Black Book Project - Copy.docx

PROJECT ON “KNOWLEDGE MANAGEMENT BANK” BACHELOR OF COMMERCE

BANKING & INSURANCE

MUMBAI UNIVERSITY

SUBMITTED BY

PARTE SEJAL SUNIL UNDER THE GUIDANCE OF

MRS.SUJATA KUMKAR

DNYAN PRASARAK SHIKSHAN SANSTHA’S

SANDESH COLLEGE OF ARTS COMMERCE AND SCIENCE

TAGORE NAGAR VIKHROLI (E) MUMBAI-400083 2018-2019 TYBBI 1

DNYAN PRASARAK SHIKSHAN SANSTHA’S

SANDESH COLLEGE OF ARTS , COMMERCE & SCIENCE

TAGORE NAGAR, VIKHROLI (E), MUMBAI - 4000 83.

DEPARTMENT OF SELF FINANCE COURSE

(BANKING AND INSURANCE)

CERTIFICATE This is to certify that Ms/SEJAL SUNIL PARTE has worked

and duly completed her/his Project Work for the degree of Bachelor in Commerce (Banking and Insurance) under the Faculty of Commerce in the subject of and her/his project is entitled, “KNOWLEDGE ABOUT MANAGEMENT BANKING” under my supervision.

I further certify that the entire work has been done by the learner under my guidance and that no part of it has been submitted previously for any Degree or Diploma of any University. It is her/his own work and facts reported by her/his personal findings and investigations.

Signature of Guiding Teacher SUJATA KUMKAR

Date of submission: TYBBI 2

Declaration by learner I the undersigned Miss PARTE SEJAL SUNIL here by, declare that the wok embodied in this project work titled “KNOWLEDGE ABOUT MANAGEMENT BANKING”, forms my own contribution to the research work carried out under the guidance of Mrs. SUJATA KUMKAR is a result of my own research work and has not been previously submitted to any other University for any other Degree/ Diploma to this or any other University. Wherever reference has been made to previous works of others, it has been clearly indicated as such and included in the bibliography. I, here by further declare that all information of this document has been obtained and presented in accordance with academic rules and ethical conduct.

Name and Signature of the learner

Certified by

Mrs. SUJATA KUMKAR

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Acknowledgment To list who all have helped me is difficult because they are so numerous and the depth is so enormous. I would like to acknowledge the following as being idealistic channels and fresh dimensions in the completion of this project. I take this opportunity to thank the University of Mumbai for giving me chance to do this project. I would like to thank my Principal, Shri. BALASAHEB MHATRE for providing the necessary facilities required for completion of this project. I take this opportunity to thank our voice principle Mrs.ALKA KADAM , for her moral support and guidance. I would also like to express my sincere gratitude towards my project guide Mrs.SUJATA KUMKAR whose guidance and care made the project successful. I would like to thank my College Library, for having provided various reference books and magazines related to my project. Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion of the project especially my Parents and Peers who supported me

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*KNOWLEDGE ABOUT MANAGEMENT BANKING*

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Index Chapter No. 1 1.1 INTRODUCTION TO BANK MANAGEMENT 1.2 ORIGIN OF BANKS 1.3 SCHEDULED & NON-SCHEDULED BANKS 1.4 EVOLUTION OF BANKS 1.5 GROWTH OF BANKING SYSTEM IN INDIA Chapter no.2 2.1HISTORY OF BANKING MANAGEMENT 2.2 DEFINITION 2.3 BANK MANAGEMENT IN THE ECONOMY 2.4 BANK FUNCTIONS Chapter no.3 3.1WHAT IS THE BANK MANAGEMENT 3.2 THE ROLE OF PROJECT MANAGEMENT IN THE BANK BY FUNCTIONAL AREA 3.3 COMMERCIAL BANKING FUNCTIONS 3.4 BANKING REGULATION ACT 1949 3.5 PENALTIES PRESCRIBED UNDER THE BANKING REGULATION ACT, 1949 Chapter no.4 4.1 BANK MANAGEMENT – LIQUIDITY 4.2 PRINCIPLES OF CREDIT MANAGEMENT Chapter no.5 TYBBI 6

4.3 BANK MANAGEMENT: FORMULATING LOAN POLICY 4.4 ADVANTAGES 4.5 DISADVANTAGES 5.1 CERTIFICATE OF DEPOSIT Chapter no.6 5.2 HOW CAN A BANK ACHIEVE LIQUIDITY 5.3 BANK MANAGEMENT - LIQUIDITY MANAGEMENT THEORY 6.1BANK MANAGEMENT: BASEL NORMS Chapter no.7

7.1 FIVE ESSENTIAL PROCESS IMPROVEMENT IDEAS IN BANKING 7.2 PROCESS IMPROVEMENT IDEAS IN BANKING NUMBER 1: START WITH NON-STANDARD WORK 7.3 PROCESS IMPROVEMENT IDEAS IN BANKING NUMBER 3: FIX BROKEN STAFFING MODELS

7.4BANK MANAGEMENT – CREDIT 7.5 PRINCIPLE OF CREDIT MANAGEMENT Chapter no 8

8.1 BANK MANAGEMENT - FORMULATING LOAN POLICY 8.2 BANK MANAGEMENT - ASSET LIABILITY 8.3 BANK MANAGEMENT - EVOLUTION OF ALM

8.4 ALM. 8.5 INTEREST RATE RISK (IRR) 8.6 GAP ANALYSIS 8.7 BANK MANAGEMENT – BANKING MARKETING Chapter no 9

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9.1 MARKETING APPROACH 9.2 BANK MANAGEMENT - RELATIONSHIP BANKING 9.3 IMPROVING CUSTOMER RELATIONSHIP

9.4 FEATURES & CHARACTERISTICS OF BANKING SECTOR!! 9.5 DIFFERENT TYPES OF BANK IN INDIA 9.6 DIFFERENT TYPES OF DEPOSITS 9.7 THE ROLE OF MANAGEMENT BANKING 9.8 BANK RISK 9.9 ISSUES AND CHALLENGES FACING INDIAN BANKING SECTOR Chapter no 10

*CONCLUSION * REFERENCE

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*Knowledge management bank* Introduction to Bank Management The purpose of this study was to understand the banking management practices of the creation, sharing, and acquisition of knowledge in their operations. Knowledge sharing individually or collectively, by the banking management adds value when new KM is practiced in a knowledge-intensive organization. Knowledge has been lately recognized as one of the most important assets of organizations. Managing knowledge has grown to be imperative for a company’s success. This paper presents an overview of Knowledge Management and various aspects of secure knowledge management. A case study of knowledge management activities at Tata Steel is also discussed. A bank is a financial institution which accepts deposits, pays interest on pre-defined rates, clears checks, makes loans, and often acts as an intermediary in financial transactions. It also provides other financial services to its customers. Bank management governs various concerns associated with bank in order to maximize profits. The concerns broadly include liquidity management, asset management, liability management and capital management. We will discuss these areas in later chapters.

Origin of Banks The origin of bank or banking activities can be traced to the Roman Empire during the Babylonian period. It was being practiced on a very small scale as compared to modern day banking and frame work was not systematic. Modern banks deal with banking activities on a larger scale and abide by the rules made by the government. The government plays a crucial role with its control over the banking system. This calls for bank management, which further ensures quality service to customers and a win-win situation between the customer, the banks and the government. TYBBI 9

Scheduled & Non-Scheduled Banks Scheduled and non-scheduled banks are categorized by the criteria or eligibility setup by the governing authority of a particular region. The following are the basic differences between scheduled and non-scheduled banks in the Indian banking perspective. Scheduled banks are those that have paid-up capital and deposits of an aggregate value of not less than rupees five lakhs in the Reserve Bank of India. All their banking businesses are carried out in India. Most of the banks in India fall in the scheduled bank category. Non-scheduled banks are the banks with reserve capital of less than five lakh rupees. There are very few banks that fall in this category.

Evolution of Banks Banking system has evolved from barbaric banking where commodities were loaned to modern day banking system, which caters to a range of financial services. The evolution of banking system was gradual with growth in each and every aspect of banking. Some of the major changes which took place are as follows −       

Barter system replaced by money which made transaction uniform Uniform laws were setup to increase public trust Centralized banks were setup to govern other banks Book keeping was evolved from papers to digital format with the introduction of computers ATMs were setup for easier withdrawal of funds Internet banking came into existence with development of internet Banking system has witnessed unprecedented growth and will be undergoing it in future too with the advancement in technology.

Growth of Banking System in India The journey of banking system in India can be put into three different phases based on the services provided by them. The entire evolution of banking can be described in these distinct phases –: Phase 1

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This was the early phase of banking system in India from 1786 to 1969. This period marked the establishment of Indian banks with more banks being set up. The growth was very slow in this phase and banking industry also experienced failures between 1913 to 1948. The Government of India came up with the banking Companies Act in 1949. This helped to streamline the functions and activities of banks. During this phase, public had lesser confidence in banks and post offices were considered more safe to deposit funds. Phase 2 This phase of banking was between 1969 to 1991, there were several major decisions being made in this phase. In 1969, fourteen major banks were nationalized. Credit Guarantee Corporation was created in 1971. This helped people avail loans to set up businesses. In 1975, regional rural banks were created for the development of rural areas. These banks provided loans at lower rates. People started having enough faith and confidence on the banking system, and there was a plunge in the deposits and advances being made. Phase 3 This phase came into existence from 1991. The year 1991 marked the beginning of liberalization, and various strategies were implemented to ensure quality service and improve customer satisfaction. The on-going phase witnessed the launch of ATMs which made cash withdrawals easier. This phase also brought in Internet banking for easier financial transactions from any part of world.

History of banking management The history of banking began with the first prototype banks which were the merchants of the world, who made grain loans to farmers and traders who carried goods between cities. This was around 2000 BC in Assyria, India and Sumeria. Later, in ancient Greece and during the Roman Empire, lenders based in temples made loans, while accepting deposits and performing the change of money. Archaeology from this period in ancient China and India also shows evidence of money lending

Definition The definition of a bank varies from country to country. See the relevant country pages under for more information. Under English common law, a banker is defined as a person who carries on the business of banking by conducting current accounts for his customers, paying cheques drawn on him/her In most common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of persons, whether incorporated or not, who carry on the business of TYBBI 11

banking' (Section 2, Interpretation). Although this definition seems circular, it is actually functional, because it ensures that the legal basis for bank transactions such as cheques does not depend on how the bank is structured or regulated. The business of banking is in many English common law countries not defined by statute but by common law, the definition above. In other English common law jurisdictions there are statutory definitions of the business of banking or banking business. When looking at these definitions it is important to keep in mind that they are defining the business of banking for the purposes of the legislation, and not necessarily in general. In particular, most of the definitions are from legislation that has the purpose of regulating and supervising banks rather than regulating the actual business of banking. However, in many cases the statutory definition closely mirrors the common law one. Examples of statutory definitions: 

"banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).  "banking business" means the business of either or both of the following: 1. receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] ... or with a period of call or notice of less than that period; 2. Paying or collecting cheques drawn by or paid in by customers. Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has led legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect cheques

Economic functions The economic functions of banks include: 1. Issue of money, in the form of banknotes and current accounts subject to cheque or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the payee may bank or cash. 2. Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the TYBBI 12

offsetting of payment flows between geographical areas, reducing the cost of settlement between them. 3. Credit intermediation – banks borrow and lend back-to-back on their own account as middle men. 4. Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to rise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. 5. Asset liability mismatch/Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets). 6. Money creation/destruction – whenever a bank gives out a loan in a fractionalreserve banking system, a new sum of money is created and conversely, whenever the principal on that loan is repaid money is destroyed.

What is Bank Management? There are many definitions of bank management. In general, bank management refers to the process of managing the Bank’s statutory activity. Bank management is characterized by the specific object of management financial relations connected with banking activities and other relations, also connected with implementation of management functions in banking. The main objective of bank management is to build organic and optimal system of interaction between the elements of banking mechanism with a view to profit. Successful optimization of the "profitability-risk" ratio in a bank lending operations is largely determined by the use of effective methods of bank management. Ability to take reasonable risk is one of the elements of entrepreneurship culture in general and banking culture in particular.

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Reliability of the bank management is determined by the following characteristics:       

management expertise in strategic analysis, planning, policy development and management functions; quality of planning; risk management (credit, interest rate and currency risks); liquidity management; management of human resources; creation of control systems: audit and internal audit , monitoring of profitability and risks liquidity; Unified information technology system: integrated automation of workflow, accounting, current analysis and control, strategic planning.

Bank Management – Credit Credit management is the process of monitoring and collecting payments from customers. A good credit management system minimizes the amount of capital tied up with debtors. It is very important to have good credit management for efficient cash flow. There are instances when a plan seems to be profitable when assumed theoretically but practical execution is not possible due to insufficient funds. In order to avoid such situations, the best alternative is to limit the likelihood of bad debts. This can only be achieved through good credit

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management practice.

For running a profitable business in an enterprise the entrepreneur needs to prepare and design new policies and procedures for credit management. For example, the terms and conditions, invoicing promptly and the controlling debts.

Principles of Credit Management Credit management plays a vital role in the banking sector. As we all know bank is one of the major source of lending capital. So, Banks follow the following principles for lending capital –

1.Liquidity Liquidity plays a major role when a bank is into lending money. Usually, banks give money for short duration of time. This is because the money they lend is public money. This money can be withdrawn by the depositor at any point of time

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So, to avoid this chaos, banks lend loans after the loan seeker produces enough security of assets which can be easily marketable and transformable to cash in a short period of time. A bank is in possession to take over these produced assets if the borrower fails to repay the loan amount after some interval of time as decided A bank has its own selection criteria for choosing security. Only those securities which acquire enough liquidity are added in the bank’s investment portfolio. This is important as the bank requires funds to meet the urgent needs of its customers or depositors. The bank should be in a condition to sell some of the securities at a very short notice without creating an impact on their market rates much. There are particular securities such as the central, state and local government agreements which are easily saleable without having any impact on their market rates. Shares and debentures of large industries are also addressed under this category. But the shares and debentures of ordinary industries are not easily marketable without having a fall in their market rates. Therefore, banks should always make investments in government securities and shares and debentures of reputed industrial houses.

2. Safety The second most important function of lending is safety, safety of funds lent. Safety means that the borrower should be in a position to repay the loan and interest at regular durations of time without any fail. The repayment of the loan relies on the nature of security and the potential of the borrower to repay the loan. Unlike all other investments, bank investments are risk-prone. The intensity of risk differs according to the type of security. Securities of the central government are safer when compared to the securities of the state governments

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and local bodies. Similarly, the securities of state government and local bodies are much safer when compared to the securities of industrial concerns. This variation is due to the fact that the resources acquired by the central government are much higher as compared to resourced held by the state and local governments. It is also higher than the industrial concerns. Also, the share and debentures of industrial concerns are bound to their earnings. Income varies according to the business activities held in a country. The bank should also consider the ability of the debtor to repay the debt of the governments while investing in their securities. The prerequisites for this are political stability and peace and security within the country. Securities of a government acquiring large tax revenue and high borrowing capacity are considered as safe investments. The same goes with the securities of a rich municipality or local body and state government of a flourishing area. Thus, while making any sort of investments, banks should decide securities, shares and debentures of such governments, local bodies and industrial concerns which meets the principle of safety. Therefore, from the bank’s way of perceiving, the nature of security is very essential while lending a loan. Even after considering the securities , the bank needs to check the creditworthiness of the borrower which is monitored by his character, capacity to repay, and his financial standing. Above all, the safety of bank funds relies on the technical feasibility and economic viability of the project for which the loan is to be given.

3. Diversity While selecting an investment portfolio, a commercial bank should abide by the principle of diversity. It should never invest its total funds in a specific type of securities; it should prefer investing in different types of securities. It should select the shares and debentures of various industries located in different parts of the country. In case of state governments and local governing bodies, same principle should be abided to. Diversification basically targets at reducing risk of the investment portfolio of a bank. The principle of diversity is applicable to the advancing of loans to different types of firms, industries, factories, businesses and markets. A bank should abide by the maxim that is “Do not keep all eggs in one basket.” It should distribute its risks by lending loans to different trades and companies in different parts of the country.

4. Stability

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Another essential principle of a bank’s investment policy is stability. A bank should prefer investing in those stocks and securities which hold a high degree of stability in their costs. Any bank cannot incur any loss on the rate of its securities. So it should always invest funds in the shares of branded companies where the probability of decline in their rate is less. Government contracts and debentures of industries carry fixed costs of interest. Their cost varies with variation in the market rate of interest. But the bank is bound to liquidate a part of them to satisfy its needs of cash whenever stuck by a financial crisis. Else, they follow their full term of 10 years or more and variations in the market rate of interest do not disturb them. So, bank investments in debentures and contracts are more stable when compared to the shares of industries.

5. Profitability This should be the chief principle of investment. A bank should only invest if it earns sufficient profits from it. Thus, it should, invest in securities that have a fair and stable return on the funds invested. The procuring capacity of securities and shares relies on the interest rate and the dividend rate and the tax benefits they hold. Broadly, it is the securities of government branches like the government at the center, state and local bodies that hugely carry the exception of their interest from taxes. A bank should prefer investing in these type of securities instead of investing in the shares of new companies which also carry tax exception. This is due to the fact that shares of new companies are not considered as safe investments. Now lending money to someone is accompanied by some risks mainly. As we know that bank lends the money of its depositors as loans. To put it simply the main job of a bank is to rent money from depositors and give money to the borrowers. As the primary source of funds for a bank is the money deposited by its customers which are repayable as and when required by the depositors, the bank needs to be very careful while lending money to customers. Banks make money by lending money to borrowers and charging some interest rates. So, it is very essential from the bank’s part to follow the cardinal principles of lending. When these principles are abided, they assure the safety of banks’ funds and in response to that they assure its depositors and shareholders. In this whole process, banks earn good profits and grow as financial institutions. Sound lending principles by banks also help the economy of a nation to prosper and also advertise expansion of banks in rural areas.

Bank Management - Formulating Loan Policy

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Basically, loan portfolios have the largest effect on the total risk profile and earnings performance. This earning performance comprises of various factors like interest income, fees, provisions, and other factors of commercial banks. The for banking organizations with less than $1 billion in total assets and 64.9 percent of total centralized assets for banking organizations with less than $10 billion in total assets.

In order to limit credit risk, it is compulsory that suitable and effective policies, procedures, and practices are developed and executed. Loan policies should coordinate with the target and objectives of the bank, in addition to supporting safe and sound lending activity. Policies and procedures should be presented as a layout for all major credit decisions and actions, enclosing all material aspects of credit risk, and mirroring the complexity of the activities in which a bank is engaged.

1.Policy Development As we know risks are inevitable, banks can lighten credit risk by development of and cohesion to efficient and effective loan policies and procedures. A welldocumented and descriptive loan policy proves to be the milestone of any sound lending function. Ultimately, a bank’s board of directors is accountable for flaying out the structure of the loan policies to address the inherent and residual risks. Residual risks are those risks that remain even after sound internal controls have been executed in the lending business lines. After formulating the policy, senior management is held accountable for its execution and ongoing monitoring, accompanied by the maintenance of procedures to assure they are up to date and compatible to the current risk profile. TYBBI 19

2.Policy Objectives The loan policy should clearly communicate the strategic goals and objectives of the bank, as well as define the types of loan exposures acceptable to the institution, loan approval authority, loan limits, loan underwriting criteria, and several other guidelines. It is important to note that a policy differs from procedures in which it sets forth the plan, guiding principles, and framework for decisions. Procedures, on the other hand, establish methods and steps to perform tasks. Banks that offer a wider variety of loan products and/or more complex products should consider developing separate policy and procedure manuals for loan products.

3.Policy Elements The regulatory agencies’ examination manuals and policy statements can be considered as the best place to begin when deciding the key elements to be incorporated into the loan policy. In order to outline loan policy elements, the bank should have a consistent lending strategy, identifying the types of loans that are permissible and those that are impermissible. Along with identifying the types of loans, the bank will and will not underwrite regardless of permissibility. The policy elements should also outline other common loan types found in commercial banks.

Bank Management - Asset Liability Asset liability management is the process through which an association handles its financial risks that may come with changes in interest rate and which in turn would affect the liquidity scenario. Banks and other financial associations supply services which present them to different kinds of risks. We have three types of risks — credit risk, interest risk, and liquidity risk. So, asset liability management is an approach or a step that assures banks and other financial institutions with protection that helps them manage these risks efficiently. The model of asset liability management helps to measure, examine and monitor risks. It ensures appropriate strategies for their management. Thus, it is suitable for institutions like banks, finance companies, leasing companies, insurance companies, and other financing bodies. Asset liability management is an initial step to be taken towards the long term strategic planning. This can also be considered as an outlining function for an intermediate term. In particular, liability management also refers to the activities of purchasing money through cumulative deposits, federal funds and commercial papers so TYBBI 20

that the funds lead to profitable loan opportunities. But when there is an increase of volatility in interest rates, there is major recession damaging multiple economies. Banks begin to focus more on the management of both sides of the balance sheet that is assets as well as liabilities.

ALM Concepts Asset liability management (ALM) can be stated as the comprehensive and dynamic layout for measuring, examining, analyzing, monitoring and managing the financial risks linked with varying interest rates, foreign exchange rates and other elements that can have an impact on the organization’s liquidity.

Asset liability management is a strategic approach of managing the balance sheet in such a way that the total earnings from interest are maximized within the overall risk-preference (present and future) of the institutions. Thus, the ALM functions include the tools adopted to mitigate liquidly risk, management of interest rate risk / market risk and trading risk management. In short, ALM is the sum of the financial risk management of any financial institution. In other words, ALM handles the following three central risks − Interest Rate Risk Liquidity Risk

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Foreign currency risk Banks which facilitate forex functions also handles one more central risk — currency risk. With the support of ALM, banks try to meet the assets and liabilities in terms of maturities and interest rates and reduce the interest rate risk and liquidity risk. Asset liability mismatches − The balance sheet of a bank’s assets and liabilities are the future cash inflows & outflows. Under asset liability management, the cash inflows & outflows are grouped into different time buckets. Further, each bucket of assets is balanced with the matching bucket of liability. The differences obtained in each bucket are known as mismatches.

Bank Management - Evolution of ALM There was no significant interest rate risk during the 1970s to early 1990s period. This is because the interest rates were formulated and recommended by the RBI. The spreads between deposits and lending rates were very wide. In those days, banks didn’t handle the balance sheets by themselves. The main reason behind this was, the balance sheets were managed through prescriptions of the regulatory authority and the government. Banks were given a lot of space and freedom to handle their balance sheets with the deregulation of interest rates. So, it was important to launch ALM guidelines so that banks can remain safe from big losses due to wide ALM mismatches.

The Reserve Bank of India announced its first set of ALM Guidelines in February 1999. These guidelines were effective from 1st April, 1999. These guidelines enclosed, inter alia, interest rate risk and liquidity risk measurement, broadcasting layout and prudential limits. Gap statements were necessary to be made by scheduling all assets and liabilities according to the stated or anticipated re-pricing date or maturity date.

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At this stage the assets and liabilities were enforced to be divided into the following 8 maturity buckets − 1-14 days 15-28 days 29-90 days 91-180 days 181-365 days 1-3 years 3-5 years And above 5 years On the basis of the remaining intervals to their maturity which are also referred as residual maturity, all the liability records were to be studied as outflows while the asset records were to be studied as inflows. As a measure of liquidity management, banks were enforced to control their cumulative mismatches beyond all time buckets in their statement of structural liquidity by building internal prudential limits with the consent of their boards/ management committees. According to the prescribed guidelines, in the normal course, the mismatches also known as the negative gap in the time buckets of 1-14 days and 15-28 days were not to cross 20 per cent of the cash outflows with respect to the time buckets. Later, the RBI made it compulsory for banks to form ALCO, that is, the Asset Liability Committee as a Committee of the Board of Directors to track, control, monitor and report

ALM. This was in September 2007, in response to the international exercises and to satisfy the requirement for a sharper evaluation of the efficacy of liquidity management and with a view to supplying a stimulus for improvement of the term-money market. The RBI fine-tuned these regulations and it was ensured that the banks shall accept a more granular strategy for the measurement of liquidity risk by dividing the first time bucket that is of 1-14 days currently in the Statement of Structural Liquidity into three time buckets. They are 1 day addressed next TYBBI 23

day, 2-7 days and 8-14 days. Hence, banks were demanded to put their maturing asset and liabilities in 10 time buckets. According to the RBI guidelines announced in October 2007, banks were recommended that the total cumulative negative mismatches during the next day, 2-7 days, 8-14 days and 15-28 days should not cross 5%, 10%, 15% and 20% of the cumulative outflows, respectively, in order to address the cumulative effect on liquidity. Banks were also recommended to attempt dynamic liquidity management and design the statement of structural liquidity on a regular basis. In the absence of a fully networked environment, banks were permitted to assemble the statement on best present data coverage originally but were advised to make careful attempts to attain 100 per cent data coverage in a timely manner. In the same manner, the statement of structural liquidity was to be presented to the RBI at regular intervals of one month, as on the third Wednesday of every month. The frequency of supervisory reporting on the structural liquidity status was changed to fortnightly, with effect from April 1, 2008. The banks are expected to acknowledge the statement of structural liquidity as on the first and third Wednesday of every month to the Reserve Bank. Boards of the Banks were allocated with the complete duty of the management of risks and were needed to conclude the risk management policy and set limits for liquidity, interest rats, foreign exchange and equity price risks. The Asset-Liability Committee (ALCO) is one of the top most committees to overlook the execution of ALM system. This committee is led by the CMD/ED. ALCO also acknowledges product pricing for the deposits as well as the advances. The expected maturity profile of the incremental assets and liabilities along with controlling, monitoring the risk levels of the bank. It needs to mandate the current interest rates view of the bank and base its decisions for future business strategy on this view.

The ALM Process The ALM process rests on the following three pillars − 

ALM information systems



Management Information System



Information availability, accuracy, adequacy and expediency



It comprises of functions like identifying the risk parameters, identifying the risk, risk measurement and Risk management and laying out of Risk policies and tolerance levels.

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ALM information systems The key to the ALM process is information. The large network of branches and the unavailability an adequate system to collect information necessary for ALM, which examines information on the basis of residual maturity and behavioral pattern makes it time-consuming for the banks in the current state to procure the necessary information. Measuring and handling liquidity requirements are important practices of commercial banks. By persuading a bank’s ability to satisfy its liabilities as they become due, the liquidity management can minimize the probability of an adverse situation developing.

The Importance of Liquidity Liquidity go beyond individual foundations, as liquidity shortfall in one foundation can have backlash on the complete system. Bank management should not only portion the liquidity designations of banks on an ongoing basis but also analyze how liquidity demands are likely to evolve under crisis scenarios. Past experience displays that assets commonly assumed as liquid like Government securities and other money market tools could also become illiquid when the market and players are Unidirectional. Thus liquidity has to be chased through maturity or cash flow mismatches.

Bank Management - Risks with Assets Risks have a negative effect on a bank’s future earnings, savings and on the market value of its fairness because of the changes in interest rates. Handling assets invites different types of risks. Risks cannot be avoided or neglected in bank management. The bank has to analyze the type of risk and necessary steps need to be taken. With respect to assets, risks can further be categorized into the following −

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Currency Risk Floating exchange rate arrangement has brought in its wake pronounced

volatility adding a across free economies following deregulation have contributed to an increase in the volume of transactions. Large cross-border flows together with the volatility have rendered the banks’ balance sheets vulnerable to exchange rate movements.

Dealing in Different Currencies It brings opportunities as also risks. If the liabilities in one currency exceed the level of assets in the same currency, then the currency mismatch can add value or erode value depending upon the currency movements. The simplest way to avoid currency risk is to ensure that mismatches, if any, are reduced to zero or near zero.

Banks undertake operations in foreign exchange like accepting deposits, making loans and advances and quoting prices for foreign exchange TYBBI 26

transactions. Irrespective of the strategies adopted, it may not be possible to eliminate currency mismatches altogether. Besides, some of the institutions may take proprietary trading positions as a conscious business strategy. Managing Currency Risk is one more dimension of Asset Liability Management. Mismatched currency position besides exposing the balance sheet to movements in exchange rate also exposes it to country risk and settlement risk. Ever since the RBI (Exchange Control Department) introduced the concept of end of the day near square position in 1978, banks have been setting up overnight limits and selectively undertaking active daytime trading.

Interest Rate Risk (IRR) The phased deregulation of interest rates and the operational flexibility given to banks in pricing most of the assets and liabilities have exposed the banking system to Interest Rate Risk.

Interest rate risk is the risk where changes in market interest rates might adversely affect a bank’s financial condition. Changes in interest rates affect both the current earnings (earnings perspective) as also the net worth of the bank (economic value perspective). The risk from the earnings’ perspective can be measured as changes in the Net Interest Income (Nil) or Net Interest Margin (NIM). Therefore, ALM is a regular process and an everyday affair. This needs to be handled carefully and preventive steps need to be taken to lighten the issues related to it. It may lead to irreparable harm to the banks on regards of liquidity, profitability and solvency, if not controlled properly.

Risk Measurement Techniques

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In order to deal with the different types of risks involved in the management of assets and liabilities, we need to manage the risks for efficient bank management. There are various techniques used for measuring disclosure of banks to interest rate risks −

Gap Analysis Model The gap analysis model portions the flow and level of asset liability mismatch through either funding or maturity gap. It is calculated for assets and liabilities of varying maturities and is derived for a set time horizon. This model checks on the repricing gap that is present in the middle of the interest revenue earned on the bank's assets and the interest paid on its liabilities within a mentioned interval of time.

This model represents the total interest income disclosure of the bank, to variations occurring in the interest rates in different maturity buckets. Repricing gaps are estimated for assets and liabilities of varying maturities. A positive gap reflects that assets are repriced before liabilities. Meanwhile, a negative gap reflects that liabilities need to be repriced before assets. The bank monitors the rate sensitivity that is the time the bank manager will have to wait so that there is a variation in the posted rates on any asset or liability of every asset and liability on the balance sheet.

The Role of Project Management in the Bank by Functional Area: 1. Operations/IT administration/database management – Registration of customers, production of ATM cards, maintenance of the bank database and procurement of IT hardware and software for the company are the projects usually undertaken in this department. TYBBI 28

2. Call Center – Most work or issues here are done on immediate basis. The action or inaction of workers in this unit can lead to service gap for the bank’s customers. Call Center projects include worker training, and IT improvement of phone systems. 3. New Branch Deployment– Deployment of a new branch or the upgrade of an existing one is typically managed as a project, from the stakeholder analysis to the practical designing, building, equipping and staffing of the branch. 4. Audit and Inspections– Audit and inspection visits to branches should be managed as projects as it impacts other internal customers of the bank.

The role of management banking To understand fully the advantages of the intermediation process, it is necessary to analyses what banks do and how they do it. We have seen that the main function of banks is to collect funds (deposits) from units in surplus and lend funds (loans) to units in deficit. Deposits typically have the characteristics of being small-size, low-risk and high-liquidity. Loans are of larger-size, higher-risk and illiquid. Banks bridge the gap between the needs of lenders and borrowers by performing a transformation function: a) size transformation; b) maturity transformation; c) risk transformation. a) Size transformation Generally, savers/depositors are willing to lend smaller amounts of money than the amounts required by borrowers. For example, think about the difference between your savings account and the money you would need to buy a house! Banks collect funds from savers in the form of small-size deposits and repackage them into larger size loans. Banks perform this size transformation function exploiting economies of scale associated with the lending/borrowing function, because they have access to a larger number of depositors than any individual borrower (see Section 1.4.2). Financial intermediaries Financial markets Savers/ depositors Direct financing Indirect financing Borrowers Asset securitization Modern financial intermediation

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b) Maturity transformation Banks transform funds lent for a short period of time into medium- and long-term loans. For example, they convert demand deposits (i.e. funds deposited that can be withdrawn on demand) into 25-year residential mortgages. Banks’ liabilities (i.e., the funds collected from savers) are mainly repayable on demand or at relatively short notice. On the other hand, banks’ assets (funds lent to borrowers) are normally repayable in the medium to long term. Banks are said to be ‘borrowing short and lending long’ and in this process they are said to ‘mismatch’ their assets and liabilities. This mismatch can create problems in terms of liquidity risk, which is the risk of not having enough liquid funds to meet one’s liabilities. c) Risk transformation Individual borrowers carry a risk of default (known as credit risk) that is the risk that they might not be able to repay the amount of money they borrowed. Savers, on the other hand, wish to minimize risk and prefer their money to be safe. Banks are able to minimize the risk of individual loans by diversifying their investments, pooling risks, screening and monitoring borrowers and holding capital and reserves as a buffer for unexpected losses.

Banks and risk Banks have to take risks all the time. Any bank has to take on risk to make money. This includes full-service banks like JPMorgan (JPM), traditional banks like Wells Fargo (WFC), investment banks like Goldman Sachs (GS) and Morgan Stanley (MS), or any other financials included in an ETF like the Financial Select Sector SPDR Fund (XLF).

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How risk arises The risk arises from the occurrence of some expected or unexpected events in the economy or the financial markets. Risk can also arise from staff oversight or mala fide intention, which causes erosion in asset values and, consequently, reduces the bank’s intrinsic value. The money lent to a customer may not be repaid due to the failure of a business. Also, money may not be repaid because the market value of bonds or equities may decline due to an adverse change in interest rates. Another reason for no repayment is that a derivative contract to purchase foreign currency may be defaulted by a counter party on the due date. These types of risks are inherent in the banking business.

Eight types of bank risks

There are many types of risks that banks face. We’ll look at eight of the most important risks. 1.Credit risk The Basel Committee on Banking Supervision (or BCBS) defines credit risk as the potential that a bank borrower, or counter party, will fail to meet its payment obligations regarding the terms agreed with the bank. It includes both uncertainty involved in repayment of the bank's dues and repayment of dues on time. All banks face this type of risk. This includes full-service banks like JPMorgan (JPM), traditional banks like Wells Fargo (WFC), investment banks like Goldman Sachs (GS) and Morgan Stanley (MS), or any other financials included in an ETF like the Financial Select Sector SPDR Fund (XLF).

2.Market risk

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The Basel Committee on Banking Supervision defines market risk as the risk of losses in on- or off-balance sheet positions that arise from movement in market prices. Market risk is the most prominent for banks present in investment banking. These investment banks include Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan (JPM), Bank of America (BAC), and other investment banks in an ETF like the Financial Select Sector SPDR Fund (XLF). This is because they are generally active in capital markets.

Major components of market risks The major components of market risk include: Interest rate risk Equity risk Foreign exchange risk Commodity risk 3.Interest rate risk It’s the potential loss due to movements in interest rates. This risk arises because a bank’s assets usually have a significantly longer maturity than its liabilities. In banking language, management of interest rate risk is also called asset-liability management (or ALM).

4.Equity risk It’s the potential loss due to an adverse change in the stock price. Banks can accept equity as collateral for loans and purchase ownership stakes in other companies as investments from their free or investible cash. Any negative change in stock price either leads to a loss or diminution in investments’ value.

5.Foreign exchange risk It’s the potential loss due to change in value of the bank’s assets or liabilities resulting from exchange rate fluctuations. Banks transact in foreign exchange for their customers or for the banks’ own accounts. Any adverse movement can diminish the value of the foreign currency and cause a loss to the bank.

6.Commodity risk It’s the potential loss due to an adverse change in commodity prices. These commodities include agricultural commodities (like wheat, livestock, and corn), industrial commodities (like iron, copper, and zinc), and energy TYBBI 32

commodities (like crude oil, shale gas, and natural gas). The commodities’ values fluctuate a great deal due to changes in demand and supply. Any bank holding them as part of an investment is exposed to commodity risk. Market risk is measured by various techniques such as value at risk and sensitivity analysis. Value at risk is the maximum loss not exceeded with a given probability over a given period of time. Sensitivity analysis is how different values of an independent variable will impact a particular dependent variable. The chart above shows how Goldman Sachs measures its various market risk. In the next part of the series, we’ll look at what is probably the most important day-to-day risk for a bank—operational risk

7.Operational risk The Basel Committee on Banking Supervision defines operational risk “as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, but excludes strategic and reputation risk.” Full-service banks like JPMorgan (JPM), traditional banks like Wells Fargo (WFC), investment banks like Goldman Sachs (GS) and Morgan Stanley (MS), or any other banks included in an ETF like the Financial Select Sector SPDR Fund (XLF) face operational risk. Operational risk occurs in all day-to-day bank activities. Operational risk examples include a check incorrectly cleared or a wrong order punched into a trading terminal. This risk arises in almost all bank departments—credit, investment, treasury, and information technology.

8.Liquidity risk Liquidity by definition means a bank has the ability to meet payment obligations primarily from its depositors and has enough money to give loans. So liquidity risk is the risk of a bank not being able to have enough cash to carry out its day-to-day operations. Provision for adequate liquidity in a bank is crucial because a liquidity shortfall in meeting commitments to other banks and financial institutions can have serious repercussions on the bank’s reputation and the bank’s bond prices in the money market. Liquidity risk can sometimes lead to a bank run, where depositors rush to pull out their money from a bank, which further aggravates a situation. So fullservice banks like JPMorgan (JPM), traditional banks like Wells Fargo (WFC), investment banks like Goldman Sachs (GS) and Morgan Stanley (MS), and any other bank included in an ETF like the Financial Select Sector TYBBI 33

SPDR Fund (XLF) have to proactively manage their liquidity risk to stay healthy. In conditions of tight liquidity, the banks generally turn to the Fed. Look at the chart above to see how financial institutions borrowed massively from the Fed during the subprime crisis of 2008–2009. Liquidity risk can ruin banks A very recent example of a bank being taken into state ownership due to its inability to manage liquidity risk was Northern Rock. Northern Rock was a small bank in Northern England and Ireland. Northern Rock didn’t have a large depositor base. It was only able to fund a small part of its new loans from deposits. So it financed new loans by selling the loans that it originated to other banks and investors. This process of selling loans is known as securitization. Northern Rock would then take short-term loans to fund its new loans. So the bank was dependent on two factors—demand for loans, which it sold to other banks, and availability of credit in financial markets to fund those loans. When markets were under pressure in 2007–2008, the bank wasn’t able to sell the loans it had originated. At the same time, it also wasn’t able to secure shortterm credit. Due to the financial crisis, a lot of investors took out their deposits, causing the bank to have a severe liquidity crisis. Northern Rock got a credit line from the government. But the problems persisted, and the government took over the bank. This shows us how important the role of liquidity management is in a bank. In the next part of our series, we’ll look into a bank’s reputational risk

8.Business risk Business risk is the risk arising from a bank’s long-term business strategy. It deals with a bank not being able to keep up with changing competition dynamics, losing market share over time, and being closed or acquired. Business risk can also arise from a bank choosing the wrong strategy, which might lead to its failure. In the heyday of cheap money in the 1990s and early 2000s, many banks were taking excessive leverage and earning supernormal profits. But most of it was a mirage. When the situation turned for worse from 2007–2008, many of the same banks that were on a roll fell flat on their face. Many of them had to take severe losses and bailouts from the government to keep afloat, while some were forced to close down. TYBBI 34

The above table lists the banks that closed down in 2014. Bank failures are more common than we think. Since 2009 to now, there have been 478 bank failures, an average of approximately six bank failures per month in the last six and a half years. Most of these closures resulted from the inability of a bank to manage one or more of the main risks that we have already discussed. All banks with a long history have faced trouble at some point. This includes multinational banks like Citigroup (C) and JPMorgan (JPM), traditional banks like Wells Fargo (WFC), asset managers like State Street (STT), and other financials that are part of an ETF like the Financial Select Sector SPDR Fund (XLF). The banks that have a sound strategy come out of the trouble stronger. Banks that want to grow too fast and too soon beyond their means grow at a rapid pace for some time but meet their doom sooner, rather than later.

9.Reputational risk Reputational risk is the risk of damage to a bank's image and public standing that occurs due to some dubious actions taken by the bank. Sometimes reputational risk can be due to perception or negative publicity against the bank and without any solid evidence of wrongdoing. Reputational risk leads to the public's loss of confidence in a bank. Reputational risk sometimes creates other problems that a bank could have avoided. Look at the table above to know about the top ten banking brands. Most brand values stem from the reputation enjoyed by a bank. All banks take utmost care to maintain and enhance their reputation. This includes multinational banks like Citigroup (C) and JPMorgan (JPM), traditional banks like Wells Fargo (WFC), asset managers like State Street (STT), and other financials that are part of an ETF like the Financial Select Sector SPDR Fund (XLF). Many bank advertisements are built around trust. This might give you an indication of how important reputation is for a bank. The bank's failure to honor commitments to the government, regulators, and the public at large lowers a bank's reputation. It can arise from any type of situation relating to mismanagement of the bank's affairs or non-observance of the codes of conduct under corporate governance. Risks emerging from suppression of facts and manipulation of records and accounts are also instances of reputational risk. Bad customer service, inappropriate staff behavior, and delay in decisions create a bad bank image among the public and hamper business development.

An example of reputational risk

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In the 1990s, Salomon Brothers was the the fifth largest investment bank in the U.S. All banks are allowed to buy government securities up to a specified limit at auctions. Salomon falsified records to buy government securities in quantities much larger than it was allowed. By buying such large quantities, the bank was able to control the price that investors paid for these securities. In 1991, the government caught the bank in its act. Salomon Brothers suffered considerable loss of reputation. The U.S. government fined Salomon Brothers to a tune of $290 million, the largest fine ever levied on an investment bank at the time.

10.Systemic risk Systemic risk is the name of the most nightmarish scenario you can think of. This type of scenario happened in 2008 across the world. Broadly, it refers to the risk that the entire financial system might come to a standstill. It can also be stated as the possibility that default or failure by one financial institution can cause domino effects among its counter parties and others, threatening the stability of the financial system as a whole. Out of these eight risks, credit risk, market risk, and operational risk are the three major risks. The other important risks are liquidity risk, business risk, and reputational risk. Systemic risk and moral hazard are unrelated to routine banking operations, but they do have a big bearing on a bank’s profitability and solvency. All banks set up dedicated risk management departments to monitor, manage, and measure these risks. The risk management department helps the bank’s management by continuously measuring the risk of its current portfolio of assets, or loans, liabilities, or deposits, and other exposures. The department also communicates the bank’s risk profile to other bank functions and takes steps, either directly or in collaboration with other bank functions, to reduce the possibility of loss or to mitigate the size of the potential loss.

Commercial Banking Functions Commercial banking is basically the parent of all types of banking available in the present banking structure. In order to understand the role of commercial banking, let us discuss some of its major functions. The following are the major functions of commercial banks – TYBBI 36

Acceptance of Deposits The most important task of commercial banks is to accept deposits from the public. Banks maintain and keep records of all the demand deposit accounts of their customers and transform the deposit money into cash, vice versa are also possible as per the requirements of the customers. Technically, demand deposits are accepted in current accounts. The depositor can withdraw deposited money anytime by means of checks. In fixed deposit accounts, the depositor can withdraw the money deposited only after a certain period. We can say, fixed deposits are time liabilities of the banks. Deposits in the saving bank accounts are subjected to certain limitations regarding the amount one can receive and withdraw. In this way, banks collect savings from people and maintain a reserve of these savings.

Deposit receipt Giving Loans and Advances One of the most important functions of commercial banks is to extend loans and advances out of the money through deposits of businessmen and entrepreneurs against permitted securities and safety like gold or silver bullion, government securities, easily saleable stocks and shares and marketable goods. Banks give advances to customers or depositors through overdrafts, discounting bills, money-at-call and short notice, loans and advances, different forms of direct loans to traders and producers.

Using Check System

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Banks facilitate services through some medium of exchange like checks. Using checks for settling debts in business transaction is always preferred over cash. Check is also referred as the most developed credit instrument. There are some other major functions of commercial banking. They perform a multitude of other non-banking operations. These non-banking operations are further classified as agency services and general utility services.

Agency Services The services banks ensure for and on behalf of their customers are agency services. The banks play the role of an executor, trustee and attorney for the customer’s will. They accumulate as well as make payments for bills, checks, promissory notes, interests, dividends, rents, subscriptions, insurance premium, policy etc. As mentioned above, they provide services for and on behalf of customers and also issue drafts, mail, telegraphic transfers on behalf of clients to remit funds. They also help their customers by arranging income-tax professionals to facilitate the process of income tax returns. Basically the bankers work as correspondents, agents or representatives of their clients.

General Utility Services The services ensured for the entire society are known as general utility services. The bankers issue bank drafts and traveller’s checks to facilitate transfer of funds from one part of the country to another. They give the customers letters of credit which help them when they go abroad.

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They handle foreign exchange or finance foreign trade by accepting or assembling foreign bills of exchange. Banks arrange for safe deposit vaults where the customers can secure their valuables. Banks also assemble statistics and business information relevant to trade, commerce and industry

Banking Regulation Act, 1949

An Act to consolidate and amend the law relating to banking Citation

Act No. 10 of 1949

Territorial extent

Whole of India

Enacted by

Parliament of India

Date

10 March

enacted

1949 Status: In force

The Banking Regulation Act, 1949 is a legislation in India that regulates all banking firms in India.[1] Passed as the Banking Companies Act 1949, it came into force from 16 March 1949 and changed to Banking Regulation Act 1949 TYBBI 39

from 1 March 1966. It is applicable in Jammu and Kashmir from 1956. Initially, the law was applicable only to banking companies. But, 1965 it was amended to make it applicable to cooperative banks and to introduce other changes.[2]

Overview The Act provides a framework using which commercial banking in India is supervised and regulated. The Act supplements the Companies Act, 1956. Primary Agricultural Credit Societyand cooperative land mortgage banks are excluded from the Act.[2]

The Act gives the Reserve Bank of India (RBI) the power to license banks, have regulation over shareholding and voting rights of shareholders; supervise the appointment of the boards and management; regulate the operations of banks; lay down instructions for audits; control moratorium, mergers and liquidation; issue directives in the interests of public good and on banking policy, and impose penalties. In 1965, the Act was amended to include cooperative banks under its purview by adding the Section 56. Cooperative banks, which operate only in one state, are formed and run by the state government. But, RBI controls the licensing and regulates the business operations. The Banking Act was a supplement to the previous acts related to banking. See also 

Banking in India



Public Debt Act, 1944

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Penalties prescribed under the Banking Regulation Act, 1949

Introduction The Banking Regulation Act, 1949 was passed by the parliament in the year 1949 with the aim to regulate all banks along with consolidating and amending the banking laws in India. It regulates and supervises the functioning of the commercial banks in India. Before 1965, the Act only took into cognizance the banking firms but in the year 1965, the Act was amended making provision for the inclusion of cooperative banks. Primary Agricultural Credit Society and cooperative land mortgage banks are excluded from the Act. The Act confers powers on Reserve Bank Of India (RBI) to regulate and control voting rights of shareholders, to provide the license to the bank, to supervise over the appointment of management and board, to regulate bank operation along with mergers and liquidation along with issuing directives and imposing penalties.

Objectives behind the passing of this Act The Banking Act was enacted in February 1949 with the following objectives: 1. It was becoming difficult to regulate the functioning of the banking sector in India due to the insufficient and inadequate provisions of the Indian Companies Act 1913. Hence, there was an urgent need for a proper legislation TYBBI 41

to regulate the same and therefore this was one of the main objectives behind passing the Act. 2. Due to inadequacy of capital many banks failed and hence prescribing a minimum capital requirement was felt necessary. The banking regulation act brought in certain minimum capital requirements for banks. 3. In order to avoid cut-throat competition in the banking sector. 4. Certain provisions were incorporated so as to ensure the protection of shareholders and the public at large. 5. In order to ensure smooth functioning, the Act was introduced which conferred power on Reserve Bank of India (RBI) to appoint, re-appoint and removal of chairman, director and officers of the banks. 6. The Act introduced licensing which helped in regulating the indiscriminate opening of new branches and at the same time promoting a balanced development in the said sector. 7. Provide quick and easy liquidation of banks when they are unable to continue further or amalgamate with other banks. 8. In order to restrict investments outside India by Indian investors, certain specific regulations were introduced. 9. Provide necessary and mandatory merger of weaker banks with established ones thereby strengthening the banking system in India.

Penalties Provided Penalties provided under Section 46 of the Banking Regulation Act, 1949 for any irregularity are as follows: 

A person who willfully misrepresents facts or omits material facts in the balance sheet or while filing any return or while furnishing any other document, or presents such facts which is known to be false by the concerned person, is liable for imprisonment of up to three years along with fine.



If a person fails to furnish documents, books, accounts or any statement which he is liable to produce under Section 35 or if he fails to answer any question which he was asked to by any inspection officer, he shall be punished with fine extending up to Rs. 2000 per offence and if he refuses to follow the procedure fine may extend to Rs. 100 per day during which the offence continues. TYBBI 42



If a banking company receives any deposit which is in contravention of any order under Section 35(4)(a), all officers and directors will be deemed guilty and shall be punishable with a fine which may extend to twice the amount of the deposits so received unless the person proves that he was unaware of the contravention or that he exercised all due diligence to prevent the occurrence of the contravention.



Further, a person will be punishable with fine which may extend to Rs. 50,000 or double the amount of default or contravention along with an additional charge of Rs. 2500 per day will continue until the contravention or default ends, if



the person does not comply with the orders, direction or any rule made or imposed



any default has been made in carrying out the terms or obligations given under Section 45(7).



Where a company has defaulted any terms or order, every person employed by the company or responsible to the company or was in charge of the company at the time of occurrence of the contravention shall be punished.



Notwithstanding anything mentioned under sub-section 5 of Section 46, where a company has committed a default or contravention and if it is proved that the default took place with the consent of or due to any gross negligence on part of any director, secretary or another officer, such officers or directors shall be punishable.

Power of RBI to impose penalties The Banking Regulation Act, 1949 confers power on Reserve Bank of India under Section 47(A) to impose penalties if there has been any default or contravention. Such powers are explained in details hereunder. 

If there is any contravention or default of the same nature as discussed above and given under Section 46(3) and Section 46(4) on part of the banking company, RBI has the power to impose a penalty not exceeding twice the amount of the deposits in respect of which such contravention was made [where the contravention is in line with the default specified under Section 46 (3)] and a penalty not exceeding Rs. TYBBI 43

5,00,000 or twice the amount involved in such contravention or default where such amount is quantifiable, whichever is more, and where such the contravention or default is a continuing one, a further penalty which may extend to Rs. 25,000 until the default comes to an end. 

One cannot file a complaint in any court of law against any banking firm with respect to any contravention or default against which the RBI has imposed a penalty.



The banking firm, against which the RBI has imposed a penalty, is liable to proceed with the payment within 14 days of issuance of notice by the RBI for making the said payment. In case of any failure in making such payment a principal court having jurisdiction over the area where the registered office of such banking company is situated or in the case where the firm is incorporated in foreign lands, that court will have jurisdiction where the principal business of the company is situated, in order to levy the defaulted payment.



A certificate shall be issued by the court making such direction under Section 47(A)(5) specifying the amount payable by the banking company which shall be enforceable in the manner same as an order from a civil court.



No proceedings can be initiated against the imposition of any penalties on the banking company if any complaint has been filed against any contravention.

Case Examples In a recent case we found that the Reserve Bank of India (RBI) has imposed on State Bank of Bikaner and Jaipur a penalty of Rs. 20 million under the scope and power conferred by Section 47(A)(1)(c) and Section 46(4)(i) of the Banking Regulation Act, 1949 for irregularity with regards to advance import remittance. In another case, RBI had filed a complaint against Gandevi peoples’ cooperative Bank Ltd. for various breaches in the functioning and running the bank, maintenance of accounts etc. provided under Section 20, 21, 35(A), 46 and 47 of the said act. In order to revoke the same complaint, the bank filed a petition in Gujarat High Court [Gandevi peoples’ Cooperative Bank Ltd. v/s TYBBI 44

State of Gujarat] who later dismissed the same and ordered for the continuation of the original trial.

Conclusion Before the passing of the Banking Regulation Act, there were many discrepancies prevalent in the banking sector. With the introduction of this Act, the functioning of the banking firms has been regulated. It has ensured a developed and balanced growth of the concerned sector. The major breakthrough was the conference of power on RBI to regulate along with the appointment and dismissal of the directors of the banking firms. In nutshell, this Act has brought all the banking firms under one umbrella with RBI being the governing body. Besides, the Act also provides for penalties for any irregularity in the functioning of any banking company thereby ensuring a smooth functioning of the same.

Bank Management – Liquidity Liquidity in banking refers to the ability of a bank to meet its financial obligations as they come due. It can come from direct cash holdings in currency or on account at the Federal Reserve or other central bank. More frequently, it comes from acquiring securities that can be sold quickly with minimal loss. This basically states highly creditworthy securities, comprising of government bills, which have short term maturities. If their maturity is short enough the bank may simply wait for them to return the principle at maturity. For short term, very safe securities favor to trade in liquid markets, stating that large volumes can be sold without moving prices too much and with low transaction costs. Nevertheless, a bank’s liquidity condition, particularly in a crisis, will be affected by much more than just this reserve of cash and highly liquid securities. The maturity of its less liquid assets will also matter. As some of them may mature before the cash crunch passes, thereby providing an additional source of funds.

Need for Liquidity We are concerned about bank liquidity levels as banks are important to the financial system. They are inherently sensitive if they do not have enough safety margins. We have witnessed in the past the extreme form of damage that an economy can undergo when credit dries up in a crisis. Capital is arguably the most essential safety buffer. This is because it supports the resources to reclaim from substantial losses of any nature.

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The closest cause of a bank’s demise is mostly a liquidity issue that makes it impossible to survive a classic “bank run” or, nowadays, a modern equivalent, like an inability to approach the debt markets for new funding. It is completely possible for the economic value of a bank’s assets to be more than enough to wrap up all of its demands and yet for that bank to go bust as its assets are illiquid and its liabilities have short-term maturities. Banks have always been reclining to runs as one of their principle social intentions are to perform maturity transformation, also known as time intermediation. In simple words, they yield demand deposits and other short term funds and lend them back out at longer maturities. Maturity conversion is useful as households and enterprises often have a strong choice for a substantial degree of liquidity, yet much of the useful activity in the economy needs confirmed funding for multiple years. Banks square this cycle by depending on the fact that households and enterprises seldom take advantage of the liquidity they have acquired. Deposits are considered sticky. Theoretically, it is possible to withdraw all demand deposits in a single day, yet their average balances show remarkable stability in normal times. Thus, banks can accommodate the funds for longer durations with a fair degree of assurance that the deposits will be readily available or that equivalent deposits can be acquired from others as per requirement, with a raise in deposit rates.

Role of the Bank can Achieve Liquidity Large banking groups engage themselves in substantial capital markets businesses and they have considerable added complexity in their liquidity requirements. This is done to support repo businesses, derivatives transactions, prime brokerage, and other activities. Banks can achieve liquidity in multiple ways. Each of these methods ordinarily has a cost, comprising of –       

Shorten asset maturities Improve the average liquidity of asset Lengthen Liability maturities Issue more equity Reduce contingent commitments Obtain liquidity protection

 

Shorten asset maturities This can assist in two fundamental ways. The first way states that, if the maturity of some assets is shortened to an extent that they mature during the duration of a cash crunch, then there is a direct benefit. The second way states that, shorter maturity assets are basically more liquid.

 Improve the average liquidity of assets 

Assets that will mature over the time horizon of an actual or possible cash crunch can still be crucial providers of liquidity, if they can be TYBBI 46



 

sold in a timely manner without any redundant loss. Banks can raise asset liquidity in many ways. Typically, securities are more liquid than loans and other assets, even though some large loans are now framed to be comparatively easy to sell on the wholesale markets. Thus, it is an element of degree and not an absolute statement. Mostly shorter maturity assets are more liquid than longer ones. Securities issued in large volume and by large enterprises have greater liquidity, because they do more creditworthy securities.

Lengthen liability maturities The longer duration of a liability, the less it is expected that it will mature while a bank is still in a cash crunch.

 Issue more equity 

Common stocks are barely equivalent to an agreement with a perpetual maturity, with the combined benefit that no interest or similar periodic payments have to be made.

 

Reduce contingent commitments Cutting back the amount of lines of credit and other contingent commitments to pay out cash in the future. It limits the potential outflow thus reconstructing the balance of sources and uses of cash.

 Obtain liquidity protection

A bank can scale another bank or an insurer, or in some cases a central bank, to guarantee the connection of cash in the future, if required. For example, a bank may pay for a line of credit from another bank. In some countries, banks have assets prepositioned with their central bank that can further be passed down as collateral to hire cash in a crisis. All the above mentioned techniques used to achieve liquidity have a net cost in normal times. Basically, financial markets have an upward sloping yield curve, stating that interest rates are higher for long-term securities than they are for short-term ones. This is so mostly the case that such a curve is referred as normal yield curve and the exceptional periods are known as inverse yield curves. When the yield curve has a top oriented slope, contracting asset maturities decreases investment income while extending liability maturities raises interest expense. In the same way, more liquid instruments have lower yields, else equal, minimizing investment income.

Part 1 Central banking and bank regulation110 The core functions of central banks in any countries are: to manage monetary policy with the aim of achieving price stability; to prevent liquidity crises, situations of money market disorders and financial crises; and to ensure the TYBBI 47

smooth functioning of the payments system. This chapter explores these issues and focuses in particular on the conduct of monetary policy, distinguishing between instruments, targets and goals. Furthermore, it examines some basic concepts as they relate to central banking theory. Specifically, the chapter investigates the following fundamental areas: What are the monetary policy functions of a central bank? Why do banks need a central bank? and Should central banks be independent from government? The chapter presents an introduction to these topics. The specific functions, organisation and roles of the Bank of England, the European Central Bank and the US Federal Reserve System are described in Chapter 6. A central bank can generally be defined as a financial institution responsible for overseeing the monetary system for a nation, or a group of nations, with the goal of fostering economic growth without inflation. The main functions of a central bank can be listed as follows: 1) The central bank controls the issue of notes and coins (legal tender). Usually, the central bank will have a monopoly of the issue, although this is not essential as long as the central bank has power to restrict the amount of private issues of notes and coins. 2) It has the power to control the amount of credit-money created by banks. In other words, it has the power to control, by either direct or indirect means, the money supply. 3) A central bank should also have some control over non-bank financial intermediaries that provide credit. 4) Encompassing both parts 2 and 3, the central bank should effectively use the relevant tools and instruments of monetary policy in order to control: a) credit expansion; b) liquidity; and c) the money supply of an economy. 5) The central bank should oversee the financial sector in order to prevent crises and act as a lender-of-last-resort in order to protect depositors, prevent widespread panic withdrawal, and otherwise prevent the damage to the economy caused by the collapse of financial institutions. 6) A central bank acts as the government’s banker. It holds the government’s bank account and performs certain traditional banking operations for the government, such as deposits and lending. In its capacity as banker to the government it can manage and administer the country’s national debt.

What are the main functions of a central bank? The central bank also acts as the official agent to the government in dealing with all its gold and foreign exchange matters. The government’s reserves of gold and foreign exchange are held at the central bank. A central bank, at times, intervenes in the foreign exchange markets at the behest of the government in order to influence the exchange value of the domestic currency. Table 5.1 presents a comparison between the main tasks performed by the US central bank, known as the Federal Reserve System (FRS) and the Euro area European System of Central Banks (ESCB) headed by the European Central Bank based in Frankfurt (more details will be given in Chapter 6). It is possible to note that there are no marked differences between the two systems: for example both the FRS and the ESCB are the sole issuers of banknotes for their respective economies; and they are responsible for TYBBI 48

maintaining the stability of the banking system. However, the ESCB has no direct role in banking supervision as responsibility for supervision in the Euro area is determined by the national central banks or other government agencies. There are five major forms of economic policy (or, more strictly macroeconomic policy) conducted by governments that are of relevance. These are: monetary policy; fiscal policy; exchange rate policy; prices and incomes policy; and national debt management policy. Monetary policy is concerned with the actions taken by central banks to influence the availability and cost of money and credit by controlling some measure (or measures) of the money supply and/or the level and structure of interest rates.1 FRS ESCB Define and implement monetary policy Yes Yes Issue banknotes Yes Yes Conduct foreign exchange operations Yes Yes Hold and manage official reserves Yes Act as the fiscal agent for the government Yes NCBs* Promote stability of financial system Yes Yes Supervise and regulate banks Yes Some NCBs* Implement consumer protection laws Yes Some NCBs* Promote the smooth operation of the payments system Yes Yes Collect statistical information Yes Participate in international monetary institutions Yes * NCBs refers to national central banks of the Euro system. Source: Pollard (2003), p. 18. Fiscal policy relates to changes in the level and structure of government spending and taxation designed to influence the economy. As all government expenditure must be financed, these decisions also, by definition, determine the extent of public sector borrowing or debt repayment. An expansionary fiscal policy means higher government spending relative to taxation. The effect of these policies would be to encourage more spending and boost the economy. Conversely, a contractionary fiscal policy means raising taxes and cutting spending. Exchange rate policy involves the targeting of a particular value of a country’s currency exchange rate thereby influencing the flows within the balance of payments. In some countries it may be used in conjunction with other measures such as exchange controls, import tariffs and quotas.2 A prices and incomes policy is intended to influence the inflation rate by means of either statutory or voluntary restrictions upon increases in wages, dividends and/or prices. National debt management policy is concerned with the manipulation of the outstanding stock of government debt instruments held by the domestic private sector with the objective of influencing the level and structure of interest rates and/or the availability of reserve assets to the banking system. In this section we focus on what monetary policy involves. However, it must be remembered that any one policy mentioned above will normally form part of a policy package, and that the way in which that policy is employed will be dependent upon the other components of that package. Box 5.1 provides essential background reading for this section on the concept and functions of money.

Part 2 Central banking and bank regulation112

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In general money is represented by the coins and notes that we use in our daily lives; it is the commodity readily acceptable by all people wishing to undertake transactions. It is also a mean of expressing a value for any kind of goods or service. For economists, money is referred to as ‘money supply’ and includes anything that is accepted in payment for goods and services or in the repayment of debts. In an economic system money serves four main functions: 1) medium of exchange; 2) unit of account; 3) store of value; and 4) standard of deferred payment. 1) Medium of exchange is probably the main function of money. If barter were the only type of trade possible, there would be many situations in which people would not be able to obtain the goods and services that they wanted most. The advantage of the use of money is that it provides the owner with generalised purchasing power. The use of money gives the owner flexibility over the type and quantities of goods they buy, the time and place of their purchases, and the parties with whom they choose to deal. A critical characteristic of a medium of exchange is that it be acceptable as such. It must be readily exchangeable for other things. It is usual for the government to designate certain coins or paper currency as the medium of exchange. 2) If money is acceptable as a medium of exchange it almost certainly comes to act as a unit of account by which the prices of all commodities can be defined and then compared. This, of course, simplifies the task of deciding how we wish to divide our income between widely disparate items. For this reason it is sometimes said that money acts as a measure of value, and this is true if value is taken to mean both price and worth, the latter being a much more subjective concept.

Bank Management - Liquidity Management Theory There are probable contradictions between the objectives of liquidity, safety and profitability when linked to a commercial bank. Efforts have been made by economists to resolve these contradictions by laying down some theories from time to time In fact, these theories monitor the distribution of assets considering these objectives. These theories are referred to as the theories of liquidity management which will be discussed further in this chapter.

Commercial Loan Theory The commercial loan or the real bills doctrine theory states that a commercial bank should forward only short-term self-liquidating productive loans to business organizations. Loans meant to finance the production, and evolution of goods through the successive phases of production, storage, transportation, and distribution are considered as self-liquidating loans. This theory also states that whenever commercial banks make short term selfliquidating productive loans, the central bank should lend to the banks on the security of such short-term loans. This principle assures that the appropriate degree of liquidity for each bank and appropriate money supply for the whole economy.

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The central bank was expected to increase or erase bank reserves by rediscounting approved loans. When business started growing and the requirements of trade increased, banks were able to capture additional reserves by rediscounting bills with the central banks. When business went down and the requirements of trade declined, the volume of rediscounting of bills would fall, the supply of bank reserves and the amount of bank credit and money would also contract.

Advantages These short-term self-liquidating productive loans acquire three advantages. First, they acquire liquidity so they automatically liquidate themselves. Second, as they mature in the short run and are for productive ambitions, there is no risk of their running to bad debts. Third, such loans are high on productivity and earn income for the banks.

Disadvantages Despite the advantages, the commercial loan theory has certain defects. First, if a bank declines to grant loan until the old loan is repaid, the disheartened borrower will have to minimize production which will ultimately affect business activity. If all the banks pursue the same rule, this may result in reduction in the money supply and cost in the community. As a result, it makes it impossible for existing debtors to repay their loans in time. Second, this theory believes that loans are self-liquidating under normal economic circumstances. If there is depression, production and trade deteriorate and the debtor fails to repay the debt at maturity. Third, this theory disregards the fact that the liquidity of a bank relies on the scalability of its liquid assets and not on real trade bills. It assures safety, liquidity and profitability. The bank need not depend on maturities in time of trouble. Fourth, the general demerit of this theory is that no loan is self-liquidating. A loan given to a retailer is not self-liquidating if the items purchased are not sold to consumers and stay with the retailer. In simple words a loan to be successful engages a third party. In this case the consumers are the third party, besides the lender and the borrower.

Shiftability Theory This theory was proposed by H.G. Moulton who insisted that if the commercial banks continue a substantial amount of assets that can be moved to other banks for cash without any loss of material. In case of requirement, there is no need to depend on maturities. This theory states that, for an asset to be perfectly shiftable, it must be directly transferable without any loss of capital loss when there is a need for liquidity. This is specifically used for short term market investments, like treasury bills and bills of exchange which can be directly sold whenever there is a need to raise funds by banks.

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But in general circumstances when all banks require liquidity, the shiftability theory need all banks to acquire such assets which can be shifted on to the central bank which is the lender of the last resort.

Advantage The shiftability theory has positive elements of truth. Now banks obtain sound assets which can be shifted on to other banks. Shares and debentures of large enterprises are welcomed as liquid assets accompanied by treasury bills and bills of exchange. This has motivated term lending by banks.

Disadvantage Shiftability theory has its own demerits. Firstly, only shiftability of assets does not provide liquidity to the banking system. It completely relies on the economic conditions. Secondly, this theory neglects acute depression, the shares and debentures cannot be shifted to others by the banks. In such a situation, there are no buyers and all who possess them want to sell them. Third, a single bank may have shiftable assets in sufficient quantities but if it tries to sell them when there is a run on the bank, it may adversely affect the entire banking system. Fourth, if all the banks simultaneously start shifting their assets, it would have disastrous effects on both the lenders and the borrowers.

Anticipated Income Theory This theory was proposed by H.V. Prochanow in 1944 on the basis of the practice of extending term loans by the US commercial banks. This theory states that irrespective of the nature and feature of a borrower’s business, the bank plans the liquidation of the term-loan from the expected income of the borrower. A term-loan is for a period exceeding one year and extending to a period less than five years. It is admitted against the hypothecation (pledge as security) of machinery, stock and even immovable property. The bank puts limitations on the financial activities of the borrower while lending this loan. While lending a loan, the bank considers security along with the anticipated earnings of the borrower. So a loan by the bank gets repaid by the future earnings of the borrower in installments, rather giving a lump sum at the maturity of the loan.

Advantages This theory dominates the commercial loan theory and the shiftability theory as it satisfies the three major objectives of liquidity, safety and profitability. Liquidity is settled to the bank when the borrower saves and repays the loan regularly after certain period of time in installments. It fulfills the safety principle as the bank permits a relying on good security as well as the ability of the borrower to repay the loan. The bank can use its excess reserves in lending term-loan and is convinced of a regular income. Lastly, the term-loan is highly profitable for the business community which collects funds for medium-terms.

Disadvantages TYBBI 52

The theory of anticipated income is not free from demerits. This theory is a method to examine a borrower’s creditworthiness. It gives the bank conditions for examining the potential of a borrower to favorably repay a loan on time. It also fails to meet emergency cash requirements

Bank Management - Basle Norms The foundation of the Basel banking norms is attributed to the incorporation of the Basel Committee on Banking Supervision (BCBS), established by the central bank of theG-10 countries in 1974. This was under the sponsorship of Bank for International Settlements (BIS), Basel, Switzerland. The Committee forms guidelines and provides recommendations on banking regulation on the basis of capital risk, market risk and operational risk. The Committee was established in response to the chaotic liquidation of Herstatt Bank, based in Cologne, Germany in 1974. The incident demonstrated the existence of settlement risk in international finance. Later, this committee was renamed as Basel Committee on Banking Supervision. The Committee acts as a forum where regular collaboration concerning banking regulations and supervisory practices between the member countries takes place. The Committee targets at developing supervisory knowhow and the quality of banking supervision quality worldwide. Presently, there are 27 member countries in the Committee since 2009. These member countries are being represented in the Committee by the central bank and the authority for the prudential supervision of banking business. Apart from banking regulations and supervisory practices, the Committee also stresses on closing the differences in international supervisory coverage.

Basle I In 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, announced the first set of minimum capital requirements for banks — Basel I. It completely aimed on credit risk or the default risk. That is the risk of counter party failure. It stated capital need and structure of risk weights for banks. Under these norms assets of banks were categorized and grouped into five categories according to credit risk, carrying risk weights of 0% like Cash, Bullion, Home Country Debt Like Treasuries, 10, 20, 50 and100% and no rating. Banks with an international presence were expected to hold capital equal to 8% of their risk-weighted assets (RWA). These banks must have at least 4% in Tier I Capital that is Equity Capital + retained earnings and more than 8% in Tier I and Tier II Capital. The target was set to be achieved by 1992. One of the major functions of Basel norms is to standardize the banking practice across all countries. Anyhow, there are major problems with TYBBI 53

definition of Capital and Differential Risk Weights to Assets across countries, like Basel standards are computed on the basis of book-value accounting measures of capital, not market values. Accounting practices vary extremely across the G-10 countries and mostly yield outcomes that differ markedly from market assessments Another major issue was that the risk weights do not attempt to take account of risks other than credit risks, like market risks, liquidity risks and operational risks that may be critical sources of insolvency exposure for banks.

Basle II Basel II was introduced in 2004. It speculated guidelines for capital adequacy that is with more refined definitions, risk management like Market Risk and Operational Risk and exposure needs. It also expressed the use of external ratings agencies to fix the risk weights for corporate, bank and sovereign claims. Operational risk is defined as “the risk of direct and indirect losses resulting from inadequate or failed internal processes, people and systems or from external events”. This comprises of legal risk, but prohibits strategic and reputation risk. Thereby, legal risk involves exposures to fines, penalties, or punitive damages as a result of supervisory actions in addition to private agreements. There are complex methods to appraise this risk. The exposure needs permit participants of market to evaluate the capital adequacy of the foundation on the basis of information on the scope of application, capital, risk exposures, risk assessment processes, etc.

Basle III It is believed that the shortcomings of the Basel II norms resulted in the global financial crisis of 2008. That is due to the fact that Basel II norms did not have any explicit regulation on the debt that banks could take on their books, and stressed more on individual financial institutions, while neglecting systemic risks. To assure that banks don’t take on excessive debt, and that they don’t depend too much on short term funds, Basel III norms were introduced in 2010.The main objective behind these guidelines were to promote a more resilient banking system by stressing on four vital banking parameters — capital, leverage, funding and liquidity. Needs for mutual equity and Tier 1 capital will be 4.5% and 6%, respectively. The liquidity coverage ratio (LCR) requires the banks to acquire a buffer of high quality liquid assets enough to cope with the cash outflows encountered in an acute short term stress scenario as specified by the supervisors. The minimum LCR need will be to meet 100% on 1 January 2019. This is to secure TYBBI 54

situations like Bank Run. The term leverage Ratio > 3% denotes that the leverage ratio was calculated by dividing Tier 1 capital by the bank's average total combined assets.

Five Essential Process Improvement Ideas in Banking

Our last article concerned a case study about the HR department of a big bank and its efforts to cut costs. This article presents another case study, but a wholly new angle. This was about making essential process improvements throughout a bank’s marketing services operation. It’s full of valuable takeaways, so let’s dive in. This is the story of a huge (80,000 employees serving 25 million customers) Canada-based bank. Their marketing arm, serving both the U.S. and Canada, was struggling to increase both its productivity and agility. Thus their wishlist, when they reached out to The Lab, was extensive. They sought:   

Standardization of their branded marketing process Reduced cycle times for each campaign Elimination of wasteful activities among 300 employees

As you probably have guessed if you’ve read any of these blogs, this bank’s search for process-improvement ideas excluded one big element: Technology. Fortunately, The Lab was equal to the task; non-technology improvement is what we’re all about. Over the course of 16 weeks, we analyzed their marketing process. We compared their activities to our proprietary marketing-operations templates. We uncovered more than 270 improvements to be implemented. And sure enough, none of them required any new technology (or the cost thereof). TYBBI 55

These improvements spanned five different areas of focus: Process improvement ideas in banking Number 1: Start with nonstandard work When organizations get big, sometimes positions can get blurred. That was the case here:    

The bank’s marketing operation lacked standard guidelines for roles and responsibilities. There were no submission or intake templates for each gate in the marketing process. The decision-making process was cumbersome. Accountability was uncertain.

Fixing this required a deft touch. We removed the unnecessary activities while preserving adherence to campaign requirements. And we helped the bank to implement standardized metrics for improving accountability and monitoring performance. If you’re looking to boost operational efficiency in the banking sector, too, these types of marketing-department changes might inspire you.

Process improvement ideas in banking Number 2: Database optimization The Quick Base database which the marketing services operation employed was not being used to its fullest potential:  Processes varied by product group.  Information captured in the database was inconsistently applied to manage campaigns.  Similarly, the data was ineffectively used to manage staff.

Is the value of your high-tech database being squandered by inefficient processes? That was the case here. The Lab was able to identify more than a half-dozen remediation actions, including rework of the database training requirements, ways to ensure consistent documentation of campaigns, and building accountability into the actual Quick Base metrics, to name a few.

Process improvement ideas in banking Number 3: Fix broken staffing models This was an area with classic cascading consequences. Campaigns weren’t prioritized by complexity. As a result, work assignments failed to account for the skill level required to execute them. The bank needed a simple, quantitative staffing model that would match workflow volumes to available capacity, productivity targets, and required support. That’s what we helped them to create and implement. TYBBI 56

Process improvement ideas in banking Number 4: Better reporting In both the U.S. and Canada, this bank’s marketing services arm was starving for concise and user-friendly management operating reports (MORs). Not many KPIs were needed, but they were essential:   

Cost/volume Productivity Service

Quality once these were implemented, the reports skyrocketed in value. They provided real-time data, linked to defined business outcomes. Finally, they were useful tools for improving both team and individual performance. Are your MORs delivering similar value? Do they currently represent a way to improve banking services and operational efficiency?

Process improvement ideas in banking Number 5: Management routines makeover You might think that marketing management spent the bulk of their time producing marketing campaigns. But you’d be mistaken. We discovered that they spent (“wasted”?) more than half of their time attending meetings, preparing for meetings, or “fighting fires.” Meetings needed to be streamlined. So did their attendance. These were essential first steps toward banking operations process improvement.

Operational excellence in financial services: The results Each of the 270 improvements we identified may have been small. But their overall impact was significant. The bank’s Marketing Services operations witnessed a capacity improvement of 20 to 26 percent. Savings hit $13.5 million. ROI was greater than six-fold. The entire project broke even in just six months. And most impressive of all, this organization was now able to produce more than 250 additional campaigns each year—a tremendous service to the rest of the enterprise. Are you seeking process improvement ideas in banking? Consider The Lab. We’ve helped scores of banks with cost cutting and operational improvement, thanks to our non-technology solutions, our unique selffunding engagement model, and irresistible money-back guarantee. Learn more about how we work here.

Duration Model Duration or interval is a critical measure for the interest rate sensitivity of assets and liabilities. This is due to the fact that it considers the time of arrival of cash flows and the maturity of assets and liabilities. It is the measured TYBBI 57

average time to maturity of all the preset values of cash flows. This model states the average life of the asset or the liability. It is denoted by the following formula – DPp = D (dR /1+R) The above equation briefs the percentage fall in price of the agreement for a given increase in the necessary interest rates or yields. The larger the value of the interval, the more sensitive is the cost of that asset or liability to variations in interest rates. According to the above equation, the bank will be protected from interest rate risk if the duration gap between assets and the liabilities is zero. The major advantage of this model is that it uses the market value of assets and liabilities.

Simulation Model This model assists in introducing a dynamic element in the examination of interest rate risk. The previous models — the Gap analysis and the duration analysis for asset-liability management endure from their inefficiency to move across the static analysis of current interest rate risk exposures. In short, the simulation models use computer power to support “what if” scenarios. For example,

What if   

the total level of interest rates switches marketing plans are under-achieved or over-achieved balance sheets shrink or expand

This develops the information available for management in terms of precise assessment of current exposures of asset and liability, portfolios to interest rate risk, variations in distributive target variables like the total interest income capital adequacy, and liquidity as well as the future gaps. There are possibilities that this simulation model prevents the use to see all the complex paper work because of the nature of massive paper results. In this type of condition, it is very important to merge the technical expertise with proper awareness of issues in the enterprise. There are particular demands for a simulation model to grow. These refer to accuracy of data and reliability of the assumptions or hypothesis made. In simple words, one should be in a status to look at substitutes referring to interest rates, growth-rate distributions, reinvestments, etc., under different interest rate scenes. This may be difficult and sometimes contentious. An important point to note here is that the bank managers may not wish to document their assumptions and data is readily available for differential TYBBI 58

collision of interest rates on multiple variables. Thus, this model needs to be applied carefully, especially in the Indian banking system. The application of simulation models addresses the commitment of substantial amount of time and resources. If in case, one can’t afford the cost or, more importantly the time engaged in simulation modeling, it makes perfect sense to stick to simpler types of analysis.

Bank Management – Banking Marketing Bank marketing is known for its nature of developing a unique brand image, which is treated as the capital reputation of the financial academy. It is very important for a bank to develop good relationship with valued customers accompanied by innovative ideas which can be used as measures to meet their requirements. Customers expect quality services and returns. There are good chances that the quality factor will be the sole determinant of successful banking corporations. Therefore, Indian banks need to acknowledge the imperative of proactive Bank Marketing and Customer Relationship Management and also take systematic steps in this direction.

Marketing Approach The banking industry provides different types of banking and allied services to its clients. Bank customers are mostly people and enterprises that have surplus or lack of funds and those who require various types of financial and related services. These customers are from different strata of the economy, they

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belong to different geographical regions, areas and are into different professions and businesses. It is quite natural for the requirement of each individual group of customers to be unique from the requirements of other groups. Thus, it is important to acknowledge distinct homogenous groups and even sub-groups of customers, and then with maximum precision conclude their requirements, design schemes to suit their particular requirements, and deliver them most efficiently.

Basically, banks engage in transaction of products and services through their retail outlets known as branches to different customers at the grassroots level. This is referred as the ‘top to bottom’ approach. It should be ‘bottom to top’ approach with customers at the grassroots level as the target point to work out with different products or schemes to match the requirements of various homogenous groups of customers. Hence, bank marketing approach, is considered as a group or “collective” approach. Bank management as a collective approach or a selective approach is a fundamental identification of the fact that banks need customer oriented approach. In simple words, bank marketing is the design structure, layout and delivery of customer-needed services worked out by checking out the corporate objectives of the bank and environmental constraints.

Bank Management - Relationship Banking Relationship banking can be defined as a process that includes proactively predicting the demands of individual bank customers and taking steps to meet these demands before the client shows them. The basic concept of this approach is to develop and build a more comprehensive working relationship with each and every client, examining his or her individual situation, and TYBBI 60

making recommendations for different services offered by the bank to help develop the financial well-being of the customer. This approach is mostly linked with smaller banks that use a more personal approach with customers, even though an increasing number of large bank corporations are beginning to motivate similar strategies in their local branches

. At the base of relationship banking is the thought that the foundations and the individual customer are partners with a goal of developing the financial security of the customer. Due to this reason, the client support representatives within the bank are frequently pursuing to acknowledge what customers like and don’t like about the services offered by the bank, how they are presented, and how to identify the services that are likely to be beneficial to each customer. This type of proactive approach is completely different from the reactive approach used by many banks over the years, in which the bank critically builds its suite of services and the qualifications for acquiring them. After which it waits passively for customers to approach them. With relationship banking, the representatives of the foundations don’t wait for customers to come to them instead, they go to the customers with a plan of action.

Improving Customer Relationships We cannot expect active participation from the customer’s side in a day, week or a month. It is the base level of building a relationship that needs trust, dialogue, a steady growth in service ownership and a growth in share of wallet if done correctly. The substitute to concentrating on establishing customer engagement is a relationship that does not satisfy its full potential or customer attrition.

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Research suggests that the concrete advantages of a completely engaged customer, who is attitudinally loyal as well as emotionally attached to the bank is very important. The following measures can be followed to build and enhance relationship with customers –

Increased Revenues, Wallet Share and Product Penetration Customers who are completely involved bring $402 in additional revenue per year to their primary bank as measured with those who are actively not involved, 10% greater wallet share in deposit balances and 14% greater wallet share in investments. Completely involved customers also average 1.14 additional product categories with their primary bank than do customers who are ‘actively not involved.

Higher Purchase Intent and Consideration Actively involved customers not only acquire more accounts at their primary bank, but also look to that same bank when thinking of future requirements. Nowadays, when almost everything is done online developing bank’s chances of being in the customer’s consideration set is essential.

Becoming a Financial Partner Less concrete, but no less important. An actively engaged customer establishes a settlement with their bank or credit union that every financial foundation would covet.

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We have seen how to improve customer bond. Another major aspect is to understand the guidelines on how the bonding with the customer can be made stronger. This can be done in the following ways −

Improve Acquisition Targeting Customer engagement begins even before a new customer opens an account. The advanced technology today makes it possible to find new prospects that are identical to the best customers who have their accounts at a financial foundation. The creation of an acquisition model monitors the product usage, financial behavior and relationship profitability, opening accounts with limited potential for involvement or growth is minimized.

Change the Conversation Let us say breaking the ice or starting a communication or interacting with customers is one of the key elements to building an engaged customer relationship. This relationship bonding starts with the conversation during the process of account opening. To develop trust, the conversation must stress on confirming that the customer believes that you are genuinely interested in knowing them, are willing to look out for them and after due course of time, they will be rewarded for their business or loyalty. This initial interaction requires concentrating more on capturing insight from the customer and figuring out the value different products and services will have from the customer point of view as opposed to simply considering features. The aim is to demonstrate to the customer that the products and services being sold must satisfy their unique financial and non-financial requirements. Unfortunately, research shows that most of the branch personnel have problems in dealing with customers around requirements and the value of services provided by an enterprise. In simple words, having an enterprise grasp of product knowledge is not sufficient. Initially, the enterprise should concentrate on sales quality as opposed to sales quantity. Some financial foundations have started using iPods to collect insight directly from the customer. While seeming less personal, an iPod new account questionnaire sets a standard collection process and basically is able to collect far more personal information than the bank or credit union employee are comfortable in collecting.

Communicate Early and Often

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It is quite alluring how banks and credit unions set goals and objectives for broadening a customer relationship and involvement and then build arbitrary rules around interaction frequency and cadence. It is not uncommon for a bank to minimize the number of interactions to one a month or less inspite of the fact that a new customer is expressing the desire for more interaction as part of their new relationship. Research suggests that the optimum number of interaction messages within the first 90-day period from both a customer satisfaction and relationship growth point of view is seven times beyond different communication channels.

Personalize the Message Studies show that more than 50 percent of actively involved customers get mis-targeted interaction. Basically, this involves talking about a product or a service the customer already possesses or regarding a service that is not in sighting with the insight that the customer has in mutual with the foundation. Presently, customers expect well targeted and personalized interacting sessions. Anything less than this makes them lose their trust on the banks. This is mostly true with financial services, where the customer has provided very personal information and expects this insight to be used only for their benefits. To establish proper engagement, it is best to involve service sales grid that reflects what services should be underlined in interaction, given present product ownership. Involvement communication is not a free size that fits all dialogue. It should show the relationship in real-time.

Build Trust before Selling To establish proper engagement, it is best to involve service sales grid that reflects what services should be underlined in interaction, given present product ownership. Involvement communication is not a free size that fits all dialogue. It should show the relationship in real-time. If a customer opens a new checking account, then the services that should be discussed are as follows –     

Direct Deposit Online Bill Pay Online Banking Mobile Banking Privacy Protection/Security Services

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Acknowledging customers beyond additional enhancements to a checking account that can further help in constructing an engaging relationship involve – Mobile Deposit Capture Rewards Program Account to Account Transfers P2P Transfers Electronic Statements Notification Alerts All along this relationship growth process, supplementary insight into the customer’s requirements should be assembled whenever possible with personalized communication expressing this new insight.

Reward Engagement Unfortunately, in banking the concept of “if you construct it, they will come” doesn’t work. While we may construct great products and supply new, innovative services, mostly customers need supplementary motivation to utilize a product optimally and for engagement to grow the way we would desire. The outcome is, mostly proposals are required to provoke the desired behavior. In the development of proposals, banks and credit unions should make sure that the proposal should be established on the products already held as opposed to the product or service being sold. Exclusively in financial services, a customer doesn’t completely understand the advantages of the new service. Thus, if the new account is a checking account, the proposal should be one that limits the cost of the checking, supplies an extra benefit to the checking or strengthens the checking relationship. Potential proposals may involve waived fees or optimally improved stages of rewards for a precise action or limited duration. The advantage of using rewards would be that a reward program is a strong engagement tool itself.

Gear to the Mobile Customer We know direct mail and phone are highly effective methods used for constructing an engaging relationship. The use of email and SMS texting has led to progressive outcomes due to mobile communication consumption patterns.

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Recently the reading of email on mobile devices exceeded desktop consumption highlighting that most messages should be geared to a consumer who is either on the go or multi-tasking or both. To interact with the mobile customer, email and SMS texting must be a point to point that is one on one conversation. The customer does not wish to know everything about the account, all that he wants to know is what is in it for them and how do they react. As links should be used to support supplementary product information if it is required a single click option should be available to say yes. With respect to these links, many financial foundations have found that using short form videos is the best way to produce understanding and response. Brilliant videos around online bill pay, mobile deposit capture and A2A/P2P transfers not only educate people but immediately link to the yes button to close the sale. It is very necessary to remember that the video should be short like under 30 seconds and constructed for mobile consumption first when using educational sales videos. As a video constructed for mobile will always play well on larger devices, the opposite is basically not true. Mobile screen needs to be focused more as nowadays everything is done on phones itself and it’s not possible to carry a desktop everywhere. Also the customer will not always bother to check the links and videos in their desktop.

Features & Characteristics of Banking Sector!! January 21, 2019 Prateek Banat BANKING Sector plays an important role in every country for there economic growth as well as currency factor. Majority Development for a country TYBBI 66

depends on the banking sector as banks maintain the competition between the currency of many developed and developing countries and there work is always attached directly with people as they store their hard cor money in there hands for saving as well as they borrow money from banks which are known as LOAN. This Scheme helps people building there HOMES & business As well as there general requirement like CARs, LCDs, home decoration or maintenance Etc. BANKING Sector characteristics:

DEALING IN MONEY

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ACCEPTANCE OF MONEY DEPOSITS

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PAYMENT AND WITHDRAWS MONEY

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INDIVIDUAL OR COMPANIES

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VARIOUS BRANCHES

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FUNCTION INCREASING RAPIDLY

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BUSINESS IN BANKING SECTOR

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IDENTIFICATION

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FACILITIES OF ADVANCE MONEY

DEALING IN MONEY All banks basically deal with money as they are financial institute where we do the money exchanges we will either gave or deposit money in banks or will lend/borrow money from banks for our requirement as per we need. ACCEPTANCE OF MONEY DEPOSITS All banks always work for there consumer satisfaction, as a result, they accept money from all their customers in a way there they also gave an Interest on deposit with the duration passed to money in the bank. Banks deposit money from peoples & after that, the protection of money is the responsibility of banks any misfortune happens to the consumer’s money will be returned by banks to the customer within a given period of time. PAYMENT AND WITHDRAWS A person who has deposit their money into a bank can able to withdraw it at any time of instance. A customer can also able to easy payment & withdraw TYBBI 67

their money with the facilities of ATM, DRAFTS, MONEY ORDERS, CHEQUES etc. INDIVIDUAL OR COMPANIES Bank can be of any type it can be a company or firm or also a person who is involved in the business of money. This is also how banks are defined. VARIOUS BRANCHES A bank can also have multiple branches for the facility of there customers as every person cannot be able to go to the main branch of the Bank so banks further grow their own branches so that they can reach to each n every person. FUNCTIONS INCREASING BANKS always believe in developing of facilities for the customers so that they always increase there functions for working like developing latest ATM machines for the transactions of money and also net banking by which will be able to buy & sell any item from the sitting in our comfort zone. BUSINESS IN BANKING BANKS do the business of money without any subsidiary business. Their only responsibility is to satisfy their customers. this is also how banks define as they do the business of money interchanging from 1 hand to other.

IDENTIFICATION Each bank has a unique name but having BANK name as common in all. which identifies the bank’s existence. people deals with different banks having different names but bank word in common in all of them. FACILITY OF ADVANCE BANKS ALSO LED/GAVE money to the people in a form of LOAN with a minimum amount of interest. people which are not able to full fill their requirements at an instance of time which required a large amount of money at that time banks lend money to them so that they full fill their requirements and returns back in small installment which are known as EMIs.

Different Types of Banks in India Category: Economy of India TYBBI 68

On September 24, 2014 By Anamika Sethi

Banks in India A bank is a financial institution whose purpose is to receive deposits and lend money to individuals and businesses, disburse payments, invest funds in securities for a return, and safeguard money. It services savings and current (chequing) accounts, provides credit to borrowers in the form of loans and through credit cards, and acts as trustees of its clients. Banks perform all of these functions or some of them depending on their nature. Other important banking activities are providing foreign exchange services for customers, financing foreign trade, operating in money market, and providing a wide range of financial-cum-advisory services. In India and other developing countries the term ‘bank’ is applied to a variety of institutions which provide funds for various purposes. So banks are of different types: commercial banks, savings banks, investment (industrial) banks, merchant banks, land development banks, co-operative banks and above all, central bank.

Different Types of Banks in India We may now make a brief review of different types of banks in India.

Commercial banks: Commercial banks are the most important types of banks. The term ‘commercial’ carries the significance that banking is a business like any other business. In other words, commercial banks are essentially profit-making institutions. They collect deposits from the public and lend money to business firms (manufacturers), traders, farmers and consumers. Commercial banks normally meet the working capital needs of trade and industry and are a part of the money market. The current account deposits of commercial banks are used as a medium of exchange, i.e., for making transactions. Deposits of other banks are not so used. These are specialized institutions which give loans to specific sectors of TYBBI 69

the economy. Here we are mainly concerned with commercial banks. So we generally use the term ‘banks’ to refer to commercial banks.

Development banks: Development banks are parts of a country’s capital market. In India they are called public financial institutions. They are specialized financial institutions which supply long-term finance to large and medium industries. They also perform various promotional functions for accelerating the rate of capital formation in the country. In this way they promote industrial development in particular and economic development in general. IFCI, IDBI and ICICI are examples of such banks. These institutions have assumed a crucial importance in providing an everincreasing proportion of industrial finance and various types of development assistance to business enterprises in India.

Co-operative banks: The co-operative banks are set up under the provisions of the co-operative society’s laws of a country. In India such banks have been set up to provide credit to primary agricultural credit societies at low rates of interest. However, some co-operative banks also function in rural areas.

Land development banks: These banks (called land mortgage banks in India) provide long-term credit to farmers for land development. They also give long-term loans to farmers for acquiring new land.

Investment banks: When a corporate entity wants to issue new equity or debt securities, an investment bank serves the role of an intermediary. They sometimes also make investment in these companies through purchase of equity shares.

Merchant banks: A merchant bank helps a company to sell its new shares to the general public. The main job of a merchant bank is raise money to lend to industry. They do not lend money themselves but instead help circulate money from those who want to lend to firms who wish to borrow.

Foreign banks:

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There are many foreign banks in India like the Citi Bank, the Hong Kong and Shanghai Bank and the Bank of America. These are not nationalized institutions like Indian commercial banks.

Central bank: The central bank is the bankers’ bank and is also the banker to the government. It controls the entire banking system of the country. The Reserve Bank of India (RBI) is India’s central bank and the Bank of England is that of England.

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Savings Account It offers high liquidity and is very popular among the masses. They provide a lot of flexibility for deposits and withdrawal of funds from the account and also have cheque facility. The interest provided by Public sector bank is only 4%, however, some of the private banks like Yes Bank and Kotak Bank offers interest between 6-7%.

Recurring Deposit It is a special type of term deposit where you do not need to deposit a lump sum savings rather a person has to deposit a fixed sum of money every month (which can be as low as Rs 100 per month). These accounts have maturities ranging from 6 months to 120 months. You can also give a standing order to the bank to withdraw a fixed sum of money from your saving account on every fixed date and the same is credited to RD account. However, the bank may charge some penalty for delay in paying the installments.

Current Account It is a demand deposit and is meant for businessmen to conduct their business transactions smoothly. These are the most liquid deposits and there are no restrictions on the number and the number of transactions in a day. Moreover, banks do not pay any interest on these accounts.

Fixed deposit It is an instrument offered by banks which gives a higher interest than a regular savings account and offers a wide range of tenures ranging from 7 days to 10 years. The rate of interest varies from bank to bank, usually; it lies between 6-10%. You may or may not have a separate bank account to open a fixed deposit with the bank. You may be charged some penalty in case of early closure of FD account. However, with the focus of government to have a bank account for everyone under the scheme of Pradhan Mantri Jan DhanYojana, you can open up a bank account for free if you do not have one and enjoy various facilities offered by banks.

Issues and Challenges facing Indian Banking Sector Jagran Josh Feb 28, 2016 09:03 IST

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Banks in India are considered to be the lifeline of the economy. They play a catalytic role in activating and sustaining economic growth. As per KPGM-CII report, India’s banking sector is expanding rapidly and has the potential to become the fifth largest banking industry in the world by 2020 and third largest by 2025. Status of Banking Sector at a glance • The Indian banking system consists of 26 public sector banks, 20 private sector banks, 43 foreign banks, 56 regional rural banks, 1589 urban cooperative banks and 93550 rural cooperative banks. • The Indian banking sector’s assets reached 1.8 trillion US dollars in 2014-15 from 1.3 trillion US dollars in 2010-11, with 70 per cent of it being accounted by the public sector. • Total lending and deposits increased at a compound annual growth rate (CAGR) of 20.7 per cent and 19.7 per cent, respectively, between 2007 and 2014 and are further poised for growth, backed by demand for housing and personal finance. • Indian Banks have successfully adopted the Basel II norms of international banking supervision and as per the Reserve Bank of India (RBI) majority of the banks have already met Basel III capital norms prior to its deadline of 31 March 2019. Factors promoting growth of Banking Sector • Emergence of Universal Banking System: Services provided by banks have expanded rapidly in the last decade. In addition to the traditional “savings and loans”, banks started providing a wide gamut of financial services like insurance, investment, asset management, etc which increased their in the economy.

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• Through partnerships and acquisitions, banks are trying to integrate financial services, wallets, payments, shopping services etc., there by adding depth to their financial services. • Economic growth: Over 9 percent GDP growth in the pre global financial crisis period (2009-10) and over 7 percent in the last two years largely facilitated the growth of this sector.

• Globalization: As India is moving towards closer integration with the world economy, India’s merchandise trade, service exports and remittances are growing at a faster pace. In order to serve these ‘new needs’ banks have evolved and redeemed themselves in India and abroad. • Policy initiatives: The Banking Laws (Amendment) Act, 2012 at the monetary front, and large scale infusion of funds into the public sector banks by the government in recent years fuelled the growth of this sector. • For the government, the banking sector is at the core of governance. Initiatives like Jan Dhan Yojana and Direct Benefit Transfer are case in point. • Usage of technology: Information and communication technologies including the mobile phones and internet connectivity are the prime reason for expanding the reach of banking sector to the youth and rural habitations.

Issues and Challenges Amidst the signs of progress, the Indian banking sector has been facing multiple challenges in recent times. Few of them are -

Non-Performing Assets • NPAs have become a grave concern for the banking sector in couple of years and impacted credit delivery of banks to a great extent. • As per a survey, net NPAs amount to only 2.36 percent of the total loans in the banking system. However, if restructured assets are taken into account, stressed assets account will be 10.9 percent of the total loans in the system. As per the International Monetary Fund (IMF), around 37 percent of the total debt in India is at risk. • India’s largest lender State Bank of India (SBI) reported a massive 67 per cent fall in consolidated net profit at 1259.49 crore rupees in the third quarter of the 2015-16 financial year and classified loans worth 20692 crore rupees as having turned bad.

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• As per an estimate, the cumulative gross NPAs of 24 listed public sector banks, including market leader SBI and its associates, stood at 393035 crore rupees as on 31 December 2015. • The Economic Survey 2015-16 also alarmed the policy makers about growing bad debts with the banks and their potential to disrupt the growth prospects in the future. • Reduced profits: The banking sector recorded slowdown in balance sheet growth for the fourth year in a row in 2015-16. Profitability remained depressed with the return on assets (RoA) continuing to linger below percent. Further, though PSBs account for 72 percent of the total banking sector assets, in terms of profits it has only 42 percent share in overall profits.

Issue of Monetary Transmission Like reduced profits, this is also an off-shoot of burgeoning NPAs in the system. With the easing of inflation and moderation in inflationary expectations, the RBI reduced the repo rate by 100 basis points between January and September 2015. However, change in the key policy rate was not reflected in lending rates as banks are not willing to transmit the benefits of low interest policy regime due to low-availability of liquidity against the backdrop of high NPAs.

Corruption Scams in the erstwhile Global Trust Bank (GBT) and the Bank of Baroda show how few officials misuse the freedom they granted under the guise of liberalization for their personal benefit. These scams have badly damaged the image of these banks and consequently there profitability.

Crisis in Management Public-sector banks are seeing more employees retire these days. So, younger employees are replacing the elder, more-experienced employees. This, however, happens at junior levels. As a result, there would be a virtual vacuum at the middle and senior level. The absence of middle management could lead to adverse impact on banks' decision making process. Steps taken by Government and Banking Sector To effectively address the above issues the Government including the RBI and the Supreme Court and the Banks themselves have taken many initiatives. Some of them are – TYBBI 75

• The Ministry of Finance in its Economic Survey 2015-16 suggested four R's - Recognition, Recapitalization, Resolution, and Reform to address the problem of NPAs. • The Union Government unveiled plans to infuse 70000 crore rupees in the next few years, but PSU banks would need at least 1.8 lakh crore rupees by 2019-20. • In October 2015, the Government announced Mission Indradhanush under which 7 key strategies were proposed to reform public sector banks (PSBs). • In May 2015, the RBI advised all PSBs to appoint internal Ombudsman to further boost the quality of customer service and to ensure that there is undivided attention to resolution of customer complaints in banks. • The Government announced its intention to introduce a comprehensive Insolvency and Bankruptcy Bill in the Parliament based on the recommendations of the Dr T K Viswanathan-headed Bankruptcy Law Reforms Committee (BLRC). • In order to rein in corruption, the Supreme Court on 23 February 2016 ruled that the top officials and employees of private banks will be considered as public servants for the purposes of the Prevention of Corruption Act, 1988. • The RBI is also facilitating rectification of procedural flaws in the system through a number of well-thought-out initiatives like restricting incremental non-performing assets through early detection, monitoring, corrective action plans, shared information, disclosures, etc. In this regard, the RBI’s resolve to clean banks books by 2017 is commendable.

Who Are Management Bank?

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We are an owner operated company with the Directors working hands on in the business. The Directors each have 20 years’ experience of the UK and International recruitment markets. Since the 1980’s we have helped thousands of people to find their next career move. Unlike larger recruitment consultancies, we do not register everyone who contacts us looking for a change of career. Candidates have to impress us for us to take the time to help you look for a career move. You have to be committed to making a move, not driven by an increase in salary alone, have a stable career history, specific skills and excellent references.

Conclusion:-

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Banks are important in economic developers of the country, each person will be depending in one or other form on bank, and banks are main source for the creation, issues & circulation of currencies in any nation. Hence in recent economy every individual is aware of the bank facility & services. Banking systems have been with us for as long as people have been using money. Banks and other financial institutions provide security for individuals, businesses and governments, alike. Let's recap what has been learned with this tutorial: In general, what banks do is pretty easy to figure out. For the average person banks accept deposits, make loans, provide a safe place for money and valuables, and act as payment agents between merchants and banks. Banks are quite important to the economy and are involved in such economic activities as issuing money, settling payments, credit intermediation, maturity transformation and money creation in the form of fractional reserve banking. To make money, banks use deposits and whole sale deposits, share equity and fees and interest from debt, loans and consumer lending, such as credit cards and bank fees. In addition to fees and loans, banks are also involved in various other types of lending and operations including, buy/hold securities, non-interest income, insurance and leasing and payment treasury services.

Reference:TYBBI 78

Internet Banking and its Facilities http://www.worldjute.com/ebank.html ATM http://en.wikipedia.org/wiki/Automated_teller_machine Online Banking http://en.wikipedia.org/wiki/Online_banking Types of banks http://en.wikipedia.org/wiki/Bank#Other_types_of_banks 1: P.K.SRIVATSAVA, BANKING THEORY & PRACTICES (Himalaya Publishing House) https://www.tutorialspoint.com/bank_management/bank_management_quick_ guide.htm https://www.investopedia.com/university/banking-system/bankingsystem12.asp

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