About the authors I-5 Acknowledgement I-7 What the Experts say... I-9 Chapter-heads I-11

Transcription

1 CONTENTS About the authors I-5 Ackowledgemet I-7 What the Experts say... I-9 Chapter-heads I-11 1 OVERVIEW OF INDIAN BANKING SYSTEM u Itroductio 1 Establishmet of Imperial Bak of Idia 2 Establishmet of Reserve Bak of Idia 2 State Bak of Idia gets its ame 2 u Bak Natioalisatio 3 u Categorisatio of Baks i Idia 4 Schedule Commercial Baks 5 Foreig Baks i Idia 8 Eligibility criteria for settig up a wholly owed subsidiary 9 Regioal Rural Baks (RRBs) 11 Geeral Policy o Brach licesig for RRBs 11 Eligibility criteria for RRBs to ope ew brach/es i Tier-1 Cetres 12 Relaxatio i Brach licesig policy to ope braches i Tier-2 to Tier-6 Cetres 12 RRBs Service Braches 13 Other Scheduled Commercial baks/private Baks 13 Old private sector baks 13 I-13

2 I-14 CONTENTS New private sector Baks 13 Additioal Bakig Liceces to Private sector Players 14 u RBI guidelies for ew Bakig Licece 14 Eligible Promoters 14 No-operatig Fiacial Holdig Compay (NOFHC) 15 Miimum Votig equity capital requiremets for baks ad shareholdig by NOFHC 16 Regulatory framework 17 Foreig shareholdig i the bak 17 Corporate goverace of NOFHC 17 Riders for New etrats i the Bakig sector 18 Etry of two New Baks i Idia i u Uiversal Bakig 20 Beefits of Uiversal bakig 21 Limitatios of Uiversal bakig 22 RBI orms for coversio of Fiacial Istitutios ito Uiversal Baks 22 u Differetiated Baks as paymet ad Small baks 24 u Narrow Bakig 25 Beefits of Narrow Bakig 26 Status of Narrow Bakig i Idia 26 u Shadow Bakig 27 Shadow System Poses Risk for the Larger Ecoomy 28 u E-Bakig 29 Types of e-bakig 29 Beefits of e-bakig 30 Limitatios/Disadvatages of e-bakig 30 Products 31 Security ad Privacy issues 31 u Summary 33 u Self Assessmet Questios 33 2 CHALLENGES AND OPPORTUNITIES FACED BY INDIAN BANKING INDUSTRY u Itroductio 34

3 CONTENTS I-15 Adequate Capital Adequacy 35 No-performig Assets 35 Fiacial Iclusio 36 Natioal Rural Fiacial Iclusio Pla (NRFIP) 36 Role of Reserve Bak of Idia i promotig Fiacial Iclusio 37 Malegam Committee Recommedatios (2010) 38 Challeges ad Difficulties : Experieced 38 Suggestios 39 Ja Dha Yojaa : Challeges ad Opportuities 40 Priority Sector Ledig 40 Market Competecy 41 Huma Resource Developmet 41 Corporate Goverace 42 u Risk Maagemet 43 Accoutig-IFRS (Iteratioal Fiacial Reportig System) covergece from accoutig stadards 44 Evirometal Risk ad MSMEs 44 u Summary 45 u Closig Case : Desigig Bakig Regulatio i Aspirig Ecoomies : The Challeges 45 u Self Assessmet Questios 47 3 NEGOTIABLE INSTRUMENTS ACT, 1881 u Itroductio 48 Characteristics of a Negotiable Istrumet 48 Negotiable Istrumet i Baks 49 Draft 49 Pay order 50 Trade acceptace 50 Certificate of Deposit 50 Cheque 50 Demad draft 50 Baker s cheque 50 Traveller s cheque 51

4 I-16 CONTENTS Iterest or Divided warrats 51 Curret accout cheques 51 u Promissory Note 51 Categories of Promissory otes 51 Bill of Exchage 53 Bills of Exchage i Bakig 53 Differece betwee Bill ad Cheque 53 Dishoour of Cheque 54 Pealties i case of dishoour of Cheque for isufficiecy etc., of fuds i the accout 55 u Practical Problems 56 u Summary 60 u Self Assessmet Questios 60 4 BANK FINANCIAL STATEMENTS AND ASSET LIABILITY MANAGEMENT u Itroductio 61 u Assets ad Liability compoets i Bak s Balace Sheet 62 Assets ad liabilities 64 u Capital 64 Equity reserves ad retaied earigs 64 Authorized Capital 64 Issued Capital 64 Subscribed Capital 65 Called up Capital 65 Paid up Capital 65 Paid up Capital orms for New Private Baks i Idia 65 u Reserve ad Surplus 65 Statutory Reserves are CRR ad SLR 66 Share Premium 66 Geeral Reserves 66 Capital Reserve 66 Ivestmet Reserves 66

5 CONTENTS I-17 Ivestmet Revaluatio Reserve 66 u Liabilities 66 Demad liabilities 66 Time liabilities 66 Other Demad ad Time Liabilities (ODTL) 67 Borrowigs 67 Other Liabilities ad Provisios 67 u Assets 67 Cash ad balaces with RBI ad other istitutios 67 Ivestmets 67 Advaces 68 Fixed Assets 68 Other Assets 69 Provisios, cotiget liabilities ad cotiget assets 69 u Bak s Profit ad Loss Accout 70 u Icome 70 u Iterest Icome 70 u Other Icome 71 u Expeses 71 u Operatig expeses 72 u Provisios ad cotigecies 72 u Sigificace of Asset ad Liability Maagemet 72 Asset Liability Iformatio framework has two compoets MIS ad Accessibility to iformatio 72 Asset-Liability Maagemet Committee (ALCO) 73 Asset-Liability process 73 u Asset-Liability Maagemet Mismatches 73 u RBI Pushback o Baks Ifra Loas 75 Asset Liability Mismatch ad liquidity Risk 77 Structural Liquidity Gaps 77 Liquidity Simulatio 77 Liquidity ratio Aalysis 78 Iterest Rate Risk i Bakig Book 78 Iterest Rate Risk Estimatio 79 Iterest rate Risk mitigatio through Off-Balace sheet Strategies 80

6 I-18 CONTENTS Cross Hedgig 81 Iterest Rate futures ad Basis Risk Exposure 81 Iterest rate futures ad Yield curve Risk 82 u Summary 82 u Self Assessmet Questios 82 5 PROFITABILITY OF COMMERCIAL BANKS u Itroductio 83 u Sigificace of Baks profitability 85 Balace sheet of State Bak of Idia 86 Profitability Parameters of Baks 87 Capital Adequacy ratio 87 Net NPA as percetage to Net advaces 88 Retur o assets (ROA) 89 u David Cole Profitability Model 89 Retur o equity Model (David Cole) Dupot Aalysis 90 Retur o assets 91 Net iterest Margi 91 Iterest expeses 91 Burde 92 u Summary 92 u Case Study : Performace Evaluatio of Baks : David Cole Model 92 u Self Assessmet Questios 96 6 CUSTOMER RELATIONSHIP MANAGEMENT (CRM) IN BANKS u Sigificace of CRM i Baks 97 Diverse ad Sophisticated Fiacial Needs of Customers 98 u Categories of Bak Customer Relatioship 98 Bak as a Debtor 98 Bak as a Creditor 100 Bak as a Guarator 100

7 CONTENTS I-19 Bak as a Lessor 100 Bak as a Aget 100 Bak as a Custodia 101 Bak as a Bailee 101 Differece betwee Pledge ad Hypothecatio 101 Differece betwee Mortgage ad Hypothecatio 102 u Bak Disclosure Norms for Customer s accout 102 Disclosure uder compulsio of law 102 Disclosure uder bakig practices 102 u Fiacial Behaviour of Techo - Savvy Bak Customers 103 u Implicatio of CRM i Baks 104 Four levels of CRM 104 Three Matras of Effective CRM 104 CRM solutios 105 u Case - CRM i Bakig - 7P s of Marketig - ICICI Bak 106 E-CRM i Baks 111 Busiess Process Re-egieerig 112 u Bakig Codes ad Stadards Bureau of Idia 112 u Customer Grievaces ad Bakig Ombudsma 112 Bakig ombudsma 113 u Closig Case - E-CRM of Idusid Bak 114 u Self Assessmet Questios RETAIL BANKING u Retail Bakig i Idia 117 Meaig of Retail Bakig 118 u Growig Aveues i Retail Bakig 118 u Techology Drive Retail Bakig 119 Drivers of Retail Growth 120 u Relatioship Maagers - Class Bakig 120 u Iovative Products ad Class Customers 121 u Class Bakig Products of ICICI Bak 121 u Bacassurace : Covergece of Bakig ad Isurace 124

8 I-20 CONTENTS The Isurace Regulatory ad Developmet Authority (IRDA) guidelies for Bacassurace 124 Baks as Isurace Brokig service providers : A milestoe i Retail Bakig 125 Challeges faced by Commercial Baks for Effective Retail Bakig 126 u Summary 126 u Closig Case : Retail Bakig i ICICI Bak 126 u Self Assessmet Questios TECHNOLOGY AND HI-TECH BANKING E-PAYMENTS u Techological Upgradatio ad Uiversal Bakig 129 Evolutio of Techology i Bakig 130 Techo Chaels of Trasactio 131 Core Bakig Solutios (CBS) 132 Automated Teller Machies (ATMs) 133 u Iteret Bakig 134 u Telephoe Bakig 134 u Customer Relatioship Maagemet Solutios 134 u Techology Drive Next Ge: A New segmet of Customers 135 u Gree Bakig ad E-Bakig 136 Techo Products of Commercial Baks 136 Gree Bakig 137 Importace of Gree Bakig 137 Importace of Sustaiable Developmet 137 u Operatioal Efficiecy ad IT Eabled Eviromet 138 I.T. services 138 I.T. ifrastructure 138 Paper 138 Priter 139 Go digital 139 Waste Maagemet - Reduce, reuse ad recycle 139 u Mobile Bakig 139 u IT Visio of Reserve Bak of Idia u Electroic Paymet System 141

9 CONTENTS I-21 Electroic Fuds Trasfer (EFT) 142 Electroic Clearig Service (ECS) 144 ECS Credit 144 ECS Debit 144 Cheque Trucatio 145 Real Time Gross Settlemet (RTGS) 145 u Iformatio System Security Maagemet Framework 145 u Summary 146 u Itegrated Case : Iovative Techological Upgradatio i the Idia Bakig Begiig of IT i Idia Bakig Sector 147 u Self Assessmet Questios RISK MANGEMENT IN BANKS u Risk - A Itegral Part of Bakig 153 Paradigm shift i Bakig Operatios 154 u Bakig Operatios ad Risk Exposure 155 u Classificatio of Risk 156 u Liquidity Risk 156 Dimesios of liquidity risk 156 Liquidity Risk - Measuremet 156 Iterest Rate Risk 157 Iterest Rate Risk ad Asset Liability Mismatch 157 Basis risk 158 Embedded Optio Risk 158 Measuremet of Iterest Rate Risk : GAP ANALYSIS 159 Credit Risk 160 Loa Review ad Risk Migratio 161 Credit Risk Measuremet Approaches uder Basel II 163 Market Risk 164 Tradig Book 164 Cotigecy Exposure 164 u Operatioal Risk 165 Factors Resposible for Operatioal Risks 165 Operatioal Risk Mitigatio Process 166

10 I-22 CONTENTS u Jourey of Risk Mitigatio of Commercial Baks from Basel I to Basel III 167 Basel I 167 Basel II 168 Differece betwee Basel I ad Basel II accord 169 Basel III 169 Regulatory Capital as % to RWA 170 Compariso of Capital Requiremets uder Basel II ad Basel III 170 Exteded Time Lie for Capital Coservatio Buffer (CCB) 171 Basel III - A New Capital Framework 171 Trasformatio Roadmap 177 Basel III Implemetatio 177 Challeges i Migratio 179 u Credit Exposure Norms ad Risk Mitigatio 179 u Summary 182 u Self Assessmet Questios 182 u Itegrated Case Study : Credit Risk Aalysis - New Horizos i The Idia Bakig Sector NON-PERFORMING ASSET MANAGEMENT FOR BETTER BANKING u NPA Maagemet i Baks 197 Meaig 198 Types of NPA 198 Sub-stadard asset 198 Doubtful asset 198 Loss assets 199 Reasos behid NPA 199 Effects of NPA o Baks & Fiacial Istitutios 199 Gross NPA ad Net NPA 199 u RBI s Framework for Revitalisig Distressed Assets 201 Early Recogitio of Stress 201 Smart Reportig : Cetral Repository of Iformatio o Large credits (CRILC) 201

11 CONTENTS I-23 Formatio of Joit Leders Forum 202 Joit Leders Forum (JLF) ad Restructurig of Stressed Assets 202 Restructurig referred by the JLF to the CDR Cell 203 u RBI s Iitiative to Ease Loa Recast Norms 204 RBI s Iitiative for Log Term Ifra Fiacig Loas 204 Wilful Defaulter 205 u SARFAESI Act 206 Recovery through various Chaels 207 Model Form for filig appeals i DRAT 207 u Debt Recovery Tribuals (DRTs) 209 u Lok Adalats 209 u Corporate Debt Restructurig (CDR) 209 u Credit Iformatio Bureau 210 u Iovative Approach for Recovery Maagemet 211 u Sale of No-performig Assets 212 Sale of o-performig assets to baks 212 Sale of No-performig assets to Asset Recostructio Compaies (ARCs) 212 Securitizatio process followed by Asset Recostructio Compay 212 Reserve Bak of Idia s iitiative for streamliig NPA sales by Baks 213 u Closig Case : Baks Rush to Offload Bad Loas 214 u Summary 215 u Self Assessmet Questios INTERNATIONAL BANKING u Iteratioal Bakig i Idia 217 u Dyamics of Foreig Exchage Market 218 u Foreig Exchage Market ad RBI 219 Milestoes i Idia s Foreig Exchage Market 219 FEMA ad sectios covered 220 Differece betwee FERA ad FEMA 221 u Forex Market Players i Idia 222 u Foreig Exchage Segmets 223

12 I-24 CONTENTS Iteratioal Bakig Divisio 223 u Foreig Exchage Correspodet Bakig Relatios 224 Nostro accout 224 Vostro accout 224 Loro accout 224 u Baks as Market Makers 224 u Iter Bak Forex Quote 224 Direct Quotatio 224 Idirect Quotatio 225 u Two way Quote 225 Bid ad Ask Rate 226 Cross Rate 226 u Other rates used i Iteratioal Markets 227 u Bak as Forex dealer 227 Bak s USD positioig as a Forex Dealer 227 u Foreig Exchage Products 229 Spot Trasactios 229 Forward Trasactios 230 Forward Rate Agreemet (FRA) quote 231 TT Buyig Rate 232 TT Sellig Rate 233 Bills Sellig Rate 233 Bills Buyig rate 233 u Foreig Exchage Risk Exposure 236 u Foreig Exchage Risk Mitigatio Tools 236 Optios 238 Europea Optio 238 America Optio 238 Cross Currecy Roll Over Cotacts 238 Fiacial Swaps 239 Iterest Rate Swaps 239 Currecy Swaps 239 Covered Iterest Arbitrage 239 Summary 242

13 CONTENTS I-25 u Closig Case : Uhedged Forex Loas Rise to 85% i July-August u Self Assessmet Questios 244 APPENDICES Appedix 1 : Priority Sector Ledig by Commercial Baks i Idia 248 Appedix 2 : Kow Your Customer/Ati Moey Lauderig/Couter Fudig Terrorism Guidelies 252 Appedix 3 : Credit Default Risk Modellig through Trasitio Matrix - A Case Aalysis at Idusid Bak Ltd. 260 Appedix 4 : Credit Proposal - Assessmet of Log term Credit Proposal for Cosortium Bakig - A research o Justificatio of Viability Report at Pujab Natioal Bak 277 Appedix 5 : Sources of Fuds of Bak of Baroda Loas 289 Appedix 6 : Major Committees i Bakig 300 Appedix 7 : Abbreviatios i Bakig 301 Appedix 8 : Gist of RBI Latest Report o Fiacial Stability Report (Icludig Tred ad Progress of Bakig i Idia ) December REFERENCES 306