banking and insurance _course lectue 2 20-jul-13.pptx
TRANSCRIPT
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Banking & Insurance
Finance (Sem III)
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Banking systems
Role of Bank Transfer of excess/surplus funds to the credit hungry activities
Efficient usage of money in the economy
Function of bank Deposit facilities
Cash credits (ODs) Advances Bill discounting by trade finance typically working capital finance
Rollover credits
Mortgages
Ebanking
Banking System
Commercial banking Basic banking activity thru borrowing of funds and lending it to business
with restriction on tenor/risk taken by the bank
Banking structure
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Banking systems
Commercial banking (continued)
Branch Banking
Banks bigger in size
Presence across nation thru branches
Controlled by Head-office Pattern took shape in UK
Clearing banks with national level organization and commonality in
banking
Conduct business from Head Office
Occupies different regions with branch network Controlled by same Board of Directors and committees
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Banking systems
Branch Banking
Preference for opening branches
Rural policy
Industry specific policy
In India RBI regulates branch licenses matching with governmentpolicy
Advantages/Strengths
Scale of economy i.e. size
Efficient use of saving
Division of labour Remittances facilities
Risk spread
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Banking systems
Commercial banking
Branch Banking (continued ..)
Disadvantages / Challenges Delegation of power
Decision making delays
Loss of initiatives
Unit Banking
Localized banking structure typically got developed on account of constrainton communication and transport facility
Linked thru correspondent bank system
Concentration in particular region
Pattern took shape in USA (Texas, Illinois) Advantages/Strengths
Local needs
Friendly Image
Mobilization of local deposits
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Banking systems
Commercial banking
Unit Banking
Advantages/Strengths (continued) Speed (decision making)
Customer Friendly
Disadvantages/Challenges
Inefficient usage of deposits Issues for remittance of funds
Risk Concentration
Group Banking Holding company for banking institutions as per bank holding company act (1956) USA
Owns commercial banking as well as NBFCs and other financial institutions
All group companies under holding company exerting control over all group entities
Advantages/Strenghts Low reserves as managed centrally
Economies of scale
Breaking of banking principal ->different sources of assets as well as liabilities
Disadvatages/Challenges Interconnectivity
Funding among group entities
Financial conglomerate may run higher risk for the system as a whole
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Banking systems
Commercial banking
Retail banking
Retail operations
Mobilization of retail deposits from small customers
Retail loan portfolio (lending to small business) High Volume low value transactions
Whole Sale banking
Big Deals
Generally catering towards needs of big corporate
Typically seen in US for financing wall street in Pre War era
Tailor made nature of advances
Development of secondary banking systems
Innovation in banking assets/liabilities
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Banking systems
Commercial banking
Whole Sale banking
Characteristics
Domestic and Foreign currency business
Size of deposits and lending at cheaper processing cost
Nature of advances making it suitable for customer
Growth of secondary market
Matching and Liquidity distribution
Matching principle
Liquidity distribution theory
Banks are liquidity brokers and converts primary securities into technicallydifferent products
Liquidity gets distributed without creating it
Reduce cost, more market information
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Banking systems
Merchant Banking
Widely and loosely used term with major emphasis on following
Corporate financial adviceIssuance of bonds/shares, M&As
Loan Syndication
Holding and dealing in quoted and unquoted securities
Fund management on behalf of clients
Investment Banking
Originator + Underwriter + Retailer
Originator enters into primary negotiations with issuing corporations
Gathering and analyzing of all info regarding issuer intent ofissuance/markets/products/history etc.
Technical/financial and legal analyst to vet details
Agreement with issuer to bring out issue and public subscriptions
Long term capital/financing avenues thru IBs
Entrepreneur of Entrepreneurs
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Banking systems
Universal Banking (continued)
Disadvantages/Challenges
Size of banking institutions
Failure impact
Systemic Risk for the economy
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Banking systems
Commercial Banking General commercial Principles Emphasis
on safety by regulator
Custodian of surplus funds
Guardian of delicate system doing business with funds of others
Banking Theory
Self Liquidity paper theory
Earning assets of banks limited to short term self liquidating loans
Includes Commercial papers, working capital loans (bill of Exchange drawn
on raw material) Liquidity Perspective
Economic cycle matching
Easy to gauge liquidity posiiton
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Banking systems
Banking Theory (continued..)
Anticipated Income Theory SLP need not always guarantee liquidity for the portfolio (abnormal fall in
prices for the commodities held under loan)
Addition of Long Term Loans against only short term loans
Loans granted on specific agreed conditions between borrower and lender on
how to conduct business Tried to overcome limitations of SLP theory and opening door for new avenues
Liquidity Banks are thought of producers of liquid instruments
What is liquidity ? Shift ability without incurring losses
Measures for Liquidity -> Reserves such as cash reserve ratiosMaximize cash holding=> Increase liquidity
Minimize Cash holding=> Increase profitability
Trade off between Liquidity and profitability
Needs banking experience, customer banking mindedness/habits, locality
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Banking systems
Employments of funds by commercial banks
Cash in hand
Cash reserves with central bank and demand deposits with other banks
Anticipation of cash requirement considering variables such as banking
awareness of customers, banking habits, seasonal demands, locality and rivals Earning assets
Call money/Notice money
Bills discounted automatically liquidating on sale of goods covered by such bill
InvestmentsLiquid instruments
Loans and advancesshort term v/s/ long term
For long term loan bank should consider margin on security, fluctuation and
shiftability
3 Cs cardinal principals for lending -> character, capacity and capital of
borrower
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Banking systems
Fund generation or Liabilities for bank
Deposits
The most acceptable way for generating funds
Banks are licensed authority to create this liability
Helps creating pool of retail savings employed for activities helpingeconomy
Money market operations
Call money/Notice money
Issuance of Certificates of deposits (CDs)
Inter bank markets
Secondary markets
ADR/GDR issuance- Overseas borrowing
Liability side has undergone a change from typical depositgeneration to market borrowing
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Banking systems
Mechanism of credit generation
Holding of idle cash at lowest level possible
This increases amount of money in circulation
Bank while lending money does not give out whole cash in one go
It creates credit for borrower and allows to draw cheques to fulfill
borrowers obligations
When cheques deposited by third party, their deposit amt go up
What about transacting securities-> it has also similar characteristics
One hypothetical example in which there is single bank with deposit ofINR 10,000 and required cash reserve ratio of 10%
B/s of bank will be shown as follows
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Banking systems
Mechanism of credit generation Hypothetical example (continues )
As per our assumption bank needs to maintain cash reserve ratio of 10%
i.e INR 1000 The bank is now eligible to make loans of INR 9000 which will be placed in
credit of the borrower giving right to them to operate their account usingcheques and creating obligation on bank to honour the payment
This INR 9,000 gives purchasing power to borrower and works as good asmoney
Liabilities Assets
Deposits 10,000 Cash in hand 10,000
Liabilities Assets
Deposits 10,000 Cash in hand 10,000
Credit to
borrower 9,000
Loans to
client 9,000
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Banking systems
Mechanism of credit generation Hypothetical example (continues )
The payees of this cheque will not require actual cash over the counter
and they will deposit this in their bank account
It cause merely transfer of credit balance from one account to other Thus legal tender money in the economy is INR 10000, through the
process of creating additional credit line for borrower the bank has added
9,000 more to money circulation
The continuation of process will increase money supply furtherLiabilities Assets
Deposits 10,000 Cash in hand 10,000
Credit to
borrower 9,000
Loans to client
Credit to
subsequent
custy 8,100
a) 9000
b) 8,100 17,100
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Banking systems
Mechanism of credit generation Hypothetical example (continues )
Limitation to creation of credit
Cash reserve ratio
Money supply by central bank
Bankers are not just merely purveyors of money but the artist
manufacturing money
New age banking
Bank with single branch operating in many places
IT revolution -> Ebanking and online payments/transfer facilities
Does the Place among 5 Ps of marketing matter?
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8/14/2019 Banking and Insurance _course lectue 2 20-Jul-13.pptx
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Banking systems
Mechanism of credit generation Hypothetical example (continues )
Limitation to creation of credit
Cash reserve ratio
Money supply by central bank
Bankers are not just merely purveyors of money but the artist
manufacturing money
New age banking
Bank with single branch operating in many places
IT revolution -> Ebanking and online payments/transfer facilities
Does the Place among 5 Ps of marketing matter?
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Banking systems
India banking system
Scheduled banks
Scheduledcommercial banks
ScheduledCooperative banks
Private bankssPublic sector
bankss
Nationalized
bankss
SBI and
Associated banksOld private banks
New Private
Banks