vignt'a™ principles and Practiogs Of Banking ang Hy | hy no eee (o) Amount ()) Mininun thereafter (il) There ts ne ma (a) Perlod of depoultt (Minimum 6 mon (i) Depoalte can be made State Bank of Indlat Now State Bank of India In providing, following, types of accounts to the customers. They ares (1) Savings Bank, (2) Current Account. a (3) Term Deposits. ch (4) Non-Resident (ordinary) Account. ( i" (5) Forelgn Currency Non Resident Account. ’ ' 5 10 lakhe and in multiple of ¢] iy ximun celllngy tha and maximum of 24 months, in multiples of month, a (6) FCNB Premium Account. * (7) Resident Forelgn Currency Accounts. 3.3 BANKING SERVICES AND PRODUCTS: Introduction: Over the years the nature and scope of services provided yy banks have changed and expanded go much that no definition banking can be comprehensive enough. At the same time, primary activity of banks continues to be “acceptingy for purpose of lending and investment, deposits of money.” oat started as safe keepers of valuables such as grain and pre metal, and the receipts Issued by them were trusted 60 muC uP they came to be used as money, 7 The roles played by banks are: (i) Payment System Constituent, (i) Financial Intermediary, and (lil) Financial Service Provider, bhsypes of ACCOUNtS, Services and Financlal Inclusion rrr st et aC a to lend a major portion of their deposits and lay the i: le of an intermediary and also constitute the payment stems because of the trust of the people that the bank will honour their commitments, To retain the trust of the people, the panks have to adhere to certain principles while conducting their pusiness. They are: (a) Liquidity. (b) Safety. (0) Profitability. (d) Secrecy. (e) Service quality. As stated earlier, the importance of banks to the nation as intermediaries and constituents of the payment system make banking more than a business. Hence, the world over, banking is highly regulated to ensure, the health of individual banks and of the banking system as a whole. The services offered by banks in their various roles can be summarised as follows with the help of chart. Banking Services Payment System Intermediary Constituent Payment Collection Forex Deposit ‘Loan and Remittances a Distribution Collection Demat Safe Keeping Advisory ‘3.1 PAYMENT SYSTEM: i Banks are the only institutions that can accept demand deposits At *Posits repayable as and when demanded by the depositor. other financial institutions can take only fixed deposits or “Posits Tepayable after a specific period of time. Next, banks arerv EN Via 412 ree Vipul’s™ Principles and Practices of Banking ang Ite cura i itor can issue a ch the only institutions on which a depositor | que ty withdraw his deposits. As the only institutions that can Compl, transactions involving cheques, and also more money from pia, to place, banks, collectively, have evolved into the Paymeny system of the economy. The banking system is, in fact, the circulatory system of the economy. If money could not be moved from account to accouny and place to place, transactions cannot be completed and economic activity will come to halt. The role of banks constituents of the payment system is as important as its role ag the largest intermediary as far as its relevance to the economy ig concerned. It also yields the banks substantial income by ‘way of fees and commission. Under this role bank provides following services and products. (A) Payment and Remittance: Under this service, following products are provided to the customer. @ Cheque. (2) Pay order/Bankers cheque. (3) Demand Draft. (4) Multi city cheques (Anywhere banking). (5) Electronic Funds Transfer. (6) Debit Card. (7) Credit Card. (8) Charge Card. (9) Travel Card. (B) Collection: (1) Transfer. (2) Local Clearing. (3) Electronic Clearing System (ECS); Credit ECS, Debit EC (4) Cheque Collection. (5) National Clearing.Ee. oraccounts, Services and Financial inclusion wT 113 0 Cash Management Service (CMs) (7) Bill Collection. a Forex - Foreign Exchange: ( when remittance takes place between place in two different nuntries, settlement of the transaction becomes a little Ssmplicated because two different currencies are involved. For ipstance, if a remittance is made from Mumbai to USA, while the emitter will pay in Indian Rupees, the beneficiary in USA will pave to be paid in Dollars. For this purpose, banks in India maintain accounts with bank abroad (Nostro Accounts) for facilitating foreign exchange transaction. So the remitter will pay the equivalent amount (Say 100 Dollars) in Indian Rupees to his bank (where he is having bank account) say ICICI Bank. The ICICI pank will instruct the bank in USA (Correspondent Bank) with whom they maintain a Nostro Account to debit or take $100 from their Nostro Account and pay it to the beneficiary in New York. The volume of international trade being large, trade remittances involving foreign exchange is substantial. 3.3.2. INTERMEDIARY: Money, to be productive needs to circulate. If all savings are hoarded, the surplus of the community will not be available for investments and this would lead to economic stagnation. Financial intermediaries play an important economic function by facilitating productive use of the surpluses of the community to generate employment and promote economic welfare by enabling Production of goods and services tequired by the community. Thus, intermediation is very important economic function. Intermediation provides a business opportunity too as the itors will be happy to bear interest at a rate lower than the Tate the borrowers are prepared to pay because they are insulated ftom all risks, The differences between the rate charged to the °wers and the rate paid to the depositors, or spread as it is Called in, banking parlance, can yield the bank substantial profits. ne Spread is the reward for managing risks, Banks provides °wing services and products under this role.Ps ena (A) Deposits: Different types of deposit = (2) Current Accounts. (2) Saving Accounts. (3) Fixed Deposits. (4) Recurring Deposits (B) Loan: Banks providing loans for ¥ ramen, Leng are csi i¥0 Credit. They are: (Q) Retail Loans: (a) Hoasing or Mortgage Loans (@) Vehicle Loans. (0 Consumer Durable Loans. (@ Personal Loans. (@. Loan against Share. (0 Loan against Fixed Deposit. (@) Personal Overdraft. (2) Business Credit: (@) Tem loans, and lease. (©) Working capital facility. (Overdraft ‘Cash Credit (i Packing Credit (iv) Demand Loan (0) Business Card. (© Trade Finance, Retail Loans and atria, YT. gnc SPURS Fae cen rer iv) Letter of credit (#) Bill negotiation (vi) Guarantees, 1 various PUNpOseS and in vay Basing us sa P janes Needs of the ciditonal service t. ging People. Tod: eee oetfeing themselves ws francl evs peerage vast banks. The financial services offered by bane inches, t 35 JO products of mutual funds geting, Products Of mutual funds and insurance companies, jection of willy il payments sl of gld cis and mary eae! ivi Yield the bank commissic eh These aces commission income The jal services andl products are basicaly clase into Bve | ) Distribution: Under distribution products are: } (2) Mutual Funds. {@) Insurance Products, (@) Government Bonds. (@) Stamp Paper. () Gold Coins (© Mobile Recharge. (7 Share of Companies (Public Issue). @) Collection: (1) Taxes (2) Utility Bills, Eg, Electricity bill (© De-Mat: DeMat share account. (D) Safe Keeping: |) Safe Deposit Vault @) Safe Custody.3.4 BANKING - CURRENT SCE sw pinitesand fractices oF BANG and iy ‘vip Prin Ing, ns EW (® Aavison: Investment Advice NARIO: Dear aeoamh vehi has Become ne of te oe bang ene oe Tig eae nog ot inn Bigs se charg nai ana Inan banks Fn a le The ebanks, which may call a5 services to its customers: ‘+ Credit Card Debit Card. = Cheque. + DeMAT Accounts Telephone Banking. ‘« Electronic Data Interchange (EDD) ATM. ‘s Electronic Funds Transfer (EFT). + Mobile Banking. + Internet Banking. Now acdays, customers are enjoying ‘Anywhere Banking’ through Core Banking systems and ‘Any Time Banking’ through new, 24/7/365 delivery channels such as Automated Teller Machines (ATMs) and Net and Mobile Banking: Another, home ‘banking, its the process of completing financial transaction from home a opposed to utilising a branch of a bank. Eg. make ‘Account Inquiries and Automatic Clearing Houses (ACHS) {facilitate the payment of bills without the need to write a cheque. Phone and mobile banking area fairly recent phenomenon for the dian banking industry. The ‘Smart Card’ with microprocessor ‘chip have added new dimension to the current scenario. An introduction of ‘Cyber Cash’ the exchange of cash takes place aot CY SEHR a con May tnxough ‘Cyber-book, j ity land phone bis acto cay, prom the above table we can und baie rors Now technologies oct aa Understand the growth of ranking. jomet management of a proces of change. In recent werd various facilitie lationship is also well. Banks are pooriding ies to the customer 7 ied tansaction ‘procesing environmn ee ea fo ety oleh, ca cozng, te ch withdrawal om any branch ‘ATM, on tine rt ‘ices including on line payment for the ame and more, ettatization in Banks: Spitalization means, iS a process of converting data i aigtal format by adopting technology. = “The following functions included in the dgitalization in banks: Flectronic Banking is an umbrella tem for the Bestors Customs may pero baeing,tarwscns wn onicaly without visting» brick-and-mortar inetation. seNfoltowing terme all refer to one fon or another of The nie baring: Personal Computes () banking. Internet gene, Virtual banking, Online banking, Home banking bare ote Electron banking It sould be noted tht the a ered to describe the various pes of eectrorc banking ter et ised interchangeably. in simple, ebanking ea ae oy with a personal computer and a browser ca et any wee o his banks website to peeform any ofthe vital Banking factions @ Mobile Banking also Known as Mbanking, SMS banking, Mob Oa Ed fr prfoing balance cess, acount enantio pape srobile phone. nga mobile phone Mere Inte! bat can ao we spec programmes, called cents Re obile networks ae UPS ‘As mobile wero genetion muted 5 UMTS to delve Ty nies econ mole Powe | zand PACKED OHO a panes an ‘ot, bile banking ScoTeS Over mon where Anytime Banki a OW reason that th me m Tamale patients ing’ 7 wth of techn}, Electronic Payment sytem Taide. More ang Ss © Gane he BREE pred noth cash py ations ae aystem. Electronic devig™ see nt a5 well aS non-cash pays making saint. ; : . ey ; ATMs have surpass, a ATMS-ATMTT ne / fixed hours of cust ime Limits t fer a host of banking services ‘dada Spee. withdrawals, requisions instruction Sc eae ue orate fos. ATM, access 10 which 18 el mene ee Payment Network System (SPNS): Under srs 0 Saar emnt participating banks ise univer ca SE ESoneh for uanaacting on this network 3° Siete pony oye eri tea tern stem shared by diferent p. ¢ Say cutoner he ATM card isued by ong G2 gto any Att iinked to SPNS, whether sitaees fhe hme bark branch or another branch of another bag the ured some basi exental banking business ng cao withdrawal depos balance enquiry ete (@ Hectronie Pure: The card has space for seven! ‘clecronic purses’ each for the storage of am anu These can be sued for diferent accounts, In adton there ib opsceforuier data such as. adress, bras, where, the user has his account and even last 30 to 50 transactions, (@) Beetronic Cheque: The smart card can be used during Fectronic Fund Transfer at the Print-of Sales (EFTPO3) Wiig Ballers checkout, the card is placed in the reade. raneee, automatically goes through authentication “etences, to authorise payments the customer types Ba: neo @ o Accounts eee 04 Fnac econ ow uo : cardholder's bank accoun automatically debited and the retailer's account creeds Electronic Cash: Funds can ed for use paper toed be loaded into a ca stron cash can then be used for making purchases with necessarily requiring authorisation of PIN, the retailer presents this information to the bank $0 that this account can be eredited. ERT Electronic Fund Transfer: The use of MICR technology for processing of cheques was the first step towards the mechanism of the cheque clearing system, which Inter pared the way for introduction of EFT systems, ‘The EFT takes two forms - credit transfes, debit transfer. EFT system as means of real-time funds transfer mechanism is now a well-established concept in all the developed countries. The wire transfers, ATMs, POS and Cards have become the largest facilitators of EFT. Real time gross settlement system and cheque truncation is, the landmark in the field of EFT system in India. SWIFT: Society for worldwide inter-bank financial telecommunications was founded in 1973 with an objective of creating a unified international transaction processing and transmission system to meet the ever growing telecommunication requirement of the banking industry. It is wholly owned by the member banks SWIFT is basically a message transmission system. All the transactions are processed without the exchange of paper, bank note cheque ete. RTGS: RTGS is an electronic payment environment ‘where payment instructions processed on a ‘continuous or real time basis and settled on a gross or individual basis without netting the details against credits payments 80 effected are ‘final’ and ‘irrevocable’ settlement is done in the books of central bank.276 BERD vipa river ard rate ot aig aay (G6) Risks Arising Out of Failure: Any loss th resulting, from failure of another person to mec ‘obligation is considered in ths category. When a rt ® agrees to perform a service for you, he underate bligation that your hope willbe met. But the erage ® to meet the obligation it would result in your fgg loss and there exists risk Eg. faluge of a contractor to complete a py scheduled. | mE 5.7 THE BURDEN OF RISK: The risk is the loss incurred by a person. When a destroyed by fire, or money is stolen, there is a financial hag negligence of someone results in injury toa person or damage the property, there is also a financial loss. These losses are ty primary burden of risk. There are other detrimental aspect of ‘The uncertainty as to whether the loss will occur require ty Prudent individual to prepare for its possible occurence vidual attempt to avoid the risk or alleviate its impact wi the help of insurance. o Geviane 1 lope oa Furthermore, the uncertainty connected with risk usu Produces a feeling of frustration and mental unrest, patclaiyit eee of pure sk People may worry about possible mishap. is worry induces a feeling of diminished ich is an Nona burden of ih alae 5.8 ELEMENTS OF INSURANCE RISK: Insurance companies do not accept all the risks that others risks that others may Wish fo transfer them. Certain characteristics shouldbe preset order to be considered a proper sujet for inure Te Take U8 Prerequisites are the ideal elements of an insurstle () There must be a sufficient ficiently large number of homogeneos ‘©*posure units to make the losses reasonably predictable p> oer ting Rk peck 175 ‘the loss produced by the risk must be definite and measurable. 9) Theloss must be acedental. fp The loss should not be ctatophic which means thatthe loss (9 Tpould not be incurred from attackby the enemies. 59 _ RISK IDENTIFICATION: risk identification is the process of identifying risks and uncertainties, systematically and continuously. Risk identification Gin start with the source of the problem, or with the problem fuel. Identification of risk is a crucial step in the process of risk Management for both individuals and organisations. The process frads to the development of information on various sources of risk, hazards, risk factors, perils and various exposures to loss. Sources of risks are the sources from which hazards, perils and risk factors develop. Hazard is a condition in an environment that {reates or increases the chance of loss or its severity. Peril is a cause of loss. Based on the threatening of asset and earning capacity of the enterprise, the risk manager is employed to carry out the function of risk management. The risk manager should apply the various trade techniques to discover the risks. The risks that are to be identified are pure risks that have a financial cost to them. Risks can be assessed/ evaluated, controlled and financed, once they have been identified. Risk identification requires knowledge ofthe organisation, the market in which it operates, the legal, socal, economic, political and climatic environment in which it does its business, its financial strengths and weakness, its vulnerability to unplanned loses, the manufacturing process and the management system and business mechanism by which it operates. Any failure to ‘identify risk may cause a major loss 0 the organisation. The ‘arious methods of risk identification are: (1) Check list method. (2) Financial statement method.5.11 RISK MANAGEMENT: Risk management is a scientific approach to the problem of pure risk in the business of insurance. The objective of rik management is to reduce or eliminate the pure risks faced by te insurance business. Although, risk management is a rect —_Understanding Risk rrr 179 phenomenon the actual practice of risk management is very old. It is a Process of protecting the persons and the assets. It is a managerial function which uses scientific approach in dealing with risks. Definition: “Risk management is a scientific approach to dealing with pure risks by anticipating possible accidental losses and designing and implementing procedure that minimise the occurrence of loss or the financial impact of the losses that do occur”.‘17 RISK MANAGEMENT IN LIFE INSURANCE: Risk management is an integrated process of delineating Seific area or risk, developing a comprehensive plan, integrating Pan and conducting ongoing evaluation. The job of risk r involves three elements, they are:BCOt i \ ec\-\ A vi & 24 Vipul’s™ Principles and Practices of Banking and insurap, > Risk analysis > Risk control > Risk financing Because the conditions under which enterprise operate change, the risk management process has a necessity to be dynamic. The elements of risk management explained through following chart, Risk Management Risk Analysis [ Risk Control Risk Financing | Risk | Avoidance ] Loss Risk Fisk | Evaluation Control | | Retention [_Teansler ‘And insurance company has to maintain “Solvency Margin”. The insurance company makes assumption into future regarding mortality, expenses, interest etc. IRDA Regulations (Assels, Liabilities and Solvency Margin of Insurers) 2000, specifies that the best estimate assumption shall be adjusted by an appropriate Margin of Adverse Deviation (MAD) which is dependent upon the degree confidence. Risk Identification Insurance, company should hold “Risk Based Capital” '? protect the policy holder against adverse developments. Risk — peso a amount of capital based on an assessment of risk. Risk based capital involves identifyi isks and qualifying them. They are: fying the key. rs > Insurance risk Market risk Credit Risk Liquidity risk Operational risk WAV VN