Ever greening of Loans

Rating of a bank: CAMELS rating:

C- Capital Adequacy A- Asset Quality (Quality of Loans & Investments) M- Management Quality E-
Earnings L- Liquidity S- Sensitivity to Market risk

Yes bank defaulting on Tier 1 bonds/ LVB Defaulting on Tier 2 Bonds

Buy when others are fearful – Sell when others are greedy

SBI Scheduled Bank- proportion of deposits: CA-20% SA 20% FD 60%

CA payout 0% / SA payout 3% / FD payout is 6%- weighted average cost: 4.20%

Crowding out & Crowding in

FCNR (Foreign Currency Non Resident Deposits) Swaps with RBI- Raghuram Rajan’s tenure

GDP= Consumption Expendiure+ Investments (Private) + Government Expenditure + (Exports –Imports)

Foreign Exchange: Scheduled Banks Eg. SBI, HSBC- Authorized Dealers category 1- Both Current account
and Capital Account transactions

Capital Account- Loans and Investments to and from foreign countries

Current Account—Remittances- Inward & Outward+ Exports & Imports- Merchandise Goods and
Intangible Services + Tourism+ Transfer payments/incomes- Interest and dividends to and from foreign
countries

Lending rates:

1.Cost of Capital/ Borrowings: From other bank Eg- Loans, {Call Money-Unsecured borrowing and
lending between scheduled banks overnight| Notice Money: 2-14 days, Term Money: 15 days up to 1
year, in Term money SLR has to be provided for, For Call and Notice Money CRR & SLR requirement not
there}, Bond coupon payments, Certificate of Deposits, borrowings from RBI eg Repo, MSF, Bank Rate/
Deposit Interest payable (Demand deposit-SA & Time/ term Deposit- FD & RD etc)

+ 2.Operational Cost + 3.Administration Cost + 4.Negative Carry Eg.CRR (RBI does not give interest on
CRR while bank pays interest on the portion of deposit held by RBI)

+ Risk Premium + Profit Margin

1,2,3,4- Base rate (Min rate below which a bank cannot lend)

MPT- Monetary Policy Transmission

RLLR- Repo Linked Lending Rates / MCLR- Marginal Cost of Funds based lending rate
ABOVE IS RBI CURRENCY INTERVENTIONS USING SWAPS DURING RAGHURAM RAJAN’S TENURE

Income Sources of banks:

1. Foreign exchange Income (Treasury)- Bid-Ask Spread

2. Banking Spread: Net Interest Income: Interest from Loans and Investments minus Interest paid
on Deposits and Other borrowings
 B2C: Retail Banking Products-Home loans, LAP- loan against Property, personal loans, car loans,
LAD- Loan against deposits, LAG-gold, Educational Loan

B2B: Corporate banking Products- Term Loan, Working Capital- Cash Credit/ Over draft, Bill
Discounting, Factoring, Pre shipment and Post shipment finance

3. Fee Based Income: Debit card fees, Credit card annual maintenance fees, Locker charges, Drafts,
Transfers.
BIG MONEY: Retail Banking- Third Party distribution commission- Wealth
Management products- Insurance, Mutual funds, PMS
Corporate Banking- Letter of Credit, Bank Guarantees

4. Investment Income ( Treasury)- 40% NW invested in capital market exposure- 20% Direct
(Government sec, Treasury bills, CP, Certificate of Deposits, Listed and Unlisted VC funds,
Mutual Funds )& 20% Indirect ( Loan against shares, Guarantees and loans to stock brokers etc)
-------------------------------------------------------------------------------------------------------------------

Extra Reads: The Asian financial crisis was a period of financial crisis that gripped much of East Asia and Southeast
Asia beginning in July 1997 

RBI Functions

Sterilization- Currency Intervention + Open Market Operation

Quantitative Easing and Tightening
RBI- Seigniorage- Difference in the face value and the cost of printing the currency is the profit

Keynesian liquidity trap

11/01/21 Current Forex Reserves is approx 585 billion usd

Credit creation by banks: Explained in class

Inflation- Cost push inflation, Demand pull inflation, Stagflation-Stagnating economy + Cost push
inflation, Recession- Keynesian Liquidity trap
Seigniorage – diff between the face value of the currency and the cost
Fischers rule= MV=PQ (Money Supply, Velocity of circulation of money, Price, Quantity)
TREPS- Tri partity Repo

LAF- Liquidity Adjustment Facilty (Repo/ Repo- Overnight Rates)

TREPS- Tri Party Repo ( MF, Non Banking companies lend to Banks , CCIL settlement )

Discuss: Interest Rate corridors

 RBI- Priority sector lending targets:
Indian Banks & Foreign banks> 20 branches- 40% of your net bank credit- priority sectors
Subsections: 18% Agriculture, 10% weaker sections of the society etc
Incase they cannot achieve the target- park the deficit in RIDF- Rural Infrastructure Development
corporation (subsidiary of NABARD)

Foreign banks< 20 branches- 32% of Net bank Credit to Priority sectors (No subsections)
Incase they cannot achieve the target- park the deficit in SIDBI

Eg. Farmers loan- given at 7 % by the bank & 2 percent subsidy is given to the bank by the
government. If farmer repays on time interest rate subvention of another 3% subsidized by the
govt. (Effective receivable for the bank- 9% / effective payable for the timely farmer-4%

Clearing and Settlement- Cheque Truncated system

Inward clearing/ Outward clearing

Clearing and Settlement: Cheque Truncated System: Inward Clearing- Download from the server
cheques /drafts issued by your branch deposited in other bank banks- payment to be made & Outward
clearing- Upload to server cheques/drafts deposited in your branch issued by other bank branches (To
be received from other banks)
Loans and Credit Process

CIBIL score: 300 – 900 (score between 750 -900 your rating is good)

Retail banking- Retail Assets team- Loans

Loans: HML-Home Loan (LTV 80%/ for affordable housing <=30 lacs LTV 90%), Education Loans, PIL-
Personal Loans, Car Loans (new cars as high as 90%, used cars approx 75%), LAP- Loan Against
Property(LTV-60%-65-70%-Banks also keep an upper cap on the maximum LAP amount/ tenure also is
shorter approx 15 years), LACP-Loan against Commercial Prop, LAS- Loan Against shares (approx LTV
50%-65%, LAG-Loan against Gold (for Banks due to covid RBI increased ltv to 90%, however bank’s
prefer 75%), LAD- Loan against Deposits (LTV 90%- Bank’s usually charge 2% more than the FD rate,
Balance Transfer, Top up, Home Improvement loans

LTV-Loan to Value/ MoS-Margin of Safety

SARFAESI Act 2002- Securitization and Reconstruction of Financial Assets and Enforcement of Securities
interest Act
Collateral classification

Pledge- LAS, LAD, LAG, Loan against jewelry

Hypothecation- Movable assets- Car loans, Loan against inventory

Mortgage- Immovable assets- Home loans/ Loan against Property/ Rental-Lease discounting

Assignment- Loan against insurance policy/ closed ended mutual funds, PPF
Loan is disbursed only after the borrower pays his own contribution amount first Eg Property cost is
Rs.100, bank will fund Rs.80 only after the borrower pays the builder Rs.20.

Case 1: Sanctioned amount is 80 Lacs | Agreement value+ stamp duty+ registration+ one time electricity
charges etc=84 lacs Property Value= 86 lacs : bank will fund 80% of 84 lacs= 67.2 lacs

Case 2: Sanctioned amount is 60 Lacs | Agreement value+ stamp duty+ registration+ one time electricity
charges etc=84 lacs Property Value= 86 lacs : bank will fund-whichever of the 3 is the lowest- 60 lacs

Case 3: Sanctioned amount is 1 crore | Agreement value+ stamp duty+ registration+ one time electricity
charges etc=70 lacs Property Value= 1.1 crore : Bank will fund 80% of Agreement value etc OR property
value whichever is lower: 80% of 70 lacs= 56 lacs (case of undervaluing property on paper-discussed in
class)

Case 4: Sanctioned amount is 1 crore | Agreement value+ stamp duty+ registration+ one time electricity
charges etc=1 Crore Property Value= 70 lacs : Bank will fund 80% of Agreement value etc OR property
value whichever is lower: 80% of 70 lacs=56 lacs ((case of overvaluing property on paper-discussed in
class)

Balance transfer etc/ different permutations on loans/ prepayment of loans- excel

If you are negotiating and reducing interest rates or making pre payment- KEEP EMI the SAME and
reduce tenure of loan

Home loan
  loan amount 5000000
`

Treasury Functions-discussed (Refer to word document already circulated)

Types of Accounts-Discussed (Refer to word document already circulated)

Retail banking: B2C cases, functions, products, challenges , operations (Refer to word document
already circulated)

KYC & AML- Anti Money Laundering

Money Laundering- Converting illegitimate unaccountable black money into Legitimate accountable
white money: process:

3 processes- Placement- Placing the money into financial economy/ institutions

Layering- series of financial transactions to hide the original source of funds

Integration- Final proceeds are integrated into the financial economy

STR- Suspicious transaction report

Further Reading- Asset Liability Mismatch

Read- Asset Reconstruction companies, Vulture Funds, CDR- Corporate Debt Restructuring, SDR-
Strategic Debt Restructuring, S4A- Scheme for Sustainable Structuring of Stressed assets

Bad Bank
Round tripping of funds- Hawala, Swiss Banks, Tax havens, Hedge Funds- invest back into India via
participatory notes (ODI- Offshore Derivative instruments)

Retail banking Divisions Done

Corporate banking
Corporate banking to done..

Read about TREDS- Trade Receivable Electronic discounting system

Punjab and Maharstra bank HDIL Wadhwans

ILFS & DHFL defaults

TREASURY ASSET LIABILITY MANAGEMENT

Infrastructure loans- Asset liability mismatch- IIFCL- Take out financing (Infra loans are for very long
durations while deposits are maturing within 2,3,5 years)

Using the current account money (0 interest paid) for CRR (0 interest received) and FD money for SLR
(Government bonds bring in interest income)

Asset liability mismatch: Asset- Loan: floating rate receivable & Liability- Fixed Deposit, Bonds &
Debentures issued- Fixed rate payable | When interest rates start decreasing floating rate receivable
decrease/ margins fall/ FD payable is still as per the earlier higher rate fixed

Investment income & Cash management- investing and parking surplus funds for income (Please refer
to Treasury Notes for details-Managing MTM losses on Government securities and investments)

Asset Reconstruction companies- Security Receipts , Asset Management Companies, Bad Banks ,
Vulture funds, Presently even Hedge funds are scouting for Distressed assets at a discount, turning
them around and making big profits
CDR- Corporate Debt Restructuring, SDR-Strategic Debt Restructuring, S4A- Scheme for Sustainable
Structuring of Stressed Assets

Read about Perpetual Tier 1 bonds with Call options in built/contingent convertibles

CAR

CAPITAL ADEQUACY RATIO: CAR- 9% | ALSO KNOWN CRAR- Capital to Risk Weighted Asset ratio

CAR: 9%= Capital: Tier 1(7%) & Tier 2 (2%)/ Risk Weighted Exposure of Assets-Loans & Investments

NUMERATOR: Tier 1- Paid Up Capital+ Retained Earnings + 45% of Revaluation Reserves (Valuation of
physical assets, property etc) + Statutory Reserves (25% of bank’s profit needs to be transferred here)
+ Perpetual Tier 1 bonds (AT1-Additional tier 1 bonds/ Usually Callable after 5 years, may also be
Cocos- Contingent Convertibles)+ Perpetual Non Cumulative Preference shares

Tier 2- 55% of Revaluation Reserves + Bonds+ Non Convertible Debentures + Preference Shares +
Subordinate Debt (weak unsecured debt) + General Bad Debt & Loss Provisions + Undisclosed reserves
+ Investment Fluctuation Reserves (Min 5% upto 10% of the Mark to market investment portfolio:
anything above 10% may be transferred to statutory reserves)

DENOMINATOR: Risk Weighted Exposure of Assets

Bank invests in Government Bonds- RWE=0 | CAR= 9% of 0= 0

Investing in Bonds issued by other scheduled banks or guaranteed by other scheduled bank-RWE=20%

Invested in another banks bonds of 50 cr what is the CAR= 9%* (20% of 50 cr)= INR 90000

Bank provides home loans <=30 Lacs- RWE=50% | Eg.loan is of 30 lacs, CAR= 9% * (50% of 30
lacs)=1.35 lacs (Ans)

Home loan of 70 lacs: RWE=75% | CAR=9%*(75% of 70 lacs)= 4.725 lacs (Ans)

Other loans/ Investment in Liquid Funds, debt securities: RWE=100% | Car Loan of 10 lacs, CAR= 9%
of 10 lacs= 90000

Loans to Capital market entities, stockbrokers, direct investment in equity, Equity MF: RWE=125%

Invested 80 crores in Equity MF: CAR=? { 9% * (1.25 of 80 cr)}= 9 crores

Investment in Venture Funds- RWE=150% : Bank invested 120 cr in a VC Fund: CAR= 9% *(1.5 of 120
cr)= 16.2 cr (Ans)
INCOME RECOGNITION | ASSET CLASSIFICATION | PROVISIONING

If Principle or Interest Not received by the bank on loans for up to 30 days it is categorized as
SMA(Special mention Account) Cat 0

If Principle or Interest Not received by the bank on loans for 31 days till 60 days it is categorized as
SMA(Special mention Account) Cat 1

If Principle or Interest Not received by the bank on loans for 61 days till 90 days it is categorized as
SMA(Special mention Account) Cat 2

If Principle or Interest Not received by the bank on loans for 90 days it is categorized as NPA (Non
Performing Assets)

ASSET CLASSIFICATION PROVISIONING

SECURED PORTION UNSECURED PORTION
Substandard Assets- Loan NPA for up to 1 year 15% 25%
2nd year- Doubtful Assets category 1 25% 100%
3rd-4th year- Doubtful Assets category 2 40% 100%
5th year- Loss Assets 100%
(or if collateral value< 10% of the loan amount)

Eg.1. Loan amount is 150 crores: Substandard asset , Collateral value is 110 cr. What is the provisioning
requirement: 15% *110 cr + 25% * 40 cr= 26.5 crore

Eg.2. loan amount 110 cr, Collateral value is 60 Cr, it is classified as Doubtful Assets category 2, what is
the provisioning requirement: 40%*60 cr+ 100% *50 cr= 74 cr

BASEL III NORMS

Capital Conservation buffer- 2.5% ( India we maintain CAR 9% + 2.5%=11.5%)

Countercyclical buffer- 0-2.5%

Liquidity coverage ratio- Minimum 1 month of liquidity has to be parked in liquid assets to run the bank
incase of emergencies

Pillars of Basel III accord

 Pillar-1 – Enhanced Minimum Capital & Liquidity Requirements

 Pillar-2 – Enhanced Supervisory Review Process for Firm-wide Risk Management and Capital
Planning
 Pillar-3 – Enhanced Risk Disclosure and Market Discipline
 (Global Liquidity standard and supervisory monitoring)
CAMELS Rating: Capital Adequacy | Asset Quality | Management Quality | Earnings | Liquidity |
Sensitivity to Market Risk

Extra reads RBI : Bank’s Stress test

Crowding Out & Crowding in

MFIN/ Microfinance/ JLG-Joint Liability Group

Dodd Frank Act, Glass Steagel act, Paul Volker Rule, Vicker rule, Gramm Leach Biley act