RETAIL BANKING –ANEESH DAY

Evolution of Banking

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the
Reserve Bank of India Act, 1934. The Indian Banking Regulation Act 1949 was formulated to govern
the financial sector.
In 1921 the presidency Banks of Bengal, Bombay and Madras with their 70 branches were merged in
1921 to form the Imperial Bank of India. During the First 5 year plan in 1951, an act was passed in
Parliament in May 1955 nationalizing the Imperial Bank and the State Bank of India was constituted
on 1 July 1955
During the period 1906-1911, several Commercial banks such as BOI, Central Bank of India, BoB,
Bank of Mysore etc were established which were all Joint Stock Banks

Definition of a Bank

Indian Banking Regulation Act (1949) defines Banking as the Acceptance of money for the purpose of
lending or investment, from deposits received from the public, repayable on demand or otherwise
withdrawable by cheques, drafts or order to otherwise (Standing Instructions, ECS).

Nationalization of Banks
First only State Bank of India (SBI) was nationalized in July 1955 under the SBI Act of 1955.
Nationalization of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960.

In 1969, Mrs. Indira Gandhi the then prime minister nationalized 14 banks then. These banks were
mostly owned by businessmen and even managed by them.

 Central Bank of India

 Bank of Maharashtra
 Dena Bank
 Punjab National Bank
 Syndicate Bank
 Canara Bank
 Indian Bank
 Indian Overseas Bank
 Bank of Baroda
 Union Bank
 Allahabad Bank
 United Bank of India
 UCO Bank
 Bank of India

1980 : Nationalisation of seven more banks with deposits over 200 crores.
Problems: Nationalized banks had job guarantee so employee efficiency very low, indiscipline and
high absenteeism, trade union problems etc. Compare with present banks

TYPE OF BANKS AND THEIR FUNCTIONS

1. Central Bank
2. State Bank of India
3. Scheduled and Non Scheduled Banks
4. Co operative Banking
5. Retail Banking
6. Private Banking
7. Investment Banking
8. Corporate Banking

1. CENTRAL BANK: RBI

1. A Central bank has the sole right of note issuance i.e. legal tender currency
2. It should be the channel, and the sole channel for the output and intake of legal tender currency.
3. It should be the holder of all the government balances, and the holder of all the reserves of the
other banks and branches of banks in the country.
4. It should be the agent , so to speak, through which the financial operations, at home and abroad,
of the government would be performed.
5. Based on its Monetary Policy It should further be the duty of the central bank to effect so far as it
could , suitable contraction and suitable expansion on money supply based on inflationary or
recessionary trends, aiming generally at stability, by using the following tools: OMO- Open Market
Operation, Sterilization, CRR, SLR, Bank Rate etc- (Discussed in class, notes given)
6. When necessary, it should be the ultimate source from which emergency credit might be obtained
in the form of rediscounting approved bills, or advances on approved short term securities or
government papers. Lender of last resort/ Banker to Banks
7. It does not deal directly with the public. It indirectly helps agriculture, industry by augmenting
resources of other banks, channeled through agencies such NABARD, SIDBI, NHB ie priority sector
targets
8. Maintains the foreign exchange reserves and gold reserves for the country (Discussed in class-
notes given)
9. Clearing House of Commercial Banks (Discussed in class-notes given)
10. Rediscounting bills for scheduled banks (Discussed in class-notes given)
11. Moral Suasion- Mild persuasion to banks and financial institutions to follow RBI requirements
based on market situations
12. Monitoring and setting Priority Sector lending targets for banks

2. STATE BANK OF INDIA

The State Bank of India acts as an agent of the Reserve Bank of India and performs the following
functions:
(1) Borrows money:- The Bank borrows money from the public by accepting deposits such as current
account deposits, fixed deposits and demand deposits.
(2) Lends money:- It lends money to merchants , industries and manufacturers. It also lends to
farmers and co-operative institutions. It lends mostly on the security of easily realizable commodities
like rice, wheat, cotton, oil-seeds, cloth, gold and government securities. The Bank can lend against
agricultural bills upto a maximum period of fifteen months and incase of other bills upto a maximum
period of six months.
(3) Banker’s Bank:-The State Bank of India acts as the banker’s bank. In discharging this
responsibility, the bank provides loans to commercial bank when required and also rediscount their
bill.
(4) It also acts as the clearing house of the commercial bank where RBI doesnot have its branches
(CLEARING FUNCTIONS DISCUSSED IN CLASS). SBI and its Associate banks are responsible for
clearing: SBBJ – State Bank of Bikaner & Jaipur, SBH – State Bank of Hyderabad, SBM – State Bank of
Mysore, SBIN – State Bank of Indore, SBP – State Bank of Patiala, SBT – State Bank of Travancore.
(4) Government’s Bank:- The State Bank of India also acts as the agent of the Reserve Bank of India.
As an agent, the State Bank of India maintains the treasuries of the State Government. The Bank also
manages the debts (buying or selling of Bonds and Treasury Bills) floated by the State Governments.
(5) Remittance:- The State Bank of India facilitates remittance of money from one place to another.
It also helps in the transfer on the funds of the State and Central Government.
(6) Functions as Central Bank:- The State Bank of India performs the functions of a Central Bank
where RBI does not have its presence.
(7) Subsidiary service functions:- The State Bank performs various subsidiary services also. It collects
checks, drafts, bill of exchange, dividends interest, salaries and pensions on behalf of its customers..
It receives valuables and documents for safe custody and maintains safe deposit vaults

3. SCHEDULED AND NON SCHEDULED BANKS

In the RBI ACT OF 1934, all banks listed in the second schedule is known as Scheduled banks
All Scheduled bank operations are under strict surveillance of RBI. All nationalised banks, most
private sector banks, foreign banks are scheduled. Most cooperative banks are non- scheduled (not
subjected to strict financial discipline).
Advantages of scheduled banks:
1. RBI can rediscount the bills already discounted by them
2.Their drafts, bank guarantee, letter of credit accepted in all government offices
3.RBI acts as lender of last resort
4. All government accounts and transaction get routed through them
5. More account holders and lesser interest payment towards deposits as compared to non
scheduled banks

4. COOPERATIVE BANKING
Definition by Paul Lambert: It is an enterprise formed and directed by an association of users,
applying within itself the rules of democracy and directly intended to serve both its own members
and the community as a whole. It is a voluntary concern with equitable participation and control
among all concerned.
1. It is organized by those who themselves need credit
2. Runs as a democracy: Run by Board of Director elected on the basis of one vote per member
Cosmos, Saraswat, Suvarna Sahakari etc

1. Rural Co-operative banks: predominantly agriculture credit banks-short, medium and long term
to agriculture, handicraft, cottage industries. Issues: Recovery, problem of valuing land, livestock,
perishable agricultural commodities, improper title of property as security, limited resources and
fund shortage, high Non performing Assets, chances of financial mis-management by the
management itself (corruption).
2. Urban Co-operative banks: Formed for meeting the credit requirement of the urban lower middle
class which larger banks do not wish to lend due to high cost of advancing and recovery. Nor do
these people have large incomes or large assets to offer as security. Membership open to traders,
merchant, professionals etc who have to contribute to share capital. They have their own funds
(paid up share capital) and borrowed funds (deposits from public and borrowing from other banks)

5. PRIVATE BANKING

It is a part of Retail banking Catering to Super High Net worth customers- minimum account opening
cheques: 4 crores (HSBC), 1 Crore (ICICI). Aim is to make fee based incomes by offering structured
and specialized investment services from which bank earns commissions. Stress is mainly on
customized investment products which are specifically designed for them using derivatives, Equity
linked note, capital protection equity plans using Constant Proportionate portfolio investment (CPPI
model) etc (Discussed in class-notes given). Lending functions are secondary and a part of the
service functions. Customer service being rendered on a more personal basis, dedicated Relationship
Managers with 8 to 10 years of investment experience. All products and services are offered at
discounted or special rates. Deposit rates better, remittance charges waived, foreign exchange
conversion rate few paises plus minus the interbank rate, loan rates discounted, documentation
waived (fundamentally similar services given to HNIs in Retail banking except Investment products
which are personally customized for these individual clients while in Retail HNI banking, products are
customized for the entire group of customers)

6. RETAIL BANKING

Basic Functions
1. Acceptance of Deposits:
Classification of Deposits:
Demand Deposits/Current Deposits-Repayable on demand-Savings accounts for individuals, Current
Accounts for businesses (CASA)
Fixed Deposits/Time Deposits/ Term Deposits
The deposit is placed for a fix time period and fixed interest rate/ instructions needed for premature
withdrawal. In exchange for the lack of liquidity, banks offer a higher yield on time deposits than
they offer on regular savings accounts.

Interest calculation for premature withdrawal of deposit and savings account interest calculation
explained in class

2. Loans & Advances: Accepts funds so that they can lend out credit to customers for consumption
towards cars, houses, consumer goods, construction etc

3. Use of Cheques: Since the deposits with banks are withdrawable by cheques it elevates bank
deposits to the position of money
n
4. Banking as a part of the Financial Services industry
a. Acting as an Intermediary: Collects Savings from those who have them and give to those who need
them.
b. Distribution of third party products such as mutual funds, insurance, RBI bonds etc
c. General Utility services such as Bill payments, safety lockers, tax payments, issuing travellers’
cheques etc
d. Non Traditional financial services in the recent times: Wealth Management and Relationship
Management Services, selling gold coins

Major Income Streams for Retail Banks

BANKING SPREAD: The bank spread is the difference between the bank's cost of funds, in terms of
interest paid to depositors, and the rate of interest the bank charges to debtors on bank loans.
Interest income on term loans, home loans, personal loans , credit cards, overdrafts, cash credit.
(Net Interest Income- Difference between the interest earned on Loans and Investments minus the
interest paid on deposits and other borrowings)

FEE BASED INCOMES: Third party incomes as Distributors of mutual funds, life insurance, general
Insurance i.e. mediclaims & Property insurance, RBI Bonds, portfolio management schemes,
merchant outlets: swipe machines, issuing bank guarantees, letter of credit etc

FOREIGN EXCHANGE INCOMES:

1. Conversion charges on currency notes OTC
2. Conversion charges on Remittances
3. Converting foreign currency for exporters and importers
4. Foreign Currency loans to Exporters / Importers via Corporate Banking
5. Multi currency accounts (2007) for exporters with inter project fund transferability in any
currency and country
6. Participating in currency futures market and holding Net Overnight Open Position limits (NOOPL)
to make speculative profits from currency movements

INVESTMENT INCOME

Income from investment in interbank call money market, Liquid & ultra short term mutual funds,
government securities, Treasury bills, Certificate of Deposits, commercial papers.

Negotiable Instruments
Transactions related to NI are governed by the negotiable instruments act 1881. Section 13 defines “
a negotiable instrument means a promissory payable either to order or bearer”
Warehouse receipts/Bills of exchange/cheques/drafts/ certificate of deposits-unsecured borrowing
by scheduled banks for a period ranging 3 months to 1 yr by issuing promissory notes/
Accommodation bill- it is a bill of exchange where a reputed third party is providing a guarantee
towards repayment as a favor without any compensation for the same. This third party remains
liable till the bill amount is repaid to the bank

BANK’S ASSETS: Loans and Bank’s Investments BANK’S LIABILITIES: Savings account, current
account, fixed deposits and bank borrowings from other sources

KYC-Know your Customer or Client/ AML- Placement, Layering and Integration/ Round Tripping of
funds (Please refer to notes given in class)

Credit Creation of Banks: Loans Create Deposits

Primary deposits: hard cash, cheque, drafts etc, total supply of money does not increase from that
when people come and open the account with these.
When banks loan out these primary deposits Derivative deposits are created which add to the
money supply. Banks advance loans to Brokers, financial institutions, individuals etc and Discount Bill
of exchange, promissory notes etc thereby increasing credit money supply.
The loan amounts are credited to the respective borrower’s accounts and they are authorised to
draw cheques up to the sanctioned amounts. Therefore debt gets converted to money. Therefore
the deposits of the respective borrowers bank increases. Incase the borrower is an account holder in
the same bank that has advanced the loan; the deposits of the same bank will increase.
Where the bank had lent out via the cheque route, the borrower will credit the cheque into his
respective bank account, whether in a different bank or the same one. This will increase that banks
deposit base by the equivalent amount. Thus money available for credit increases.
Whenever any bank purchases an income earning asset, it credits that amount to the account of the
seller, thereby indirectly creating a new deposit, which the respective borrower/seller can withdraw
using cheques. Thus banks convert debt into money

Balance Sheet approach:

Let us assume a Deposit of INR 2000, of which the bank has to keep 20% as cash reserves and may
lend the rest

Step 1: Bank A
Liability Asset
New Dep: Rs 2000 New cash: 2000
Total: Liab: 2000 Asset: 2000

Step 2: bank A
Liability Asset
Deposit: 2000 Cash: 400
Loan to X: 1600
Total: Liab: 2000 Asset: 2000

Step 3 : Bank B (X is an Account holder)

Liability Asset
New Dep: 1600 Cash in hand: 1600
Total: Liab: 1600 Asset: 1600

Step 4: bank B
Liability Asset
Deposit:
1600 Cash in hand:320
Loan to Y: 1280
Total Liability: 1600 Total Asset: 1600

Step 5: Bank C (Y is an Account holder)

Liability Asset

New Dep: 1280 Cash in hand: 1280

Total: Liab: 1280 Asset: 1280

Credit creation multiplier (K)

 K (Deposit multiplier)=1/ r , where r=percentage of deposit to be kept as liquid cash under the
Fractional Reserve system with the central bank under the Cash Reserve Ratio requirement , which is
currently at 5.50%

Therefore K=1/5.50% which is around 18 times. Thus Credit creation can take place up to 18 times
the initial deposit amount.

RATES GOVERNING BANKS

PLR-PRIME LENDING RATE: 5 top Commercial Banks charge between 11-15%- Prime Lending Rate
(PLR) is that rate of interest at which a bank lends to its best customers with highest credit
worthiness. This rate factors in operating costs, administration costs, cost of interest payment on
deposits, risk premium as per creditworthiness of borrowers etc.
The BASE rate of a bank factors in all these costs except for the risk premium factored in for
borrowers. Thus it’s the minimum rate below which a bank cannot lend.

CASH RESERVE RATIO: 4%- liquid cash that banks have to maintain with the Reserve Bank of India
(RBI) or any designated Currency chest maintained at premises of approved banks deemed to be
part of RBI, as a proportion of their deposits, which is 4% of their Net demand and time liabilities
(NDTL).
NDTL- Aggregate of liabilities to others (eg. Savings accounts, current accounts, fixed deposits)
+ net- interbank liabilities (liabilities of the bank with the banking system minus assets with the
banking system)

STATUTORY LIQUIDITY RATIO: 20.5% - SLR refers to the amount that all banks require to maintain in
form of approved government securities, gold or cash, which is 23% of their net demand and Time
liabilities

BANK RATE: 6.75%: Longer term borrowing rate from RBI, it is also the Bill Re- discounting rate
applicable for scheduled banks.

REPO RATE: 6.25%- Bank borrowing from RBI by pledging government bonds as security when banks
have to meet temporary shortfalls. The banks then repay the loan by repurchasing the securities
from RBI by paying the principle and the applicable rate. It is an overnight borrowing rate

TERM REPO: Bank borrowing from RBI by pledging government bonds for tenures such as 7 days,
14 days, 28 days at rates decided by RBI

REVERSE REPO RATE: 5.75%- Banks’ lending to RBI when banks have surplus liquidity. The banks park
the funds with RBI, in turn RBI pledges government securities to the bank. In other words it is the
borrowing rate for RBI when it borrows short term funds from banks by pledging government
securities.

CAR: 9%- Capital Adequacy Ratio- As per Basel 2 norms the minimum is 8% while RBI has fixed 9% as
CAR -It is amount of a bank's own (Tier 1 and Tier 2 capital) expressed as a percentage of its risk
weighted credit exposures i.e. (Capital/Risk weighted exposure of assets- loans & investments)
determines the capacity of the bank in terms of honoring deposit withdrawals and managing other
risk such as credit default risk, operational risk.
In case of Scheduled Commercial Banks CAR= 9 per cent
For New Private Sector Banks CAR = 10 per cent
For Banks undertaking Insurance Business CAR = 10 per cent
For Local Area Banks CAR =15 per cent
The government prefers banks to hold 12% CAR with 9% in Tier 1 Capital and 3% in Tier 2 capital

LAF: Liquidity Adjustment facility- The RBI uses Repo and Reverse Repo to aid banks in adjusting
their liquidity requirements and help in meeting Monetary policy measures.

MARGINAL STANDING FACILITY: 6.75%- The banks will use Marginal Standing Facility to borrow
overnight money only when they have exhausted all other existing channels like collateralized
borrowing and lending obligation (CBLO) and liquidity adjustment facility (LAF). The rate of interest
on amount availed under this facility will be 100 basis points above the LAF repo rate, or as decided
by the Reserve Bank from time to time. Banks can dip below 1% of their statutory liquidity ratio to
avail cash from this window. Banks can avail overnight, up to one per cent of their respective Net
Demand and Time Liabilities (NDTL)

ROLES AND FUNCTIONS OF DIFFERENT DEPARTMENTS

1. MIHU: May I help you:

1. Primary screening and addressing customers’ requirements when they enter the branch and then
directing them to the respective departments as per their queries and demands.
2. Judge the potential of customers for cross sale of banking products based on their perceived net
worth and thereby directing them to Branch Banking or Priority banking for either starting a new
relationship or deepening existing relationship.
3. Divert customers to Alternate Delivery Channels (ADC) such as Phone Banking and Internet
Banking to save the time of Service executives.
4. Assist in resolving very basic service queries

2. CUSTOMER SERVICE: Following services are performed by them

1. Operational aspect of physically opening customer Accounts post checking the accuracy of
all documents and resolution of any discrepancy . Marking them according to the customer
type as Special Category Client or high risk client in case he’s a politician, police official etc
who has enough influence to damage the bank’s reputation in case of any customer issue.
2. Ensuring that all KYC norms (Address proof, photo ID, photograph etc) are followed and
collected during account opening
3. Follow AML guidelines diligently. Track accounts with heavy inflow/outflow and report to
the relevant authorities to safeguard the interest of the bank. Also ensure that business
transactions which should be through current accounts are not routed through savings
accounts to get interest rate. Raise STRs i.e. Suspicious Transaction Report based on these
heavy irregular fund flows
4. Keep a tab on clients whose cash flows highly exceed their mentioned profession or
business.
5. Resolve queries pertaining to Credit cards, personal loans and home loans, assisting clients
in their payments, change of EMI structure or part or full foreclosure and services related to
accounts.
6. Responsible for service and resolution of queries pertaining to products such as interest
 calculation on deposits, placing fresh deposits and renewing the ones which have maturing
selecting the optimum interest rates and time periods as per client specifications
7. Assist the customers in inward and outward remittances/ money transfers
8. Generating leads or Cross Sale of investments and other banking products by selling some of
the products themselves like credit cards, deposits which are low involvement product or
else directing the customer to the Relationship Manager for the respective product or
department by generating ‘warm leads’.
9. All services pertaining to Locker opening, maintenance and collecting the charges are their
responsibility
10. Maintaining Branch inventories of credit cards, debit cards, Sealed passwords for Accounts,
internet banking, phone banking, account opening kits and cards. These are all held by them
confidentially in fire proof lockers etc
11. Ensuring all transactions, documentation, accounts opening formalities, service standards
are followed as per rules laid down by group compliance, country risk and reputation
analysis before opening Non Resident accounts (CRRT-Country Risk and Reputational Table),
which has a list of countries which are high risk for money laundering, terrorism financing
etc. They are responsible for meeting branch audit requirements

3. TELLERS (CASHIERS)
1. Receipt and payment of cash over the counter and following certain security norms in case the
amounts are very large i.e. letter from customer stating source of funds or its usage/Pan Card
copy etc
2. Account to account fund transfers within the same bank/ branch.
3. Safeguard interest of customers from fraudulent practices by identifying signature mismatches
and forgery on cheques, since they have a specimen signature on the records
4. Identify and destroy counterfeit currency
5. Encashment and also issuance of traveller’s cheques, gift cheques, and demand drafts.
6. Fund transfers via RTGS-real Time Gross Settlement-/ NEFT-National Electronic Fund transfer
7. Maintenance of Cash in ATMs
8. Exchanging foreign currency OTC (Over the Counter)
9. Acceptance and Clearing of cheques
10. Balancing the books of accounts end of day

RTGS: The acronym 'RTGS' stands for Real Time Gross Settlement. RTGS system is a funds transfer
mechanism where transfer of money takes place from one bank to another on a 'real time' and
on 'gross' basis. Bank’s maintain a dedicated RTGS settlement account with RBI for outward and
inward payments. This is an intra-day account. The account is funded at the start of the day from
a current account held by RBI, Mumbai. The excess balance in this account at the end of the day
is swept back to the current account and thereby zeroing the RTGS settlement account. This is
the fastest possible money transfer system through the banking channel. Settlement in 'real time'
means payment transaction is not subjected to any waiting period. The transactions are settled
as soon as they are processed. 'Gross settlement' means the transaction is settled on one to one
basis without bunching with any other transaction. Minimum amount for transfer is 2 lakhs.

NEFT settlement takes place 6 times a day during the week days (9.00 am, 11.00 am, 12.00 noon.
13.00 hours, 15.00 hours and 17.00 hours) and 3 times during Saturdays (9.00 am, 11.00 am and
 12.00 noon). Any transaction initiated after a designated settlement time would have to wait till
the next designated settlement time. Contrary to this, in RTGS, transactions are processed
continuously throughout the RTGS business hours. The minimum amount to be remitted through
RTGS is Rs.2 lakh. There is no upper ceiling for RTGS transactions. No minimum or maximum
stipulation has been fixed for NEFT transactions.

4. BRANCH BANKING SEGMENT

HSBC- Power Vantage/ Citibank-Citi Blue
Mid market and Mass market Customers. The account opening cheques range from Rs.5000 for
Mass market, while 1 Lac for Mid market, especially in multinationals
Relationship Managers and Financial Consultants are assigned to customers to cross-sell banking
products and offer wealth management services. Apart from the other products such as retail assets,
credit cards etc, the focus is to primarily to sell Life Insurance with a secondary focus on mutual
funds. Commissions on basic insurance products ranged from 15% to 40% on the first years premium
as against 2.25% in mutual funds when Entry Load was prevalent i.e. ( 5 lac of Premium in insurance
@ 40% commission gives a revenue of INR 200,000 , while approx INR 90,00,000 of MF sales gave
the similar revenues)
Even now with entry load ban on MFs upfront charges and reduced charges on insurance, even then
insurance is much more profitable. Since Branch banking is a Volumes game and not a Value
proposition the products aggressively sold are all very high revenue products, so that large
percentage of income may be derived from the smaller amounts sold per customer

5. PRIORITY BANKING

HSBC- Premier/ ABN Amro-Van Gogh Preferred Banking/ Citibank-Citigold/ Standard Chartered-
Priority Circle
Value proposition with account opening amounts ranging from 25 – 30 lacs
1. Experienced Relationship Managers and Customer Service Managers assigned to fewer groups of
customers for personalised and specialised services
2. Wealth Management Services to customers, consolidating previous, existing and fresh
investments spanning equity, debt and sectoral mutual funds, stocks, bonds, gold, deposits,
commodities, insurance, foreign investments, real estate etc. Thereby providing customised
investment solutions which are extensively tracked, rebalanced and allocated according to
customer risk profiling and cash flows
3. High focus on Structured investment products using derivatives etc are designed especially for
these clients
4. Higher Deposit rates are offered, while fees are waived off in mostly all banking transactions and
products
5. Very high limits offered on debit and credit cards with international service facilities included
which are either free or heavily subsidised. All annual charges on cards are waived.
6. Extremely competitive rates are offered on currency conversion, while remittance charges are
mostly waived or discounted
7. Multiple account facilities in different countries offered to High Net worth clients with business
interest across the globe. In one country the priority account minimum balance needs to be
maintained, while in other countries it can be a zero balance account.
8. Interest Rates charged on Home loans and personal loans are at a significant discount to Branch
banking customers, and also with much lesser documentation requirements
7. RELATIONSHIP MANAGEMENT

1. Wealth Management: Financial Planning, Investor risk profiling, Asset allocation & Product
selection, Portfolio tracking & rebalancing (Explained in class)
2. Managing incremental cross sale of investments and other banking products
3. Retention of customers, deepen the relationship with constant interaction and ensure
quality service and resolution of queries within given TAT (Turn around time)
4. Acquire new relationships and grow their balances through investments in various products.
Maintain and grow CASA balances.
5. Sales of all categories of Life Insurance products i.e. market linked plans (ULIPs), term
policies and Endowment Plans
6. Equity research, advisory, monitoring and stock trading through the Portfolio Management
Services route
7. Constant reviewing and monitoring customer’s portfolios and detailed financial planning to
address any need gaps using proprietary software. Thereby make changes in the portfolio
based on current market levels and movements debt, equity and commodities side
8. Provide structured products to HNI clients. Most products are designed with inbuilt features
to participate in the derivatives segment and involve aggressive option trading strategies
and positions in Futures, to either enhance profitability or hedge risks
9. Track foreign currency markets to enable Non Resident customers profit from exchange rate
fluctuations
10. Also focus on the corporate relationship segment (company accounts) as an avenue for high
revenue from large company investments, by liaising with the corporate banking channel
based on revenue sharing models.
11. Ensuring all audit and compliance norms are followed. Cross border investment and
insurance norms have been followed. All investments have to be documented extensively
capturing the minutest of investor/investment details. Anti Money Laundering measures
have to be followed and country specific risk measures have to be taken as per CRRT
(Country Risk Reputational Table) i.e. investments coming from Iraq, Nigeria, Zambia etc
which are of risky nature
12. Conduct regular market research to review, assess, analyze, report on competitor activities
of other banks and financial institutions ,and capturing changing consumer behavior and
general industry trends

8. RETAIL ASSETS
 1 Selling Home loans, car loans and Personal loans to existing and new customers
2. For home loans, liaison with designated lawyers and property valuers to ensure that the
property to be kept as mortgage is secure with clear title, no encumbrances and with
required market valuation for ensuring the security of the loan.
4. Credit managers verify customer income documents, calculate his repayment capacity
and then Sanction loans.
5. The final Disbursal of loan ie. Cheque handed out to borrower, takes place post a clear
legal report of the property papers from lawyers and based on the technical valuation report
by property valuer of the current market value of property
6. Hold marketing events at the bank, companies, societies, clubs, malls, multiplexes etc
sometimes offering concessional interest rates to promote loans.
7. Types of products: Home Loans, Loan against property, Loan against commercial
property, Balance transfer, Top up . Also discuss the detailed process of Sanctioning and
Disbursement of loans (Discussed in details class)

9. RETAIL LIABILITIES
1. Selling CASA: Current accounts and savings accounts
2. Selling Fixed deposits to increase the banks deposit base

10. CUSTOMER ACQUISITIONS TEAM (CAT)

1. Initiating and implementing Marketing efforts for acquiring new accounts by individual sales
efforts, organizing customer meets, seminars & events
2. Procuring databases from various sources for cold calling and selling banking propositions
3. Taking customer references from existing and prospective clients for sourcing more accounts
4. Collecting and completing the required documentation for account opening

11. TRAINING & DEVELOPMENT

1. Ensure all mandatory certifications are completed by the sales and service staff and provide
training for the same
2. Develop Learning & management modules covering a wide range of banking, finance and
investment topics with online tests for getting a formal qualification
3. Extensive training provided on identifying money laundering trails and investments routed
from high risk countries.
4. Provide training on new product launches, changes in bank policies, new technologies,
rebranding and re launching existing products
5. Regular training on investments, insurance and financial planning for customers
6. Create talent pools by identifying and segregating employees based on various skill sets
ranging from team management, selling skills, knowledge quotient, customer handling
techniques etc by conducting regular workshops
7. Update staff on new legislations, competitor strategies and prevailing market opportunities

12. AUDIT & COMPLIANCE

1. Oversee that all branch operations are conducted based on Group compliance norms and
legalities laid down by external entities such as the central bank, IRDA, AMFI etc
 2. Ensure Sales Quality is maintained on all banking product sales. Checking that there is no
wrong selling due to target pressure, forgery of documents while selling banking products,
mismatch of signatures, investment product not matching the clients risk profile,
investment tenure and age.
3. Conduct regular audit on all investment & insurance sales making sure that cross border
investment norms are maintained (US, Canada Australia etc) Anti Money Laundering
guidelines are followed, CRRT (Country Risk and Reputations Table) countries such as
African countries etc are highlighted, documentation and records are all in order, the Sales
person had all the mandatory licenses and customer interest has been met

13. RESEARCH TEAM

1. Daily updates, mails & messages on market trends and occurrences spread over all investment
types
2. Compile extensive and detailed studies about markets, economics, new & existing funds, equity,
global and local trends, sectors etc.
3. Track and research all mutual funds based over many parameters and compile a ‘White list’ or
‘Choice list’ which streamlines the best mutual funds in every sector and category based on their
research which are recommended by the bank
4. Assist the sales team in closing large investment deals with their value added inputs based on
views and market direction

14. BACK OFFICE OPERATIONS

Back office functions. Issuance of cheque books, debit and credit cards and their respective
passwords, placement and withdrawal of deposits, generating internet & phone banking passwords,
generating account opening kits, bank statement etc

15. COLLECTIONS

Recovery and settlement of bad loans, credit card defaults etc

Customer background checks, field investigation reports and risk management measures such as
verifying customer’s area of residence and whether he stays in a negative area , healthiness of his
prior banking transactions, previous loan repayment records, credit history before the bank
authorizes loans or credit cards, register name on CIBIL: Credit Information Bureau of India Limited)
incase the customer defaults.

16. TREASURY FUNCTIONS

1. Cash Management & Risk management:

Maintaining the cash reserves, capital and liquidity of the bank. Ensuring that the bank maintains
the Cash reserve ratio and Statutory Liquidity Ratio requirements as laid down by the central bank.
Participating in Repo, Interbank call money markets & CBLO in the case of shortfall and park excess
money in Reverse Repo market or lend in the Call money markets in case of surplus

Maintaining the Tier 1 & tier 2 capital of the bank as per the Capital Adequacy Ratio requirement laid
down by RBI for the bank to adequately protect itself from any form of risk, broadly credit risk and
investment risk:
Tier I Capital = Ordinary Share Capital (Paid up share capital)+ Retained Earnings/ Reserves & Surplus
+ Perpetual Non Cumulative Preferential shares+ Statutory Reserves*+ Capital Reserves (surplus
arising out of sale proceeds of assets) + Perpetual Debt Instruments (Based on approval)

*Statutory reserves – Under Sec 17(1) of Banking regulation Act 1949, every banking company
incorporated in India shall create a reserve fund out of the balance of profit each year as disclosed in
P&L account. The transfer to the reserve fund will be before any dividends are declared, the amount
being equivalent to not less than 20% of the profit

Tier II Capital = Undisclosed Reserves + General Bad Debt Provision+ Revaluation Reserve +
preferential share capital + Hybrid Debt instruments+ Investment Fluctuation Reserves* +
Subordinate debt (Debt that is either unsecured or has a lower priority than that of another debt
claim)

*Investment Fluctuation Reserves- Banks are advised to build up this reserve to protect their
investments against adverse developments in future. The IFR should be a minimum of 5% of the
banks’ investment portfolio which should be built up within 5 years. This should be computed only for
investments under the’ Held/ Available for Trading’ and ‘Available for Sale’ categories. Bank’s may
build this up up to 10% depending on the size and composition of their portfolio. Excesses may be
transferred to the Statutory Reserves under Tier 1 capital

2. Monitoring & Control of Interest Rate risk and price risks on securities
Trading in money market securities (Treasury bills, Commercial papers, Certificate of Deposits etc)
and government Bonds are done by banks. The Securities are maintained in 3 categories: HTM (Held
to Maturity), AFS (Available for Sale) and AFT (Available for Trade)
Banks have to maintain 23% of their Net Demand and Time liabilities in Government securities and
other approved Securities as per SLR requirement. For securities to be categorized as SLR bonds they
have to have an implicit guarantee from the government both for interest and principle.

Currently an average of 27-28% in these securities is being maintained by banks.

The maximum HTM limit is 24.5% of the Net Demand and Time liabilities, and this does not have to
be marked to Market (MTM) as per movement in yields/bond prices so no profits not losses need to
be shown. However the additional % in AFS & AFT segment in banks attracts the MTM requirement,
Thus losses or profits on the security holdings have to be reflected as per regulations in the Profit &
Loss account. Individual securities have to be Marked to Market, Net depreciation if any has to be
provisioned for by the bank.

The ‘Held for Trade’ category securities have to be Marked to Market every month while the
‘Available for Sale’ securities need to be Marked to Market every quarter.

Securities are held in HFT up to 90 days, post 90 days if they are not sold due to tight liquidity
situations or extreme volatility then under extreme circumstance the bonds may be shifted to the
AFS category. This however is not an automatic route and board approval is compulsory for the
same.
Movement to and fro from the Held to Maturity segment happens usually once a year that too with
the Board of Director’s approval only. These 2 categories have to reflect the notional profits or losses
arising from both Price risk and interest rate risk. (Discussed in details in class along with Futures
hedging positions)

Bank Treasury also participates in the derivative markets such as Interest rate futures to reduce risk
from bond price fluctuations. For example go short on the underlying bond in the interest rate
futures market if the Spot price of Government Securities is expected to fall, thus offsetting the loss
in the Spot segment by gaining in the futures segment. (In Interest Rate futures market due to
physical delivery requirement for the 10 year bond segment less participation by institutions causes
illiquidity. The underlying is a notional ten year bond, but delivery has to be settled with bonds
maturing between 9-12 years if delivery is assigned. While even though the 90 day Treasury bill
segment is cash settled but too short a maturity of the underlying prevents effective hedging
discouraging high participation). There are also contracts on 2 year and 5 year Bonds which have
been introduced to encourage wider participation.

4. Foreign exchange functions of the bank

a.Banks buy foreign currency from exporters/ merchants and sell the same on the interbank forex
market. They also sell foreign currency to importers by buying from the interbank forex market.
Banks buy and sell in the interbank markets to square off their foreign currency balances at the end
of each day making a spread income on the buying and selling rates (Bid-Ask Spread). In case a bank
maintains an open position (over bought or oversold) it exposes itself to foreign exchange
fluctuation risks.

b. Proprietary trading in foreign exchange for profitability and also to cater to large corporates who
may have forex needs the following day, by holding Net Overnight Open Position Limits (NOOPL) on
foreign currencies and Day light trading (Intra Day trading) to make speculative gains from currency
movements

c. Meet foreign exchange needs of importers and exporters and giving them loans and advances in
foreign currency

d. Make profits from foreign currency conversion both OTC and remittances making a Bid-Ask
spread. Bid is the currency buying rate offered by banks which is lower than interbank rates and Ask
is the selling rate quoted by the bank on the currency which is higher than interbank rates.

e. Providing options for hedging of foreign currency fluctuation risks to corporates by providing OTC
derivative instruments such as forward covers/ forward contracts/ Swaps. Banks make a spread on
the currency as well as fee based income.

f. Participate in the currency futures market (Currency derivatives). For banks to trade in currency
futures they need permission from RBI, have a net worth of minimum 500 crores, a Capital Adequacy
Ratio of 10%, profitable for last 3 years and have Net Non Performing Assets of less than 3%

4. Capital Issuance: Implementing the raising of capital for the bank through the following methods
a. Public offer through IPO or FPO, Divestment, issuance of ADRs, GDRs and Rights issue (Rights are
issued whereby existing shareholders have the privilege to buy a specified number of new shares
from the firm at a specified price within a specified time)

b. Private placement of stocks or bonds (QIP-Qualified Institutional placements with QIB (Qualified
Institutional Buyer), DII (Domestic Institutional Investor- MF/ Insurance Co), Foreign Institutional
Investors, Private Equity funds , Venture Capitalist etc)
 c. Raising fund in the short term via the Repo window, interbank call money markets (overnight- Call
money, 1 to 14 days-Notice money, 15 days up to 1 year-Term money), CBLO, COD-Certificate of
deposits (7 days to 1 year unsecured promissory notes issued by scheduled banks to raise money)

d. Raising long term funds through Bonds, FCCB (Foreign currency convertible bonds),CD
(convertible debentures), NCD (Non convertible debentures) (Conversion premium concept
explained in class)and Preferential shares (Preferential shares are not traded in the stock exchanges
and share holders receive fixed percentage of dividend per share every year. The core right is that of
preference in the payment of dividends. There is a negotiated fixed coupon payment with
cumulative option or non cumulative. In case of bankruptcy or liquidation preferential share holders
will get their part before common stock holders. Preferential share holders are not entitled to voting
rights. There is cumulative and non-cumulative preference shares)

d. Securitization: It is a process of aggregating a portion of existing debt of a bank where there is a

cash flow receivable over a period of time into a common pool, and thereby issuing new securities
backed by this pool to collect fresh funds from public or financial institutions etc. These securities
are often known as MBS- Mortgage Backed Securities, CDO- Collateralized Debt Obligation and ABS-
Asset Backed Securities

5. Invest in short term money market instruments, capital market exposure and government bonds
to enhance profitability:
a. Certificate of Deposits of other banks
b. Govt Treasury bills: These are short term (up to one year) borrowing instruments of the
Government of India. T-Bills for three different maturities are available: 91 days, 182 days
and 364 days. Treasury Bills are available for a minimum amount of Rs.25,000 and issued at
a discount to face value. On maturity the face value is paid to the holder
c. Invest in Commercial papers of top companies. These are unsecured money market
instruments issued in the form of promissory notes by high grade companies when they wish
to borrow money for a short period (7 days to 1 year) and offering competitive interest rates
d. Park excess funds in Short term Debt Mutual Fund schemes such as Cash funds/ Ultra short
term bond funds/Liquid funds and Liquid plus funds where there barely any risk of capital
erosion. Banks may invest up to maximum 10% of their net worth in Liquid funds
e. Lend surplus in Call money markets or park excess in Reverse repo market with RBI
f. Invest in government bonds
g. Banks can have a direct capital market exposure of up to a maximum of 20% of their Net
worth which may go towards convertible bonds, convertible debentures, equity, equity
mutual fund units, and exposure to venture capitalist companies both registered or non
registered. The banks direct investment in all these investments cumulatively cannot cross
the 20% threshold of banks net worth. Investment in Liquid mutual funds cannot cross 10%
of the bank’s net worth as per RBI’s present regulations.

Note from RBI master circular: Bank’s capital market exposures would include both their
direct exposures and indirect exposures.
The aggregate exposure (both fund and non-fund based) of banks to capital markets in all forms would include the following:

i. direct investment in equity shares, convertible bonds, convertible debentures and units of equity-oriented mutual funds
the corpus of which is not exclusively invested in corporate debt;
ii. advances against shares/bonds/debentures or other securities or on clean basis to individuals for investment in shares
(including IPOs/ESOPs), convertible bonds, convertible debentures, and units of equity-oriented mutual funds;
 iii. advances for any other purposes where shares or convertible bonds or convertible debentures or units of equity
oriented mutual funds are taken as primary security;
iv. advances for any other purposes to the extent secured by the collateral security of shares or convertible bonds or
convertible debentures or units of equity oriented mutual funds i.e. where the primary security other than
shares/convertible bonds/convertible debentures/units of equity oriented mutual funds does not fully cover the
advances;
v. secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market
makers;
vi. loans sanctioned to corporates against the security of shares / bonds/ debentures or other securities or on clean basis
for meeting promoter’s contribution to the equity of new companies in anticipation of raising resources;
vii. bridge loans to companies against expected equity flows/issues;
viii. underwriting commitments taken up by the banks in respect of primary issue of shares or convertible bonds or
convertible debentures or units of equity oriented mutual funds. However, with effect from April 16, 2008, banks may
exclude their own underwriting commitments, as also the underwriting commitments of their subsidiaries, through the
book running process for the purpose of arriving at the capital market exposure of the solo bank as well as the
consolidated bank. The position in this regard would be reviewed at a future date.
ix. financing to stockbrokers for margin trading;
x. all exposures to Venture Capital Funds (both registered and unregistered)

The aggregate exposure of a bank to the capital markets in all forms (both fund based and non-fund based) should not
exceed 40 per cent of its net worth (as defined in paragraph 2.3.4), as on March 31 of the previous year. Within this overall
ceiling, the bank’s direct investment in shares, convertible bonds / debentures, units of equity-oriented mutual funds
and all exposures to Venture Capital Funds (VCFs) [both registered and unregistered] should not exceed 20 per cent
of its net worth.

Type of Accounts

Resident Accounts /NRE- Non Resident External/NRO- Non Resident Ordinary/FCNR/ RFC

FCNR: Foreign Currency Non Resident Accounts:

In this type of accounts funds are held in foreign currencies but only in the form of foreign currency
fixed deposits. The deposit rates vary according to the respective foreign currency. Foreign currency
deposits such as USD, GB Pound, AUD- Australian dollar, AED (Dirham), CAD- Canadian dollar, EUR,
HKD-Hongkong Dollar, JPY-Japanese Yen can be held. This foreign currency may be repatriated back
abroad freely.

RFC-Resident Foreign currency accounts:

An Indian Resident who travels extensively abroad may open this account for depositing foreign
exchange acquired from travelling abroad as payment for service or some business or the unspent
amount of foreign exchange, or gift or honorarium received from abroad. These accounts may also
be held by Non Resident Indians who have returned to India for permanent settlement after staying
abroad for minimum 1 year. This account can be opened without any regulatory approval from RBI.
These account s can hold erstwhile foreign currency held in FCNR account while they had NRI status.
Income from overseas assets or income from sale of overseas assets, entire amount of pension
received from abroad can be credited to these accounts. The balances from this account may be
remitted abroad for bonafide purposes. In these accounts funds are held in foreign currencies.
However no interest is paid on this account as it is maintained as a current account and also without
any ceiling. Debits to this account has to be made as permissible under the Foreign Exchange
Management Rules.

Funds held in NRE and NRO savings account are in Indian Currency.
Difference between NRE and NRO:
1. Funds can be freely repatriated from NRE accounts back to the foreign country, while from NRO
accounts money can be transferred out only post CA certification that any taxes due to Indian
government has been paid on the amount, so not very easily. The limit of repatriation on NRO is up
to USD 1 million per year.
2. NRE SAVINGS account interest does not attract any tax, while NRO savings account interest
attracts tax
3. In NRE accounts, the interest rates on deposits are not taxed, and are now decontrolled without
any upper cap set by RBI, so banks are offering high competitive rates unlike earlier which are
comparable domestic rates. NRO account deposit interest rates are taxed as per investors tax slab,
since the higher Resident Indian deposit rates are received.
4. One cannot deposit domestic currency (rupees) in the NRE account, only foreign currency. Which
then gets converted into Indian rupees and then credited to the account. While in NRO accounts
Indian currency and foreign currency both can be deposited. And then the foreign currency gets
converted to rupees.
5. One can transfer funds from NRE to NRO but not vice versa

8. CORPORATE BANKING

Micro Small & Medium Enterprises< 50 crore turnover

Mid Market Enterprises: 50-250 crore turnover
Large Local Corporates> 250
CIB (Corporate institutional banking) GCB (Global Corporate Banking – These are for Indian
companies who have business both local and Global eg. Bajaj, Thermax or for foreign companies
who have business in India e.g. Mercedes. Loans can be in foreign currency and are of very large
denominations.

Functions:

Employment of funds—fund based and non-fund based

Fund based lending: It is where there is actual lending by the bank with direct funds being provided
to customers through disbursing term loans, bill discounting, factoring etc. The bank earns a spread.

Non Fund based lending: Here the bank does not actually lend funds to the customer but acts as a
backing to a customer for a certain fee to help him avail funds from another organization. The bank
takes on the risk of meeting payment obligations on behalf of the customer in case the customer
defaults on his payments. These are in the form of Letters of credit and bank guarantees. Thus only if
the customer defaults then the bank has to make the payment on his behalf to the lender and that
becomes fund based lending for the bank. This is a contingent liability for the bank. The bank derives
Fee based incomes for the same.

Cash credit facilities: The bank specifies a credit limit for the borrower. This account is the primary
method in which Banks lend money against the security of commodities, inventories basically
tangible goods etc, book debts or receivables, collaterals and guarantees. It runs like a current
account except that the money that can be withdrawn from this account is not restricted to the
amount deposited in the account. Instead, the account holder is permitted to withdraw a certain
sum called "limit" or "credit facility" in excess of the amount deposited in the account.
The customer withdraws funds from the account for operating expenses and deposits the inflows
primarily by way of sales.
The bank generally stipulates that the account should be ‘brought to credit’ periodically. The
periodicity of such credit depends on cash to cash cycle. Hence the sum of credits in the account
should practically reflect the ‘sales’ achievement of the firm for that period. The bank can question
the borrower if there is a substantial difference between the actual sales of the borrower and the
sum of credits in the cash credit account.
The banks also levy a ‘commitment charge’ on the unutilized amount due to opportunity cost.
Cash Credits are, in theory, payable on demand. These are, therefore, counter part of demand
deposits of the Bank. (This limit is usually up to 20% of the turnover of the company)

Overdraft facilities- Overdrafts are like Cash credits because they are permitted as withdrawals over
and above the borrower’s credit balance in his current account. Borrower may overdraw his current
account up to an agreed limit and pays interest only for the time the money is used. In other words,
the account holder withdraws more money from a Bank Account than has been deposited in it i.e.
Withdrawing over and above the borrower’s credit balance in his current account.

Difference between Cash Credit and over draft:

Cash credits are purpose oriented while Over drafts are not purpose oriented. The bank may grant
an overdraft to satisfy urgent credit requirement of the customer or for honoring a cheque (Implied
Overdraft) where the customer doesn’t have sufficient balance in his account. This could be against
a collateral security or personal guarantee.
In the case of Cash Credit, a proper limit is sanctioned which normally is a certain percentage of the
value of the commodities/inventory pledged by the account holder with the Bank.
Overdraft, on the other hand, is allowed against a host of other securities including financial
instruments like shares, units of mutual funds, surrender value of LIC policy and debentures.
Even against personal guarantee of borrower or his ‘net worth’, which is called a Clean overdraft.
This makes it riskier hence a higher interest rate than cash credit.
Overdraft is not on demand like cash credit but has to be appraised by the bank after the customer
approaches the bank, which is also known as ‘Express overdraft’.

Term Loans: Banks lend money in this mode when the repayment is sought to be made in fixed, pre-
determined installments for a specified tenure. This type of loan is normally given to the borrowers
for acquiring long term assets i.e. Plants, machinery, business expansion funding-organic/inorganic.
They generally carry maturities ranging from 1 to 7 years. The repayment terms are a function of the
useful life of the asset and the borrower’s capacity to generate cash flows sufficient to service the
debt. The bank would need collateral for this type of long term lending.

Letter of Credit: Letters of credit are used primarily in international trade transactions of significant
value, for deals between a supplier in one country and a buyer in another. It is a commitment on the
bank’s part to place an agreed sum at the sellers / exporters disposal on behalf of the buyer/
importer under precisely defined conditions. Under the arrangement , a bank at the request of a
customer undertakes to pay a third party by a given date, according to agreed stipulations and
against the presentation of documents, the counter-value of goods or services shipped.

It is an instrument used for settling trade payments, where payment is made against certain
Financial documents such as bill of exchange, Invoice and packing list, shipping documents such as
bill of lading for ships, airway bill and insurance certificate proving the shipment was insured against
loss or damage in transit, Customs clearance papers, excise duty papers etc. Thus the Letter of Credit
is honored only when all the required financial documents mentioned in the LC are furnished by the
seller/exporter.

The parties to a letter of credit are usually a Beneficiary or seller who is to receive the money, the
issuing bank of which the applicant or buyer is a client.
The advising bank of whom the beneficiary/ seller is a client, which advises the LC to the beneficiary,
thereby assuring the genuineness of the LC.
There can also be a Confirming bank which adds guarantee to the LC opened by another bank. This is
not mandatory but is desirable in cases where the buyer or his bank is not internationally reputed.
There may also be a Reimbursement bank which is authorized to honor the reimbursement. It is the
bank with which the issuing bank has an account from which the payment is to be made (Nostro
account)

Almost all letters of credit are irrevocable, i.e. cannot be amended or cancelled without prior
agreement of the beneficiary, the issuing bank and the confirming bank.

The bank will only issue a letter of credit if they know the buyer will pay. Some buyers have to
deposit (or already have) enough money to cover the letter of credit, and some customers use a line
of credit with the bank. A seller only gets paid after performing specific actions mentioned in the LC
that the buyer and seller agree to and the banks simply review documents proving that a seller
performed his required actions.

Bank Guarantees: A guarantee from a lending institution ensuring that the liabilities of a debtor will
be met. In other words, if the debtor fails to settle a debt, the bank will cover it. An importer may
request his bank for a bank guarantee against his payment obligation or a business house.

Difference between LC and Bank guarantee

A letter of credit is a bank’s direct undertaking to the seller (called the beneficiary), that it will pay
within the specified date and according to the clauses mentioned in the LC incase the buyer does not
pay within that date. When a letter of credit is in use, the issuing bank does not wait for the buyer to
default, and for the seller to invoke the undertaking.

In contrast, a guarantee is a written contract stating that IN THE EVENT the primary party (the buyer)
is unable or unwilling to pay its dues to the supplier only then the bank, as guarantor to the
transaction, would pay the client's debt to the seller.
With a bank guarantee, only if a client defaults the bank assumes liability. With a letter of credit,
liability rests solely with the issuing bank which then must collect the money from its client.
Therefore, the principal character of an LC is that it is a potential claim against the bank, rather than
a bank's client as in the case of bank guarantee. So LC is riskier for the issuing bank as compared to a
bank guarantee.

Pre shipment finance: This is also called Packing Credit, which is short term working capital provided
to exporters to procure raw materials, manufacture, arrange for shipment , warehousing etc. This is
provided to the seller by his bank on furnishing a Letter of credit issued from the buyer’s bank or a
confirmed order from an extremely reputed foreign purchaser. It is also granted as an advance
against incentives receivable from the government, advance against duty draw backs, and advance
against cheques/drafts received as an advance payment. This is provided before the goods are
loaded for departure. The exporter can avail Packing Credit either in rupees or in a foreign currency.
Features of Packing Credit in Rupees: The PC availed against an LC or confirmed order will be
adjusted by the bank out of the proceeds from the exports made against the LC/order.
The period does not normally exceed 180 days. Though special extension may be granted up to 360
days.
Exporters with good proven track record may be given Running account facility to avail Packing
credit without lodging an LC or confirmed order. The borrower will have to produce these
documents to the bank in a reasonable time.
The PC availed against LC/confirmed order will be adjusted against the export proceeds against that
LC/Order.
Packing credit may be maintained as a running account for exporters with proven and good track
record without lodging an LC or confirmed order. The borrower will have to produce the LC/ Order
to the bank within a reasonable time.
This credit is given at concessional rate of interest.
Refinance is available for banks from the Reserve Bank of India against PC for exporters.
Packing Credit in rupees is available for both cash exports and Deemed exports.

Features of Packing Credit in Foreign Currency (PCFC):

This is available only for Cash exports not deemed exports.
The rates are linked to LIBOR so much cheaper than the PC in rupees rates
Exporters receive their proceeds in dollars which will be adjusted against the Packing Credit already
accounted in dollars so they don’t get the benefit of rupee depreciation against the dollar in case PC
was availed in rupees
PCFC can be maintained as running accounts
Refinance from Reserve Bank of India is not available for PCFC
For lending under PCFC scheme banks may use their foreign currency balances in Resident Foreign
currency Accounts, Foreign Currency Non Resident accounts, Export Earners foreign currency
accounts etc .

Post shipment finance: Working capital provided to exporters when the bank advances funds from
the time a shipment that has been dispatched to the importer till the time the export proceeds are
realized by seller.
It is working capital finance extended against the evidence of shipping documents for the purpose of
financing the export receivables. Post Shipment Finance is an insured deal. After making shipment
the exporter submits to his bank the set of export documents such as the Bill of Lading from the
Ship, The official Bill charged to the buyer (invoice), a copy of the insurance policy insuring the goods
in case the ship sinks, goods damaged, inspection certificate, packing list etc. The bank then verifies
the documents and confirms that the shipment of goods is as per the LC or Confirmed order.
In case a letter of credit has been provided by the importer’s bank, then the exporter’s bank checks
whether all these documents are in conformity to the LC and only then provides the capital.
The bill is drawn in foreign currency and the proceeds are credited in rupees to the exporter’s
account after adjusting the Packing credit outstanding against it.

Factoring: It is a financial transaction whereby a business sells its accounts receivable (i.e. invoices)
to a third party (called a factor) at a discount in exchange for immediate money with which to
finance continued business. The factor (bank) obtains the right to receive the payments made by the
debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount.
Factoring is the sale of receivables whereas bill discounting is borrowing where the receivable is
used as collateral. The duration of lending capital under Factoring is usually for less than 180 days.
Factoring is an insured deal (Credit risk insurance providers- ICICI Lombard, Atradius, Factoring
International, Coface, New India Assurance), since risk is transferred to the bank post purchasing the
Bill/ invoice. Factoring does not need a LC or bank guarantee from the buyer unlike forfeiting and
these are finances for short durations. The factor charges the seller a service charge, as well as
interest based on how long the factor must wait to receive payments from the debtor. The factor
also estimates the amount that may not be collected due to non-payment (credit risk), and makes
accommodation for this when determining the amount that will be given to the seller. The factor's
overall profit is the difference between the price it paid for the invoice and the money received from
the debtor, less the amount lost due to non-payment. As per RBI norms Factoring has to be with
recourse.

Forfaiting: “ Forfait” is derived from French word “a forfait” which means forfeiting or surrender
of rights. It is a method of export trade financing, especially when dealing in capital goods (which
have long payment periods- 180 days up to 7 years) or with high risk countries. In forfaiting, a bank
advances cash to an exporter against invoices or promissory notes guaranteed by the importer's
bank or against Letter of Credit issued by importer’s bank. The bank purchases the receivables i.e.
invoice/promissory note from the exporter. The bank also known as the ‘Forfaiter’ takes on all
risks involved with the receivables and its recovery. The amount advanced is always 'without
recourse' to the exporter i.e. once exporter obtains financing payments, he will not be responsible
for the solvency of the debtors any more. The amount funded is less than the invoice or note
amount as it is discounted by the bank. The discount rates depends on the terms of the
invoice/note and the level of the associated risk and tenure. There is no more payments or
administrative expenses due from the exporter. Unlike forfeiting however, factoring does not
require a bank guarantee or LOC, can be used by small exporters and covers small amounts and
short maturities such as less than 180 days.

Bill discounting: discounting is borrowing by the seller/exporter where the receivable i.e. promissory
note is used as collateral and the seller/ exporter thereby avails working capital from the bank.
Type of bills:
Clean Bills: These bills are not supported by any ‘document of title to goods’ since both the goods
and documents such as bill of lading etc which allows the delivery to buyer has already been sent to
the buyer. Thus this is like an unsecured loan which depends on the creditworthiness and honesty of
counterparties.

Accommodation Bill: Bill of exchange endorsed by a reputable third party (called an accommodation
party or accommodation endorser) acting as a guarantor, as a favor and without compensation. The
bill then can be discounted on the financial strength of the guarantor who remains liable until the
bill is paid.

Documentary Bill: These are bills accompanied by ‘documents of title to goods’ such as airway bills,
bill of lading, lorry receipt , warehouse receipt etc, which gives the holder of these documents the
right to take delivery and possession of these goods. These are safer than Clean bills since they are
backed by the security of the ‘documents of title to goods’ which are endorsed in the favor of the
bank who can take delivery of the goods, liquidate them and realize the debt in the case of
nonpayment.

2 types of these bills is Documents against payment (The buyer has to first pay the seller’s bank,
then collect the documents of title to goods, and then taking delivery of goods. This is very similar to
cash sales) and Documentary Usance bill or Document against acceptance (These bills give a credit
period to the buyer, where the seller instructs his bank to hand over the “document of title to
goods” only if the buyer accepts the bill payment in writing mentioning a specified date of payment.
It has a specified credit period or Usance period. These bills are supported by documents of goods
and bears the instruction to the bank that the documents can be delivered to the buyer only if he
‘Accepts’ the bill in writing. The bank finances the seller against the ‘Accepted Bill’ and holds the
‘accepted’ bill till it is paid on the specified date. On the due date the bill is presented for paymemt
and the credit is adjusted. An Usance bill turns into a ‘clean bill’ since once the buyer ‘accepts’ the
bill, the documents are delivered to the buyer and the buyer takes possession of goods.Therafter the
bank will depend solely on the ‘acceptance’ of the buyer till the bill is paid)

Supply bills: Do not fall under the negotiable Instruments Act. These are raised when the buyer is the
government or some very large corporations. Delivery is made first against a ‘work order’ and the
seller produces documents evidencing dispatch of goods such as Railway receipts or bill of lading.
Post the buyer inspects the goods and he is satisfied an ‘invoice’ is raised on the buyer along with a
certification of acceptance of goods by the buyer. Both these are then submitted to the bank by the
supplier for financing, till the invoice is processed by the buyer and payment is received.

This facility is given only to borrowers with proven track record of supplies to the government or
large corporations, since advances against Supply bills are like clean advance.

Drawee Bill: In this case the bank finances the Buyer, the Drawee. The buyer’s bank itself discounts
the bill and sends the amount to the seller. This has the effect of financing the purchases of the
buyer.

Drawee Bills finance purchase of inputs and raw materials, while Drawer Bills finances Receivables.

Charge: When banks accept different securities in respect to loans granted, the bank is said to have
a ‘charge’ over these assets which constitute these securities. There is Fixed charge (A specific
charge giving the bank the right to sell designated properties to recover debt) and Floating charge
(This is a charge on present and future property and not attached to any specific asset)

Mortgage: It is the transfer of interest to the lender in specific immovable property for the purpose
of securing a loan, on the condition that this interest will be returned to the owner when the terms
of the mortgage have been satisfied. It is a security for the loan that the borrower provides to the
lender. The ownership remains with the borrower, but some rights are transferred to the bank such
as recovering its dues by selling the property. Most prevalent is Equitable mortgage where all the
original title deeds of the property and General Power of Attorney is given to the bank and taken
back by the borrower once loan is repaid.

Pledge: There should be bailment of goods. Bailment is derived from the French word bailer which
means to deliver. The objective of the bailment should be to hold the goods as security for the
payment of a debt or the performance of a promise. There is actual or constructive delivery of goods
to the lender. The bank is the Plegee, who enters into an explicit contract with borrower (Pledgor)
under which the securities are delivered to the bank. This then can get liquidated and sold by the
bank in case of non payment.

Hypothecation: Hypothecation is a charge against property for an amount of debt where neither
ownership nor possession is passed to the creditor. Hypothecation is a charge against movable
property. The goods will, unlike a pledge, be retained by the borrower and be in the borrower’s
possession. The borrower gives only a letter stating that the goods are hypothecated to the banker
as security for the loan granted. Legally the borrower cannot sell these goods till the time the
repayment is made. The document contains a clause that obligates the borrower to give possession
of the goods to the bank on demand by the bank.

Difference between the three:

In a mortgage there is transfer of interest in the immovable property till the re-payment of the loan
and borrower has to sign General power of attorney in favour of the bank which remain worthy
until the full & final payment. Hypothecation involves movable property which is given as security
for the loan however the possession of movable property remains with the debtor. In the case of
pledge too, movable property is the security, but here, the creditor i.e. bank, is given physical
possession of the movable property.

Assignment: The borrower assigns actionable claims to the bank. Actionable claims or receivables
due to the borrower are money due from government departments or semi government
organizations or receipts from Life insurance policies. The bank gets absolute right over the funds
assigned to it and other creditors of the borrower do not get priority over the bank in realizing their
dues from the assigned debt.

Banker’s Lien: ‘Lien’ is the right of the bank to retain the securities given by the borrower until the
debt due is fully repaid.
There is General Lien which confers the right to the bank to retain any goods bailed to them till
payment is recovered. And there is
Particular Lien where specific securities are earmarked for specific debt. The bank has the right to
sell the goods and securities of the borrower defaults.

SARFAESI ACT 2002

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets
without the intervention of the Court. The Act provides three alternative methods for recovery of
non-performing assets, namely: -

 Securitization: It is the process of aggregating existing debt instruments, many times even
illiquid debts, in a common pool, then issuing new securities backed by the pool to raise
fresh funds. All assets can be securitized so long as they are associated with cash flows.
 Asset Reconstruction : Restructuring existing loans and selling the bad loans to Asset
Reconstruction companies
 Enforcement of Security without the intervention of the Court

The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac. NPA
loan accounts where the amount is less than 20% of the principal and interest are not eligible to be
dealt with under this Act. Non-performing assets should be backed by securities charged to the Bank
by way of hypothecation or mortgage or assignment.

The Act empowers the Bank:

 To issue demand notice to the defaulting borrower and guarantor, calling upon them to
discharge their dues in full within 60 days from the date of the notice.
  To give notice to any person who has acquired any of the secured assets from the borrower
to surrender the same to the Bank.
 To ask any debtor of the borrower to pay any sum due or becoming due to the borrower.

Wealth Management

Wealth management is a service provided by financial institutions to help individuals and companies
to protect and grow their wealth. This advanced investment advisory discipline involves providing a
diverse range of services, such as financial planning, investment management, tax planning and cash
flow and debt management, customized and based on client requirements and his risk appetite. and
thereby investing his capital in a wide range of investment types and asset classes such as mutual
funds, insurance, stocks, commodities, bonds, real estate, bullion etc

There are two aspects to the wealth management process. One is protecting assets from market
crashes or slowdowns, availing tax advantages and capitalizing or hedging against unexpected
events. Secondly, growing the asset values through methods that actively manage risk and reward
attempting to make financial gains for clients beating given benchmark returns.

Wealth Management entails 2 distinct objectives for customers: 1. Asset management: which
involves investing said amount in different asset classes, ensuring appreciation of capital, protection
of portfolio, tracking, rebalancing portfolio and capital growth. 2. Liability Management: Studying
customer’s existing liabilities such as business loans, home loans, personal loans etc and providing
the required Life insurance cover to protect his family from heavy outflows towards loan repayment
in case of his premature death. Also providing adequate cover to customer to ensure his family get a
big lump sum or certain fixed income for atleast 5, 10, 15 years to maintain their existing living
standards in the case of customer’s unexpected death.

Mutual Funds

A mutual fund is a professionally managed and regulated investment trust, with a collective
investment scheme that pools money from many investors and invests it in stocks, bonds, short-
term money market instruments, and/or other securities based on the objective of the scheme, on
behalf of the investors. A single Mutual fund house may have several different schemes investing in
these specific asset types. Individual investors own a percentage of the value of the fund
represented by the number of units they purchased and thus share in any gains or losses of the fund.
The mutual fund has a fund manager that trades the pooled money on a regular basis with an aim to
beat benchmark returns.

Origination of Mutual Funds

First MF was UTI established in1963 and set up by RBI . First scheme was Unit Scheme 1964,
popularly known as US64.
Entry of Public Sector Funds in 1987 ie SBI mutual Funds, Canbank, Punjab national Bank MF, BBOI,
BOB
1993 was entry of private sector funds ICICI,Franklin