends
the same money at 3.20% to a highly-rated borrower for 5 years.

The net transaction appears profitable—the bank is earning a 20 basis

point spread—but it entails considerable risk

Suppose, at the end of a year, an applicable 4-year interest rate is

6.00%.

The bank is in serious trouble. It is going to be earning 3.20% on its loan

and paying 6.00%

ALM prevents such happenings

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Statutory Ratios
SLR (Statutory Liquidity Ratio)

Maintained in the form of cash, gold or government

securities as a certain percentage of bank’s demand and
time liabilities.
In India Current SLR is (It changes from time to time and
you know where to find it.) 
CRR (Cash Reserve Ratio)

Maintained in form of cash reserves or current account

with the Central Bank, as a certain percentage of bank’s
demand and time liabilities.
The objective is to ensure the safety and liquidity of the
deposits with the banks.
In India Current CRR is (It changes from time to time
and you know where to find it.) 

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Investment Bank
Investment Bank

Investment banks are financial intermediaries

who, much like commercial banks, have a principal
purpose of bringing borrowers and lenders together

Difference

Commercial banks borrow money from

individuals in the form of savings and checking
deposits to lend to other individuals and
businesses

Investment banks help lenders invest directly in

the business of the borrowers.

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Investment Banking
Investment Bank is,
An institution which acts as an underwriter or agent for corporations
issuing securities
It has a large role in facilitating mergers and acquisitions, private
equity placements and corporate restructuring
Unlike traditional banks, investment banks do not accept deposits
from and provide loans to individuals

Investment Banking involves

Advisory services to investor and

Investing on behalf of the investor

Investment Banking is offered to

High Net worth Individuals of Bank

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Wealth Management
Wealth Management

Why?

Do you have $1 million in assets? $10 million? $20 million or more?

Are you building a legacy or getting ready to leave one?
Are you exercising stock options or executing a will?

If Yes, then you need Wealth Management

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 Wealth Management…
Wealth management reflects three fundamentals of financial security needed during the
life of an individual and after –

Accumulation
Continue growing assets, amassing wealth
Takes place during early stages of life
(getting married, having children, etc.)

Preservation
Maintaining lifestyle during retirement
Protecting family or business after you are no more

Transfer
Creating a Lasting Legacy for future generations
Either sharing the rewards of your life's work with
heirs or to benefit a cause or charity

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Risk and Reward
What is Risk?
We are faced by uncertainty about the future

In finance this uncertainty set is populated by returns

Some we want

Some we don’t want

The undesired elements of the uncertainty set are known as

RISK

The desired outcomes are reward

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Dimensions of Risk and Reward

Likelihood
Consequence
The product of likelihood and consequence equal risk
The Rumsfeld quotation:
There are the risks that we know that we know
There are the risks that we know that we don’t know
And there are the risks that we don’t know that we don’t know.
Strictly the first of these is not a risk -it is an expectation and we price expectations
The second we provide capital against
The third ……

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 Risk Management

 
Risk Management is
Attempting to
Identify and then manage threats
That could severely impact or bring down the organization
  
It involves
        reviewing operations of the organization

 
       identifying potential threats to the organization

identifying likelihood of their occurrence

  taking appropriate actions to address the most likely threats

        
       

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Questions ?

Point of Contacts:
Vijaya Bhaskar V (Bangalore)

_experience the commitment TM

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