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CLASS 01

Banking and
Financial Institutions
Banking and
Financial Institutions

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
Financial Institutions

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


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
Deals in money and its substitutes

Provides other financial services


Brittanica.com
Deals in money and its substitutes

Provides other financial services

Accept deposits and make loans


Brittanica.com
Deals in money and its substitutes

Provides other financial services

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
Financial Institutions

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


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
Banks portfolio - Loans

Unsecured
Interest 10 - 14%

Secured
Banks portfolio - Loans

Unsecured
Interest 10 - 14%
Tenure high

Secured
Banks portfolio - Loans

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

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

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

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

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


Savings bank
account
Lowest interest rate

Money on-call

Uncertainty
Savings bank
account
Lowest interest rate

Money on-call

Uncertainty
Savings bank
account
Lowest interest rate

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
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
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
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
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
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
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
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
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
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
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
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
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
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
Deposit Bank Encode &
cheque A endorse

Reserve Bank
Or
Clearinghouse
Deposit Bank Encode &
cheque A endorse

Reserve Bank
Or
Clearinghouse

Recon
Bank A to B Bank B to A
cumulative
Deposit Bank Encode &
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
Financial Institutions

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 structure in India:
Banking structure in India:

Apex bank Reserve Bank of India


(RBI)
Banking structure in India:

Apex bank Reserve Bank of India


(RBI)
Commercial banks
Co-operative banks
Development banks
Banking structure in India:

Apex bank Reserve Bank of India


(RBI)
Commercial banks
Co-operative banks
Development banks
Commercial banks

Nationalised Private

State Bank of India HDFC


ICICI
Axis, etc.
Commercial banks

Nationalised Private

State Bank of India HDFC


ICICI
Axis, etc.
Commercial banks

Nationalised Private

State Bank of India HDFC


ICICI
Axis, etc.
Banking structure in USA:
Banking structure in USA:

Board of governors

Federal open market


committee
Banking structure in USA:

Board of governors

Federal open market


committee

Federal reserve banks


Banking structure in USA:

Board of governors

Federal open market


committee

Federal reserve banks

Member banks and other


depository institutions
Banking structure in USA:

Board of governors

Federal open market


committee

Federal reserve banks

Member banks and other Non-bank financial


depository institutions companies (NBFCs)
Banking structure in USA:

Board of governors

Federal open market


committee

Federal reserve banks

Member banks and other Non-bank financial


depository institutions companies (NBFCs)
Banking structure in USA:

Board of governors

Federal open market


committee

Federal reserve banks

Member banks and other Non-bank financial


depository institutions companies (NBFCs)
Banking structure in USA:

Board of governors

12 Federal open market


committee

25
Federal reserve banks

Member banks and other Non-bank financial


depository institutions companies (NBFCs)
Banking structure in USA:

Board of governors

12 Federal open market


committee

25
Federal reserve banks
343,000
Member banks and other Non-bank financial
depository institutions companies (NBFCs)
Banking and
Financial Institutions

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


BANK FOR INTERNATIONAL SETTLEMENTS

Basel
BANK FOR INTERNATIONAL SETTLEMENTS

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
BANK FOR INTERNATIONAL SETTLEMENTS

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
BANK FOR INTERNATIONAL SETTLEMENTS

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
BANK FOR INTERNATIONAL SETTLEMENTS

Basel is a city in Switzerland

Representative offices in Hong Kong and Mexico City

Basel II Accords are most popular as of now

Basel III accords are up for implementation from


2013 onwards
BANK FOR INTERNATIONAL SETTLEMENTS

International organization
which fosters international monitoring
and financial cooperation and serves as a bank
for central banks
BANK FOR INTERNATIONAL SETTLEMENTS

Forum for discussion and decision making


amongst central banks and within international
and supervisory community
BANK FOR INTERNATIONAL SETTLEMENTS

Centre for economic and monetary research

primary counter party for central banks and their


financial transactions

agent or trustee in connection with financial


operations
BANK FOR INTERNATIONAL SETTLEMENTS

Centre for economic and monetary research

Primary counter party for central banks and their


financial transactions

agent or trustee in connection with financial


operations
BANK FOR INTERNATIONAL SETTLEMENTS

Centre for economic and monetary research

Primary counter party for central banks and their


financial transactions

Agent or trustee in connection with financial


operations
BANK FOR INTERNATIONAL SETTLEMENTS

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
BANK FOR INTERNATIONAL SETTLEMENTS

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
BANK FOR INTERNATIONAL SETTLEMENTS

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
BANK FOR INTERNATIONAL SETTLEMENTS

Established 17th of May, 1930

Worlds oldest international financial organization

Basel Accords have to be followed by banks

Clients of these commercial banks are affected

Basel III Accords implementation from 2013


onwards
BANK FOR INTERNATIONAL SETTLEMENTS

Established 17th of May, 1930

Worlds oldest international financial organization

Basel Accords have to be followed by banks

Clients of these commercial banks are affected

Basel III Accords implementation from 2013


onwards
Banking and
Financial Institutions

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


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
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
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
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
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
Profit cycle of a bank

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

Checking, ATM access and overdraft


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

Checking, ATM access and overdraft


Loans
Application fees, commissions, penalty
charges, account fees, etc.
Profit cycle of a bank

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

Earn returns on investments

Bank financing and fees comprises most of


banks profits

Maximise profits by making their own


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

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

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

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

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
Recap

Bank and its portfolio

The banking structure in India, the US


and the bank for International Settlement

The profit cycle of a bank


Thank You

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