Management of Banking and Financial Services

Cover
Copyright Page
Contents
Foreword
Preface to the Third Edition
Preface
Acknowledgements
About the Authors
01 Managing Banking and Financial Services—Current Issues and Future Challenges
	SECTION I The Setting
	SECTION II The Global Financial System—current Issues
		A Rewind to the Financial Crisis of 2007–08 The Causes of the Crisis
		The Causes of the Crisis
		Macro Economic and Financial Stability—Understanding the Linkages
		The Role of ‘Trust’ in Financial Stability
		The Role of Regulation in Ensuring Financial Stability
		The Objectives of Financial Regulation
		Financial Stability—the Over-arching Agenda for the Future
	SECTION III The Indian Financial System—An Overview
		Financial Stability in India
	SECTION IV The Indian Banking System—
an Overview
		The Bank Market Structure in India
		Who Owns the Commercial Bank in India?
		The Way Forward…
		Annexure I: Banking Sector Reforms
		Annexure II: Committee on Financial Sector
Reforms—2009: Main Proposals of the
Raghuram Rajan Committee
		Annexure III: Select Major Policy and Legal
Reforms Since 1991–92
02 Monetary Policy—Implications
for Bank Management
	SECTION I BASIC CONCEPTS
		A Macroeconomic View
		Central Bank Tools to Regulate Money Supply
		The Impact of OMOs on Other Tools of
Monetary Policy
		Central Bank Signaling Through the ‘Policy Rate’
		Popularity of the ‘Repo’ Rate as the Policy Rate
		The Monetary Ratios
		Other Factors that Impact Monetary Base and Bank Reserves
	SECTION II APPLICATION OF THE MONETARY POLICY TOOLS IN INDIA
		The Monetary Base in India
		Measuring Money Supply in India
		Operation of Reserve Requirements in India
		Net Demand and Time Liabilities
		Operation of the Bank Rate in India
		Open Market Operations in India
		Repo Market Instruments Outside the LAF
	SECTION III MONETARY POLICY TOOLS IN SELECT COUNTRIES
		The United States of America
		Other Tools of Monetary Policy
		Canada
		The Eurosystem
		Other Developed and Developing Countries
		Annexure I: Computation of the NDTL for the
Banking System in India
03 Banks’ Financial Statements
	SECTION I BASIC CONCEPTS
		Bank Liabilities
		Bank Assets
		Contingent Liabilities
		The Income Statement
	section II FINANCIAL STATEMENTS OF BANKS OPERATING IN INDIA
		Bank Liabilities
		Bank Assets
		Income Statement of Indian Banks
		Other Disclosures to be Made by Banks in India
	section III ANALYZING BANKS’FINANCIAL STATEMENTS
		Annexure I: CAMELS Ratings
		Annexure II: Key Performance Indicators (KPI)
for Banks
		Annexure III: Some Alternative Models for Bank Financial Statement Analysis
		Annexure IV: Analysis of Profitability—A Du Pont
Analysis of Bank Groups in India
		Annexure V: Changes in International Accounting
Standards and Code of Good Practices
on Transparency in Monetary and Financial
Policies—The International Monetary Fund
04 Sources of Bank Funds
	SECTION I BASIC CONCEPTS
	SECTION II BANK LIABILITIES—DEPOSITS
		Protecting the Depositor—Deposit Insurance
		Deposit Insurance in India
	SECTION III PRICING DEPOSITSERVICES
		The Need to Price with Precision
		Some Commonly Used Approaches
to Deposit Pricing
		Marginal Cost of Funds Approach
		New Cost of Funds Analysis
		Deposits and Interest Rate Risk
	SECTION IV Bank LIABILITIES— NON-DEPOSIT SOURCES
		The Funding Gap
		The Indian Scenario
		Non-deposit Sources of Funds
		Cost of Funds
	SECTION V BANK DEPOSITS IN INDIA—SOME IMPORTANT LEGAL ASPECTS
		Banking’ Defined
		Who is a Customer?
		Who is Eligible to be a Customer?
		General Guidelines for Opening Deposit Accounts
		Termination of Banker–Customer Relationship
		Types of Deposit Accounts
	SECTION VI DESIGN OF DEPOSIT SCHEMES—SOME ILLUSTARATIONS
		Recurring Deposit Scheme (RD)
		Reinvestment Deposit Scheme
		Fixed Deposit Scheme
		Cash Certificates
		Annexure I: Some Important Non-Deposit Funding
Sources for Banks in India and the USA
		Annexure II: Some Important Legal Provisions
Relevant for Bankers
		Annexure III: A Summary of Important Legal
Aspects of Bank Deposits in India
		Annexure IV: Anti-Money Laundering and
Know Your Customer Guidelines—International
Best Practices and Guidelines for Indian Banks
05 Uses of Bank Funds—The Lending
Function
	SECTION I BASIC CONCEPTS
		Introduction
		Banks’ Role as Financial Intermediaries
		Gains from Lending
		Who Needs Credit?
		Features of Bank Credit
		Types of Lending
	SECTION II THE CREDIT PROCESS
		Constituents of the Credit Process
	SECTION III FINANCIAL APPRAISAL FOR CREDIT DECISIONS
		Financial Ratio Analysis
		Common Size Ratio Comparisons
		Cash Flow Analysis
	SECTION IV FUND BASED,NON-GFOUND BASED AND ASSET BASEDLEADING—FEATURES AND POPULAR FORMS
		Fund Based Lending
		Non-fund Based Lending
		Asset Based Lending
	SECTION V LOAN PRICING AND CUSTOMER PROFITABILITY ANALYSIS
		Step 1: Arrive at Cost of Funds
		Step 2: Determine Servicing Costs for the
Customer
		Step 3: Assess Default Risk and Enforceability
of Securities
		Step 4: Fixing the Profit Margin
		Some More Models of Loan Pricing
		Annexure I: Risk Classification Criteria
		Annexure II: The Importance and Role of Credit
Rating Agencies (CRAS)
		Annexure III: Credit Appraisal—Some Commonly Used Financial Ratios
		Annexure IV: Income Statement-Based Cash
Flow Analysis
06 Banks in India—Credit Delivery
and Legal Aspects of Lending
	SECTION I MODES OF CREDIT DELIVERY
		Cash Credit
		Loan System for Delivery of Bank Credit—
The Working Capital Demand Loan
		Overdrafts
		Bills Finance
		Pricing of Loans
	SECTION II LEGAL ASPTCTS OF LENDING
		What are Unsecured Loans?
		What are Secured Loans?
		What is a ‘Security’?
		Annexure I: Types of Borrowers and Modes
of Lending
		Annexure II: Reclassification of Borrowers’ Financial Statements for Credit Appraisal
		Annexure III: Some Common Securities for
Bank Loans
07 Credit Monitoring, Sickness
and Rehabilitation
	SECTION I BASIC CONCEPTS
		The Need for Credit Review and Monitoring
		Triggers of Financial Distress
		Financial Distress Models—The Altman’s Z-Score
		Some Alternate Models Predicting Financial Distress
		The Workout Function
	SECTION II CREDIT INFORMATION COMPANIES IN INDIA
		CIBIL and Loan Approval
		Other Credit Information Companies in India
		Debt Restructuring and Rehabilitation of Sick
Firms in India—The Workout Function
		What is Restructuring?
		Criteria for Considering Restructuring
		Relief Measures under Restructuring
		Valuation of Restructured Advances
		Annexure I: Warning Signs that Banks Should
Look out for—An Illustrative Checklist
		Annexure II
		Annexure III: Case Studies: Debt Restructured
Under CDR
08 Managing Credit Risk— An Overview
	SECTION I BASIC CONCEPTS
		Expected Versus Unexpected Loss
		Defining Credit Risk
		The Basel Committee’s Principles of Credit
Risk Management
		Loan Workouts and Going to Court for Recovery
		Credit Risk Models
		Basel Committee—Proposals for Measuring
and Controlling Credit Concentration risk
	SECTION II MEASURINGCREDIT RISK— INTRODUCTION TO SOME POPULAR CREDIT RISK MODELS
		A Basic Model
		Modeling Credit Risk
	SECTION III CCREDIT RISK TRANSFERS—SECURITIZATION,LOAN,SALES,COVERED BONDS AND CREDIT DERIVATIVAS
		Covered Bonds
		Credit Derivatives
		Some Basic Credit Derivative Structures
	SECTION IV TREATMENT OF CREDIT RISK IN INDIA—SOME IMPORTANT EXPOSURE NORMS,PRUDENTIAL NORMS FOR ASSET CLASSIFICATION,INCOME RECOGNITION AND PROVISIONING
		Some Important Exposure Norms
		Prudential Norms for Asset Classification, Income
Recognition and Provisioning
		Income Recognition
		Asset Classification
		Provisioning Norms
	SECTION V TREATMENT OF CREDIT RISK IN INDIA—SECURITIZATION AND CREDIT DERIVATIVES
		Securitization—The Act
		Securitization—The Guidelines
		Sale of Assets by Banks Not Involving SC/RC
		Securitization—The Indian Experience
		Credit Derivatives in India50
		Annexure I: Basel Committee—Principles
for the Assessment of Banks’ Management
of Credit Risk
		Annexure II: Salient Features of Securitization
09 Managing Credit Risk—
Advanced Topics
	SECTION I BASIC CONCEPTS
		Estimating PD, EAD and LGD—The Issues
		Why Do We Need Credit Risk Models?
		Credit Risk Models—Best Practice Industry
Models
	SECTION II SELECT APPROACHES AND MODELS—THE CREDIT MIGRATION APPROACH
		The Credit Migration Approach (Used by
Credit Metrics)
		Calculation of Portfolio Risk
		The Credit Migration Approach (Used by Credit
Portfolio View)
	SECTION III SELECT APPROACHES AND MODELS—THE OPTION PRICING APPROACH
		The KMV Model
		Improvements Made to the Basic Structural
Model in the Current Version EDF8.0
	SECTION IV SELECT APPROACHES AND MODELS—THE ACTUARIAL APPROACH
		Credit Risk+™ Model
	SECTION V SELECT APPROACHES AND MODELS—THE REDUCED FROM APPROACH
		Kamakura Risk Manager Version 8.0 and
Kamakura Public Firm Models Version 5.0
		A Brief Description of the Approaches Follows
		Which Model is Better—Structured or
Reduced Form?
	SECTION VI PRICING CREDIT DERIVATIVES
		Pricing Credit Default Swaps—Understanding
the Cash Flows
		Pricing Credit Default Swaps—Grasping
the Basics
		Pricing Collateralized Debt Obligations—
The Basics
	SECTION VII  CREDIT RISK MEASUREMENT AFTER THA FINANCIAL CRISIS
		The Financial Crisis—An Overview and Analysis
		Current Developments and Regulatory Changes
	SECTION VIII A NOTE ON DATA ANALYTICS AND BUSINESS SIMULATION
		Business Simulations: 5 Reasons Why Business
Simulations Are Great Learning Tools
		Annexure I: The Global Credit Crisis—A Brief
Chronology of Events in 2007–08
10 Managing Market Risk—Banks’ Investment Portfolio
	SECTION I BESIC CONCEPTS
		The Treasury Functions
		Risks and Returns of Investment Securities
	SECTION II MEASURING MARKET RISK WITH VAR
		Approaches to VaR Computation
	SECTION III THA INTER PLAY BETWEEN MARKET AND CREDIT RISK
	SECTION IV BANK’INVESTMENT PORTFOLIO IN INDIA—VALUATION ANDPRUDENTIAL NORMS’
		Classification of the Investment Portfolio
		Valuation of Investments
		Investment Reserve
		Determination of ‘Market Value’ While
Marking to Market (HFT and AFS Categories)
		‘Non-Performing’ Investments
		Income Recognition
		Annexure I: Case Study—LTCM Collapse and
Link with VaR
		Annexure II: Summary of Regulatory Responses
to Market Risk Measurement Practices by Banks
After the Global Financial Crisis
11 Capital—Risk, Regulation and Adequacy
	SECTION I BASIC CONCEPT
		Why Regulate Bank Capital?
		To What Should Capital be Linked to
Ensure Bank Safety?
		The Concept of Economic Capital
		The Concept of Regulatory Capital
	SECTION II RISK-BASED CAPITAL STANDARDS—
REGULATORY CAPITAL
		Demystifying the Basel Accords I, II and III
		Basel Accord I
		Basel Accord II
		Basel Accord III
	SECTION III APPLICATION OF CAPITAL ADEQUACY TO BANKS IN INDIA
		Capital Funds of Banks Operating in India
		Calculating Capital Charges and
Risk-Weighted Assets
	SECTION IV ILLUSTRATIVE PROBLEMS ON CALCULATING CAPITAL ADEQUACY
		Steps for Computing Risk-Weighted Assets
		Annexure I: Determination of Risk Weighted
Assets Under the Basel Norms
		Annexure II: The Financial Crisis of 2007—
Basel II and the Blame Game
		Annexure III: Pillars II and III of Basel II Accord
and Their Application to Indian Banks
		Annexure IV: Capital Adequacy Ratios of Indian
Banks—Some Comparative Tables
12 Managing Interest Rate and Liquidity Risks
	SECTION I THE CHANGING FACE
OF BANKING RISKS
	SECTION II ASSET LIABILITY MANAGEMENT
	SECTION III INTEREST RATE RISK
MANAGEMENT
		Managing Interest Rate Risk
		Measuring Interest Rate Risk
		Managing Interest Rate Risk—A Strategic
Approach
		Interest Rate Risk or Model Risk?
		Alternative Methods to Reduce Interest Rate Risk
	SECTION IV MANAGING INTEREST RATE
RISK with INTEREST RATE DERIVATIVES
		Swaps
		Interest Rate Futures
		Forward Rate Agreements (FRAs)
		Interest Rate Options
		Interest Rate Guarantees
		Swaptions
		Arbiloans
		Derivatives Market Growth—The Issues
	SECTION V LIQUIDITY RISK MANAGEMENT
and basel III
		Sources of Liquidity Risk
		How to Measure Liquidity?
		Modern Approaches to Liquidity Risk
Management
		Approach to Managing Liquidity for Long-Term
Survival and Growth
		Approach to Managing Liquidity in the Short Term—
Some Tools for Risk Measurement
		Basel III—The International Framework for
Liquidity Risk Measurements, Standards
and Monitoring
	SECTION VI APPLICABILITY TO BANKS
IN INDIA
		Interest Rate Derivatives in India
		The Exchange Traded Interest Rate
Derivatives in India
		ALM Framework for Indian Banks
		Liquidity Risk Management in Indian Banks
		Annexure I: Theories of Interest Rates
		Annexure II: Concept of Duration and Convexity
		Annexure III: Features of a Sound Liquidity
and Funds Management Policy and Symptoms
of Potential Liquidity Risk
		Annexure IV: Management of Liquidity Risk
in Financial Groups—Key Findings
		Annexure V: ALM in India—Classification of Bank
Liabilities and Assets According to Rate
Sensitivity and Maturity Profile
13 Banking Functions, Retail Banking and Laws in Everyday Banking
	SECTION I BASIC CONCEPTS
		Negotiable Instruments
		Types of Deposits
		Non-Resident Indian (NRI) Accounts
		Mandates and Power of Attorney
	SECTION II RETAIL BANKING—NATURE
AND SCOPE
		Why Banks Focus on Retail Business
		Emerging Issues in Handling Retail Banking
		SWOT Analysis of Retail Banking
		Strategies for Success in Retail Banking
	SECTION III CUSTOMER RELATIONSHIP
MANAGEMENT (CRM)
		CRM Strategies/Steps
		Three Tip Questions for Managers
		Image-Building Exercises
		Blending Tradition with Technology
	SECTION IV LAWS IN EVERYDAY BANKING
		Key Acts That Govern the Functioning
of the Banking Sector
		Different Customers—Different Laws
		Bank–Customer Relationship
		Rights of a Banker
		Obligations of a Banker
14 Banking System—Services
and Innovations
	SECTION I COMMERCIAL BANKING SYSTEM AND STRUCTURE
		Globalization and Innovations
	SECTION II CASE STUDIES OF BANKS
		The ICICI Bank
		HSBC Bank
		The State Bank of India (SBI)
	SECTION III CASE IN DETAIL—HSBC BANK
		Accounts
		Credit Cards
		Standard Privileges for HSBC Card Holders
		Loans
		Wealth Management
		Insurance
		Special Offers
		Case Questions
15 International Banking—Foreign Exchange and Trade Finance
	Introduction
	SECTION I BASIC CONCEPTS
		Exchange Rates
		Forex Market
		Transfer Systems
		Direct and Indirect Quotations
		Functioning of Foreign Exchange Market
	SECTION II INTER-BANK MARKET
AND FOREX DEALING
		Forex Dealing Room Operations
		Spot, Forward, Cash, TOM Rates in an Inter-Bank Market
		Bid and Offer Rates
		Foreign Exchange Market
	SECTION III TRADE FINANCE—
LETTERS OF CREDIT
		Financing International Trade Through Letters of Credit
		Flowchart Depicting a Typical Import
Transaction with Letter of Credit
		Types of LC
	SECTION IV TRADE FINANCE—FINANCING
EXPORTERS
		The Export Credit Scheme
		Features of Packing Credit in Local Currency
Features of Pre-Shipment Credit in Foreign
		Currency (PCFC)
		Post-Shipment Finance
	SECTION V FOREIGN CURRENCY
LOAN (FCL)
		Features of Foreign Currency Loans
16 High-Tech Banking—E-Payment
Systems and Electronic Banking
	SECTION I BASIC CONCEPTS
		Why Do We Need Technology in Banking?
		Benefits of Electronic Banking
	SECTION II E-PAY MENTS
		The Importance of Payments and Settlement
Systems
		International Standards and Codes for Payment
and Settlement Systems
		Payment and Settlement Systems in India
	SECTION III RETAIL PAY MENT SYSTEMS
		Paper-Based Instruments in Retail Payment
Systems—An Overview
		Electronic Retail Payment Systems—An Overview
	SECTION IV PLASTIC MONEY
AND E-MONEY
		Credit Cards
		Debit Cards
		Credit and Debit Cards in India
		Other Payment Channels/Products
	SECTION V SECURITY ISSUES
IN E-BANKING
17 Understanding Financial Services
	SECTION I Non-Banking Financial
Company
	SECTION II Venture Capital and
Private Equity
		Stages in Venture Capital (VC) Investing
	SECTION III CREDIT CARDS
		Major Parties Involved in Credit Card Transaction
		Working of Credit Cards
		Charges and Profits in Credit Card Transactions
	SECTION IV HOUSING FINANCE
	SECTION V IPO (Initial Public Offering)
	SECTION VI Microfinance
		Challenges
	SECTION VII Pension Funds
		Pension Funds in India
	SECTION VIII Alternate investments
		Commodities
		Hedge Funds
	SECTION IX CONSUMER RIGHTS AND PROTECTION APPLICABLE TO FINANCIAL SERVICES
		Consumer Protection and Regulation in India
18 Insurance Services
	SECTION I BASIC CONCEPTS
		Basic Features of Insurance Contracts
		Benefits of Insurance
		Types of Insurance Products
	SECTION II INDIA’S INSURANCE SECTOR — AN OVERVIEW
		The Insurance Sector
		Changing Scenario of the Life Insurance Sector
		Insurance Regulatory Development
Authority (Irda)
		IRDA Regulations
		Life Insurance Corporation of India
		Export Credit Guarantee Corporation
of India (Ecgc )
	SECTION III BANKS AND INSURANCE
SERVICES—BANCASSURANCE IN INDIA
		How Does Bancassurance Help Banks?
		How Does Bancassurance Help Insurance Companies?
		How Does Bancassurance Help Customers?
	SECTION IV GLO BAL INSURANCE INDUSTRY ,
OPPORTUNITIE S AND CHALLENGES
		The Industry After the Financial Crisis4
		Challenges
		Opportunities
		Convergence
		The Growth of Insurance Demand
19 Mutual Funds, Securities Trading,
Universal Banking and
Credit Rating
	SECTION I MUTUAL FUNDS
		Advantages of Mutual Funds
		Types of Mutual Funds
		Important Terms
	SECTION II MUTUAL FUNDS
		Factors Behind Growth of Online Trading
		Impact on Securities Market
	SECTION III UNIVERSAL BANKING
		Size and Market Power
		Diversification—Insurance and Securities
		Core of Universal Banking
		Impartial Investment Advice
		Benefits to Banks
		Benefits to Customers
		Challenges
	SECTION IV CREDIT RATING SERVICES
		Credit Rating—An Overview
		Information to Investors
		Benefits to Issuers
		Benefit to the Regulators
		Differences of Opinion in the Credit
Rating Industry
20 Cash Management and Demand
Forecasting in ATMs
	SECTION I INTRODUCTION
	SECTION II THE CASE OF BHARATH BANK
		Outsourced Agents for ATMs
	SECTION III THE CASE OF GLOBAL BANK
		Information Flow in the Supply Chain—
Role of IT Infrastructure
	SECTION IV CASH DEMAND FORECASTING
		Time Series Analysis of Cash Withdrawals
from ATMs
		Sales Trends and Other Factors
		Annexure I: ATM—Post- and Pre-Installation
Activities
21 Mergers and Acquisitions in the
Banking Sector
	SECTION I MERGERS AND ACQUI SITIONS
	SECTION II CASE OF BANK OF MADURA
MERGER WITH ICICI BANK
		Profiles of Banks
		Swap Ratio and Stock Price Fluctuations
		Suitability Analysis
		Synergies of the Merger
		Annexure I: Share Price Volume Data
		Annexure II: The Merger of Bank of Tokyo Mitsubishi and UFJ Bank
22 Innovations in Products and
Services—Cases of Three Banks
	CASE STUDY I BARCLAY S BANK
		UK Banking
		Barclay Card
		Barclays Capital
		Barclays Global Investors
		Barclays Wealth Management
		Performance and Governance
		Products and Services
		Other Services
		Savings and Investment
		Recent Initiatives
		Barclays Strategy
		Case Questions
	CASE STUDY II ING VYSYA BANK
		Milestones of the Bank Over the Long Years
of Its Services
		The Origin of Ing Group
		The New Identity: Ing Vysya Bank
		Customer Relationship Management
		IT Implementation for Quick Customer Response
		Retail Banking
		ING Vysya Bank’s Retail Banking Strategy
		Case Questions
	CASE STUDY III STATE BANK OF INDIA
		Features of the State Bank of India
		Primary Activities
		Secondary Activities
		Products and Services
		Case Questions
23 Innovations in Products and Services in Banking—Cases of Public and Private Sector Banks
	CASE STUDY I CORPORATION BANK
		Personal banking
		Loan Schemes
		Cards
		High-Tech Banking Products and Services
		Products and Services for Non-Residents
		Important Services
		Case Questions
	CASE STUDY II SOUTH INDIAN BANK
		Introduction
		SIB Deposit Schemes
		Loans and Advances
		NRI Schemes
		Other Service Features Offered by SIB
		Case Questions
Appendix: Objective-Type Questionson Commercial Banking
Index