C1T2 Banking PDF

CLASS 01
Banking and
Financial Institutions
Banking and
What is a bank?
What constitutes a banks portfolio?
Banking structure in India & the US
Bank for International Settlement
The profit cycle of a bank

Banking and
What is a bank?

Deposit
Interest
Loan
Interest
BANK
Deposit Loan
Interest Interest
BANK
Connects customers that have capital deficits

to customers with capital surpluses
Brittanica.com
Deals in money and its substitutes
Brittanica.com
Provides other financial services

Brittanica.com
Accept deposits and make loans

Brittanica.com
Accept deposits and make loans
Derive a profit from the difference in the

interest rates paid and charged, respectively
Banks are critical to our economy
Deposit
money
Interest on
Balance Pool
Credited of Money
to AC
BANK
Amount
Deducted AC
from Credited
balance
Write
Cheque
Deposit
money
Interest on
Balance Pool
Credited of money
to AC
BANK
Amount
Deducted AC
from Credited
balance
Write
Cheque
Deposit
money
Interest on
Balance Pool
Credited of money
to AC
BANK
Amount
Deducted A/C
from credited
balance
Write
Cheque
Deposit
money
Interest on
Balance Pool
Credited of money
to AC
BANK
Amount
Deducted A/C
from credited
balance
Write
cheque
Deposit
money
Interest on
Balance Pool
Credited of money
to AC
BANK
Amount
deducted A/C
from A/C credited
balance
Write
cheque
Deposit
money
Interest on
balance Pool
credited of money
to A/C
BANK
Amount
deducted A/C
from A/C credited
balance
Write
cheque
What would have happened if you
didn't use banks as an intermediary?
Fund holders would have invested
directly in markets, capital markets
or bullion market
Buyers of funds would have got

their financing from these markets
Fund holders would have invested
directly in markets, capital markets
or bullion market
Buyers of funds would have got

their financing from these markets
Banking and
What is a bank?

BANK
Assets Liability
MONEY
MONEY
BORROWED
LENT TO
FROM
CUSTOMERS
CUSTOMERS
LOANS FD/CB
BANK
Assets Liability
MONEY
MONEY
BORROWED
LENT TO
FROM
CUSTOMERS
CUSTOMERS
LOANS FD/CB
BANK
Assets Liability
Secured loans
Unsecured
loans
BANK
Assets Liability
Secured loans Collateral

Unsecured backing
loans
What is a collateral?
Collateral
House
An LIC policy
Anything against which the bank gives the loan

Collateral
House
In case of a default
Bank will sell asset and get back money

Banks portfolio - Loans
Unsecured
Secured
Unsecured
Interest 10 - 14%
Secured
Unsecured
Interest 10 - 14%
Tenure high
Secured
Unsecured
Interest 10 - 14%
Tenure high
Lend - long time
Secured
BANK
Assets Liability
Secured loans
Unsecured
loans
NO Collateral
backing
Unsecured loans
Maximum tenure around five years
Interest - 14-20% in India
Risk high - no back-up, no surety
Maximum cap on loan amount
Cannot take too many unsecured loans

Unsecured loans

Unsecured loans

Unsecured loans

Unsecured loans

Savings bank
account
Lowest interest rate
Money on-call
Uncertainty
Savings bank
account
Money on-call
Uncertainty
Savings bank
account
Money on-call
Uncertainty
Savings bank Fixed maturity plans
account
Lowest interest rate Higher interest rates
Money on-call Certainty
Uncertainty 80% customers will not

take out money before
fixed time
account

fixed time
account

fixed time
BANK
BANK
Money
BANK
Money Loan
Interest
Banks can legally extend considerably more
credit than they have cash
How do banks create money?
We trust banks with our money
Honour our checks
Deposit money every day
Lending the same money and more
Extend more credit than they have cash
Demand our money, well get it
Honour our checks
Honour our checks
Honour our checks
Honour our checks
Honour our checks
Return our money when demanded
Fish
Retail Bank
market
Bank
Loans
Certificates of deposit
Other financial products
Interest they charge on
loans
is higher
Interest they pay

depositors is lower
Fractional reserve system
Banks create money in economy by making loans
Amount of money banks can lend is set by Federal

Reserve in US and RBI in India
Reserve requirement 10% of banks total deposits
Amount can either be held in cash on hand or

with banks reserve account with Central Bank








Bank
A
Deposit
Rs 100
Reserve Rs
10
Lend Rs 90
Bank Bank
A B
Deposit
Rs 100
Reserve Rs
10
Lend Rs 90
Bank Bank
A B
Deposit Deposit
Rs 100 Rs 90
Reserve Rs
Reserve Rs 9
10
Lend Rs 90 Lend Rs 81
Bank Bank
Bank C
A B
Deposit Deposit Deposit

Rs 100 Rs 90 Rs 81
Reserve Rs Reserve Rs
Reserve Rs 9
10 8.1
Lend Rs 90 Lend Rs 81 Lend Rs 79.9

So how do banks process cheques?
Deposit Bank
cheque A
Deposit Bank Encode &
cheque A endorse
cheque A endorse
Reserve Bank
Or
Clearinghouse
cheque A endorse
Reserve Bank
Or
Clearinghouse
Recon
Bank A to B Bank B to A
cumulative
cheque A endorse
Reserve Bank
Or
Clearinghouse
Recon
Bank A to B Bank B to A
cumulative
Recon ledger, whatever is the difference

exchange hands between banks
Banking and
What is a bank?

Banking structure in India:
Apex bank Reserve Bank of India

(RBI)

(RBI)
Commercial banks
Co-operative banks
Development banks

(RBI)
Commercial banks
Co-operative banks
Development banks
Commercial banks
Nationalised Private
State Bank of India HDFC

ICICI
Axis, etc.
Commercial banks

ICICI
Axis, etc.
Commercial banks

ICICI
Axis, etc.
Banking structure in USA:
Board of governors
Federal open market

committee
Board of governors
Federal open market

committee
Federal reserve banks

Board of governors
Federal open market

committee
Member banks and other

depository institutions
Board of governors
Federal open market

committee
Member banks and other Non-bank financial

depository institutions companies (NBFCs)
Board of governors
Federal open market

committee

Board of governors
Federal open market

committee

Board of governors
12 Federal open market

committee
25

Board of governors
12 Federal open market

committee
25
343,000
Banking and
What is a bank?

BANK FOR INTERNATIONAL SETTLEMENTS
Basel
Basel is a city in Switzerland
Representative offices in Hong Kong and Mexico City
Basel II Accords are most popular as of now
the Basel III accords are up for implementation

from 2013 onwards

from 2013 onwards

from 2013 onwards
Basel III accords are up for implementation from

2013 onwards
International organization
which fosters international monitoring
and financial cooperation and serves as a bank
for central banks
Forum for discussion and decision making

amongst central banks and within international
and supervisory community
Centre for economic and monetary research
primary counter party for central banks and their

financial transactions
agent or trustee in connection with financial

operations
Primary counter party for central banks and their

agent or trustee in connection with financial

operations
Primary counter party for central banks and their

Agent or trustee in connection with financial

operations
Established 17th of May, 1930
Worlds oldest international financial organization
Basel Accords have to be followed by banks
We, as clients of these commercial banks are

effected
Basel III Accords implementation from 2013

onwards

effected

onwards

effected

onwards
Clients of these commercial banks are affected

onwards
Clients of these commercial banks are affected

onwards
Banking and
What is a bank?

Profit cycle of a bank
1. Product is money
Interest rate for borrowers
Number of people who want to borrow

Amount of money available to lend
Accept deposits at lower interest rate
Gives loans at higher interest rate
Loaning money is inherently risky
Never know if will get money back
Riskier the loan, the higher interest rate
Deposit
Interest
Deposit Loan
Interest Interest
1. Product is money
2. Banking fees
Banking fees
Checking, ATM access and overdraft

Loans
Application fees, commissions, penalty
charges, account fees, etc.
Banking fees

Loans
Banking fees

Loans
1. Product is money
2. Banking fees
3. Low risk investments
Banking fees
Earn returns on investments
Bank financing and fees comprises most of

banks profits
Maximise profits by making their own

investments
Banking fees

banks profits

investments
Banking fees

banks profits

investments
Banking fees
Must keep a certain amount of deposits liquid

Defined by the banking governance rules
Must invest primarily in loans
Any other investment has to be very low risk
Banking fees

Banking fees

Banking fees

Recap
Bank and its portfolio
The banking structure in India, the US

and the bank for International Settlement

Thank You

C1T2 Banking PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

C1T2 Banking PDF

Uploaded by

Copyright:

Available Formats

CLASS 01

What constitutes a banks portfolio?

Banking structure in India & the US

Bank for International Settlement

The profit cycle of a bank

What constitutes a banks portfolio?

Banking structure in India & the US

Bank for International Settlement

The profit cycle of a bank

Connects customers that have capital deficits

Provides other financial services

Provides other financial services

Accept deposits and make loans

Provides other financial services

Accept deposits and make loans

Derive a profit from the difference in the

Buyers of funds would have got

Buyers of funds would have got

What constitutes a banks portfolio?

Banking structure in India & the US

Bank for International Settlement

The profit cycle of a bank

Secured loans Collateral

Anything against which the bank gives the loan

Bank will sell asset and get back money

Maximum tenure around five years

Interest - 14-20% in India

Risk high - no back-up, no surety

Maximum cap on loan amount

Cannot take too many unsecured loans

Maximum tenure around five years

Interest - 14-20% in India

Risk high - no back-up, no surety

Maximum cap on loan amount

Cannot take too many unsecured loans

Maximum tenure around five years

Interest - 14-20% in India

Risk high - no back-up, no surety

Maximum cap on loan amount

Cannot take too many unsecured loans

Maximum tenure around five years

Interest - 14-20% in India

Risk high - no back-up, no surety

Maximum cap on loan amount

Cannot take too many unsecured loans

Maximum tenure around five years

Interest - 14-20% in India

Risk high - no back-up, no surety

Maximum cap on loan amount

Cannot take too many unsecured loans

Money on-call Certainty

Uncertainty 80% customers will not

Money on-call Certainty

Uncertainty 80% customers will not

Money on-call Certainty

Uncertainty 80% customers will not

Interest they pay

Amount of money banks can lend is set by Federal

Reserve requirement 10% of banks total deposits

Amount can either be held in cash on hand or

Amount of money banks can lend is set by Federal

Reserve requirement 10% of banks total deposits

Amount can either be held in cash on hand or