Banking and Insurance Semester 3

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A Bank is defined as an institution which accepts deposits and lends money or makes investments.
Bank must perform two essential functions
Acceptance of deposits Lending or Investing
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Functions of a Bank
Finance Marketing Human Resources

Information Technology
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Structure of the Banking System

Central Bank (RBI)

Scheduled Banks

Non Scheduled Ba

State Co op Banks

Commercial Banks Indian Public Sector Banks Private Sector Banks Foreign

SBI and its Subsidiaries Regional Rural Banks

Other Nationalized Banks

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Banking
Retail Banking Wholesale Banking Private Banking

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Retail Banking
Accepting Deposits Opening Accounts Disbursing Individual Loans Demat Account and Trading Account Mutual Fund Distribution Insurance Product Distribution
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Wholesale Banking
Corporate Banking
Treasury Management Risk Management

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Corporate Banking

Relationship Management Credit Appraisal Cash Management Services Bank Guarantees Letter of Credit

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Treasury Management
Treasury
Investments ADR / GDR Interest Rate Swaps

Treasury Operations
Domestic Transactions
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Risk Management
Client Risk (Creditworthiness)
Industry Risk Liquidity Management

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Private Banking
Handling Individual Clients
Entertaining HNIs

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General Departments
Human Resources Information Technology Legal Credit Cards Back office Operations

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Case
2 brother Amit Verma and Namit Verma are
living in the USA carrying out their import export business. Their parents are living in India along with their other brother Chirag Verma who invests heavily in the stock market. Their parents have retired and keep all their savings in the form of cash at home. Their parents are planning a trip to the USA to visit them.
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Banks Balance sheet

Liabilities are the sources of the funds
Assets are the uses of the funds

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Liabilities
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Capital

Authorized Capital Issued Capital Subscribed Capital Called up Capital Paid up Capital

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Reserves and Surplus

Statutory Reserve
As per Banking Regulation Act 1949 part of the profit is to be transferred to this reserve

Capital Reserve
Surplus arising out of revaluation

Share Premium Balance in P & L A/c.

Profit after appropriation
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Deposits
Demand Deposits Term Deposits FCNR Deposits Deposits from other banks

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Borrowings
Borrowings from within India
Refinance or borrowing from RBI Borrowings from Commercial Banks Borrowings from IDBI, NABARD, Exim Bank Overseas borrowings by Indian branches Overseas borrowings by foreign branches

Borrowings from Abroad

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Other Liabilities and Provisions

Bills Payable
DD, TT, TCs, etc

Inter Office Adjustment Interest Accrued

Interest accrued but not due

Others
Provision for Income tax Outstanding charges like rent etc.
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Assets
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Cash and Bank Balance

Cash and Balance with RBI
Cash in Hand Foreign currency and cash Balances in overseas branches

Balance with RBI

CRR Balance in currency chest

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Cash and Bank Balance

Amount held by bank in current account
and fixed deposit with other banks

Money at call and short notice

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Investments
Government Securities
Securities issued by Central and State Govt.

Approved Securities
SLR Securities

Shares
Investment in Subsidiaries Bonds/Debentures Investment in Gold,CPs,CDs.
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Loans and Advances

Three formats are required
Types or nature of advances Secured and unsecured advances Sectorial credit advances
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Types / Nature of Advances

Bills Purchased and discounted Cash Credit Overdraft Demand loan Term loan

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Secured / Unsecured Advances

Secured by tangible assets
Covered by bank/ Govt. guarantee Unsecured advances

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Sectorial Advances
Priority sector
Public sector Advances made to other banks

All other advances

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Fixed Assets
Land and Buildings Furniture and Fixtures Computers Vehicles All other fixed assets

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Other Assets
Inter office adjustment
Interest Accrued Tax paid in advance

Stationery and Stamps

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Contingent Liabilities / Off Balance sheet items

Liability which may or may not arise

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Claims against bank not acknowledge as debt Liability for partly paid investment Outstanding forward exchange contract Guarantees given by bank, in & outside India Currency / Interest rate swaps
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Income Statement

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Interest Earned
Interest on advances
Dividend and interest income from
investment

Interest on balances with RBI and inter

bank funds
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Other Income
Commission, exchange and brokerage Profit on sale of investment Profit on revaluation of investment (Any loss will be shown as deduction) Profit on sale of land building & other assets Profit on exchange transaction Miscellaneous income
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Interest Expended
Interest on deposit
Interest on RBI / inter bank borrowings

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Operating Expenses

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Payment to and provisions for employees Rent, taxes, lighting Printing and stationery and Advertisement Depreciation Directors fees and Auditors fees and Law charges Postage, Telephone etc Repairs and maintenance Insurance Other expenses
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Indian Banks Balance Sheet

Liabilities Assets

Capital Reserves and Surplus Deposits Borrowings Other Liabilities and provisions Contingent Liabilities

Cash and Balances with

RBI Balances with banks and money at call and short notices Investments Advances Fixed Assets Other Assets
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Income Statement
Income Expenses

Interest Earned Other Income

Interest Expended Operating Expenses

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Ratios
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Operating Efficiency
Total Operating Expenses ---------------------------------------Total Assets

X 100

Lower ratio shows banks efficiency

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Non Interest Income / Net Total Income

Non Interest Income ------------------------------------- X 100 Net Total Income Net Total Income = Net Interest Income + Other Income

Shows the share of non interest income to total

income
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Return on Equity (ROE)

Net Profit --------------- X 100 Equity

Shows the return to the shareholders

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Return on Company / Assets

Net Profit ------------------------------------------- X100 Total Assets / Total Liabilities

Shows how well the banks is using the

assets to generate profits
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Cost of Borrowed Funds

Interest Expenses ------------------------------------------- X 100 Deposits + Borrowings

Higher the ratio higher is the cost of funds

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Earnings Per Share (EPS)

Net Profit --------------------------Number of Equity Shares

Shows the earning per share

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Price / Earnings Ratio (P/E)

Current Market Price ------------------------------------EPS

Helps in determining the true value of the

share
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Net Interest Margin (NIM)

Total Interest Income Total Interest Expenses -------------------------------------------------------- X 100 Total Assets

Shows the net interest income compared

to the total assets

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Ratio Analysis
Operating Efficiency Non Interest Income / Net Total Income ROE ROA Cost Of Funds EPS P/E NIM
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Concepts
Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR) Primary Lending Rate (PLR) Repo Rate and Reverse Repo Rate Inter Bank Call Money Market Capital Adequacy Ratio (CAR) Cheque
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Concepts
Cash Reserve Ratio (CRR) 5% Statutory Liquidity Ratio (SLR) 24% Primary Lending Rate (PLR) Capital Adequacy Ratio (CAR) 9% Inter Bank Call Money Market Repo Rate and Reverse Repo Rate Cheque
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Repo 4.75%
G Secs

Money Reserve Bank of India (RBI) G Secs Bank

Money

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Reverse Repo 3.25%

G Secs

Money Reserve Bank of India (RBI) G Secs Bank

Money

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Cheque

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Cross Cheque

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Bank Nifty
Amount to be invested max Rs 20,00,000 Minimum investment Rs 4,00,000 in each stock
(Min 5 stocks and max 12 stocks). From 2nd July to 8th July 2009. 6th July allowed to buy/sell stocks. Aim is to outperform the Bank Nifty and the Nifty. Highest group gets 12 lowest group gets 2. Presentation 6 marks. Bonus Marks for outperforming Bank Nifty and the Nifty
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Reserve Bank of India (RBI)

Regulator Banker to the Government Interest Rates Currency Foreign Exchange
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Measures Taken by India to combat the Sub Prime Crisis

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 FII money being pulled out of the

country. Measures taken by RBI to intervene in the currency market. Impacted the export market. Made imports more expensive. Higher fiscal deficit. Corporate could not raise money in the International market.
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Tax Rates
Income tax threshold has been raised to
Rs. 1.60 lakhs from 1.10 lakhs.

For women there is no tax for income

below Rs 1.90 lakh from 1.45 lakhs

Senior citizens need not pay tax for

income below Rs 2.40 lakh from 1.95 lakhs.
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Monetary Policy & Fiscal Policy

CRR, SLR, Repo and Rev Repo Rate
cuts. RBI ensured that their were PLR cuts in PSU banks at least. Oil Bonds were treated as SLR investments. Increase the FII limit for corporate bonds from $3bn to $6bn
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