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Managment of Commercial Bank For NBL
Managment of Commercial Bank For NBL
Defination
A commercial bank (or business bank) is a type of financial institution and intermediary. It is a bank that lends
money and provides transactional, savings, and money market accounts and that accepts time deposits.
Financial intermediation
The process performed by banks of taking in funds from a depositor and then lending them out to a borrower.
The banking business thrives on the financial intermediation abilities of financial institutions that allow them to
lend out money at relatively high rates of interest while receiving money on deposit at relatively low rates of
interest.
The microfinance sector in Nepal has expanded and became more diversified in recent years and apart from
serving the poor, particularly women, may also fill the gap left by the progressive withdrawal of commercial banks
from rural areas, due to the insurgency and cost savings measures. Diversification has come from the
commercialization of leading NGOs and their transformation into rural microfinance banks. They compete with
pre-established public Regional Rural Development Banks, using the same Grameen Bank methodology as many
of the smaller Nepali microfinance institutions .
The major objectives of the Financial intermediation in Nepal are
To promote the deprive sector economy
To make financial remote financial service at backwarded area of Nepal
For small and cottage industry financing
But however the practices of neplease micro finance which is holding major part of financial intermediation in
Nepal is being commercial rather than to meet their social objectives for promoting Nepal backwarded economy .
ADBL is gradually shifting it’s objectives form Financial intermediation towards commercial bank .
Banking instruments p
(2) Checks or Cheques: A "check" may be defined as a written order on a bank or banker for the payment of money
(3) Bills of exchange or drafts: A "bill of exchange" or "draft" may be defined as an order drawn by one party,
called the "drawer," on another party, called the "drawee," for the payment of money to a third party, called the
"payee," the amount to be charged to the drawer. A bill of exchange may be drawn payable at sight or at some
specified time subsequent to sight or demand.
(4) Acceptances: Unless the drawee wishes to pay a time draft or bill when presented before it is due, he writes
across the face of the paper the word "accepted," with his signature and the date. This means that the drawee
assents to the terms of the bill or draft and binds himself to honor it at maturity. It then becomes known as an
"acceptance."
(5) Promissory notes: A "promissory note" is a promise made in writing by one party, called the "maker," to pay a
sum of money to another party, called the "payee," or to his order.
6) Cards
7) Letter of Credit: A standard, commercial letter of credit is a document issued mostly by a financial institution,
used primarily in trade finance, which usually provides an irrevocable payment undertaking. The parties to a letter
of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client,
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and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot
be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank.
8) Traveller's Cheque(TC): A traveler's cheque is a preprinted, fixed-amount cheque designed to allow the person
signing it to make an unconditional payment to someone else as a result of having paid the issuer for that privilege.
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This probability is used as a dependent variable (effect) whose variance is explained by a set of independent
variables (cause). Financial ratios and other external variables are generally used as independent variables.
Econometric techniques include linear and multiple discriminant analysis, multiple regression, logit analysis and
probit analysis.
Optimisation models use mathematical programming techniques to minimize lender error and thus maximise
profits.
Neural networks try to emulate the human decision-making process using data as used in econometric techniques.
Hybrid systems involve establishing causal relationships by estimating the parameters of such relationships.
Interest Rates
Interest rates are the amount that a borrower pays for to a lender in order to use capital for a specific period of time.
Interest rate is also known as the cost of borrowing assets. Interest rates are expressed in terms of annual
percentages on the amount that is borrowed or on that portion of the borrowed amount that remains unpaid.
Who Determines Interest Rates?
In countries with centralized banking systems, the rate of interest is determined by the central bank or a federal
bank. A country’s economists observe the prevailing financial conditions before they make recommendations.
Accordingly, the country’s central bank devises a national interest rate policy that governs interest rates pertaining
to lending and borrowing throughout the nation.
Factors That Affect Interest Rates
Interest rates are usually determined by the forces of demand and supply. Here are some factors that financial
institutions or lenders consider when they determine interest rates for a specific amount:
Opportunity cost: This is the profit that a lender can earn, if the loan amount had been invested elsewhere.
Inflation: The rate of inflation impacts interest rates because every lender wants returns from the loan to reflect the
reduced purchasing power. Lenders usually add the existing or expected inflation value to the interest rates to avoid
losses. Alternatively, lenders can also charge market-driven interest rates that correspond with changes in the rate
of inflation.
Default: There is always a probability of borrowers declaring bankruptcy. They can also abscond or default on
loan repayment. So, this aspect impacts interest rates too.
Loan duration: In short-term loans, it is possible to predict risk factors and inflation rates to a certain extent but
not for long term loans. Long term loans are difficult to estimate because the lender has to incorporate all possible
risks to estimate the future value of the loan amount. A lender’s priority would be to remain profitable. So, it
results in formulating higher interest rates.
Types of Interest Rates
Simple interest is calculated on the principal amount or the amount left unpaid.
Compound interest differs from simple interest in two ways. Firstly, compound interest can be calculated annually,
semiannually, quarterly or continuously. Next, the unpaid interest earned is added to the unpaid amount to obtain
principal amount for the next period.
Key Interest Rate Facts
Interest rates are charges paid or received for borrowing or lending money.
Interest rates are expressed as a percentage of the sum in question, and vary depending on the product (credit card,
certificate of deposit, savings, house loan, car loan, interbank loan, etc), the economic climate and conditions,
political situation, monetary policy, fiscal policy, legislation, and more.
Interest rates are key drivers in any free-market economy. The lower the central bank rates, the easier money flows
between banks and ultimately to consumers.
Interest rates directly contribute to consumer activity in that the higher they are for bank savings account and
certificate of deposits (CDs) the more the consumers will save. The same is true for Treasury Bills, or T-Bills,
which are guaranteed US government bonds.
Interest rates drive consumer spending and lending in the credit card sector as well, although less-so than
elsewhere.
Lower credit card interest rates mean more people will apply for credit cards, facilitating more consumer stimulus
and spending. Note that high interest rates never stopped consumers from using their credit cards, however.
Interest rates, in the form of T-Bills also play a role in foreign investment. China has a trillion or more US dollars
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invested in the US, and if the T-Bill rates suddenly dropped and China pulled their money out, the US would suffer
unimaginable financial turmoil.
]The subject of interest rates is broad and complex, and is vitally important to every economy's consumer and
commercial success.
Asset and Liability Management
In banking, asset and liability management is the practice of managing risks that arise due to mismatches
between the assets and liabilities (debts and assets) of the bank.
Banks face several risks such as the liquidity risk, interest rate risk, credit risk and operational risk. Asset Liability
management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks,
other financial services companies and corporations.
1.liquidity risk:
Asset Liquidity - An asset cannot be sold due to lack of liquidity in the market - essentially a sub-set of
market risk. Funding liquidity - Risk that liabilities Cannot be met when they fall due
2.interest rate risk
Interest rate risk is the risk (variability in value) borne by an interest-bearing asset, such as a loan or a
bond, due to variability of interest rates. In general, as rates rise, the price of a fixed rate bond will fall, and vice
versa. Interest rate risk is commonly measured by the bond's duration.
3.Credit Risk
Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the
principal or interest (coupon) or both).
4. Operational Risk
operational risk is a risk arising from execution of a company's business functions. As such, it is a very
broad concept including e.g. fraud risks, legal risks, physical or environmental risks, etc
5. Market Risk
Market risk is the risk that the value of an investment will decrease due to moves in market factors. The
four standard market risk factors are:
Equity risk, the risk that stock prices will change.
Interest rate risk, the risk that interest rates will change.
Currency risk, the risk that foreign exchange rates will change.
Commodity risk, the risk that commodity prices (e.g. grains, metals) will change.
Banks manage the risks of Asset liability mismatch by matching the assets and liabilities according to the maturity
pattern or the matching the duration, by hedging and by securitization. Much of the techniques for hedging stem
from the delta hedging concepts introduced in the Black-Scholes model and in the work of Robert C. Merton and
Robert A. Jarrow. The early origins of asset and liability management date to the high interest rate periods of 1975-
6 and the late 1970s and early 1980s in the United States. Van Deventer, Imai and Mesler (2004), chapter 2, outline
this history in detail.
Modern risk management now takes place from an integrated approach to enterprise risk management that reflects
the fact that interest rate risk, credit risk, market risk, and liquidity risk are all interrelated. The Jarrow-Turnbull
model is an example of a risk management methodology that integrates default and random interest rates. The
earliest work in this regard was done by Robert C. Merton. Increasing integrated risk management is done on a full
mark to market basis rather than the accounting basis that was at the heart of the first interest rate sensivity gap and
duration calculations.
Liquidity and Profitability Management
Liquidity is the ability to meet the future obligation
In banking term it is the value of liquid assets bank possess in various forms.
Profitability is the return from the efficient and effective use of capital and assets. Maximisation of the banks stock
price by increasing cash flow is the profitability.
Causes of liquidity crisis
1. Better to say its Liquidity Crunch - since it is of short term nature and is fluctuating.
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2. This is the crunch for Banking Sector only not for the economy as a whole.
3. Decreasing growth in remittances - no surplus left with NRB
4. Increased number of cooperatives, Financial institutions and ATMs - which increases the need of holding
more cash in vault and machines.
5. Rural sectors' economy is also being gradually monetised due to which they are also holding more money (few
years ago barter system was in practice)
6. Inflation and money supply - inflation is in a greater percentage than the growth of money supply. (M1 is
being decreased at 1.3% and M2 is increasing at 3.7% however inflation is at 9.5% as on May, 2011)
7. Problem appeared due to the weaknesses of commercial banks also. Like:
o Credit growth is higher than the deposit growth. (credit has increased at 11% however deposit has
increased at 2.95%, as on May, 2011)
o Weak portfolio management - huge investment in real estate, which is now very stagnant due to which
cash flow is not happening.
o Mismatch of maturity - they could not match the maturity of source and use of fund (funds from short
term sources are being used in long term nature loans); weak forecast and management of institutional
bulk deposits
8. Lack of public faith over banking system - they are holding cash with themselves. (Liquidity is flowing toward
the bigger banks)
9. Informal trade - need for cash for the informal business (they can't do it through banking,); open boarder
10. Requirements of the declaration of source of income - due to the requirement of Anti-Money Laundering
provisions.
11. Political reasons - government expenditures are being delayed - govt. surplus with NRB is 15.71 arb.;
Domestic borrowing is 10.75 arb,
12. Capital flight - insurance, over invoicing of imports, hundi etc.
Principles or Theories of Liquidity management
1. The real bill doctrine
it states that the bank should invest or finance the self liquidating assets i.e loan.Self liquidating
loans are those which are meant to finance producion storage transportation and distribution. when
such goods are sold the loans are considered to liquidate themselves autometically.
2. The shiftability Theory This theory of bank liquidity states that if the commercial bank maintain a
substantial amount of asets that can be shifted on to the other bank for cash without material loss in case of
necessity, then there is no need to reply on maturities.
3. The anticipated income theory This theory states regardless of the nature and character of the borrowers
business the bank plans the liquidation of the long term loan from the anticipated income of the borrower
Deposit management of commercial bank
One of the main functions of banks is to accept deposits. Deposits may be fixed, saving, current etc Banks
will have to pay interest to the customers on the basis of the amount deposited by them. Deposits are used
for the purpose of lending but since banks are using other peoples money to do business, it should make
shure that it will be able to repay the deposits to the respective customers when they claim for it. The
management of all this is called deposit management.
The major factor to be consider over deposit management are
Cost of fund .
Liquidity and profitability trade up
Causes of liquidity crisis and trend of liquidity at industry
Types of deposit product and there relevancy and use
Portfolio of deposit or deposit mix.
Seasonal demand of liquidity etc
Pricing of banking products
Pricing has two dimensions – competitors and consumers. When you price your deposits based only
on the competitive landscape, you are assuming that consumers respond to rates in the same way all
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the time. This assumption is incorrect. In reality, consumers respond to rates based on the principles
of behavioral finance.
The governing principle of behavioral finance is that consumers make intuitive decisions during
stressful economic times, as a result of high money anxiety, and shift to analytical decision-making
mode when economic conditions improve. The implication of this principle is that financial
institutions can price deposits differently during various levels of money anxiety
One of the most difficult, yet important, issues you must decide as an entrepreneur is how much to
charge for your product or service. While there is no one single right way to determine your pricing
strategy, fortunately there are some guidelines that will help you with your decision.
Before we get to the actual pricing models, here are some of the factors that you need to consider:
Positioning - How are you positioning your product in the market? Is pricing going to be a key part of that
positioning? If you're running a discount store, you're always going to be trying to keep your prices as low as
possible (or at least lower than your competitors). On the other hand, if you're positioning your product as an
exclusive luxury product, a price that's too low may actually hurt your image. The pricing has to be consistent
with the positioning. People really do hold strongly to the idea that you get what you pay for.
Demand Curve - How will your pricing affect demand? You're going to have to do some basic market
research to find this out, even if it's informal. Get 10 people to answer a simple questionnaire, asking them,
"Would you buy this product/service at X price? Y price? Z price?" For a larger venture, you'll want to do
something more formal, of course -- perhaps hire a market research firm. But even a sole practitioner can chart
a basic curve that says that at X price, X' percentage will buy, at Y price, Y' will buy, and at Z price Z' will buy.
Cost - Calculate the fixed and variable costs associated with your product or service. How much is the "cost of
goods", i.e., a cost associated with each item sold or service delivered, and how much is "fixed overhead", i.e.,
it doesn't change unless your company changes dramatically in size? Remember that your gross margin (price
minus cost of goods) has to amply cover your fixed overhead in order for you to turn a profit. Many
entrepreneurs under-estimate this and it gets them into trouble.
Environmental factors - Are there any legal or other constraints on pricing? For example, in some cities,
towing fees from auto accidents are set at a fixed price by law. Or for doctors, insurance companies and
Medicare will only reimburse a certain price. Also, what possible actions might your competitors take? Will too
low a price from you trigger a price war? Find out what external factors may affect your pricing.
The next step is to determine your pricing objectives. What are you trying to accomplish with your pricing?
Short-term profit maximization - While this sounds great, it may not actually be the optimal approach for
long-term profits. This approach is common in companies that are bootstrapping, as cash flow is the overriding
consideration. It's also common among smaller companies hoping to attract venture funding by demonstrating
profitability as soon as possible.
Short-term revenue maximization - This approach seeks to maximize long-term profits by increasing market
share and lowering costs through economy of scale. For a well-funded company, or a newly public company,
revenues are considered more important than profits in building investor confidence. Higher revenues at a slim
profit, or even a loss, show that the company is building market share and will likely reach profitability.
Amazon.com, for example, posted record-breaking revenues for several years before ever showing a profit, and
its market capitalization reflected the high investor confidence those revenues generated.
Maximize quantity - There are a couple of possible reasons to choose the strategy. It may be to focus on
reducing long-term costs by achieving economies of scale. This approach might be used by a company well-
funded by its founders and other "close" investors. Or it may be to maximize market penetration - particularly
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appropriate when you expect to have a lot repeat customers. The plan may be to increase profits by reducing
costs, or to upsell existing customers on higher-profit products down the road.
Maximize profit margin - This strategy is most appropriate when the number of sales is either expected to be
very low or sporadic and unpredictable. Examples include custom jewelry, art, hand-made automobiles and
other luxury items.
Differentiation - At one extreme, being the low-cost leader is a form of differentiation from the competition.
At the other end, a high price signals high quality and/or a high level of service. Some people really do order
lobster just because it's the most expensive thing on the menu.
Survival - In certain situations, such as a price war, market decline or market saturation, you must temporarily
set a price that will cover costs and allow you to continue operations.
At banking sector
Banks' disinclination to compete on price is generally tied directly to the paucity of analytics and rigor in their
pricing computations".
Essentially pricing can only get more sophisticated as more analytics enter the decisioning process. Simple
segmentation analytics will help but any serious attempt to manage pricing in a more sophisticated way will
involve multiple models (risk, propensity to buy, propensity to use credit, retention risk) and do some trade off
between them. In addition pricing decisions will still need rules as there are layers of regulation and policies
that must be applied around the models. The key element to get started is that Banks need more finely grained
segmentation for their pricing. Most of them already do a great job of segmentation for risk, credit line
management and so on but they lack this approach in pricing. They don't have a comprehensive pricing strategy
that reflects the sensitivities and desires of customers. As Kathleen says:
"If there is one factor that has hampered banks in their ability to be customer-centric and proactively manage
their relationships with customers, it is their reliance on a one-size-fits-all approach to the mass market".
So how would you tackle this from an Enterprise Decision Management approach:
Focus on the pricing decision made for a product and a customer as a specific operational decision
As distinct from saying the decision is a strategic one as to how to price a product line.
Build analytic models for various aspects of the customer
Propensity to buy Credit Risk
Price sensitivity Retention Risk
Lifetime value
Interbank relations
Describing any loan, deposit, transaction or other relationship between two banks. Interbank transactions
provide a great deal of liquidity . It protect bank from liquidity crisis and profitability management . In Nepal
we can observe interbank relation as an between different category of bank at all class that means not
catagorily separate. Inter bank relation help bank for the following purpose
Use of bank route for remittance both at domestic and international .
Use of fund of other bank for the short term during the time of crisis .
Less cash in transit .
Use of treasusry deal for short term investment of fund .
Member of clearing house and support for cash less transection
Thanks
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