Bank Management

PGDM
IIMC
2020
Praloy Majumder
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Session One

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 Units in an economy ..
• In an Economy there are three units :
– Individual or Households : This is the unit which
is providing labour and services to other two units
against which it is receiving wages ;
– Government : This is the unit which is availing the
service of the household and then producing
goods and services as well as policy measures for
overall improvement of a country ;
– Business : This is the unit which is generating
goods and services by making investment and the
same is being used for consumption of other two
units.
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Flow of income,payments and production in the
economic system

Flow of Expenditure
For consumption and
taxes
Flow of production
Of Goods and
Producing Services Consuming
Units Units
( Mainly (Mainly
Business Households)
Govt)
Flow of Productive
Services

Flow of Income

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Poll time

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 Direct Finance
Flow of Fund

Borrowers Lenders
(deficit budget (surplus budget
unit) unit)

Primary Security

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 Semi Direct Finance
Primary Security Primary Security

Security brokers,
Borrowers Lenders
dealers and
(deficit budget (surplus
investment
unit) budget unit)
bankers

Flow of Funds Flow of Funds

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 Indirect Finance
Secondary Security
Primary Security

Financial
Borrowers Intermediaries Lenders
(deficit budget (Banks, (surplus
unit) Financial Institutions budget unit)

Flow of Funds Flow of Funds

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 Financial Disintermediation
• In the process of financial disintermediation ,
the role of financial intermediary has been
eliminated and the borrowers can raise the
fund directly from the lender with the help of
either public issue or private placement of
securities.
• This can be performed with the help of stock
exchanges.

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Poll time

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 Importance of Bank
Economy Capital Banking Importance
Market Penetration of Banking

Developed Strong High Moderate

Developing Moderate Moderate Moderate to

High

Low income Moderate to Moderate to High

country Weak Low

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 Comparison of developing and
developed economy
Median value ( Developing Economy Developed Economy
between 2000-
2020)
Vietnam China India Indonesia USA UK
Domestic credit 95.82% 125.04% 48.94% 36.42% 183.70% 136.47%
to Private Sector (
% of GDP)
Domestic Credit 95.82% 124.96% 48.94% 25.92% 52.12% 136.24%
to Private Sector
by banks ( % of
GDP)
Banks NPL to 2.28% 1.25% 5.12% 2.43% 1.85% 2.38%
total gross loan (
%)
GDP growth rate 6.55% 9.13% 7.23% 5.07% 2.28% 2.23%
( %)
GDP at Current 262 14343 2875 1119 21374 2827
USD ( billion) as 12
on 2019
 Pace of economic
development and bank credit
Phase I Phase II Phase III
( GDP Value from USD 700 ( GDP Value from USD 100 ( GDP Value from USD 3000 billion to
billion to USD 1000 billion ) billion to USD 3000 billion ) USD 6000 billion )
China
Domestic credit to Private 92.53% 111.12% 124.41%
Sector by bank /GDP

Time taken to reach to the 3 7.1 3

next phase ( years)

GDP growth rate 9.58% 10.50% 10.15%

India
Domestic credit to Private 45.63% 50.15% Yet to cross phase II
Sector by bank /GDP

Time taken to reach to the 2.8 13

next phase ( years)

GDP growth rate 7.66% 6.98%

Indonesia
Domestic credit to Private 32.45% ( **37.75%) Yet to cross Phase II Yest to Cross Phase II
Sector by bank /GDP

Time taken to reach to the 7.3

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next phase ( years)
Role of bank in next 4 years

Source : IMF
 GDP growth and bank credit
• GDP contracted by 23.8%
• GDP = C+I+G+ X- M
– C= consumption
– I = investment
– G = government
– X = export
– M = import

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 Employment in urban areas ( 15
year and above )
Self employed Regular wages Casual labour Total
/salaried
employees
Male
April- June 38.7% 48.0% 13.3% 100%
2019

Female
April- June 33.3% 58.3% 8.4% 100%
2019

Person
April- June 37.7% 50.0% 12.3% 100%
2019

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 Bank credit and GDP post
pandemic
• Capital starved country
• Capital can come from :
– Abroad
– Domestic
• Shortage of capital :
– MSME is short of Rs 23 trillion as per UK
Sinha committee report

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Poll time

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Standard and Poor predictions
on global banking sector
Late exiter - High India, Mexico , South
negative impact Africa

Australia, US, France ,Indonesia,

Mid exiter - Moderate Italy,Spain , UK , Japan ,
negative impact Germany , Brazil , Russia

China , Singapore , Canada ,

Early exiter - low Hongkong,South Korea, Saudi
negative impact Arabia

2021 2022 2023 2023 b

Source : S&P Global banking report Sept 2020

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Banking business

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Performance of Indian Bank
Q1 2020 -21
Performance of Indian Bank - Q1 2020-21
Profit ( Rs crores ) Gross NPA (%)
2020 2019 2020 2019
BOB -864 710 9.39% 10.28%
SBI 4189 2312 5.44% 6.15%
Canara 406 329 8.84% 8.77%
ICICI 2599 1908 5.46% 6.49%
HDFC Bank 6658 5568 1.36% 1.26%
Kotak 1244 1366 2.70% 2.19%
Axis 1112 1370 4.72% 5.25%
Bandhan 550.00 804.00 1.43% 1.70%
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 Performance of global bank
2020
Performance of global banks - First Nine Months
First Half Third quarter
Bank of
America , Lesser loan losses
Citi Bank provisions ; lower profit
and JP for banks lesser focus on
Morgan Slender profits treasury income
Wells
Fergo Loss Lower income
Goldmand
Sachs and
Morgan Profit but lesser compared
Stanley Stellar profits to Q2

Provisions
booked by
big 5 USD 60 billion USD 6.5 billions 22
What is the way forward ?

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Poll time

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Analysis of bank balance sheet

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 HDFC Bank As on March 31 ,2020 ( ITC Limited as on March 31, 2020 ( Rs crores )
Rs crores )
% of total % of total
Equity share 548.33 0.04% Equity share 1229.22 1.63%
Capital Capital
Reserves and 170437.70 11% Reserves and 62799.94 83.47%
Surplus Surplus
Share holders 170986.03 11.17% Share holders 64029.16 85.11%
fund fund
Deposits 1147502.29 74.98% Non current 2116.79 2.81%
liability
Borrowings 144628.54 9.45% Current liability 9089.41 12.08%
and provisions
Other liabilities 67394.40 4.40%
and provisions

Total Liabilities 1359525.23 88.83% Total Liabilities 11206.20 14.89%

Total Capital Total Capital

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and Liabilities 1530511.26 100.00% and Liabilities 75235.36 100.00%
 Analysis Liability Side…
• In Bank : Equity and reserve component is
much less than that of a manufacturing
company .
• In Bank : TOL is higher;
• Financial leverage is significantly higher in
case of a bank compared to that of a
manufacturing company .
• If the financial leverage is higher , the risk of
bank is also higher .

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 HDFC Bank As on March 31 ITC Limited as on
,2020 March 31, 2020
Rs crores % of total Rs crores % of total

Cash and 72205.12 4.72% Cash and 6843.27 9.10%

Bank with Bank
RBI
Balance with 14413.60 0.94% Investment 30630.61 40.71%
Banks
Investments 391826.66 25.60% Loans 4333.66 5.76%
Advances 993702.88 64.93% Receivable 2092.00 2.78%
Financial 1472148.26 96.19% Financial 43899.54 58.35%
Assets Assets
Fixed Asset 4431.92 0.29% Fixed Asset 23297.75 30.97%
Other Assets 53931.09 3.52% Inventories 8038.07 10.68%

Physical 58363.01 3.81% Physical 31335.82 41.65%

Assets Assets
Total Assets 1530511.27 100.00% Total Assets 75235.36 100.00%

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 Analysis Asset Side…
• Bank: Fixed asset part is significantly lower
compared to that of the manufacturing
company .
• Bank : Financial asset in the form of loans and
advances are significantly higher compared
to that of the manufacturing company .
• Bank : Financial Investment is also higher
compared to that of manufacturing company
.
• Bank’s assets are financial where reduction of
price can be much faster.
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 Off Balance Sheet Items …
• Besides the on balance sheet items i.e. Assets
and Liabilities , Banks do have large amount
of Off Balance Sheet Items
• In the case of Off Balance Sheet items, some
of them are traded and some of them are not
traded.
• For Off Balance sheet items risks are quite
high and this must be captured to contain the
risk.
• Off Balance Sheet non traded items are
associated with Credit Risk
• Off Balance Sheet traded items are associated
with mainly Market Risk
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 Complex Holding Structure
……
• Banks are holding lot of investments in their
books which is originated in the complex
structures
• This complex structure makes it very difficult
for the regulator to identify the risk and also
to quantify the risks
• This complex structure should be also be
addressed to contain the risk of the system
• The ring fencing strategy has to be adopted
to contain the risk :
– Study the recent draft guidelines of RBI
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 Process of Reducing the risk
Liability Side Asset Side Process
Impact Reduce the riskiness
Reduce the Risk of asset by proper
By Increasing the regulation : capital
Capital : market exposure ;
Capital Adequacy Reg concentration
Ratio ; ulati exposure ;
By Reducing the ons Marking the asset as
dependence on per market value ;
Short term Maintenance of
liability Liquid asset ;
ALM

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Balance sheet of bank

Equity
Net fixed
asset
Borrowing Investment
Loans and
advances
Deposit Other assets
Cash and
Bank
Other RBI Balance
liabilities

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