Part two: Bank management.

Lecturer: Mohamed shibiin

Master of economics and master of bank
management
Introduction of bank management
 Bank management is the process which banking resources
are properly utilized for a achieving the bank objectives.
 Bank management refers to the process of
managing banks statuary activity and employees at
bank.
 Bank management is characterised by the specific
object of financial relations connected with
banking activities and other relations, also
connected with implementation of management
functions in banking.
 The bank management is also the managing of debit-
equity ratio which provides profit and loss assessment to
banks.
 Bank management is the process of planning,
organizing, staffing, coordinating, motivating and
controlling the all of the resources to proper utilize
the banking business to achieve the organizational
goals.
 The main objective of bank management is to build
organic and optimal system of interaction between
the element of banking mechanism with a view
point to profit.
 The only way to achieve handsome amount of
profit compared similar kind of organizations is to
establish skilled and efficient management in any
organization.
Bank is a profit oriented organization, therefore its
management procedure is more challenging as
regulatory system always is there to control the bank
management.
the functions of bank management process
Bank management is a systematic way of doing banking
business.
 It is a process to emphasize that all managers,
executives of their attitude or skill, engage in some
interrelated functions in Oder to achieve their desired
goals.
Bank management process involves for basic activities.
1.Planning&decision making: determining courses of
action:
 Looking ahead into the future and predict possible trends
or occurrences which are likely to influence the working
situation is the most vital quality as well as the banker.
 Planning means setting a bank’s goal and
deciding how best to achieve them. Regarding the
goals and setting the future course of action from
a set of alternatives to reach them.
 The plan helps to maintain the managerial effectiveness
as it works as a guide to the personnel for the future
activities. For a banker, planning and decision making
require an ability to foresee, to visualize, and to look a
head purposefully.
2. Organizing coordinating activities and resources:
Once a banker set goals and developments plans, his
next managerial function is organizing human and
other resources that are identified as necessary by the
plan to reach the goal.
Organizing involves determining how activities and
resources are to be assembled and coordinated.
Organizing produces a structure of relationships in a
bank and its through these structure relationships
that future plans are pursued.
Basically organizing is deciding where decisions will
be made, who will do what jobs and tasks, who will
work for whom, and how resources will assemble.
3.Leading managing and motivating people:
The third basic managerial function is leading. The skill
of influencing people for particular purpose or reason
is called leading.
Leading is considered to be the most important and
challenging of all managerial activities. Leading is
influencing or prompting the member of the
organization to work together with the interest of the
organization.
Coordinating is also essential in leading. Most authors
do not consider it separate function of management.
Rather they regard coordinating as the essence of
manager ship for achieving harmony among individual
efforts towards accomplishing group targets.
4.Motivating is an essential quality for leading:
Motivating is the function of management process
of influencing people’s behaviour based on the
knowledge of what cause and channel sustain
human behaviour in particular committed direction
Since leadership implies fellowship and people tend to
follow those offer a means of satisfying their own
needs, hopes and aspirations it is understandable
that leading involves motivation leadership styles
and approaches and communication.
5.Controlling: monitoring and evaluation activities.
Monitoring the organizational process to ward goal
fulfilment is called controlling.
 Monitoring the progress is essential to ensure the
achievement of organization goal.
 Controlling is measuring. Comparing, finding deviation
and correcting the organizational activities which are
performed for achieving the goals or objectives.
Controlling activities generally relate to the measurement of
achievement or results of actions which were taken to
attain the goal.
 All managers carry out the main functions of the bank
management, planning, organizing, staffing, leading and
controlling.
 But depending on the skills and the position on the bank,
the time and labor spent in each function will differ.
Asset management: The term “asset management” refers to
the financial service of managing assets by means of
financial instruments with the aim of increasing the
invested assets.
Thus, an asset manager is a company whose business
purpose is managing wealth.
Asset managers bundle a person’s savings and invest
them as profitably as possible in the world economy.
Investment opportunities include government financing
through sovereign bonds, private sector financing
through equity or bond purchases, and financing
infrastructure needs, with the aim of generating a return
that is shared between the asset manager as
remuneration and the investor as their return.
Asset management is the process of developing,
operating, maintaining, and selling assets 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.
Every company needs to keep track of its assets. That
way, the relevant stakeholders will know just what assets
are available and what can be used to provide optimal
returns. The assets owned by any business fall into two
main categories: fixed and current assets. Fixed or non-
current assets refer to assets acquired for long-term use,
while current assets are those that can be converted into
cash within a short amount of time.
Liability management of bank:
What Is Liability Management?
Liability management is the practice by banks of
maintaining a balance between the maturities of their assets
and their liabilities in order to maintain liquidity and to
facilitate lending while also maintaining healthy balance
sheets. In this context, liabilities include depositors’ money
as well as funds borrowed from other financial institutions.
Types of loans:
1. Real estate loans: are secured by real property –land,building,and
other structures and include short term loans for construction and
land development and longer term loans to finance the purchase of
farmland, homes, apartments, commercial structures and foreign
properties.
2.Financial institution loans include credit to banks, insurance
campanies,and other financial institutions
3. Agricultural loans: are extended to farms and
ranches to assist in planning and harvesting crops
and supporting the feeding and care of livestock.
4 commercial and industries loans: are granted to
business to cover purchasing inventories, paying
taxes and meeting payrolls.
5. Loan to individuals : include credit to finance the
purchase of automobiles, mobile home, appliances,
and other retail goods, to repair and modernize
homes and to cover the cost of medical care and
other personal expenses and are either extended
directly to individuals or indirectly through retail
dealers.
Establishing a good written loan policy.
The most important elements of a well written loan
policy.
1) Good statement for the entire loan portfolio(eg.
Statement of the characteristics of good loan Porto
folio in terms of types, maturities, size, and quality
of loans)
2) Specification of the lending authority given to
each loans officer and loan committee(measuring
the maximum amount and types of loan that each
employee and committee can approve and what
signatures of approval are required.
3. Lines of responsibility in making assignments and
reporting information.
4. Operating procedures for soliciting, evaluating and
making decisions on customer loan application
5. The required documentation that is to a company
Each loan application and what must be kept in the
lenders files(financial statements, security
agreements)
6.lines of authority detaining is responsible for
remaining and reviewing the institutions credit
files
Capital management:
Capital is the investment in, or contribution to, the business of
an institution that ranks behind depositors and other creditors
as to entitlement to repayment or return on investment.
Capital provides a stable resource to absorb any losses and thus
provide a measure of protection to depositors and other
creditors in the event of liquidation.
Managing capital is the ongoing process of determining and
maintaining the quantity and quality of capital appropriate for
an institution.
Managing capital adequacy requires a clear understanding of
an institution’s capital requirements and capital position related
thereto.
Capital management is an important component in the safe and
sound management and the strategic planning of all institutions.
 Importance of bank capital
Banking business is based on trust. Lack of trust in
the public regarding the activities of a bank,
automatically creates panic among depositors.
On the other hand well structure banks premises
building layouts, use of high technology increase
good will. Existing clients become satisfied and
proud of this. On the other hand, potential clients
approach to these banks for better service. All of
these are possible, only when the bank has better
capital base so that its does not face financial
difficulty at the time of raising the above assets.
The importance of bank capital is discussed bellow
1. To create and maintain public confidence: both
the existing and potential depositors are interested
to those banks which own adequate volume of
capital.
2. to provide for normal hazards and unforeseen
contingencies: bank may face unforeseen
contingencies and financial risks in their day to
day business. Adequate capital helps bank to
overcome unforeseen contingencies as well as
loses a risen from bad debt, non performing
customers and irresponsible employees. Etc.
3. To act as a cushion in times of restricted monetary
policy(i.e. Increase bank rate etc) the shortage of
loanble funds arises when the government takes
any kind of restrictive monetary policy.
4. To raise awareness that owners have stake along
with depositors in the supply of loanble funds:
Bank depositors often think that the bank is operating
the business by using only their deposit.
5. to obtain permission for opening new branches: the
bank regulatory authority takes the amount of
capital as the basis for expansion of the banking
activities and establishing new branches.
6. To avoid punitive measures for reasons of capital
inadequacy: the government or bank regulatory
bodies periodically check the statement of a bank and
also conduct field investigation by their
representative officials to get information about the
financial condition and adequacy of capital of a
bank. When any violates the rules and regulations or
any guide lines, then the bank is served warning and
or even punished by regulatory bodies. Thus to avoid
such punitive actions and run the business with
reputation, bank has to maintain capital not less than
a required by the regulatory authorities.
 Functions of bank capital
Capital is very important for the activities of a bank.
The functions of bank capital are discussed below.
1. To acquire the physical plant and basic necessities
needed to render banking services: physical
infrastructure like office equipment, furniture,
employees etc are required to a star a banking
business. Capital is evitable to acquire these assets .
The larger the amount of capital of a bank and the
more attractive multi-storied building bank has,
the more valued clients will be attracted to it.
2. To act as one of the sources of funds for loans and
investments: the purpose of investment and loan
activities is to increase the income of the bank.
Bank may meet up a portion of the loan and
investment demand through raising capital. though
most of the loan and investment activities are
operated the depositors money, sometimes bank
operates this activity with its own capital, especially,
at the preliminary phase of the banking business.
3. To protect the uninsured depositors in the event of
insolvency and liquidation: recently, bank
regulatory authority has looked into through serving
an Oder of deposit insurance to ensure
The safety of the deposit. In times of a bank liquidation
or failure, deposits which are not insured need to
returned from the capital resources of the bank.
4. To act as an unanticipated loss absorber: hazards,
business losses and unforeseen contingencies like
bad debt, misfeasance on the part of the employees
when occur at any time may call for huge amount of
money. Capital plays an important role to resolve
such type of losses.
5. To serve as a regulatory restraint: govt, or bank
regulatory authority provides the direction of the
adequacy of bank capital and mount of capital
reserve.
The objective of capital management is to ensure
that, on the one hand, capital is, and will continue
to be adequate to maintain confidence in the safety
and stability of the institution and that, on the other
hand, the return on capital is sufficient to satisfy
the expectations of investors.
Although the particulars of capital adequacy and
capital management will differ among institutions,
a comprehensive capital management programme
requires:
 establishing and implementing sound and prudent
policies governing the quantity and quality of
capital required to support the institution;
and developing and implementing appropriate and
effective procedures to monitor, on an ongoing
basis, the institution’s capital requirements and
capital position to ensure that the institution meets
its capital requirements and will continue to meet
its future capital requirements.
Liquidity management: one of the most important
tasks, the management of any bank or other
financial service provider faces is ensuring
adequate liquidity at all times, no matter what
emergencies my suddenly appear. A bank is
considered to be liquid if it has ready access to
immediately spendable funds at reasonable costs at
precisely the time those funds are needed. Funds
may be needed not only, tomorrow, next week, or
next year to meet promises to depositors,
borrowers, and other customers. When the
promises( for depositors as and when
presented)come due the bank must make payments.
Or equivalent funds.
 Indeed, lack of adequate liquidity can be one of the first
signs of real trouble. The cash shortage that banks in
trouble often experience make clear that liquidity needs
can not be met on time.
 A bank may be closed if it can not raise sufficient liquidity
even though, technically, it may still be solvent.
 Bank must be always ready to honour the withdrawal
requests of the clients whenever they need so, this is the
clients’ minimum expectation to be met by the bank.
 Any delay or inability to fulfil this expectation creates
enough grounds fore the clients to switchover to other
banks. And this may create panic and loss of public
confidence consequent upon which the bank even fail or
face punitive measures by the regulatory authorities.
Liquidity and profitability are two contradictory
concepts. One can not be effective without the other.
But excess of one may slowdown the other. Too
much squeezing of any of the two can also aggravate
the situation.
Consideration for profitability
Depositors are the main sources of bank's fund. By save
keeping their deposits, banks can not make profit
other than earning service charges. But banks need to
spend huge amount as transaction cost for
maintaining these deposits. If a bank only maintain
deposit, the profitability can not be achieved.
So bank grants credits at a higher rate of interest from
the borrowers and the interest banks pay to depositors.
The difference between interest received from the
borrower and the interest given to the depositors is
know as spread.
The higher the spread the higher the profit banks can
earn after meeting expenses pertaining transaction
and other related expenses.
Other than loan activities, banks invest a portion of
their funds in a money market or capital market
instruments and earn interest or dividend income. The
more a bank could extend as loan and invest through
money and capital market instruments, the more profit
it can earn.
Consideration for liquidity: banks have to keep a
portion of a bank funds as liquid to fulfil short term
liabilities.
Other wise, in the time of liquidity crises, any delay
in making payments as and when required can
dissatisfy the depositors or potential receivers of
loan instalments. If the a bank faces unavoidable
crises in meeting liquidity, clients most likely will
react negatively.
if the liquidity crises repeatedly occurs,
clients will switch their deposits to other
banks.
Clients, other than depositors also scratch for new
banks. finally the bank will be considered as a
problem bank. as such maintaining adequate liquidity
is of for most importance to keep the confidence of
people at satisfactory level.
 What do the banks need to do?
Holding a reasonable portion of deposit is necessary for
liquidity. But banks can not a set a side large portion of its
funds as cash.
Because if doing so, less amount remain to invested as
loans or invested as loans or investment to earn profit.
On the other side, if bank invest the largest portion of their
funds without maintaining needed adequate liquidity,
depositors and other creditors will be come impatient and
react adversely that creates panic among the members of
the public.
 so, banks should maintain required necessary liquidity
first and than should invest the rest of the amount for
profit either as loan and/or as investment through open
markets.
If they fail to do so, the banks will surely face either
liquidity crises or profitability crises.
Maintaining judicious trade off between liquidity
and investments sine qua non for both profitability
and successful survival of the bank.
Since a bank can realize higher profits from assets
that are relatively illiquid, there is natural trade off
between profitability and liquidity.
Commercial banks must invest as profitably as
possible within reasonable limits of liquidity.
Because of this potential conflict, regulators in a
number of countries have established certain
minimum liquidity requirements
Credit risk management:
Credit risk in banking is most simply defined as the
potential that a bank borrower or counterparty will
fail to meet its obligations in accordance with agreed
terms. The major cause of banks failures are
inadequate credit risk management.
Every financial institution specially banks has their
own credit risk policy.
When a borrower applies for a loan, the lender must
evaluate their reliability to make future monthly
payments. Beyond requests for information on a
borrower’s current financial situation and income,
many lenders will also want to see their borrowing
and payment history.
 Types of risk
• Interest Rate Risk: It is the risk of adverse effect of interest rate
movements on a firm’s profits or balance sheet.
• Credit Risk: It is the risk which may arise due to default of the
counter-party.
• Liquidity Risk: It is the risk which arises if the given asset or fund
is not traded at right time in the market.
• Internal Business Risk: it is due the inefficiency of management
in the business.
• External Business Risk: This type of risk arises due to external
environment in the business.
• Financial Risks: This risk originates due to improper composition
of the operations.
• Market Risk: This is the risk which occurs due to market
conditions which results in reduction in returns expected on
investment. It is also referred to as price risk.
• Technology Risk: Type of risk which arises due to
failure in technology.
• Operational Risk: This risk is due to any type of
operational failure like, inadequate monitoring,
systems failure, management failure, human error.
Operational Risk includes Model risk, people risk,
legal and compliance risk.
• Foreign Exchange Risk: It is due the changes in the
foreign exchange rate, currency values etc. which
affects the firm
Interest Rate Risk Management:
• Interest Rate risk is the exposure of a bank’s financial
conditions to adverse movements of interest rates.
• Though this is normal part of banking business,
excessive interest rate risk can pose a significant threat
to a bank’s earnings and capital base.
• Changes in interest rates also affect the underlying
value of the bank’s assets, liabilities and off-balance-
sheet item.
• Interest rate risk refers to volatility in Net Interest
Income (NII) or variations in Net Interest Margin(NIM).
• Therefore, an effective risk management process that
maintains interest rate risk within prudent levels is
essential to safety and soundness of the bank.
Measurement of Interest Rate Risk
Gap Analysis- Simple maturity/re-pricing Schedules
can be used to generate simple indicators of interest
rate risk sensitivity of both earnings and economic
value to changing interest rates.

Duration Analysis: Duration is a measure of the

percentage change in the economic value of a
position that occur given a small change in level of
interest rate.
PART TWO IS End
Thank you.