FINANCIAL MANAGEMENT OF BANKS

MACRO ASPECTS OF BANKING

 RESERVE BANK OF INDIA & MONETARY POLICY

RBI was constituted under the RBI Act, 1934 and began functioning w.e.f. 1 st of
April,1935. The main objective are:
 Promoting growth and maintaining price stability.
 Maintaining monetary stability.
 Maintaining financial stability and ensuring the sound health of financial
institutions.
 Efficient credit allocation
Bank rate
Bank rate to inflation
Bank rate to prime lending rate (PLR) and deposit rates
Effects on demand – spending and saving decisions
Cash flow
Asset prices
Stock prices
Exchange rates
Tools of monetary control
 CRR
 SLR
 BR
 OMO
 Repo
UNDERSTANDING BANK’S
FINANCIAL STATEMENT
BALANCE SHEET
Sources of Funds (Bank Liabilities)
1. Net Worth
(a) Capital
(b) Reserve & Surplus = Statutory Reserve +
Capital Reserves + Share Premium + Revenue
and other Reserves + Balance in P&L Account
2. Deposits
(a) Demand Deposits
(b) Saving Deposits
© Term Deposits
3. Borrowings
4. Other Liabilities and Provisions
(a) Bills Payable
(b) Interest accrued
© Others
Uses of Funds (Bank Assets)
1. Cash and balances with the RBI
2. Balances with banks and money at call and
short notice
3. Investments:
 Government securities
 Approved securities
 Shares
 Debentures and bonds
 Subsidiaries and / or joint ventures
 Other investments
4. Loans and advances:
(a) By nature of credit facility
(b)By security arrangements
© By sector
5. Fixed assets:
(a) Premises (including land)
(b) Other assets (including furniture and fixtures)
© Assets on lease
6. Other assets
Contingent Liabilities
a) claims against the bank not acknowledged as debts
b) Liability on account of outstanding forward exchange contracts
c) Guarantees given on behalf of outside constituents
d) Currency swaps, interest rate swaps & futures
INCOME STATEMENT

Sources of Income
Interest Earned
 Interest / discount on advances/bills
 Income from investments
 Interest on balances with RBI and other inter-bank funds
 Others
Other Income
 Commission, exchange and brokerage
 Profit/loss on sale of investments
 Profit/loss on revaluation of investments
 Profit/loss on sale of building and other assets
 Profit on exchange transactions
 Income earned by way of dividends
 Miscellaneous income
Sources of Expenses
Interest Expended
 Interest on deposits
 Interest on RBI / inter-bank borrowings
 Other Interest

Operating Expenses
 Payments to and provisions for employees
 Rent, taxes and lighting
 Printing and stationery
 Advertisement and publicity
 Depreciation on bank’s property
 Directors’ fees, allowances and expenses
 Auditors’ fees and expenses
 Law charges
 Postage, telephone, etc.
 Repairs and maintenance
 Insurance
 Other expenses
Provisions and Contingencies
Other Disclosures to be made by Banks in India = The banks are

mandated to disclose additional information as

part of annual financial statements as follows:
1.Capital adequacy ratio
2. Gross value of investments
3. Repo transactions
4. Non-SLR investment portfolio
5. Forward rate agreement/interest rate swap
6. Movements in NPAs
CAMELS MODEL
Regulators, analysts and investors have to periodically assess the financial condition
of each bank. Banks are rated on various parameters, based on financial and
non-financial performance.
CAMELS is an acronym, where each letter refers to a specific category of
performance.
CAMELS model objectives.
Ratings are assigned for each component in addition to the overall rating of a bank’s
financial condition. The ratings are assigned on a scale from 1 to 5.
Rating analysis and interpretation
CAMEL MODEL
C - Capital Adequacy
- Capital adequacy ratio
- Debt-Equity Ratio
- Advances to Assets
- G-Secs to Total Investments
A - Asset Quality
- Gross NPAs to Net Advances
- Net NPAs to Net Advances
- Total Investments to Total Assets
- Percentage change in Net NPAs
- Net NPAs to Total Assets
M- Management
- Profit per Branch
- Total Advances to Total Deposits
- Business per Employee
- Profit per Employee
E- Earning Quality
- Operating Profits to Average Working
Funds
- Percentage Growth in Net Profits
- Spread
- Net Profit to Average Assets
- Interest Income to Total Income
- Non-Interest Income to Total Income
L- Liquidity
- Liquid Assets to Total Assets
- G-Secs to Total Assets
- Liquid Assets to Demand Deposits
- Liquid Assets to Total Deposits
S – Sensitivity to market risk
SOURCES OF
TI
E S BANK FUNDS
I LI
A B
LI
N K
B A
DESIGN OF DEPOSIT SCHEMES
The principles underlying the concept of ‘time value of money are prevalently used
in designing deposit schemes.
 Recurring deposit scheme (RD)
 Reinvestment deposit scheme
 Fixed deposit scheme
 Cash certificates
USES OF BANK FUNDS
T S
S E
A S
N K
B A
INTRODUCTION
Bank’s role as financial intermediaries
Gains from lending
Features of bank credit
Types of lending
Short-term loans
Long-term loans
Revolving credits
CREDIT PROCESS
Loan policy
1. Loan objectives
2. Volume and mix of loans
3. Loan evaluation procedures
4. Credit administration
5. Credit files
6. Lending rates
Broad steps to credit analysis
1. Building the credit file
2. Project and financial appraisal
3. Qualitative analysis
4. Due diligence
5. Risk assessment
6. Making the recommendation
Credit delivery and administration (including credit review and monitoring)
 FINANCIAL APPRAISAL FOR CREDIT DECISION

Financial ratio analysis

Common size ratio comparisons
Cash flow analysis
TYPES OF LOANS
Loans for working capital
Loans for capital expenditure and industrial credit
Loan syndication
Loans for agriculture
Loans for infrastructure – project finance
Loans to consumers or retail lending
Non-fund based credit
CREDIT RISK TRANSFERS
LOAN SALES
Syndication
Novation
Securitisation
The securities sold to investors are called ABS,
since they are backed by the homogeneous pool of
underlying assets. Originators of ABS usually want
to sell loans ‘without recourse’. Hence investors
usually safeguard their interests through three
mechanisms – (a) overcollateralisation, (b)
senior/subordinated structures, © credit
enhancement.
TREATMENT OF CREDIT RISK IN INDIA
Credit and investment exposure
What are non-performing assets
Prudential norms for income recognition
Prudential norms for asset classification
Provisioning norms
MANAGEMENT OF MARKET
RISK
NTS
E
S TM
VE
IN
OBJECTIVES & CLASSIFICATION
1. Safety of capital
2. Liquidity
3. Yield
4. Diversification of credit risk
5. Managing interest rate risk exposure
6. Meeting pledging requirements
Held to maturity (HTM)
Held for trading (HFT)
Available for sale (AFS)
TREASURY FUNCTIONS
Investment advice and assistance to customers, including other banks, to manage their
investment portfolios.
Structuring products to hedge the bank’s own capital.
Buys and sell securities on behalf of the customers.
Speculate on short-term interest rate movements
Sources of treasury profit
 Foreign exchange business
 Money market products
1. Repo
2. T-bills
3. CP
4. CD
5. BA
 Securities market products
1. Government securities
2. Corporate debt
3. Equities
Returns of investment securities
1. Interest income
2. Income from reinvestment
3. Capital gains or losses

Risks of investment securities

1. Interest rate risk
2. Credit risk
3. Liquidity risk
4. Inflation risk
 CY
CAPITAL RISK EQU
A

AD
ND
A
ION
LAT
EGU
R
PRUDENTIAL REGULATION
Economic regulation and prudential regulation
Prudential regulatory model calls for imposing the
regulatory capital level to maintain the health of
banks and the soundness of the financial system.
The Reserve bank of India issued prudential
norms based on the recommendations of the
Narsimham Committee report. These norms strive
to ensure that banks conduct their business
activities as prudent entities, that is, not indulging
in excessive risk taking and violating regulations in
pursuit of profit.
BASLE COMMITTEE
What is BASEL committee?
BASEL Capital Accord 1988: The Basle Capital
Accord of 1988 refers to the agreement among
member countries of the Basle Committee on
Banking Supervision on a method of ensuring a
bank’s capital adequacy.
The Basel norm of capital adequacy was introduced
in India following the recommendations of the
Narsimham Committee (1991).
CAPITAL ADEQUACY
Capital adequacy ratio is a measure of the amount of a bank’s capital expressed as a
percentage of its risk-weighted assets.
This capital framework, based on the Basel committee proposals, prescribes two tiers of
capital for the banks:

1. Tire-I capital which can absorb losses without a bank

being required to cease trading and
2. Tier-II capital which can absorb losses in the event of
a winding-up.
Tier-II capital should not be more than 100 percent of Tier-I capital and subordinated
debt instruments should be limited to 50 percent of Tier-I capital. Revaluation
reserve should be applied a discount of 55% for inclusion in Tier-II capital.
General provisions/loss reserves should not exceed 1.25 percent of the total
weighted risk assets.
Risk weight of assets.
INSURANCE
Sources of income

1. First year premium

2. Renewal premium
3. Single premium made under consideration for
annuities
4. Income from investments
5. Income from miscellaneous sources
Uses of funds

1. Outgo = claims by maturity, claims by death,

annuities surrenders.
2. Expenses of management = commission, salary &
other benefits to the employees, other expenses of
management.