Lecture 1

Bank management

In general, bank management refers to the process of managing the Bank's statutory activity.
Bank management is characterized by the specific object of management - financial relations
connected with banking activities and other relations, also connected with implementation of
management functions in banking. The main objective of bank management is to build an
organic and optimal interaction system between the elements of banking mechanisms with a
view to profit.

Types of bank management

What are the types of bank management?

It also provides other financial services to its customers. Bank management governs
various concerns associated with bank in order to maximize profits. The concerns
broadly include 1.liquidity management, 2.asset management, 3.liability management
and 4.capital management.

1.Lquidity management takes one of two forms based on the definition of liquidity. One
type of liquidity refers to the ability to trade an asset, such as a stock or bond, at its
current price. ... In either case, liquidity management describes the effort of investors or
managers to reduce liquidity risk exposure.

2.Liability management is the process of managing the use of assets and cash flows to
reduce the firm's risk of loss from not paying a liability on time. Well-managed assets
and liabilities involve a process of matching offsetting items that can increase business
profits.

3. Asset management refers to the process of developing, operating, maintaining, and

selling assets. Correctly identifying and in a cost-effective manner. Most commonly
used in finance, the term is used in reference to individuals or firms that manage assets
on behalf of individuals or other entities.

4.Capital management (CM) is a financial strategy aimed at ensuring maximum

efficiency in a company's cash flow. Its aim is for the business to have adequate means
to meet its day to day expenses, as well as financial obligations in the short-term
Characteristics of Bank managent
• management expertise in strategic analysis, planning, policy development, and
management functions; • quality of planning; • risk management (credit, interest rate,
and currency risks); • liquidity management; • management of human resources; •
creation of control systems: audit and internal audit monitoring of profitability and risks
liquidity

Peinciple of Bank Managent

Profitability ratios are a class of financial metrics that are used to assess a business's
ability to generate earnings relative to its revenue, operating costs, balance sheet
assets, or shareholders' equity over time, using data from a specific point in time

Trade-off exchange something of value, especially as part of a compromise. the government

traded off economic advantages for political gains. In economics, a trade-off is defined as an
"opportunity cost." For example, you might take a day off work to go to a concert, gaining the
opportunity of seeing your favorite band, while losing a day's wages as the cost for that
opportunity.

Bank
A bank is a financial institution and a financial intermediary that accepts deposits and channels
those deposits into lending activities, either directly by loaning or indirectly through capital
markets.

Bd bank:

“A bank is a dealer in debts- his own and other peoples” - G. Crowther.

“Bank is an economic institution whose main aim is to earn profit through exchange of money and credit
instrument” - Jhon Harry.

“A bank is an institution,the principal function of which is collect the unutilized money of the people and to
lend it to others.”

Money
anything that is generally acceptable as a means of exchange and which at the same
time acts as a measure and store of value

Banker includes a person, or corporation, or a company acting as banker” – Negotiable

Instrument
An organization involved in “Banking business” to be treated as Bank as well as Banker. → All
officials representing the organization involved in “banking business” are also to be treated as
Banker.
Banking is the activities of banker. Banking is what is done by the banker. In general terms,
the business activity of accepting and safeguarding money owned by other individuals and
entities, and then lending out this money in order to earn a profit is called banking.
“It means the accepting for the purpose of lending or investment of deposits of money from the
public, repayable on demand or otherwise with drawable by cheque, draft, order or otherwise.”

Differenciate between bank and Banking

Bank is a tangible object banking is a service Bank refers to the physical resources like building,
staffs, furniture, etc banking is the output (financial services) of the bank by utilizing those
resources

Bank objective Earning profit by providing various banking services. Bankinig Helping achieve
bank’s objective

Bankers and Banks liable to their depositors, customers and subscribers for their services
Banking is liable to its owner and management for its deed.

Lecture-2

Types of Banking structure/systems:

1. Nationalized bank
2. Private commercialized bank
3. Foreign bank
4. Development/specialized bank

Functions of Bank
1. Agency related functions: Agency or representative functions Collection and payment of
cheques, demand drafts and bills Purchase and sale of securities Trustee and executor
services Remittance of money Purchase and sale of foreign exchange Issuing letters of
credits to the customers Other agency functions
2 . General utility service: Providing safe deposit locker facilities

Providing business information

 3. Consodium functions.

SLR (solvency of the bank)

The SLR is determined by a percentage of total demand and time liabilities. Time liabilities
refer to the liabilities which the commercial banks are liable to pay to the customers after a
certain period mutually agreed upon, and demand liabilities are such deposits of the
customers which are payable on demand. An example of time liability is a six month fixed
deposit which is not payable on demand but only after six months. An example of demand
liability is a deposit maintained in a saving account that is payable on demand through a
withdrawal form such as a cheque. Bd. 13%

Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial

bank has to maintain in the form of liquid cash, gold or other securities.

Risk-weighted assets Risk-weighted assets are used to determine the minimum amount
of capital that must be held by banks and other institutions to reduce the risk of insolvency.
The capital requirement is based on a risk assessment for each type of bank asset. For
example, a loan that is secured by a letter of credit is considered to be riskier and requires
more capital than a mortgage loan that is secured with collateral 4.50

Banks calculate risk-weighted assets by multiplying the exposure amount by the relevant
risk weight for the type of loan or asset

Rwa= eligible capital/loans

Rate of return
Bank managers are also responsible for using assets to generate a reasonable rate of
return. In some cases, assets that carry more risk can generate a higher return to the bank,
because those assets generate a higher level of interest income to the lender. Managers
have to balance the potential rate of return on an asset category with the amount of capital
they must maintain for the asset class.

Credit Creations: Credit creation is the process by which commercial banks are able to
create loans in the form of new deposits.

Liquidity Management

Liquidity means an immediate capacity to meet one’s financial commitments. The

degree of liquidity depends upon the relationship between a company’s cash assets
plus those assets which can be quickly turned into cash, and the liabilities awaiting
payments could be met immediately. The liquidity and the Investments are two
corners opposite to each other.
Principles of liquidity managent

Nearly every transaction has implications on your bank’s liquidity, so you need a liquidity risk management
strategy that ensures your cash flow is sufficient and you’re prepared for external market shifts or changes in
depositor behavior. Especially with unstable financial markets in the past decade, liquidity management has
become more complex than ever before – so it’s essential that you understand the driving principles behind a
robust strategy.

Here are the four most essential principles of robust liquidity risk management that you should consider and
implement at your middle-market bank:

1. Identify Liquidity Risks Early

A liquidity deficit at even a single branch or institution has system-wide repercussions, so it’s paramount that
your bank be prepared before a shortfall occurs. This means your bank needs to have a rigorous process
for IDENTIFYING AND MEASURING LIQUIDITY RISK.

Your liquidity management process should include a forward-looking framework to project future cash flows
from assets, liabilities and items not on your balance sheet. This framework should include:

 The ability to conduct risk analysis on extreme, hypothetical situations

 The maintenance of liquid assets to serve as a cushion in case of a possible shortfall

2. Monitor & Control Liquidity Regularly

Once you’ve identified and forecasted your bank’s liquidity risk, you need to actively MONITOR AND
CONTROL ANY RISK EXPOSURES OR FUNDING NEEDS. Depending on the size and scope of your bank,
this monitoring needs to account for multiple legal entities, business lines and international currencies. Of
course, you must also remember to account for any banking compliance regulations that might limit the
transferability of your liquid assets.

Ensure that your liquidity risk MONITORING AND CONTROL TOOLS include the following indicators and
metrics (via ACCENTURE):

 Global liquidity indicators

 Business-specific liquidity indicators
 Advanced cash flow forecasting
 All relevant regulatory ratios

3. Conduct Scheduled Stress Tests

Just like any professional facility must practice for fire drills or emergency procedures, your bank needs to
conduct regular financial stress tests to anticipate different potential liquidity shortfalls. Your stress tests should
include both short-term and long-term scenarios that identify sources of liquidity strain and that ensure all
exposures align with your established liquidity risk tolerance.

Confirm that your regularly scheduled stress tests include the following scenarios:

 Institution-specific strains
 Market-wide stress scenarios of individual variables
 Market-wide stress scenarios of multiple, combined variables
4. Create A Contingency Plan

Using the results of your stress tests, adjust your liquidity risk management strategies accordingly. Then, use
these new policies and positions to develop a formal contingency funding plan (CFP) that clearly articulates
your bank’s plan for overcoming liquidity shortfalls in various emergency situations.

A robust CFP should (via BASEL COMMITTEE):

 Outline policies for managing various stress environments

 Delegate clear lines of responsibility
 Establish escalation procedures
 Be regularly tested and updated

In today’s complex financial markets and ever-changing compliance environment, liquidity risk management is
more difficult than ever. However, with these four principles to guide your liquidity management efforts, your
bank navigates these shifting tides with greater security and confidence for the future.

Types of liquidity
Asset liquidity: The liquidity of an asset refers to how easily that asset can be converted to
cash when it is bought or sold. ... Market liquidity: Market liquidity refers to the conditions of
a market in which an asset can be bought or sold

Liquidity is a measure companies uses to examine their ability to cover short-term financial
obligations

How banking sectors contribute to development?

https://www.bbalectures.com/role-of-commercial-banks-in-economic-development/

Contribution of Banking Sector in Economic development of Bangladesh

Banking systems may make a positive contribution to the economic growth and development of country
such as Bangladesh. How the banking sector of a developing country can contribute to its further
development are enumerated below.

1. By promoting accumulation or formulation capital by moving resources to productive sources.

2. Mobilization of saving: Banks helps to increase saving potential of developing country’s citizens
by providing various schemes.
3. Increases availability of funds by removing the deficiency.
4. Commercial banks have a major role to attain self-sufficiency.
5. Implementation of modern technology requires a healthy source of capital and it is the
Commercial Banks that provide it to develop a country’s socio economic conditions.
6. In Bangladesh specializes development banks such a Bangladesh Krishi Bank & and RKUB have
been pioneering the development of agricultural sectors that has the largest share of our GDP.
7. Development of Industrial sector
 8. Banks helps promising companies to expand their markets by providing additional capital
through various loan facilities.
9. A strong banking sector is essential for a balanced foreign trade.
10. Implements Optimum use of resources.
11. Remove budget deficits.
12. Pioneer research and development to improve the economic conditions of a country.

Lecture 3

Image result for bank customer relationship Relationship between a banker and customer comes into
existence when the banker agrees to open an account in the name of customer. The relationship between
a banker and a customer depends on the activities, products or services provided by bank to its
customers or availed by the customer

The relationship between a banker and a customer depends on the activities, products or services
provided by bank to its customers or availed by the customer. Thus the relationship between a banker
and customer is the transactional relationship. Bank’s business depends much on the strong bondage
with the customer. “Trust” plays an important role in building healthy relationship between a banker and
customer.

Banking The Banking Regulations Act (B R Act) 1949 does not define the term ‘banker’ but
defines what banking is? As per Sec.5 (b) of the B R Act “Banking' means accepting, for the
purpose of lending or investment, of deposits of money from the public repayable on demand or
otherwise and withdrawable by cheque, draft, order or otherwise."

Banker A Banker's main job is to give financial advice to clients, especially on matters related to savings,
investments, loans, and securities.

Customer • Those who maintain account relationship with banks i.e. Existing customers. • Those who
had account relationship with bank i.e. Former Customers

• Those who do not maintain any account relationship with the bank but frequently visit branch of a bank
for availing banking facilities such as for purchasing a draft, encashing a cheque, etc

Relationship

Creditor–Debtor: Lending money is the most important activities of a bank. The resources mobilized by
banks are utilized for lending operations. Customer who borrows money from bank owns money to the
bank. In the case of any loan/advances account, the banker is the creditor and the customer is the debtor.

Trust relationship: As per Sec. 3 of Indian Trust Act, 1882 ‘ A "trust" is an obligation annexed to the
ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared
and accepted by him, for the benefit of another, or of another and the owner. When a person entrusts
valuable items with another person with an intention that such items would be returned on demand to the
keeper the relationship becomes of a trustee and trustier. Customers keep certain valuables or securities
with the bank for safekeeping or deposits certain money for a specific purpose (Escrow accounts) the
banker in such cases acts as a trustee.

2. Bailee – Bailor: Sec.148 of Indian Contract Act, 1872, defines "Bailment" "bailor" and "bailee". A
"bailment" is the delivery of goods by one person to another for some purpose, upon a contract
that they shall, when the purpose is accomplished, be returned or otherwise disposed of
according to the directions of the person delivering them.

Banks secure their advances by obtaining tangible securities. In some cases physical possession of
securities goods (Pledge), valuables, bonds etc., are taken. While taking physical possession of
securities the bank becomes bailee and the customer bailor. Banks also keeps articles, valuables,
securities etc., of its customers in Safe Custody and acts as a Bailee.

3.Lessor and Lessee: Sec.105 of ‘Transfer of property Act 1882’ defines lease, Lessor, lessee,
premium and rent. As per the section “A lease of immovable property is a transfer of a right to enjoy
such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price
paid or promised, or of money, a share of crops, service or any other thing of value,

Definition of Lessor, lessee, premium and rent : (1)The transferor is called the lessor, (2)The
transferee is called the lessee, (3)The price is called the premium, and While providing Safe Deposit
Vault/locker facility to their customers bank enters into an agreement with the customer. The
agreement is known as “Memorandum of letting” and attracts stamp duty

Banks lease (hire lockers to their customers) their immovable property to the customer and give them
the right to enjoy such property during the specified period i.e. during the office/ banking hours and
charge rentals. Bank has the right to break-open the locker in case the locker holder defaults in
payment of rent. Banks do not assume any liability or responsibility in case of any damage to the
contents kept in the locker. Banks do not insure the contents kept in the lockers by customers.

Bank has the right to break-open the locker in case the locker holder defaults in payment of rent.

4.Agent and Principal

Banks collect cheques, bills, and makes payment to various authorities viz., rent, telephone bills,
insurance premium etc., on behalf of customers. . Banks also abides by the standing instructions given by
its customers. In all such cases bank acts as an agent of its customer, and charges for theses services.

5.As a Custodian: A custodian is a person who acts as a caretaker of something. Banks take legal responsibility for a
customer’s securities. While opening an account bank becomes a custodian

6. As a Guarantor: Banks give guarantee on behalf of their customers and enter in to their shoes.
Guarantee is a contingent contract. As per sec 31,of Indian contract Act guarantee is a " contingent
contract ". Contingent contract is a contract to do or not to do something, if some event, collateral to such
contract, does or does not happen. It would thus be observed that banker customer relationship is
transactional relationship. The guarantor basically provides a sort of security on behalf of the borrower to
the bank, that in case the borrower fails to repay the loan amount or other dues to the bank the guarantor
will make good that shortfall.

Duties of a banker.
Duties of Customers
Circumstances under which banker can disclose information of customer's account

a)Under compulsion of law. (b)Under banking practices. (c)For protecting national interest. (d)For
protecting bank’s own interest (e)Under express or implied consent of the customer f) Instruction from
Central Bank

Rights of Banker

• Right of General Lien • Right of Set-Off • Right of Appropriation • Act as per the mandate of customer •
Right to Charge Interest, Commission, Incidental Charges etc

Right of Appropriation: It is the right of the customers to direct his banker against which debt (when more
than one debt is outstanding) the payment made by him should be appropriated.

Banker's right to charge interest, commission, incidental charges etc. : Banker has an implied right to
charge for services rendered and sold to a customer. Bank charges interest on amount advanced,
processing charges for the advance, charges for non-utilization of credit facilities sanctioned, charges
commission, exchange, incidental charges etc. depending on the terms and conditions of advance banks
charge interest at monthly, quarterly or semiannually or annually.

Termination of relationship between bank and customer: The relationship between a bank and a customer
ceases on: (a) The death, insolvency, of the customer. (b) The customer closing the account i.e.
Voluntary termination (c) Liquidation of the company (d) The closing of the account by the bank after
giving due notice. (e) The completion of the contract or the specific transaction.