END TERM EXAMINATION

SIXTH SEMESTER (BBA)-MAY-JUNE 2012

MANAGEMENT OF COMMERCIAL BANKS
BBA(B&I)-308
Time:3 hrs. M.M.: 75

Note: ttempt all questions. Internal choice is indicated.

of the following: 6x3-15)

Q.1. Write short notes on any three
of banks.
Q.1. (a) Define the internal performance
and how much internal
Ans. Internal performancemeans how banks are operating
of the bank. We appraisethe bank conditions
control is used to control the performance
on the following basis:
structure. It means how banks
1. Capitalisation:capitalisation refers to capital
and how much cash is kept in
have divided their capital into different instruments
will be more idle cash it affect
the performance
reserve and how much is invested. Ifthere
ofthe uank.
asset quality refers to non performing assets and performing8
2.Asset Quality:
the performanceof
be more non performing
there will assets, it will affect
assets also. If

banks and will have on the earning of assets.

effect
are able to meet demand of customers
3. Liquidity: liquidity refers to how banks market and will
will be less to invest in
on time. Ifthere will be more liquidity, there
effect the performance of banks.
how banks are operating. How many
faults
4. Operating efficiency:it refers to
are there in functioning?
able to earn on their
to how much banks are
5. Profitability: Profitability refers
investment. where they
should try to invest in those investments
6. Tax minimization: Banks and efficiency
More tax reduces the profitability
can take benefits oftax minimization.
of banks
1.6)Describe the banking operations. executed by a
maybe defined as The legal transactions
Ans. Banking operations and investments,
such as providing loans, mortgages for profit on
bank in its daily business,
and size of the bank. Banks arecompanies operated
depending on the focus in money.
They make money by dealing
behalf of shareholders. bank are to:
The major functions of a retail, or "clearing,
Accept deposits

Grant loahs
Act as an agentforpayments
Provide range of otherservices
in three main ways:
Thereforebank make money and charging these
savers to borrowers
some of the money deposited by
Lending
on the sums loaned
borrowers interest
and services
Charging fees for products
by savers
Investing the money deposited
2-2012 Sixth Semester,
Management of Commereinl Banka
Q.1.c) Define the investment
portfolio.
Ans. An investment portloho in 951.
a colleetion of anaets owned an
ind:vidual or by
by
an institution. An investor's "dctiom
portfolio ean include renl estate nnd so-called "hard" ansets, there w
such as gold bars. But
most invostment portfolion, partieulnrly portfolion that olannir aref
a
ssembled to pay for retirement, are made up mainly of nocuritien, such an stoicks, chjective
money funds and exchango traded funds. Investment
bonds, mutual funds, market 19th Ju
portfolho should have: national
Liquidity thus fai
village
Profitability
April
Minimum tax liability took pla

Q.1.d) Explain the structureof commercial banks. 1.

Ans. The commercialbanks canbe broadly classified under two heads: requir
1. Scheduled Banks: Scheduled Banks refer to those banks which have been indust

included in the Second Scheduleof Reserve Bank of India Act, 1934. 2

In India, scheduled commercialbanks are of three types: contr

) PublicSectorBanks: Thesebanksare owned and controlled by the government.

these
secti
The main objective of these banks is to provide service to the society,not tomake
profits. State Bank of India, Bank of India, Punjab National Bank, Canada Bank and
exis
banks.
Corporation Bank are some examples of public sector
acr
Public sector banks are of two types: bar
(a) SBI and its subsidiaries;
(b) Other nationalized banks.

(ii) Private Sector Banks: These banks are owned and controlled by private
businessmen.Their main objective is to earn profits. ICICI Bank, HDFC Bank, IDBI
Bank is some examples of private sector banks.
(iii) Foreign Banks: These banks
areowned and controlled by foreign promoters.
Their number has grown rapidly since 1991, when the process of economicliberalization
had started in India. Bank of America,American Express Bank, Standard Chartered
Bank are examples of foreign banks.
2.Non-Scheduled Banks: Non-Scheduled banks refer to those banks which are
not included in the Second Schedule of Reserve Bank of India Act, 1934.

Q.1.(e) What were theprimary reasons forreplacement of FERA with FEMA

act?
Ans. FEMA replaced FERA as it fails to achievesfollowing objectives:
To regulatecertain payments.
To regulatedealingsin foreign exchange and securities.
Tb regulate transactions, indirectly affecting foreign exchange.
To regulate the import and export of currency.
To conserve preciousforeignexchange.
so as to promote the economic
The proper utilization of foreign exchange
development of the country. ofBanks in India?
Nationalization
2. What were the objectives behind the it. (5+10-15)
These objectives are achieved ornot? Discuss economic
ofIndia(GO)adoptedplanned
After independence the Government five year plans
came into existence
Ans. Accordingly,
development for the country (India).
 I.P.
University-(BBA)-Akash Books 2012-3
1951.This economicplanning basically aimed at s8ocial ownership of the means of
S1tion.However, commercial banks were in the private sector those days. In 1950-
prore were 430 commercial banks. The Government of Indiahad some social
51ther hese commercial banks failed helping the
objectives
The: government in attainingt these
ofplanning.
ives. Thus, the government decided to nationalize 14 major
objectives commercial banks on
All with a base over Rs.50 crores were
19th July, 1969. commercial banks deposit
It banks were controlled business houses and
ationalized. was considered that by
failed in catering to the credit needs of poor sections such as
thiis cottage industry,

illage industry, farmers,

craft
men, ete. The second dose of nationalisation came in
when banks were of commercial banks
ADril 1980 nationalized. The nationalisation
with an aim to achieve following major objectives.
took place
Social Welfare: It was the need of the hour to direct the funds for the needy and
1.

of the Sectorsuch as agriculture,

reguired sectors Indian economy. small and village
were in need of funds for their expansionand further economic development.
industries
2. Controlling Private Monopolies: Prior to nationalisation many bankswere
controlled by private businesshouses
and corporate families. It was necessary to check
ensure a smooth supply of credit to socially desirable
these monopolies in order to

sections.
of banks
8. Expansion of Banking: In a large country like India the numbers
were It was necessary to spread banking
existing those days certainly inadequate.
new
across the country. It could
be done through expandingbanking network (byopening
bank branches) in the un-banked areas.
4. Reducing Regional Imbalance:
In a country like Indiawhere we have a urban
for banks to go in the rural areas where the banking
rural divide; it was necessary
nationalisation
facilities were not available. In orderto reduce this regional imbalance
was justified:
sector and its allied activities
5. Priority Sector Lending:In India, the agriculture
income. Thus these were labelled as the
were the largest contributor to the national credit.
were deprived of their due share in the
priority sectors.Butunfortunatelythey
was needed for catering funds to them.
Nationalisation urgently
to
In Indiamore than 70% population used stay
6.Developing Banking Habits: such a large
to develop the banking habit among
in rural areas. It was necessary

population.
of commercial
banks was undertaken with tall
Though the nationalisation In fact it converted many of the
it failed in attaining them.
objectives, in many senses
institutions in the loss making entities.
The reasons were obvious lethargic
banking etc. Under
ofprofit motive, politiçal interference,
working,lack of acountability, lack
look to the whole process of nationalisation
this backdrop it is necessary to have a critical
in the period after bank nationalisation.
in India are:
The major limitations of the bank nationalisation banks have spread across the
1. Inadequate banking facilities:
Even though
in>the backward
country; still many parts
of the country are unbanked. Especially
and north-eastern
states such as the Uttar Pradesh, Madhya Pradesh, Chhattisgarh
states of India.
The resources mobilized after
2.Limited resources mobilized and allocated:
the needs of the Indian economy..
the nationalisation is not sufficient if we
consider
allocation is not as per
Sometimes the mobilized are enough but the resource
deposits
the expansions.
 4-2012 Sixth Semester,Management of Commercial Banlks
3.
Lowered efficiency
and profits: After nationaligation
government sector. Many times political forces pressurize ks
zed them. went in
done on professional and ethical It Bankir
profitability of banks.
grounds. resulted into lower efficien asthe
ded pl=

4. Increased and 8actio

expenditure:Due to huge expansionin a poor
administrative expenditure, trade union branch network 1 conpu
struggle, etc. banks
dangerous levels. expenditurein gestat 7.Tel-
5. Political and sed toa iking
c
Administrative Inference:
sufiered due to the Many public sector eries a

political interference. It was seen in banb. minal

ultimately resulted in huge
non-performing assets (NPA)of these
arranging loan adly
banks and B.
OR inef. It ctron
Q.2. Explain therecent ineficiency.
in economic and trends of commercial ceivin
social banks. How does banka L.
development of Indian twee
Ans.
Following are the recent
Economy? helps aymem
1. Electronic developmentsin commercial
Payment Services:E banking: (5+5+5-15) he rr
e-govenance,e-mail, Cheques: Now-a-days we are
e-commerce,e-tail etc. In the
being developed in US
for same manner, a newhearingabont
conventional paper
introduction of
cheque. India, as
e-cheque,which will
eventually
technology is 0D
Negotiable InstrumentsAct to
harbinger the introduction replace the ave
and has alreadybeen of
E-chequeinstruments. amended to e-cheque. the cher
2.Real Time include;Truncated he
Gross Settlement cheque
introduced in India nves
sinceMarch (RTGS): Real Time Gross
can be 2004, is a Settlement
givenby banks to system through which system,
bank.The RTGS transfer funds
from their electronics
instructions
nu
of efficient system is account to the
and maintained and account of In
As the name faster funds transfer among operatedby theRBI and another
sh
suggests, funds
banks provides a means
transfer facilitating their pu
Therefore,
money can reachthe between banks financial
has the takes placeon a operations.
beneficiary 'RealTime' ine
responsibility to credit basis.
3. the instantaneously and the
ElectronicFunds beneficiary's account
within two beneficiary's bank
whereby anyone who Transfer (EFT):Electronic hours.
wants to make Funds Transfer
approach his bank and
make cash payment to another (EFT)is a system
funds
directly from his payment or give person/company etc. can
own accountto
Completedetails such as the bankinstructions/authorization to transfer
or current the receiver's account of the
account), bank name, bank account
atthe time name, city,branch receiver/beneficiary.
number, account
of
requesting forsuch name etc. should type (savings
account transfers so that be furnished to the
correctly and the bank
4. faster. RBI is amount reachesthe
the service
Electronic provider of
payment aystem that Clearing Service EFT. beneficiaries
can be used (ECS):
especially where to make bulkElectronic Clearing Service
each is a retail
Bmalleramount. individual
payments/receipts of a
This payment is of a similarnature
make/receive facility is meant for repetitive nature and
large volumes of of
5. companies and relatively
Automatic Teller payments rather government
than for funds departments to
populardevise in Machine (ATM): transfers by
a day 7 India,which Automatic Teller individuals.
a
days week. Itis a enables the
customers to
Machine is the most
devise that
routine
banking transactions allowscustomer withdraw their money 24
cash without who has an ATM hours
withdrawal,ATMs can be interacting with a card to
used for human perform
accounts,
depositofcheques and payment of utility bills, teller. In addition to
6.Point cash into funds transfer
of SaleTerminal: accounts,balance between
linked online to Point ofSale enquiry etc.
the Terminal is a
computerizedcustomer computer
informationfiles ina terminalthat is
bank and
magnetically
 L.P.University-(BBA)-Akash Books 2012-5

oded plastic transaction card that identifies the customer to the computer. During a
nsaction, the customer's accountis debited and the retailer's accountis credited by
computer for the amount of purchase.
7.Tele Banking: 'TeleBanking facilitates the customerto do entire non-cash related
Voice Recorder is used for simpler
hking on telephone. Under this devise Automatic
and transactions, manned phone
eries and transactions. For complicated queries
minals are used.
Electronic Data Interchange is the
8. Electronic Data Interchange (ED):
documents like purchase order, invoices, shipping notices,
ectronic exchange of business format
fceiving
advicesetc. in a standard,computer processed, universally accepted
be used transmit financial information and
EDI can also to
etween trading partners.
ayments in electronic form.
in a country is discussed as under:
he rele of a commercial bank developing
The commercial banks help in
1. Mobilising Saving for Capital Formation:
in developing countries
network of branch banking.People
nobilising savingsthrough of deposit
induce them to save by introducing variety
ave low incomes but the banks also mobilise idle savings of
of individual depositors. They
schemes to suit the needs them into
the banks channelize productive
the few rich. By mobilisinginsavings, formation of a developing country.
Thus they help the capital
investments. sector in a
banks finance the industrial
2. Financing Industry: The commercial and long-term loans to industry.
short-term, medium-term
number ofways.They provide commercial banks undertake
short-term loans. In India, the
In India they provide ofsmallscale industries,
and also provide hire-
short-term and medium-term financing
debenturesof large scale
finance. Besides,they underwritethe shares and
purchase but also help in developing
industries. Thus they
not only provide finance for industry
is undeveloped in such
countries.
the capital market which and
in financing both internal
Trade: The commercial banks help
3. Financing to stock goods in
banks loans to retailers and wholesalers
external trade. The provide one place to anotherby
in the movement ofgoodsfrom
which they deal. They also help and accepting
bills of exchange,
such as discounting
all types of facilities finance both exports
providing etc. Moreover,they
drafts,
facilities,issuing to importers
providing overdraft exchangefacilities
of countries by providing foreign
and imports developing
and exporters ofgoods. the large agricultural
sector
The commercialbanks help in agricultural
4. Financing Agriculture: loans to traders
a number ofways.They provide areas to provide agricultural
countries in
in developing in rural
a network of branches of their produce,
commodities.They open to
for the marketing
agriculturists
finance directly irrigation
credit. They provide of their farms, for providing
and mechanisation
for the modernisation
for developingland, etc. countries being
facilities, in underdeveloped
Activities: People durable
5. Financing Consumer resources to buy
sufficient financial of
low incomesdo not possess consumers for the purchase in
poor and having banks advance loans to also help
The commercial etc. In this way, they
consumer goods. fans, refrigerators, loans
by providing
such items as houses,
scooters,
in developing countries
ofthe people
the standard of living
raising finance
for consumptive
activities.
Activities: The commercial banks for the
Generating loans
6.Financing Employment countries. They provide
developing vocational
activities in and other
employment generating in engineering, medical
person's studying
education of young
 6-2012 Sixth Semester, Management of Commercial Banks
institutes ofhigher learning. They advance loans to
young entrepreneurs,
medical an
engineering graduates,and other technically trained persons in
loan establishing their ou
business. Such facilities are being own
provided by a number of commercial
india. Thus the banks not only banks in
help inhuman capital formation but also in
entrepreneurial activities in developingcountries. increasine

7. Help in Monetary Policy:The

commercial banks help the
ofa countryby faithfully economic development
following the monetary policy ofthecentral
central bank depends upon the bank. In fact, the
commercial banks for the success of
its policy of
management in keeping with requirements of a monetary
developingeconomy.
Thus the commercial banks
contribute much to the
by grantingloans to growth ofa developing economy
agriculture, trade and industry,
capital formation and by
by helpingin physical and human
followingthe monetary policy of the
country.
Q.3.(a)Explain efficiency of commercial
efficiency of commercial banks?
banks. How you will increase the
Ans. Eficiencyof bank (9)
is
areindicators of important for atleast two reasons,
success, by which the performanceof individual first efficiency measures
as whole, can be checked. Banks face banks,and the industry
growing competition, both from otherbanks and
from firms and market outside the
industry and therefore there is need that banks
should operate efficiently. Second reason for
measuring efficiency is that it is related to
Government policies, economy etc.
Methods of increasing efficiency:
1.Increase allocational efficiency: it means
deployment of funds into different
instruments in such a way banks can maintain their
liquidity and can earn income.
Banks should increase its allocational
efficiency in order to improveits overall efficiency.
2. Decrease disintermediation: In disintermediation, the commercial banks will
lose customers because of
opting out of othersourcesby the borrowerslike commercial
papers, public deposits etc. The banks should innovate its
products to decrease
disintermediation.
3. Increasethe volume of credit and
profitability: volume of credit in the banking
system depends on various factors like requirement of CRR, SLR, level of
disintermediation.
4. Reduce provisioning for loan losses or non
performing assets: Bank should reduce
such provisioning as it will reduce the of banks on accountofincome reserved
profitability
for losses will reduce the investment income of banks.
6. on is related to
Set limit theoperatingcost structure: operating cost employee
operational costs. There is need to set limits for operating cost to control
cost and other
efficiency ofbanks.
Q.3. (b)How commercial banks manage their capital in recession period
(6)

Ans. The objective ofbank's capital management is to reach a solvency ratio sund
for the Group to continue its lending activities during a period of dificult ital
conditions. The available capital must be such that regulatoryand interherheavw
to
requirements aremet during such a period, and it must be possible weat

unexpected losses.
The planning issubject to two overall considerations: ings;
capital
ofeari with an
1. optimisation of the Group's risk and maximisation Dortfolios
portfolios
to acquire
2. taking advantage of the situation in the market
acceptable risk.
 I.P. University-(BBA)-Akash Books 2012-7
Measures taken to manage capital in recession:
(a)Risein Bank Rate:Refers to one of the most widely used measure taken by the
central bank to control capital in recession. The bank rate is the rate at which the
commercialbank gets a rediscount on loans and advancesby the central bank. The
increase in the bank rate results in the rise of rate of interest on loans for the public.
This leads to the reduction in total spending of individuals.

(6) Performing Open Market Operations (OMO):Refers to one of the important

method used by thecentral bank to reduce the credit creation capacity of commercial
banks. The central bank issues governmentsecurities to commercial banks and certain
private businesses. In this way, the cash with commercial banks would be spent on
purchasing government securities.
As a result, commercial bank would reduce credit
supply for the general public.
decrease in reserve ratios by
(c) Changing Reserve Ratios: Involves increase or
of commercial banks. For example,
the central bank to reduce the credit creation capacity
when the central bank needs to reduce the credit creation capacity of commercial banks,
it increases Cash Reserve Ratio (CRR). As a result, commercial banks need to keep a
from their with the central bank. This
large amount of cash às reserve deposits
total

would further reduce the lending capacity of commercial banks. Consequently, the
investment individuals in an economy would also reduce.
by
OR
Q.3. Discuss thevarious types
ofNPAs in Indian Banks. What are the causes
of mounting these NPAs? What are the effects
ofNPAs on banking function?
5+5+5)
Ans. A Non-performing asset (NPA) is defined as a credit facility in respect of which
instalment of Bond finance Principal has remained 'past due' for a
the interest and/or
is used by financial institutions that refer to loans that
specified period of time. NPA
has failed to'make interest or principle
are in jeopardyof default. Once the borrower
the loan is considered to be a non-performing asset.
payments for 90 days/ Months3
Types of NPAs:
into the
Banks are required to classify non-performing assets further following
asset has remained non-performing
three categories based on the period for which the
and the realisability of the dues:
asset is one which has been classified as
1. Sub-standardassets: a sub
standard

NPA for a not exceeding 12 months.

period
2. Doubtful Assets: a doubtful asset is one which has remained NPA for a period

exceeding 12 months.
the bank, internal or external
3. Loss assets: where loss has been identified by or
has not been written off, wholly
auditor or central bank inspectors. But the amount
partly.
15% ofits reserves.
Sub-standard asset the asset in which bank have to maintain
is

as non-performing for period of

more than 12
All those assets which are considered
which cannot be recovered are
months are called as Doubtful Assets. All those assets
called as Loss Assets.
Causes of NPAs:
borrowers.
1. Default -One
of the main reason behind NPA is default by
natural
condition of a region effected by
2. Economic conditions Economic
reason may cause NPA.
calamities or any other
 of Commercial Banks
R 2012 Sivth Semester,Management

3. No more proper risk management Speculation ia one of the maior -

lonna to horrowers with hod50n
ronan hrhnd defanlt Sometimer hanks provide
credit
of defanit. in these cases
history T'here ie high probability
minded borrower bribe bank officialstow..
Mis-management (Oen etloans
ill

.
4.

with an ntentionof defanlt

times borrowers divert the borrowod c. ,
Diversion of funds Many ds
in loan dorumentS. It 18 very hard to recover from
purposes nt her than mentioned these
kind of horrewprs

Impact of NPAs on banking:

in
1. Profitability: NPA means booking of money terms of bad asset, which ee
due to wrong choice of client. Because of the money get.ing blocked the nc
curred
of
hank decreases not only by the amount of NPA but it lead to onor totability
that much of profit invested in some reum ea
g proJect/asset. So NPA does not
current but stream ot prolit, which
affect
profit also future may lead to losgof
some
long-term beneficial opportunity
2. Liquidity: Money is getting
blocked, decreased profit lead to lack of
enough cash
at hand which lead to borrowing money 1or Snorest period which oftime lead to additional
cost to the company.
3. Involvement of
Time and etforts
Management: of
management is another
ndirect costwhich bank has to bear due NPA.
to Time and efforts of management in
handling and managing NPA would have to some fruitful
diverted which
would have givengood returns. Now days, banks have activities,
special employees to deal and
handle NPAs, which is additional cost to the bank.

4Credit Loss: If a bank is facing problem of

NPA, then it adversely affects the
value terms of market for credit. It will lose its
ofbank in
goodwill and brand image and
credit which have negative
impact to the people who are putting in their
banks. money in the
4.(a)What isLiquidity risk? How it effect the
(8)
Ans. Liquidity banking sector?
risk may be defined as
probability of loss arising from a situation
where
(1) there will not be enough cash and/or cash
equivalents to meet the needs of
depositors and borrowers,
(2) sale of
illiquid assets will yield less than their fair value, or
(3) illiquid assets will not be sold at the desired time due to lack
Effects of Liquidity risk: ofbuyers.

1.Promote deposits: since bank is

suffering from lack of liquidity, it should
promote
deposits from public by them
offering attractive rate of interest and schemes.This will
provide fundsto the banks to
meet their working capital needs.
2. Conservative
lendings: Banks don't have funds to meets its daily cash needs
due to lack of liquidity.The banks should follow conservative
lending policy. The banks
should make iimited lending to the
generalpublic.
3. Decrease investment: The bank makes investment nce
and lending of in addition to accepta
money.As bank is not having in
governinent securities so liquidity, it shouldreduceits nv
that it can meet its
working capital need easily
4.
Borrowing from RBI and other banks: If take
bank is not in
abovethree steps, it can opt for short term borrowingfrom RBI andcona LRut
other banh
this option will be
expensive for banks due to high interest rate
 I.P.University-(BBA)-AkashBooks 2012-9

5. Offer more products generate cash: The banks need of cash in order to
to
third party products and
fulfl their liquidity requirement can be fulfilled by offering
introduction of new products.

Q.4.(b) Discuss the importance of externalaudit in reducing the operational

(7)
risk and creditrisk.
Ans. Exiternal auditing: External audit is an independentbody which resides

outsidr of theorganisation which it is auditing. They

are focused on the financial accounts
the company shareholders. The
or risks associated with finance and are appointed by
the annual statutory audit of the
main responsibility of external audit is to perform
financial accounts, providing an opinion
on whether they are a true and fair reflection of
auditors often examine and
the company's financial position. As part of this, external
the risks which could affect the
evaluate internal controls put in place to manage
to determine if they are working as intended.
financial accounts,

How it reduces the risk of credit and operational risk

to which
accounting figures precisely
reflect changes in
Quality: the degree
1.

financial position, earnings, and cash flow.

that supplement
to which the company provides details
2. Transparency: the degree
and accounts reported in statementsand filings.
explain
are
3. Internal controls: the processes and procedures that ensure transactions
and company assets
accuratelyrecorded,financial statements reliably produced,
proteced from theft.
for Detecting Material Error
and Fraud: Auditors are
4. Auditor's Responsibility
an audit to obtain reasonableassurancethat
responsible planning and performing
for
The concept of reasonable
the inancial statementsare free of material error and fraud.
the of the financial statements.
does not insure or guarantee accuracy
assurance, however, the difference
are to understanding
The following characteristics of an audit important
or absolute assurance.
between reasonableassurance and a guarantee
audit of financial statements.the auditor
5. Detection of Error or Fraud: In an the audit to
error and fraud and, accordingly, designs
assesses the risk of material some
or fraud. However,
assurance of detecting significant errors
provide reasonable client personnel
irregularities or frauds
areconcealed through forgery or collusion (among audit
to detect forgeries, nor will customary
or outsiders). Auditors are not trained
a and executed audit may
detet conspiracies. As a result, properly designed
procedures
audits can only provide reasonable assurancethat
not detect material fraud.Therefore,
of material misstatements
and cannot absolutely
finane.al statements are free have some
the auditor may
the accuracyof financial statements. Likewise,
guarantee acts.
the detection of certain types of illegal
responsibility for
OR
of
dealing. Define the various methods
Q4. Explain the foreign currency the merits and demerits of the methods.
and explain
foreigncurrency dealing (6+9)
transaction that involves
Ans. Foreignexchange transaction is a type of currency conversion of currency
transaction involves
two countries. Generally, a foreign exchange of currency in a foreign exchange
country
of one' with that of another. The conversion
be performed through:
transactioncan
1. buying or selling of goods
and services on credit;

2. borrowing or lending funds.

 10-2012 Sixth Semester, Management of Commercial Banks

is
A foreign exchange transaction usuallycarried out. in foreignexchange
transaction is where a person buys narketa
An example of a foroign exehange dollars and
sella
pennds
Methods of Foreign Currency Dealing
The thme major types oftrading are:
Day Trading
Swing Trading
Position Trading
While day trading and swing
trading are short-termin nature,
of longer-termduration. Each of them positional trading is
serves a different and suits different
investor
furpose
types.
1. Day trading
Day trading is a type oftrading wherein traders
buy or sell currenciesfor a single
day in the hope of making desired
profits. Day traders always close their trades within
the same day, which
minimizes risks associated with
market. By the end ofthe overnight movements in the
day, they exit with whatever profits or losses
main objective of a day trader is to earn they have. The
quick benefits from small price movements on
an inta-day basis. There are four
typesoftradingstrategies that a day trader
practices.
Scalping:Scalpersare concerned with onlysmall
changes in quotes. They put large
orders at a certain level and after a small
gain,let's say 10 to 20 pips, they immediately
reverse the position and exit.
Scalpersbelieve that small moves in
capturethan large ones.They also believe that by quotes are easier to
taking advantage of small moves in
large positions, they can multiply
profits.
Fading: Fading is a risky trading strategywherein an investor
trades against the
prevailing market direction. The investor buys in times of
when the prices are increasing. The declining prices and sells
underlying psychology of a fade-traderis to take
advantage of any price reversal because after a
sharp decline or rise in the currency, it is
bound to have show some reversals. This
type of trading is extremely risky but is
advantageous as well. It offers handsome amounts of return
traders are often considered when it works. Fade-
greedy,but generallythey are simply risk takers.
follow strict risk They
management rules which offer specified fixed risks.
Dily Pivot: This type of trading strategy is based on a
statistical tool called the
pivot table. This table determines the
pivot point, supports and resistances for the
current movement. Atrader then
identifies the market movement
The following are formulaswhich and tradesaccordingly.
calculate pivot points:
Pivot =
Pointfor Current Price Level High + Low +Close
=
Resistance1 (2x Pivot (previous)3
Point) -Low (previousperiod)
= -
Support 1 (2x Pivot Point) High
(previousperiod)
=
Resistance2 (PivotPoint - Support 1) + Resistance1
Support 2 =Pivot Point (Resistance1-
Support 1)
=
Resistance 3 (PivotPoint - Support 2) + Resistance2
=
Support 3 Pivot Point -(Resistance
2-Support 2)
Pivot traders need to
strictly use risk
management tools to be successful. For
example, if a trader generates a buy
position at the current price, he/she
closest support as the uses the
stop-loss, while the target price is
resistance. Pivot traders are determined by the closest
dependent on statistical calculations and
machines than work more like
following a rationale behind the movement. In
volatile
markets,there is
 I.P.
University-(BIBA)-AkashBooks 2012-11
a higher chance of the stop-loss being triggered, which is why this strategy is more
suitable for less volatile markets.
Momentum trading: The last type of trading
strategy for day trading is one which
rides on market. Traders take a buy position when a
the ongoingmovement in the
currency is rising and sell when it is declining. They identify currency pairs which are
moving significantly in one direction and trade nccordingly. They use various momentum
the momentum
oscillator, RSI, MACD,
etc. in order to identify the
indicators, like
strength of the current movement and decide whether to take positions and in which
direction.
2. Swing Trading: Like day trading, swing trading is another type of short-term
trading. The basic difference between swing trading and day trading is the time frame:
While day trading is limited to a singleday, swing trading often stretches over more
than one day in order to take advantage of quoteswings.Similar to day trading, investors
don't hold positions long-term and don't calculate in a long-ternm scenario. The time
frame forswing trading may be an hour, a day or maximuma couple of days. Swing
traders generallytarget higher profits than day traders. At the same time risks
especially those associated with holding positions overnight- are higher. Generally,
three diferent swing trading strategies are distinguished.
Breakout trading: Breakout trading takes advantage of breakoutson charts. The
breakouts can be small, like the high on an intraday chart, or they may be huge
breakouts

A breakout trader looks at the breakout point,

on daily, weekly and monthly charts.
those breakouts, and then takes their
asses if and when a currency quote witnesses
close to next support or resistance level. They also maintain
position and put the target
strict stop-loss points close to the breakout point
which reduces their risk in times of
adverse price movements.
for swing traders is retracement
Retracement trading: Another trading strategy
is the Fibonacci
technical indicator used for retracementtrading
trading. The underlying
the retracement levels based
Retracement. Itis a mathematical caleulation showing
61.8%, and 100%. Fibonacci
on the Fibonacci ratios of 0%, 23.6%, 38.2%, 50%, of the current
indicate supportsor resistances
retracements are horizontal lines which
in the givenchart: One needs
trend.They are calculated by first locating turning points the specified time
to find the highest level and
the lowest level of the quote during
are
low or the other way round. Sixlines
is drawn from the high to the
period. Then a line while 0%
indicates the start of the move
drawn at different Fibonacci levels: 100% indicate the various support
indicates the reversing point. 23.6%,
38.2%, 50% and 61.8% a
retracement trading is that when price
or resistance levels. The basic idea behind test the
chances are high that it will
rises to a certain
level and starts correcting,

previous levels. a certain

the market moves within
Reversaltrading: Reversaltrading works when after testing
if a currency quote starts facing
selling pressure
range. For example, takes short position
to test the lower levels again. Trader
highs, the quote is expected the stop-loss
from the high levels with the high being
while the currency pair reverses starts reversing
from the lowest
point. They
take sell positions when the currencypair
the low of the range.
level in a range with thestop-loss being
is positional trading.
The last type of trading practice
3. Positional Trading: movements over a comparatively
longer

Positional traders
look for benefits from price from to weeks
hold their positions days
generally
time than swing or day traders. They ofthe to positional trading
is to identify
as well. One keys
and sometimes for months Positional trading always depends
pairs which promise large
movements.
currency
 of C'ommerninl lau
Nith Nomester, Manngement
19 01s
and tevhntenl annlynin l'onitioal
ot fndamentnl
mntuw ndern
HNn a DwtorH Nnd th nlwa
ettvt of tindanontnl
tior the lmgnr term for the eurron"y pair.
n emparlms wmdeal ana
tevtude
the entry and evit puinta
tradera enpeef n hglur prott,
while nt te nnme im herte th
typs. powonal puriod. ifferant
the longor holding
a assiated with in
tyea and naNOWTNed HtrategioH not oxhausti.
This
thre most
list

ofter many opportunitiea

which mostly requires
oftrading
ommon trading prarticoa day

statiatical formuln that

ading,
nnd oxpeorienced trndee
for both
begimnera
aro
nwing
trnding und po,Ilownver

Plvot
generallybuilt-in iin
trad

tradin
l
many
- and retracement trading aroe ROmo of tho nimpler ntratogion hnt
breakout trading, HCulping nd fadin ares
tradling
plathrms
for beginners. Reversal trading, K,on the
and ineroaned offorta from tradera and
hand, equire a lot nmore
skill other

market herefore
more oxporionco playora. P'ositional trading
generally practiced by
arn
ina
and technical analysis which takes trnders a long time to
offundamental pr blend

perfect. Not only level

of
experience
and
planned offort, but also the plannina
n
should play a role in pieking the right trading stratogy: Positional trading Area
for long-term investmentstrategies, while day trading und swing trading suit

term invastors better.

e
What is NBFIs? Critically examine the role ofNBFls
Q.5. in the develonmond
of Indian economy.
(15)
Ans. NBFI is a financial institution that does not have a full banking license and
cannot
acept deposits from the public. However, NBPls do facilitate alternative finandin
services, such as investment (both collective and individual), risk
pooling, financial
consulting, brokering, money transmission, and check cashing. NBFIs are a source of
consumercredit (along with licensed banks). Examples of nonbank financial institutions
include insurance firms, venture capitalists, currency
exchanges, some microloan
and non-bank financial institutions
organizations, pawn shops.These provide services
that are not necessarily suited to banks, serveas
competitionto banks, and specialize
in sectors or groups.

e role and importance of non-bank financial intermediariesis clear from the

functions performed by these institutions.
various Major functions ofthe NBFIs are as
follows:
1. the non-bank
Financial Intermediation: The most important function of
linancial intermediaries is the transfer of funds from the savers to tho investors.

Pinancial intermediation is economicaland less expensive to both small businesses

and small
savers,

)
lt provides funds to small businessesfor which it is difficult to sell stocks and
a
bonds because of
high transaction costs,
lt
also benefits the small savers by pooling their
funds and diversifying their
investments.

mo
mic es
Basis of Financial Intermediation: Handling of fundsby financial
18 more
economical and more efficient than that by the individual
based on
wealth

is
T DeCause of the fact that financial intermediation
(a) the law
of large
numbers, and
0)economies of scale in portfolio management.
on the basis of the
statistical la geNumbers: Financial intermediaries
this law not all
operate
the creditors will withdraw

their funds rge numbers. According to if some creditors

are withdrawingcash,
eseinstitutions. Moreover,
fromthesei
 L.P.University-(BBA)-AkashBooks 2012-13
some others may be depositing cash. Again, the financial intermediaries also receive
or investments made by them. All these factors
regular interest payments on
loans
cash only a small fraction of the funds
enable the financial intermediaries to keep in
by the creditors and lend or invest the rest.
provided
i#) Economies of Scale: Large size of the asset portfolios enables the financial
intermediaries to reap various economiesof scale in portfolio management. The main

economies are:
(a) reduction of risk through portfolio diversification:
(blemploymentof efficient and professional managers; and
(c) low administrative cost of large loans and
(d) low costs of establishment, information and transactions.

3. Inducement to Save: Non-bank financial intermediaries play an important

role in promoting savings in the country. Savers need stores of value to hold their
savings in. These institutions provide a wide range of financial assets as store ofvalue
and make available expert financial services to the savers. As stores of value, the
financial assets have certain special advantagesover the tangible assets (such as,
of goods, etc.). are
physical capital, inventories They easily storable, more liquid, more
income ratio is positively related to both
easily divisible, and less risky. Infact, saving-
financial institutions and financial assets; financial progress. induces larger savings
out of the same level of real income.
takes place when the savers
4. Mobilisation of Saving: Mobilisation of savings
office savings deposits, life
hold savings in the form of currency, bank deposits, post
NBFI efficient
insurance policies, bills, bond's equity shares, etc. provides highly
in the
two of NBFTs involved
mechanism for mobilising savings. There are types

mobilisation of savings;
such as savings and loan associations, credit unions,
(a) Depository Intermediaries,
small savings and provide high
mutual saving banks etc. These institutions mobilise
liquidity of funds.
such aslife insurance companies, public provident
(6) Contractual Intermediaries,
enter into contract with savers and provide
funds,pensionfunds, etc. These institutions
over the long periods.
them various types of benefits
of is to earn profits by investing
5.Investment ofFunds: The main objective NBFIs
these institutions follow different investment
the mobilised savings. For this purpose, invest in
and loan associations, mutual saving banks
policies. For example, savings
invest in bonds and securities.
mortgages,while insurancecompanies
OR
Discuss the role of international
Q.5. Define the internationalbanking. (5+10-15)
world.
banking to remove the recessionthroughout on the Global
Settlements' Committee
Ans. According to the Bank for International in one country
is when a bank headquartered
Financial System,international banking
- for example,when a Canadian bank
extends credit to residents of anothercountry at the
to Eric Philip Davis,
a senior researcher
lends money Americans.According
to
United Kingdom, it also
Social Research in the
National Institute of Economic and an American bank issues
includes domestic loans
made in foreign currencies, as when
dollars. Davis also includes
rather than U.S.
a loan to an American resident in euros, money in a bank in
made to foreign banks, as when an American keeps
deposits
Switzerland or the Bahamas.
 14 2012 Sixth Semester, Management of Commercial Banks

Fi netionR of internationalhanking
clients -
trade financing
1 imports and exports of their
Facilitate

2 Arrange for forrign exchange -croBs border transactions and foreign invoot
3 AMMINt in hedging exchange rate risk nvestments

4 Trade foreign exchange producta fortheir own account

5 Borrow and lend in the Eurocurrency market
6.Participate in international loan syndicate - lending to MNCs project
7.Fhnancing and to sovereign governments-
economicdevelopment
8Participate in
underwriting of
Eurobonds and foreign bonds
issues.
Role of international banking:
1.Themain profit of the
internationalization
work is the increase
Nurplus of consumers. For the banking services ofbanking ofthe
when the interest rate of the surplus of consumer is
sponsoring is decreased, while the increased
increases. More specifically, for a interest-rate of
healthy competition, the deposits
maximized, afterit increases the profit in question is
interest-ratesof
rates of
sponsoring and the cost of deposits by decreasing the
supplies. interest
2. A second profit from the
internationalization of
international banking extension increases the banking work is that the
improving and their flow.This effectivenessof
means that, the effectiveness international capitalby
brings in economic
contact lenders and of distribution of
borrowers from capital
3.Another different countries.
profit from the
degree of internationalizationof
convergence of interest-ates of financier markets,isthe
domestic increasing
Euromarkets. At the same market with those that existin the
the time, the internationalizationof
weakening of the financier markets leads to
phenomeron of deportation of
sector, as in an private investment in the public
environment of free market of
investments from the capital,the prevention of the
state,is private
capital compensated, relativelyeasily, with the foreigner
saving
 END TERM EXAMINATION
SIXTH SEMESTER (BBA)-MAY-JUNE 2013
MANAGEMENT OF COMMERCIAL BANKS
BBA(B&1)]-308
Time:3 hrs.
M.M.: 75
Note:Attempt any five questions. Internal choice is indicted.

Q.1. Explain briefly the structure of Indian Banking system.What is the

role of commercial banks in theeconomic development of a country? (15)
Ans. Indian banking system comprises of both organized and unorganized banks.
bankers and village money-lenders.Organised
Unorganisedbanking includes indigenous
banking includesthe following:

1. Reserve Bank of India: The Reserve Bank of Indiais the CentralBanks ofour
country. It came intobeing on april1, 1935 under the Reserve Bank of India Act, 1934.
This acts as a leader of money market and the bank of the bankers. It supervisesand
regulatesthe activities of commercial banks and other financial institution. It frames
and supervisesvarious policies to bring and maintain monetary equilibrium in the
economy. It also acts as the banks to the CentralGovernment.
Its functionsare:
(a) to issuepaper money
(b) to regulate control and supervisethe commercial banks of the country
(c) to control money market
d)to frame policies to regulate and control the loans and advances

(e) to regulateand control the foreign exchange

2.Commercial Banks: It is a financial institution which acceptsdeposits against
which cheques can be drawn, lends money to commerce and industry and renders a
number of other useful services to the customers and the society. Commercial banks
receive deposits in the form of fixed deposits, savingbanks accountsand current accounts
and advance money, generallyfor shortperiods, in the form of cash credits, overdrafts
and loans.

Its functions are:

(a) receiving deposits from the public and the businessfirms
(b) lending money to varioussections of the economy for productiveactivities
(c) issue of demand drafts, travelers cheques,banks for the smooth remittance
card,
of funds.
(d) provision of locker facility to the customers
of customers
(e) safe custody of documents, ornaments other valuable
and
funds to
3.
Development Banks: Development banks provide:long-term the
industrial banks or special financial
industrial enterprises. They are also known as
the issue of sharesand debenturesand mobilising
institution. They raises their funds by
to lend
long-term deposits from the public. Out of these funds, they are in a position
for long period. Industrial banks specialize in financing large scale industrial
money
units.
 of Commercial Banks
2-2013 Sixth Semester, Management

Tts functionsare:
requirin
loans to industrialorganisations quiring fixed
(a) provision of long-term
programmes capital
their expansion and modernization
for
h) Promotion of new industrial ventures. They investin
the shares and d
of industnial organizationand
also underwrite the
issue of their shares
shares and debenturesE
and debe
dentures R
in project studies and
the management nt e de
res,
of
(c) Provision
oftechnical guidance project de
d) Controlling and guiding the aflairs of the industrial undertaking by sen in
ecuring
representationon their boards of directors.
4. EXIM Bank: The Export-Import Banks of India (EXIM bank) was set.
up
January. 1982 as a statutory corporation and it commenced operations on March
982. The Bank, with its headquarters at Bombay, has an authorized capital of Rs
200 7
crore, which may be increased to Rs 500 crores by the Central Government. The
a 17-member IM EX
Bank has Board of Directors, with Chairman and Managing Director aas
the chief and full-time director. The Board of Directors consists of th
executive the
of the
representative Government of India, RBI, IDBI, ECGC, commercial banks and
exporting community. Its recourses mainly comprises contributions from
the
government in theform of grantsand loans, markets borrowing, deposits of
duration from the long-terms
public and the short-term and long-term funds from the
Bank of Reserve
India.
The functionsof EXIM bank include:

(aPlanning, promoting and developing exports and imports;

(b)Providing
technical, administrative and
managerial assistance for
management and expansion of exports;and promotion,
(c)
Undertaking market and investment
related to surveys and techno-economie studies
development ofexports of goods and services.
5.
Cooperative Banks: Cooperative banks are
formed on the
operative to extend credit facilities principle of co
to farmers and scale industrial
promotes in small concerns and
general the habit of thrift and self
help among the low and middle
groups ofthesociety. The income
distinguishingfeature of a
profit motive. co-operativebank is the absence of
Cooperative banks are very
farmers, artisan,In helpful to meet the
India; co-operativebanks have requirement of small
rural deposits. been the pioneers in
Cooperative banking has a three-tier mobilizing
Cooperative Bank at the state structure.At the top there is
level. At the State
Cooperative Banks. At the base of intermediate level, there are
the Central
the village level. pyramid there are Primary Credit Societies
at
6.Regional Rural
Banks (RRBs): Regional Rural
organizationsoperating in different Banksare local level
to serve States of India. banking
primarily the rural areas of India They have been created with a view
with basic
However, RRB's may have branches banking and financial
set up for urban services.
operation may include urban operations and their area of
areas too. The main
financialresources from purpose of RRB's is to
to small and rural/semi-urban areas and mobilize
marginal farmers, grantloans and advances
agriculturallaborers and rural mostly
operation of RRBs islimited to the artisans. The area of
or more districts in area as notified by
the State. RRB's Government ofIndia covering one
RRB's perform various also perform a
functions in variety of different
functions.
followingheads:
(a)Providing
banking facilities to rural and
(6)Carrying out semi-urban areas.
government operations like disbursement
workers, distributionof ofwages of MGNREGA
pensions etc.
 (7.
Providing Para-Banking
NABARD
1.P.University-(BBA-Akash Book
facilities like locker facilities, debit and
(National Farm Bank): The National Bank for Agricultural
2013-3

credit cards.

and
Rural Development started its operations with effect from July 15,1982. It is an apex
development bank with a mandate for providing credit flow for promotion and
development ofagriculture, small scale industries and all other allied economic activities
in rural area. Its main function is to provide refinance to lending institutions in rural
area.
Other functionof NABARD includes:
a) Prepare on annual basis, rural credit plans for all the districts in the country.
These plans form base for annual credit plans of all rural financialinstitutions

(6)Undertakes monitoring and evaluation of projects refinanced by it.

(c) Promotes research in the fields of rural banking, agriculture and rural
development
a regulatory authority,supervising, monitoring and guiding
(d) Functions as
and regional rural banks.
cooperative banks
8. Land Development Banks: These banks provde long-term credit
agriculturalists against securityoftheir land forpurchasing tools and implements and
forpermanent improvements of land.In India,these banks were set up to provideloans
to agriculturists on easy terms against mortgage of land for the purpose ofrepayment
ofloans to village money- lenders and indigenous bankers. They raise their recoursesby
also acceptlong-term depositsfrom
issuing shares and debentures to the public. They
the public. They grant loans to agriculturists which are repayable by instalments spread
over a number of years ranging from twenty to thirty years.
9. Indigenous Banks: In many countries, there are businessmen doing banking
the indigenous
business as side occupation.. The merchant bankers of England and
bankers in India are the example of such bankers. The Indian central Banking Enquiry
firms
Committee defined an indigenous banker as an individualor private receiving

in hundis or money. These banks borrow by accepting

deposits and dealing lending
on current accounts as well as fixed deposits. The indigenous banks form an
deposits
structure because they do not follow the banking
unorganized part of the banking
do not publish their accounts and do not
practices as others banks in the country.They
business from their great grandfather.
get then audited. They inherittheir banking the conservative
The main drawback of indigenous bankers is that they are still following

practices. They
arenot governed by RBI.
Role of commercial banks
Role of commercial bank in economic development:
in economic development is given below:
1. Trade Development: The commercial banks provide capital, technical
to their need, which
leads to
assistance and other facilities to businessmen according
development in trade.
finance the most important
2. Agriculture Development: Commercial banks
medium and long-term loans
sector of thedeveloping economics i.e. agriculture,short, of tube wells,
installation
are provided for the purchase of seeds and fertilizer,
and thresher eto.
constructionof warehouses, purchase of tractor
on industrial sector
The countries, which concentrated
3. Industrial Development: Hong Kong and
economic development. South Korea, Malaysia, Taiwan,
made rapid with the help ofcommercial
industrial sector
developed their
Indonesia have recently
banks.
 of Commercial Banks
401 Nixth Sementer, Management

banks help in increasing the rate of

Capital Formation: Commercial
4.
capita
rmation in a eountry. Capital formationmeans increase in number of producti
nt,
.
finance the projects responsible
teehnology, plant and machinery. They efon

inereaning the rate of eapital formation.

Development of Foreign Trade: Commercial banks help the traders oft
difterent countrien to undertake business.Letter of credit

hank to the exporters to er ure the payment. The banks also

is issued by the importa.

arrange foreign exchange

r
&. Tranaforof Money: Commercial banks provide the facility oftransferring fun
fhom one place to another which leads to the growth of trade.
7.More Production:A good banking system ensures more production in all secton
of the economy. It increasesthe productioncapabilities ofthe economy by strengthening
capital structure and division of labor.
8.Development of Transport: The commercial banks financedthe transportsector
It has reduced unemployment on one hand and increased the transport facility on the

other hand. Remote areas are linked to main markets through developed transport
system.
9. Safe Custody: The business concerns and individualscan make themselves
tension free by depositing their surplus money in banks. The banks also provide them
the facility oflockers to keep their precious articles and necessary documents safe.
10. Increase in Saving: Commercial banks persuade the people to save more
Differentsaving schemes with attractive interestratesare introduced for this purpose
Number of bank branches is opened in urban and rural areas.
11. Export Promotion Cells: In order to boost the exports of the country, the
banks have established export promotion cells for the information and guidance to the
exporters.
12. Economic Prosperity: Economic prosperityof country depends on number
a
of factors including the development of commercial banking. A
sound banking system
ofthe people by providing them short,medium and long-
promotes theeconomic status
term loans.
as per RBI. What steps have been taken
Q.2. Define Non performing assets
by the banks in India to reduce NPA?
(15)

when it ceases to
Ans. An asset,including a leased asset,becomes non-performing as a credit
bank. A non-performing asset'(NPA) was defined
generate income for the has remained
facility in respect of
which the interest and or instalment of principal
was reduced in a phased
of time. The specified period
past due' for a specified period
manner nN under:

Yoar ending Mareh 31 Specified period

four quarters
1993
1994 three quarters
two quarters
199 onwards
latogorien ofNP'At assets further into
the following
to classit on-portorming non-performing
lAn are required for which theasset has
remained
baMed on the perivd
ree alogorion as
Hd the valinubilityofthedue
a ud atandard asset
is one which
hasbeen classified
anaeta:
1Hub-atAndard 1 month
NIM Ar a pertod no exveeding
 I.P.
Uhiversity-(BBA-Akash Books 2013-5
2. DoubtfulAssets:a doubtful assetis one which has remained
NPA for a period
exceeding
12 months
a Loss assets: where loss has been identified by the bank, internal or external
auditor or central
bank But the amount has notbeen written
inspectors. off, wholly or
partly
Causes of NPAs:
NPAs what are "Bad Loans" or defaults. Default, in the financial
result from termed
is to meet
parlance, the failure financial obligations, say non-payment of a loan
installment. These loans can occur due to the following
reasons
Usual banking operations /Bad lending practices

A banking crisis (ashappened in South Asia and Japan)

Overhang component (due to environmentalreasons,businesscycle, etc.)
Incremental component (due to internal bank management, like credit poliey.

terms ofcredit, etc..)

Steps to reduce NPAs

The following are some strategies by which banks are trying to curtail non performing
assets to a greatextent:
1. Recovery camps: Bank personneljointly approach the defaulting borrowers
for repayment ata place and time convenientto both the parties. These aremore suited
to small loans. Normally the borrowers who had availed small loans will be more in
number in rural and semi urban areas rather than urban and metro centres. As such,
the banks instead of conducting the recovery camps at their branches,they usually
conduct such recovery camps in panchayat board offices,court buildings.
centres like

government department buildings etc such recovery camps so that the borrowers
find
it
convenientto attend the recoverycamps. Under certain circumstances, the manager in
to each visit each house
charge of the bank branches along with somebranch officials go
due of loans availed by them.
of the borrowers and recoverthe instalments in respect
an advance notice is served on the
This type of recoverycamp will be successful in case
borrowers mentioning the date ofrecovery camps
2. Preference of claims:Banks should expeditiously and properly claim indemnity
called
from organizations like Deposit Insurance and Credit Guarantee Corporation
Fund
DICGC, Export Credit Guarantee Corporationcalled ECGC, Credit Guarantee
Trust for small scale industries, Insurance Companies etc and invoke Government/
other personal guarantees to recover loan dues and reduce non performing
assets.

3. Compromise proposals: Compromise routes are adopted by banks, where

borrowers experience certain genuine difficulties and where normal recovery is not
of the banks on the principle of "one
possible. It involves certain sacrifices on the part
bird at hand is worth two in the bush". Such proposals can
be taken up considering the
net worth of the borrower/guarantor,
history of the borrowal account, security available,
time value of offer made etc
loans which have
4. Technical write off: Normally banks decide writing off small
accounts under any
become bad and the recovery is not at all possible in those
have been expired; he has
Circumstances on accountof the facts that the borrower might
losses in respect of the
no means to repay the loan at any cost and there may be huge
of servicing such non performing accounts.
properties etc.This is for the sole purpose
amount of non performing
5. One time settlement scheme:To reduce the absolute
with Reserve Bank of India are announcingone time
assets, Government of India along
 6-2013 Sixth Semester, Management of Commercial Banks

settlementschemes periodically for the past few years. When the

borrowers
and when the borrowers are farmers, small entrepreneurs etc and they findare. ali
it
to like bad It works
difficu't pay
their
dues
for
various reasons health
and fall in their
busi maintains
to
ventures,, however,they have the inclination repaytheir debts to the banks,thist governme
ofpractice is very nmuch helpful to the borrowers and the lending institutions.
Surely t governn-
in a lose loan amount when
banks are position to certain portion of their they:are crunch.
conducting one time settlement schemes. (4)
6.Suit filing: Filing taken up as a last resort when all other remedies
ofsuit is accordi
Banks can initiate recovery proceedings with o
fail. unchec
recover non performingassets ha
of the other
of law. To expedite the process, banks should be
withoutintervention courts aler econom
and proactive in all stages of the proceedings. i.e. preparation of plaint, service ot
stabilit.
summons,written

needed etc.
statements, trial of the suit,obtaining decree copy, praying for interim
relief, execution of decrees, attachment of the property, arrest of the defendants,

7. Debt recovery tribunals:The debt

if

make t
5
variois

recovery tribunal act was passed by Indian in case

Parliament in 1993 with the objective of facilitating the banks and financial institutions makes
of
for speedy recovery dues in cases where the loan amountis Rs. 10 lakhs and above (E
time under the act not being adheredto in disposing off the suits e
The limitenvisaged is any
infrastructure and shortage of recovery personnel with the DRTs.
because ofinadequate implie
Nonetheless,the DRT act and subsequent amendment in 2000 have provideda great indire
improvement over the normal legal forum diffc
8. Lok adalats: It is a legal forum for expeditious settlementof loan dues on
consensus arrivedbetween the bank and theborrowers mediated by the Lok Adalat busir
9.Securitisation act: The securitisation and financial assets and enforcementof close-

securityinterestSARFAESIact2002 aims to empower banks as securedcreditors to

take possession, manage and sell the securities without the intervention of cour and
tribunal. It also aims at Asset Reconstructionby securitization or Reconstruction info

Company. However, loan with balance below Rs. 1 lakh unsecured loans and loans
from the purview of this act.
against collateral of agricultural land are exempted by t
on the role ofRBI in current NB
Q.3. List the major functions of RBI. Comment
(15) can
economic scenario.
which is discussed below:
Ans. The function of RBI can be categorized into function the
the sole right or authority or monopoly
(1)Issue of Currency Notes: The RBI has de
and coins of smallerdenomination.
of i8suing currency notes except one rupee note R
the RBI. Currentlyit is in denominations
These currency notes are legal tender issued by to ana
The RBI has aot powers only 1ssue
of Rs. 2, 5, 10, 20,50, 100, 500, and 1,000. It issues
W=
for other denominations.
these currency notes
withdraw but even to exchange coins, exchang
securities, rupee
notes against the security of gold bullion, foreign
hese of India bonds.
Dills and promissory notes and government
institution has obligato
(2)Banker to Banks:The RBI being an apex monitory banks in the
country,i
to and give direction to other commercial
POers guide, help other banks to create credit
n Controlthe volumes
of banks reserves and allow with
has to maintain a part of their resevB
nat proportion.Every commercial bank these banks approacn u
viz. the RBI. Similarly in need or in urgency
parent's
Tund. Thus it is called as thelender of the last resort.

an ankerof Government:The RBIbeing the apex monitory boay na

func
nction

anagent ofthecentral and state various banking

governments. It performs
hehalf the government
of thegove
on behalf of
P aeposits,paid taxes and make pavments
 L.P.
University-(BBA)-Akash Books 2013-7
Tt works as a representativeof the government even at the international level. It
maintainsgovernment accounts,provides financial advice to the government.It manages
overnment public debts and maintains foreign exchange reserves on hehalf of the
grovernment. It provides overdraft facility to the government when it faces financial
crunch.
(4) Credit Control Function: Commercial bank the country creates credit
in
the But
according to demand and supply in the economy. if this credit creation is
or the economy into inflationary cycles. On the
unchecked unregulated then it leads
other hand, credit creation is below the required limit then it harms the growth of the
economy. As a central bank of the nation the RBI has to look for growth with price
stability. Thus it regulates the credit creation capacity of commercial banks by using
various credit control tools.
(5) Banker, Agent and Adviser of the Government: Central bank advice to
make the varioustypes ofpolicy. They play the role of adviserofthe government specially
in case ofthe financial policy asa banker and agent to the government, the central bank

makes and receives payment on behalf of government.

(6) Lender of the Last Resort: Central bank never ever refuses to accommodate
any elgible commercial bank needing fund. By the Lender of the last resort, It
is

implied that the central bank assumes the responsibility

of
meeting directly and
indirectly all reasonable
demands for accommodation by commercial banks in times of
diffculties and crises.
to banks for carrying its
(7)Granting License to Banks: The RBI grantslicense
even to
business.License is also given for opening extensioncounters, new branches,
close down existing branches.
as perthe directives
(8)Bank Inspection: The RBI grantslicense to banks working
In to this can ask for periodical
and in a prudent manner without undue risk. addition it

of assets and liabilities.

information from banks on various components
Institutions arenot influenced
(9) Control over NBFIs: The Non-Bank Financial
RBI has a to issue directives to the
by the working of a monetary policy. However right
it
NBFIs from time to time regarding their functioning. Through periodic inspection,
can control the NBFIs.
Insurance Scheme: The RBI has set up
(10) Implementation of the Deposit
in order to protect the deposits of small
the Deposit Insurance Guarantee Corporation The
below Rs. One lakh are insuredwith this corporation.
depositors. All bank deposits a bank failure.
in case of
RBI work to implement the Deposit Insurance Scheme
of Commercial Banks: The RBI checks
the
(11)Periodical Review of the Work of
that they can test the maintenance
work of commercial bank on regular basis so
solvethe problems of commercial banks.
commercial banks and can help out to
Role efRBI:
functions:
RBI plays important role in economy through following
comprises the
(1)Development of the Financial System: The financial systemThe sound and
financial markets and financial instruments.
financial of the
institutions,
of the rapid economic development
efficient financial system is a precondition and non-banking
of main banking
nation. The RBI has encouraged establishment of the economy.
of diverse sectors
institutions to cater to the credit requirements
like India,the RBI has
In an agrarianeconomy
(2)Development ofAgriculture: and allied activities.
attention for the credit
need ofagriculturesector
to provide special
direction by increasing
theflow of credit to
It has successfully rendered services in this
 s-2013 Sixth Semester,Management of Commercial Banks

has earlier the AgTiculture Refinance and Development

.
this sector. It

ARDC to look after the credit, National Bank for Agricultureand Rural
Corporatio
NABARD and Regional Rural Banks (RRBs).
3 Provisionof IndustrialFinance: Rapid industrial
growth is tho
Developme
economic development. In this regard, the adequate and timely ey for
small, medium and
large industry is very 8ignifican In this availability i faste
regardthe
been instrumental in setting up special financial
inst utions h: credit
RBI has
SIDBI and EXIM Bank etc. such as alway
ICICI Ltd.
IDR
4)Provisions of Training: The BI has
the staffof the
always tried to
to
banking industry. The RBI has set provideessentia
several places. National
up the bankers'
BankManagement i.e.
Institute of raining
training colleg
ie. BSC and College
of Agriculture Banking i.e. CAB are
NIBM, Bankers
esat

few to StaffColl
5)Collection of Data: Being the mention. ollege
apex monetary
collecte,
process and disseminatesstatistical authorityof the
rate. inflation,
data on several country, the RRI
savings and investments etc. This topics. It
includes inter
researchers and data proves to
policy makers. be quite
(6) useful for
Publication of the Reports: The
division. This division Reserve Bank has its
collects and
The reports and bulletins publishesdata on several separate publication
are sectors of the
reports, RBI Annual
regularlypublished
Report, Report on by theRBI. Itincludes economy.
India., etc. This Trend and RBI weekly
information is made Progress of Commercial
(7)Promotion available to thepublicalso at Banks in
to
of Banking Habits: Asanapex cheaper rates.
promote the banking habits organization, the RBI
in the always tries
measures for an country. It institutionalizes
of
expansion thebanking savings and takes
as the network.It has set
Deposit Insurance up many institutions such
NHB-1988, etc. These Corporation-1962,UTI-1964,
organizations IDBI-1964,
people During economic develop and promote NABARD-1982,
reforms it has taken banking habits
many initiatives for among the
promoting
banking habitsin India. encouraging and
(8)Promotion of
the facilities for Export through Refinance: The
RBI always tries to
providingfinancefor
foreign trade encourage
Export-Import Bank ofIndia (EXIM especially exportsfrom
Bank ofIndia)and India.The
Corporation of India (ECGC) are the Export Credit
supported by Guarantee
purpose. refinancing their for
lending export
Q4.a) List the major
banking reforms in India since
independence.
Ans. Following are the (5+10)
1. major reforms in
banking:
Nationalization ofbanks.
2.
Granting operational
3: autonomy to banks.
Liberalization ofentry norms
4. forbanks.
teductionin
statutory
lending. pre-emptionss0as to release
greaterfunds for commercial
5.
of
Deregulation interest rates.
6.Relaxation
in investment
7. norms for banks.
of
Easing restrictions
in respectof
8. banks foreign
Withdrawal ofreserve currency investments.
requirements on inter-bank
borrowings
 I.P.University-(BBA)-Akash Books 2013-9
9.4.(6) What are the advantages and limitationsof paper less banking
e
Ans. Advantages of banking are as follows:
1. Consumers can use their computers and telephone modem to dial in from home
or any sit where they have access to computer.
2. The services are available 24x7 day
3. Transactionsareexecuted and confirmed quickly, although not instantaneousiy.
4. In general, the customer will find lower fees and higher interest rates on
deposits
due to the reduced cost of operating online and not needing numerous physical bank
branches.
5. transaction fairly broad.Customers can do everything
is
Therange of available
from simply checking on an account balance to applying from a mortgage.
6. The interface is very user-friendly and often intuitive.

Limitations: E-Banking suffers from following limitations:

1.Poorly delivered e-banking services can be slow time consuming. &

2.Someidentity authenticationrequirements can be annoying & overwhelming for

clients.

3.Might require lots of paperwork & proceduresfor registration set-up, such as&
documentations& power of attorney to spouses beyond what is required for traditional
paper-based dealings.
4. Can be difficult for clients to get familiarized with the bank's website e- &
banking channel as each bank has its own unique website & methods.
5. Frequent changes & adjustments to the bank's website & delivery channels that
require re-familiarization & in some cases re-registration & documentation.
6. Distrust by some clients in some countries with primitive legal system and
unreliable technological infrastructure might face security & legal challenges.

Q.5. Classify the major risks for commercial banks as per international
norms. Statebriefly the methods of managing these risks. (10+5)
Ans. The major risks faced by commercial banks are as follows:
(a)Credit Risk: A bank'sbusinessmodel is basically predicatedon the idea that
the large majority of lenders will repay their loans on time, but a certain percentage
willnot. So long asthe bank'sestimatesof repayment rates are accurate, or conservative,
there are few problems. When a bank fails to adequately estimate and price the rate of
losses, or when economic conditions change significantly, banks may face higherlevels

of bad which can shrink the bank's capital reservesto an unacceptablelevel. Taken to
the extreme,if a bank underestimates the amount ofcredit losses it will incur, thebank
can fail altogether.
(6, Liquidity Risk: Banks lend out the vast majorityof the funds they receive as
deposits, therefore, there is always a risk that the
bank will face a sudden rush of
withdrawals that it cannot meet, with the cash it has on hand. Banks cannot call in
loans on demand ard cannot legally forbid depositors from withdrawing funds.

(c)Market Risk: As banks frequentlyhold investment securities on their balance

As
sheet, they are vulnerable to changes in the market value of those investments.
in debt instruments widely
many banks hold significant percentages of their reserves
thought of as "safe, (includingU.S. government bonds),a sudden market decline in
back on lending. to say nothing
those securities could force banks to raise capital or pare
oftheloss in shareholderequity from the investment losses.
10-2013 Sixth Semester,
Management of Commercial Banks
(d) Operating Risk: Banks are
also vulnerable to the
asany competitive same sort of operatina
enterprise. Management may make mistakes
expansion, marketing or other regarding acquisit
policies, and lose ground to rivals. In the
operating risk can have a case of ban
longer tail than in otherindustries. Banks
underprice loans to garner market share,but may be tempted
bank for many underpriced mortgage loans can
and
years, hurt
over-aggressive lending (lending to poor credit
threaten the survivalof the risks) can
bank itself.
(e) Interest Rate Risk: As so much ofa bank's
profitability is determinedby the
interestrates they charge and
pay out, banks are highly exposed to changes in
rates. Banks must always be making interet
predictions and estimatesof futur interest rate
movements and positioning their balance sheet, accordingly.
Unexpected rate changes
can significantly impair profitability, as the bank
repositions its balancesheet.

Legal Risk: The bank industry also faces certain legal risks that arenot very
common outside of the financial services industries. In addition to the aforementioned
laws concerning fair and honest lending, banks are also compelled to play a role in
monitoring potential illegal activities on the part of customers. In particular, banks are
required to be on the lookout for signs of money laundering. There are strict "know your
customer" rules.in place and banks must report transactions to the U.S. Treasury that
exceed a certain dollar amount.
Risk Management deals with the identification, assessmentand variousstrategies
usees
that help mitigate the adverse effects of risk on the organization. Management
and increase the
risk management as a strategic tocl to mitigate the loss of property

successchance of the organization.

Various types of risk management can be categorized as follows:
are present in every
(a) Operational Risk Management: Operational risks
of the business functions of the
arise due to the execution
enterpises. These risks and action plans to meet
need to assess these risks prepare
enterprises. Enterprises
risk management deals with
the impact of risk. At the primary level, operational
technical failures and human errors like:

Mistakes in execution
System failures
Policy violations

Legal infringements
Rule breaches
Indirect and direct additional risk taking
need to understand the risks present
(6)Market Risk Management: Enterprises
out of competition.Enterprise need to
in the market, inherentto the industryor arising
It Deals with different types ofmarket
assess it and developtheir capabilities.
properly and currency risk.
uch as interest rate risk, equity risk, commodity risk,
risks,
risk is one of the fundamenta
c) Credit Risk Management: Managing credit
is largely becoming
Work of the financial institution. Credit portfolio management to tne
the risk related
for the enterprise to keep track of risk.It Deals with
essential
probability of nonpayment from the debtors
risk
that interest ra
dInterest raterisk management: There are many ways
canbe managed.
t rate
lender to fix the interest
A8imple method is when the borrower requestsits
of its toan for the
period ofthe loan.
 LP University-(BBA)-Akash Books 2013-11
An alternative product for a borrower on floating rates would be to consider using
an interent rate swap.

Similarly horrowers can convert a fixed rate loan back to a floating loan using a
derivative, such as an interest. rate swap.

Investors can invest in fixed rate assetsor alternatively investin floating rate
aRseth and fix the rate using an interest swap.

(e) Liquidity risk management: Liquidity risk management system is an

mportant part of risk management system of commercial banks, which shall be
commensurate with business size, property and complexityof the bank. Liquidity risk
management policy shall be in conformitywith thegeneral development strategy of the
bank, and match the general financial strength of the bank, with the interaction and
conversion of liquid risk and other risks fully taken into account. Liquidity risk
elements:
management system shall include the following fundamental
1. Board of Directors and Senior Management's effective monitoring,

2. Perfectliquidity risk management strategy, policy and procedures;

control
3. Perfect liquidity risk recognition, measurement, monitoring and
procedures;
4. Perfect internal control and effective monitoring mechanism;

5. Perfect and effective information management system; and

6. Effective management mechanism.

crisis
in a
of Non Banking Financial Companies (NBFCs)
Q.6. Examine the role in the regulatory
India. Quote any two recent changes
developing country like (15)
frameworkforNBFCsin India. under
is a company registered
Ans. A Non-Banking Financial Company (NBFC) of
1956 engaged in thebusiness ofloans and advances, acquisition
the Companies Act, or
issued by Government or local authority
shares/stocks/bonds/debentures/securities insurance business,
of a like nature,leasing, hire-purchase,
other marketable securities whose principal business is that of
chit business but does
not include any institution than
or sale of any goods (other
industrial activity, purchase immovable
agriculture activity, and sale/purchase/constructionof
or providing any services has business of
which is a company and
securities) principal
institution
property.A non-banking sum or in instalments
under any scheme or arrangement in one lump
receiving deposits financial company.
also a non-banking
or in any other manner, is
by way ofcontributions
the
Role ofNBFCs: financial intermediaries
is clear from
of non-bank are as
The role and importance functionsof the NBFls
these institutions. Major
various functions performed by
follows: non-bank of the
The most important function investors.
1. Financial Intermediation: of funds from the savers to the
is the transfer
financialintermediaries to both small businesses
is economical and less expensive
Financial intermediation
and small savers, to sell stocks and
forwhich it is difficult
small businesses
(a)It provides funds to
transaction costs,
their
bonds because of high their funds and diversifying
savers by pooling
(6)It also benefitsthe small
investments.
 12-2013 Sixth Semester, Management of Commercial Banks

2. Economic Basis of Financinl Intermedintion:

Handling of funds by financial
cial
economicaland more efficient than that by the individual
is
intermediaries more wesl
ealth
owners because of the fact that financial intermediationis based on
(a the law of largenumbers, and
) ecnomies ofsealein portfolio management.
Law of Large Numbers: Financial intermediariesoperate on the basis of the
statistical law of large numbers. According to this law not all the creditors will
withdraw
theirfunds from these institutions. Moreover, if some creditors are
withdrawing cash,
some others may be depositing cash. Again, the financial intermediariesalso
receive
regular interest payments on loans or investments made by them. All these
factors
enablethe financial intermediariesto keep in cash
only a small fraction of the funds
provided by the creditors and lend or iavest the rest.
()
Economies of Scale: Large size of the asset
portfolios enables the financial
intermediaries to reap variouseconomies of scale in
portfolio management. The main
economies are:
(a) reduction
of risk through portfolio diversification:
lemployment of efficient and professional managers; and
(c) low administrativecost
of large loans and
(d) low costs
of establishment,informationand transactions.
3. Inducement to Save:
Non-bank financial
role in intermediariesplay an important
promoting savings in the country. Savers need stores of value to hold their
savingsin. These institutions providea wide
range of financial assetsas store of value
and make availableexpert financial
services to the savers. As stores of value, the
financial assets have certain
special advantages over the tangible assets (such
as,
physical capital, inventoriesof
goods,etc.). They are easily storable, more liquid, more
easily divisible, and less risky. In fact,
saving- income ratio is related to both
positively
financial institutions and financial assets; financial progress. Induces larger savings
outofthe same level ofreal income.
4.
Mobilisation of Saving: Mobilisationof
savings takes place when the savers
hold savings in the form of currency, bank deposits, post office
savings deposits, life
insurance policies, bills, bond's equity shares, etc. NBFI
provides highly efficient
mechanism for mobilising savings. There are two
types of NBFTs involved in the
mobilisation of savings;
(a) Depository
Intermediaries, such as savingsand loan associations, credit unions,
mutual saving banks ete. These institutions mobilise
small savings and providehigh
liquidity of funds.
(b) ContractualIntermediaries,
such as life insurance companies, public
funds, pensionfunds,etc. These institutions enter into contract with savers provident
and provide
them various types of benefits over the
long periods.
5. Investment of Funds:The
main objective ofNBFIs is to earn profits by investing
the mobilised savings.For this purpose, these institutions follow different investment
policies. For example, savings and loan
associations, mutual saving banks invest in
mortgages,while insurance invest in bonds and securities.
companies
Q.7. Discuss the methods of appraising the efficiency and
Banks. In this performance o
context highlight the main features of
of CAMELApproach.
ethods appraisingthe efficiency and performance of banks:
th 0al of commercialbanks.All the strategies designed and activitiesProfit
thereof are
15
performeu
meant to realize this
grand objective.
 1.P.
University-(BBA)-Akash Books 2013-13
Temeasure the profitability of commereial bankn there are
variety of ratios
1. Return on Equity (ROE): ROE is a
financial ratio that refers to how much
profit a company earned compared to the total amount of ahareholder
equit.y invested
or found on the balance sheet. ROE is what the shareholderslook
in return for their
A business that has a high returnon
itnvestment. equity is more likely to be one that. is
capable of generating cash internally. Thus, the higher the ROE he
better the company
is interms of profit generation.It is furtherexplained
by Khrawish (2011)that. ROE is8
the ratio of Net Income after Taxes divided by 'Total
Equity Capital. It represents the
rate of returnearned on the fiunds invested in the bank by its stockholders. ROE
reflects8
how effectively a bank management is using shareholders' funds. Thus, it can be deduced
from the above statement that the better the ROE the more effective the
management
in utilizing the shareholders capital.
2. on Asset (ROA): ROA is also another major ratio that. indicat.es the
Return
profitability of a bank. It is a ratio of Income to its total asset (Khrawish, 2011). It
measures the ability ofthe bank management to generateincome by utilizing
company
assets at their disposal. In other words, it shows how
efficiently the resources of the
company are used to generate the income. It furtherindicates the efficiency of the
management of a company in generating net income from all the resourcesof the
(Khrawish, 2011). Wen (2010),state that a higher ROA shows that the
institution

company is more etficient in using its resources.

3.Net Interest Margin (NIM): NIM is a measure of the difference between the
interest income generated by banks and the amount of interest
paid out to their lenders
for example, deposits), relative to the amount of their (interestearning) assets. It is
usuallyexpressed as a percentage of what the financial institution earns on loans in a
specific time period and otherassetsminus the interest paid on borrowed funds divided
by the average amount ofthe assets on which it earned income in that time period (the
average earning assets). The NIM variable is defined asthe net interest income divided
by total earnings assets (Gul et al., 2011). Net interest margin measures the gap
between the interest income the bank receives on loans and securities and interest cost
of its borrowed funds. It reflects the cost of bank intermediation services and the

efficiency of the bank. The higher the net interest margin, the higher the bank's profit
and the more stable the bank is.
Determinants of Bank Performance: The determinants of bank performances
can be classified into bank specific (internal) and macroeconomic (external) factors.
1. Bank Specific Factors/Internal Factors: the internal arebank specific
factors
variables which influence the profitability of specific bank. These factors are within the

scope of the bank to manipulate them and that they differ from bank to bank. These
includecapital size, size of deposit liabilities, size and composition of eredit portfolio,
interest rate policy, labor productivity, and state of informationtechnology, risk level,

management quality, bank size, ownership and the like. CAMEL framework often used
by scholarsto proxy the bank specific factors. CAMEL stands for Capital Adequacy
Asset Quality, Management Efficiency, Earnings Ability and Liquidity. Each of these
indicators are furtherdiscussed below.

(a)Capital Adequacy: Capital is one of the bank specific factors that influence
the level ofbank profitability. Capital is the amount of own fund available to support
the bank'sbusiness and act as a buffer in case of adverse situation (Athanasoglou et al.
2005). Banks capital creates liquidity for the bank due to the fact that deposits are
most fragile and prone to bank runs. Moreover, greater bank capital reduces the chance
ofdistress (Diamond,2000).However, it is not without drawbacks that it induce weak
14-2013 Sixth Semester, Management of Commercial Banks

demand for hability. thecheapest sources of fund Capital adequacyquacy isis th

the level
to enable them withstand the risks
capital required by the banks such as of
credit,
and operational risks they are exposed to in order to absorb the market
protect the bank's debtors. According to Dang (201l), the
on the basis of capital adequacy ratio (CAR). Capital
potential loses
adequacy of capital io
adequacy ratio shows tho
nd
ged
strength of the bank to withstand losses during crisis.
Capitaladequacy ratio is dir
Droportional to the resilience of the bank to crisis
situations.
(b)Asset Quality:The bank's assetis another bank
a bank. The bank assetincludes
the profitability of specific variable that
affecto
among others current
portfolio.fixed asset, and other investments.Often asset, credit
a growing asset
age of the bank (Athanaseglouet al., 2005). (size) related to
the
More often than not the
major asset that generatesthe major share of loan of a bank is
the
asset o. commercialbanks from which the banks income. Loan is the
they generateincome.The maior
determines the profitability of banks. quality of loan
The loan portfolio portfolio
bank profitability.The quality hasA direct
highestrisk facing a bank is the bearing on
loans (Dang, 2011). losses derived from
Thus, nonperforming loan ratios delinquent
quality. Different
are the best
types of financial ratios used proxies for asset
different scholars. to study the
Itis the performances of banks by
major concern of all
nonperforming loans to commercial banks to
low level. This is so keep the amount of
of the because high
profitability bank.Thus,low nonperformingloan affects the
good health of the nonperforming loans to total loans shows that
portfolio a bank. the
(c)
Management: Efficiency
factors that determine the Management Efficiency is one of the key internal
bank profitability. It is
ratios like total
assetgrowth,loan represented by different financial
of the growth rate and earningsgrowth rate.
complexes subject to capture with financial ratios. Yet, it is one
in managing the Moreover,operational efficiency
operating expensesis anotherdimensionfor
performance of management is often management quality. The
evaluation expressed qualitatively through subjective
ofmanagement systems,
ofstaff, and others. organizational discipline, control
Yet, some financial ratios of the systems,quality
for financial statements actas a
management efficiency. The capability of the proxy
efficiently, income maximization, management to deploy its resources
ratios. One of this reducing operating costs can be measured
ratios used to measure by financial
income ratio (Rahman et al. management quality is operating profit to
in Ilhomovich,
the operating 2009;Sangmi and Nazir,2010).
profits to total income (revenue) The higher
termsof the more the efficient
operational efficiency and income management is in
generation. The other
proxy management
quality is expense to asset important ratio is that
ratio.
(d)Liquidity
Management: Liquidity is anotherfactor that
ofbank performance. determines the level
Liquidity refers to the
mainly of depositors. ability ofthe bank to fulfill its
According to obligations,
related with bank Dang (2011)adequate level of
profitability. The most common liquidity is positively
liquidity position of a bank financial ratios that
reflect the
asset and total according to the above author
loan to customer are customer
to measure deposits. Other scholars use deposit to total
liquidity. For instance different financial ratio
measure the Ilhomovich (2009) used
liquidity level of banks in cash to
China and deposit ratio to
Malaysiafound that Malaysia. However, the study conducted
level of banks in
performancesofbanks (Saidandliquidity has no with the
Tumin, relationship
2. External 2011).
Factors/Macroeconomic Factors: The
GrossDomestic
stability,
also Product,Inflation, Interest macroeconomic poliey
other Rate and Political
macroeconomicvariables that affect instability are
the
performances ofbanks. For
instand
 .P. University-(BBA)-Akash Books 2013-15
affects the demand for banks asset.
the trend of GDP During the declining GDP growth
the demand credit falls which in turn negativelyaffect the profitability of hanks. On
for
the contrary, in a growing economy as expressed by positive GDP growth, the demand for
credit is high
due to the nature of business cycle. During boom the demand for credit is
to recession (Athanasoglou et al., 2005). The same authors state in
high compared
to theGreek situationthat the relationship between inflation level and banks
relation
remained to be debatable.The direction of the relationship is not clear
profitability is
and Chan, 2009).
(Vong
Q8. Briefly describe any three ofthe following: 5x315)
Q.S.(a)Operational risk.
Ans. A form ofrisk that summarizes the risks a company or firm undertakes when
it attempts to operate
within a given field or industry. is the risk that
Operational risk
is not inherent in financial,systematic
or market-wide risk. It is the risk remaining
after determining financing and systematic risk, and includes risks resulting from

breakdowns in internal procedures, people and systems.

Assessment of Operational Risk
1. In addition to identifying the risk events,banks should assess their vulnerability
these risk events. Effective risk assessment allows a bank to better understand
its
to
risk profileand most effectively target risk management resources. Amongst the possible
risk are:
tools that may be used by banks for assessing operational
and activities against a
2. Self Risk Assessment: A bank assesses its operations
driven and
menu of potential operational risk vulnerabilities. This process is internally weaknesses
checklists and/or workshops to identify
the strengthsand
oftenincorporates
ofthe operational risk environment.
assessments
3. Scorecards,forexample,provide a means oftranslating qualitative
a relative ranking of different types of operational
into quantitativemetrics that give
to a business line while
relate to risks unique
risk expOsures. Some scores may
specific
address inherent
business lines. Scores may
others may rank risks that cut across
risks, as well as the controls to mitigate them.
functions
various business units, organizational
4. Risk Mapping: In this process, of weakness
This exercise can reveal areas
or proce8s flows are mapped by risk type.
action.
and help prioritise subsequent management
are statistics and/or metrics, often
5. Key Risk Indicators:Key risk indicators
into a bank's risk position.
These indicators should
financial, which
can provide insight
or quarterly)to alert banks
to changes
be reviewed on a periodicbasis (such as monthly the number of
Such indicators may include
that may be indicativeof risk concerns. of errors and
rates and the frequency and/or severity
failed trades, staffturnover
omissions.
transaction of banks.
Q.8.6) Foreign currency denominated in a currency
refer to transactions
Ans. Foreign currency transactions the banking office is
(domestic) currency of the country in which
other than the local

located.
includes:
Foreign exchange transaction to partake in and
currenciesto allow customers
1.The purchase and saleofforeign
commercial trade transactions.
complete international to allow customers
(orthe financial
2. The purchase and sale of foreign currencies
financial investments.
in foreign real and
to take positions
itself)
institution
 Banks
16-2013 Sixth Semester, Management of Commercial
to offset
3.The Purchase and saleofforeigncurrencies for hedging purposes custome

(orFI itself) exposure in any given currency.

purposes base
4. To purchase and sale of foreigncurrenciesfor speculative
Q.8.(c)International banking. on the Globai
Settlements'Committee
Ans. According to theBank for International
when a bank headquartered in one country
Pinancial System, international banking is a Canadian bank
for example, when
credit to residentsofanother country-
extenci banking are:
of international
Americans. Major functions
to
lends money
their clients
trade financing -
1. Facilitate imports and exportsof
and foreigninvestmenta
border transactions
2.ATange for foreign exchange -cross
risk
3.Assistin hedging exchange rate
for their own account
4. Trade foreign exchange products
market
5. Borrow and lend in the Eurocurrency
loan syndicate lending MNCsproject
to -
6. Participate in international
economic development
7. Financing and to sovereign governments-
and foreign bonds issues
8.Participate in underwritingof Eurobonds
an international bank account:
There are many advantages to opening
24/7
Safe and secureglobal access to your money over
in multiple currencies gives
you greaterflexibility
transfers
Quick and easy
your finances location for all your
offers one central
convenient to operate and
Simple and
banking requirements
Unlimited access to foreign exchange
rate fluctuations
Provides security againstexchange on the Isle ofMan
a stable offshore jurisdiction
Grow and protect your money in
service whereveryou
are in the world
Confidential

Limitations ofinternational banking:

1. It is more risky than national banking
2. It can be more difficult to resolve any issues that may arise with your account if
you hold it offshore.
Whilst you may well be
3.You have to choose your offshore jurisdiction carefully.
nation and how it is
aware of how the banking industry operates in your own home
regulated, the rules and regulations
abroad differ massively.
4.Higher fees is charged in international Banking
Q.8.(d) Asset Liability Management.
Ans. The ALM is defined as "managing both assetsand liabilities simultaneously
forthe purp0seofminimizing the adverseimpact of interest rate movement, providingg
liquidity and enhancing themarket value of equity. It is also defined as "planning
procedure which accountsfor all assets and liabilities of a bank by rate, amount and
maturity."
The featuresofthis approach are:
focuses more control on volume, mix and st
)lt return/cost of both assets and
liabilities.

(6) Efective coordination

on both, the assets and liabilities,to maximize the spreaa, lo
and
ffset
customer 1.P.University
(BRA-Akash Books 2013-17
sbase c)Revenues and costs affect both sides
ofthehalance st.eet.

The Processof Al.M:

on the the
Broadly. process of AlLM rests on the following three important pillara
Global
one 1. ALM informationsystem:This comprises
country of availability of information accuracy
nadian and its
sufficiencv
bank
2. ALM organization: Setting up of asset liability management committee and
set up at different levels.
organizational
3.ALM process: Management of liquidity risk, interest rate risk, market risk, trading
investments
risk. capital planning and profit planning.

Objectives of ALM:
The broad objectives ofthe ALM Policy are profit planning, liquidity management,

management, FOREX
risk risk management, equity risk management and
interest
ect commodity price risk
management
Q.9. Describe the typical investment portfolio of a commercial bank. What
are the major considerations in the management of this portfolio? (15)
Ans.An investment portfolio is a collection ofassets owned by an individual or by
an institution. An investor's portfolio can include real estate and so-called "hard"assets,
such as gold bars. But most investment portfolios, particularly portfolios that are
xibility over assembled to pay for a retirement, are made up mainly of securities, such as stocks.
bonds, mutual funds,money market funds and exchange traded funds
all
For your Investments vehicles open to banks are two broad groups:
1. Money market instruments:which reach maturity within one year and are
characterized for their low risk and immediate marketability, such as treasury bills,
certificate of deposit, international Eurocurrency deposits, and many commercial

sleofMan instruments.
are generally
2. Capital market instruments:which mature beyond one year and
Such as treasury
noted for their higher expected rate ofreturn and capital gainspotential
and all kinds of corporate
notes and bonds over one yearto maturity, municipalbonds,
bonds.
account if more recently: they are variations on
3. Other investment instruments developed
traditional notes and bonds, and
new investment vehicles such as:
ay well be Structured notes: instruments with adjustableinterest rates.
how a
it is
income and principal generatedby
Securitized assets: claims against expected
loans.
pool of similar-type
issuedagainstgroupsofmoitgage loans
Mortgage-backed bonds: securities
instruments that have been
transformed fróm a
Stripped securities: Financial of with
aneously interest coupons into a series zero-couponbonds,
amount with periodic date of
principal dates and the redemption
roviding the range ofmaturitiesmatching the coupon payment
lanning the principal amount.
Process of managing an itvestment portfolio
unt and Portfolio Management Process: the plan, work in monitoring
invested according to
never stops. Once funds are initially are the
the status of the portfolio and investorneeds begins. Following
and updating
process:
and steps for portfolio management short-term and
ets construction: usually focuses on investor's
(a) Policy statement and expectations.
with capital market history,
long-term needs, familiarity
pread,
 Sixth Semester, Management of Commerci al Banks
18-2013

hInvestment Strategy:To examine current and projected finane

it cial,
and intermediato.
politicnl, and
social
conditions, focuseson short-term econom
conditions to use in constructinga specific portfolio.

c) Construct the portfolio according to the plan; it focuses on ino

minimum risk levels. investors
needa
(d) Feedback and continual monitoring: to monitor and
update i
environmental conditions, and evaluate portfolio performance
Investment Strategy Considerations: Following points
while making portfolio investment by bank:
mss.
Time
1. Active vs. Passive: One important
consideration ishow
day to day. A portfolio can be a
actively managed, which portfolio is
portfolio and how often it is traded means the manag
nage queste
depend, largely,on the
by bank manager. A passively managed investment position of the
portiolio tends to invest decisiona.
sions
honds (usuallymimicking in a made
an index)-and, generally, basketo
where purchases are made for the long term. employs a
buy and hola stocks or
9
versification: 1s addr
in order to spread, and

objectives,
Diversification the allocation of
therefore
diversification1s
Diversification can be
an
possibly mitigate, risk.
assets to
several
Regardless ofyour
important consideration in
achieved in any number of
categories
inveeto
building any portfolio
agove
ea
ways, including by: man
man
Government securities or securities
guaranteed. obje
Securities of
non-governmental and fixed interest. long
Securities of
foreign companies or that
3. Investment risk: foreign governments.
there is no IPS
between the different investment that is risk
types of free. A good distinction all6inve
investment
capitalrisk to income risk. opportunities can be made
Before starting by comparing
level
ofyour risk tolerance. In the investing you should
carefullyconsider the
short-term, risk
variability, whereas in the
long-term perspective,can bedefined as price volatility or
being unable to risk is viewed as
financially meet you goals due to the possibility of haw
4. insufiñcientcapital. out
Liquidity: Portfolio must maintain
portfolio securities can be high degree of liquidity to assure
sold and the that
proceeds used to satisfy
redemptions in pr
compliance with the
requirements. Restricted securities
Bankhas ultimate responsibility to make generally regarded as illiquid. he
liquidity of liquidity determinations and to monitor
portfolio securities.
5,
Reassessing Portfolio Weightings: Once
need to bank have an establishedportfolio, it
analyze and rebalance it because a
your initial periodically market movementsmay cause
weightings to change. To assess portfolio's actual asset m
allocation,
quantitatively categorize the investments and determine their
whole. The other factors that are values' proportion to the
likelyto change over time are bank's current
financial
situation, future needs and risk tolerance. Ifthese
things change,bank may need to
adjust your portfolio accordingly. Ifrisk tolerance of
bank has dropped,itmay need to
reduce the amount of equities held.
 END TERM EXAMINATION
SIXTH SEMESTER (BBA-MAY-JUNE 2014
MANAGEMENT OF COMMERCIAL BANKS
BBA(B&)-308
Time:3 hrs.
M.M.: 75
Note: Attempt any five questions including Qno. l which is compulsory. Selectone
each unit.
question from

q.1.Answer any five of the following: (3x515)

Q.1.a) Investment Policy.
Ans. An investment policy statement is a client-specific document designed to
address the objectives, constraints, unique circumstances, and overall policies that
govern investment related activities of the non profit. The document should set forth
clear responsibilities
for all parties
involved
in the nonprofit's investment program -
the board of trustees, investment committee,investmentadvisor/consultant, investment
managers, and custodian.A well consttructed IPS will present the portfolio's financial
objectives within the contextofhow much risk the trustees are willing to take on. The
long-term strategic asset allocation of the portfolio should be detailed; to help ensure
that the portfolio is invested in accordancewith the nonprofit's long-term goals. The
IPS should also set operational guidelines for constructing a portfolio to carry out the
investment strategy. Lastly, the IPS shouldsetforth rules for monitoringand reviewing
all facets of the investment program.
Importance of investment policy:
(1) It helps define all associated parties and their responsibilities.
When all parties
have a clear understanding of their roles, time meetings iguring
spentin committee
out who is responsible for which action item can be minimised.
in accordance with the non
(2) It will help to ensure that the portfolio is invested

long-term objectives even during times of market uncertainty. The IPS should
profit's
in times of market stress, when
help to remove emotions from the investment process
individuals are more likely to act irrationally

(3) A clear, well-defined investment policy statement is important to the success of

role in the overall governance
a nonprofit's investment program, as it plays a vital
to ensuring that the
structure of the non profit. Well-defined objectives are important
in
mission of the non profit can be achieved.Clearly defined objectives set forth theIPS
to help ensure that future
can help in the determination appropriatespending
of rates,
assets.
grant making is not impaired due to a drop in foundation
Q.1.(6) Social responsibility
of commereial banks.
which they showcase
Ans. Banks in India have been indulgingin a lot of activities
Commercial Banks
as their contribution in terms of corporate social responsibility.
fulfil their social responsibility through following
means:
extent up to
is used to measure the
1. Rural Branch Expansion: This variable
formulatedby the Reserve
which the banks are following the financial inclusion policy
Bank of India to promote balanced growth of the economy.
Reserve Bank of India, Priority
2. Priority Sector Lending: As described by the
scale and ancillary industries,
Sectorlendingmeans lendingto the agriculture, small
 2 2014 Sixth Semester, Management of Commercial Banks

new and renewable sources ofenergy, cottage industries, artisans, food and ae
processing. education, housing and weaker section.
While for domestic banka
cent of their net both
publie and private sectors are required to lend 40 per bank
NRC)1o the priority sector, foreign banks are required to lend 32 per cent of
to the priority sector
ofthei their
N Q.1.(e)
Ans. An
3. Environment Protection: This variable includesall the
activities carried f future in

In
the banks for the purpose ofenvironment protection or, to reduce e the bamount.
harm by adoptingdifferent initiatives, replacing environme is lin
traditional activities enhat
by eco friena
nteres ra
processes or activities in day to day business
obtain am
4. Education: The major activities carried out by the banks in the
field ofeducati, swap.
are as follows:
How
Support to low income family studentswith financial assistance,free unifo The
and books
payments
Motivational camps to go to school, for the students to Party
of rural areas.
5.Community Welfare:This variable is used to measure the (in almo
activities
by the banks for the welfareofthe performet For
community. As per the data,highest number
has contributed in this CSR ofbank LIBOR
activity.
Q.1.(c) International Banking. changes
Ars. According to the Bank for every m
International Settlements'Committee on the
Financial
System, international banking is when a bank Globao
extends credit to residents headquartered in one countr chance
of anothercountry- for
example, when a interes
lends money to Americans.
Major functionsof international Canadian ban sandy1
Sand
banking are:
1. Facilitate
imports and exports of
their clients -
trade financing princip

2.Arrange for $1,000-

foreignexchange- cross border
3. Assistin
hedging exchange rate risk
transactionsand foreign
investment W
4. Trade exposu
foreignexchange products for their own
account likely
5.Borrow and lend in
the Eurocurrency market rate F
6.
Participate in internationalloan
7. Financing and to
-
syndicate lending to MNCs
project
sovereign
8. governments-economic development the i
Participate in underwriting
ofEurobonds and foreign bonds issues speci
Q.1. d)CAMEL Principles. arei
-. Ans, CAMEL
basically, a ratio-based model
is, pay
banks. It is a model for ferevaluating the
ranking/rating of the banks CAMEL performance of
developed in the 1970s by the
Reserve,the FDIC and the
three federal
model of rating was first
banking supervisors of
the U.S (theFederal
n
OCC) as partof the
Rating System",to regulators'"Uniform Financial
provide a convenient Institutions thr
on-site examination.
The banks were summaryofbank condition at the time of its an
acronym C-A-M-E-L: judged on five different
components under the
1. NF
Capital adequacy
2:Asset
quality eX
3.
Management
4.
Earnings au
5. pa
Liquidity

p
 1.P. Books 2014-3
University-(BBA-Akash

Q.1.(e) Interest rate swap.

Ans. An agreement.between two parties (known as counterparties) where one stream
of futureinterest payments is exehanged for another based on a specified principal
amount. Interest rate swaps often exchange a fixed payment for a floating payment
that is linked to an interest rate (most ofen the LIBOR). A company will typically use
interest rate swaps to limit or manage exposure to fluctuations in interest rates, or to
lower interest than it would have been able to getwithoutthe
lobtain a marginally rate

swap.
How works/Example:
it

The most common type ofinterest rate swap is one in which PartyA agrees to make
Dgvments to Party B based on a fixed interest rate, and Party
B agreesto make payments
to Party A based on a floating interest rate. The floating rate is tied to a reference
rate

Offered Rate, or LIBOR).

(in almost all cases, theLondon Interbank
For example, assume that Charlie owns a $1,000,000investment that pays him
the payment Charlie receives
LIBOR+1% every month. As LIBOR goes up and down,investment that pays her 1.5%
owns a $1,000,000
changes. Now assume that Sandy that he
she receives never changes. Charlie decides that
every month. The payment rather take a
and Sandy decides that she'd
would rather lock in a constant payment into an
Charlie and Sandy agree to enter
chance on receiving higher payments. So to
interest rate swap contract.
Under the terms of their contract, Charlie agrees pay
the "notional
on a $1,000,000principal amount (called
Sandy LIBOR + 1% per month to pay Charlie 1.5% per month on the
or "notionalamount"). Sandy agrees
principal"
$1,000,000 notional amount.
for businessesto hedge their
Why it Matters: Interest rate swaps provide a way
believes long-term interest rates are
in interest rates. Ifa company
exposure changes
to
to interest rate changesby exchanging
its floating
it can hedge its exposure
likely to rise,
rate payments forfixed rate payments.

Q.1.Non performing assets. is defined as a credit facilityin respect of which

Ans. ANon-performing asset(NPA) remained 'past due'for a
and/or instalment of Bond financePrincipal has
the interest to loans that
institutions that refer
of time. NPA is used by financial or principle
period make
Once the borrower has failed to
specified interest
are in jeopardy of default. to be a non-performing
asset.
for 90 days/ 3 Months the loan is considered on
payments since they depend
are for financial institutions
assets problematic
Non-performing
interest payments
forincome. the following
assets furtherinto
Banks are required to classify non-performing
for which the asset
has remained non-performing
three categories based on the period
and the realisability of the dues: has been classified as
a standard assetis one which
1. Sub-standard
assets: sub
12 months.
a
NPA for period not exceeding NPA for a period
a doubtful assetis
one which has remained
2. Doubtful.Assets:
months. internal or external
exceeding 12 been identified by the bank,
where loss has written off, wholly
or
3.Loss assets: But the amount has not been
bank inspectors.
auditoror central
in the financial
Default,
partly. "BadLoans" or defaults. of a loan
NPAs result from what are termed say non-payment
to meet financial
obligations,
is the failure
parlance, can occur due to the following reasons:
instalment.These loans
 Banks
of Commercial
Management
Sixth Semester, practices
4-2014 /Bad lending raising
and Japan) for cons
operations South Asia cycla etc.)
Usual banking (as happened in reasons,
business 6.
A banking
crisis
(dueto environmental
bank management,
like crel:
polis
employ
component (due to internal educat:
Overhang
component institu
Incremental
etc..) 1
UNIT
terms of credit,
banks in Indian
Economy.
an.
1 engine
busine
role ofcommercial is
country discussed unde India.
Q.2. Discussthe bank in a developing banka b
commercial The commercial entres
Ans. The role of a Formation: in coP
for Capital People developing
varietyofd
Saving
1. Mobilising networkof
branch banking. ofa c
to save by introducing
savings through induce them idle saui
mobilising but the banks They also mobilise cen
low incomes depositors. into prod ana
have
to suit the
needs of individual
the banks channelizethem
schemes savings, country.
the few rich. By
mobilising formationofadeveloping hby gT
in the capital sector in.
investments.
Thus they help financethe industrial
The commercial banks loans to indust capit
2. Financing Industry: medium-term and long-term like
short-term, countries
number of ways.They provide Income of the Latin American in Korea,the
short-term loans. But imp
In India they provide forone to threeyears.
medium-term loans In India,the commercial tran
Guatemala,they advance loans to industry.
advance long-term of small scale and to ir
commercial banks
also industries,
medium-term financing
and and area
banks undertake short-term underwritetheshares debenturs
finance. Besides, they but in for t
also provide hire-purchase for industry aso help
Thus they not only provide finance the
scale industries. in such countries.
oflarge market which is undeveloped
the capital and
developing in financing both internal
Trade: The commercial banks help to stockgoods in
est-
3. Financing
loans to retailers and wholesalers
external trade. The
banks provide to anotherby
eco
in the movement of goods from one place
deal. They also help
which they bills of exchange,
all types of facilities
such as discounting and accepting me
providing finance both exports
issuing drafts, etc. Moreover, they
providing overdraft facilities, facilities to importers
foreign exchange
and imports of developing countries by providing OV
and exporters ofgoods.
sector
4. Financing Agriculture: The commercialbanks help the large agricultural
loans to traders in agricultural
in developing countries in a number ofways. They provide
in rural areas to provide agricultural
commodities. They open a network ofbranches
for the marketing oftheir produce,
credit. They provide finance directly to agriculturists
for the modernisationand mechanisation of their farms, for providing irrigati0n

facilities, for developing land,etc.

They slso provide financial assistancefor animal husbandry, dairy farming. sheep
breeding, poultry farming,pisciculture and horticulture. The small and marginal farmers
and landless agricultural workers,artisans and petty shopkeepers in rural areas are
provided financial assistance through the regional rural banks in India.These regional
rural banks operate under a commercial bank. Thus the commercial banks meet the
credit requirements of all types of rural people.

Financing Consumer Activities:People in underdeveloped countries being

5.
poor and having low incomes do not possess sufficient financial resources to buy durable
consumer goods. The commercial banks advance loansto consumers for the
purchase of
such itemsas houses,
scooters, fans,refrigerators, etc. In this way, they also help
 I.P. Books
University-(BRA-Akash 2014-5
the of the people in developing countries by
raising standard ofliving providing loans
for consumptive activities.
Employment Generating Activities: The commercial banks finance
6. Financing

employment generating activities in developing countries. They provide loana for the
education of young person's studying in engineering,medical and other vocational
institutes ofhigher learning. They advance loans to young entrepreneurs, medical and
graduates, and other technically trained personsin establishing their own
engineering
business.
Such loan facilities are being providedby a number ofcom mercialbanks in
India. Thus the banks not only help inhuman capital formationbut also in increasing
in
developingcountries
entrepreneurial activities

7.Help in Monetary Policy:The commercial banks helptheeconomic development

of a country by faithfully following the monetary policy of the central bank. In fact, the
central bank depends upon the commercial banks for the success of its policy of monetary
management in keeping with requirements ofa developingeconomy.
Thus the commercial banks the growth of a developing economy
contribute much to
and human
by grantingloans to agriculture, trade and industry, by helpingin physical
the monetary policy of the country.
capital formation and by following

s. Balanced development of different region: Commercial banksare playing

of different region. They help to
important role in ensuring the balanced development
transfer the surplus funds from developedregion to less developedregion. Banks helped
in rural
toincreasethe mobilityof capital in various ways like starting their operations
are able to get funds
areas and there fortrade and industries in less developed region
trade and production in
for their development and in turn, it increased the investment,
the country
commercial bank has
9. Help in promoting exports: In order to promote export,
information about general trade and
established export promotion cell. They provide
of the country to its customers.
economic conditionboth inside and outside
of banks? What is the need of it? Discuss its
Q.3. What is nationalization
(15)
merits and demerits.
of Indiatakes
Ans. Bank Nationalizationis the processby which the government
the bank and makes it a government bank.
over full or majority stake/control on
which are supported and guided by the
Nationalized banks refer to the bank3
other words,it is no
the control from their former owners, In
government by taking over inthe company
longer privately owned. The government acquires majorityshareholding
to promise its control.
minimum 51% of paid-up
The state government or central government acquires
bank to nationalize the bank and the board of directors are
capital of the former private
to handle the management
and investment decisions of thebank
appointed by the govt
as per the government policy took place
of commercial banks
Need of nationalization: The nationalisation
with an aim to achieve following major objectives:
for the needy and
1. Social Welfare:It was the
need ofthe hour to direct the funds
and village
of the economy. Sector such as agriculture, small
required sectors indian
further economicdevelopment.
industries were in need of
funds for their expansion and
Prior to nationalisation many banks were
2. Controlling Private Monopolies: It was necessaryto check
business houses and corporate families.
controlled by private
 6-2014 Sixth Semester, Management of Commercial Banka
these monopolies in order to ensure a smooth supply of credit
it to ans
to
sections. socially
In a large country like India the
3. Expansion of Banking: numbers desirab
those days were ertainly inadequate. It was necessaryto fbank units redu
spread bankim exist
country. It could be done through expanding banking network 2. 7al
(by
branches) in the un-banked areas. openingnew and rate a
4. Reducing Regional Imbalance:in a country like
Indiawhere we 3Sio
rural divide; it was necessary for banks to go in the
rural areas
hos.
a e declared
facilities were not available. In order to reduce this where ne urban
was justified:
regional imbalance
1.
C
nationalig
banking their
du
5. Priority Sector Lending:In India,the isation
5.P
agriculture sectorand its
tributor to the national income. allied art risk for
Thus these were
priority sectors. But unfortunately they were deprived labellede sector.
Nationalisation was urgently needed for of theirdue share in the.
catering funds to them. 6.
6. Developing Banking Habits:In redit,
India more than 70% sector,
rural areas. It was necessary to population used to stau: investr
develop the banking habit
Main causes or among such a large populat.
advantages of nationalization: ation.
Following were the main causes
of nationalization:
1.
Equal Distribution of banks
Wealth: The
banks to provide equal government nationalizedthe A
distribution of wealth. Because industries and
over the major few familieshad full or
portion of national wealth. So contro
th-

chances ofearning to the government decided to liquid

people by nationalizing the provide equal
2.End of units. proce
Monopoly: There was matu
the market. complete hold offew
They were charging capitalists over the
higher prices from the supply of
monopoliesgovernment consumers. To remove
nationalized the the
to the
public atlowerprice. industries,so that goods should
be provided
liab
3. Check on
Smuggling and Hoarding: The
banks on this government nationalizedthe various
ground that capitalists were
They used thecreditfor misusing the savings of the and
hoarding and smuggling. whole nation.
4. Fair
Distribution of Credit: The
distribtion of credit. All banks were nationalized to
the classesof the provide the fair
farmer and small public will enjoy the credit dis
businessman was ignored the
facilities. Small
6.Economic by banks before go
nationalization.
Stability: It was also
adoptuniform policyafter argued that all the business
institutions will
nationalization.It will
6. Effective provide economic
Planning: It was also stability.
will argued that after nationalization
prepare the plans more
effectively and the rate of government
7. Increase in output will rise.
Production: It was also argued that
will work more after
honestly and efficiently to nationalizationthe labour
increase the
8. Increase in Social production oftheseunits.
Welfare: Before
banks was in few hands. But nationalizationall the
after profit ofindustries
nationalizationit will be used and
the whole nation. for the best o
interest
9.Price
Stability:If was also climes that
in the economic statebank can
activity with the minimize the fluctuation
help of nationalized
Disad antagesofnationalization: commercial bank.
1. Increase in
Corruption: The nationalized
the industrial units were
government ofiçialsand itincreased handed over
the corruption in this
sector. of
Efficiency
u
 L.P.
University-(BBA)-Akash Books 2014-7
units reduced after nationalization.

2.Pall in P'roduction:
Afer the nationalization production of various units decreased
and rate of profit removed.
The managers of those units did not pay proper attention.
3. Sick Industries:In the short period these industries suffered a loss and were
declared sick industries.

4. Carelessness
Labour: After nationalization workers became careless about
of

their duties and this attitude

of labour affected the
productionadversely.
5. Public Sectorover Weighted: Public sector has become
overweightand it is health
risk for the economy. More over public sector is flourishing at the expenses of private
sector.

6. Private Sector Discouraged: The nationalization policy discouragedthe private

sector, and due to this rate of investment decreased. Even the target of private
investment in the 8th five year plan could notachievedue to the fear of nationalization.
UNIT II
Q.4. Discuss Asset and Liability management of scheduled commercial
banks with respect to the RBI guidelines. (15)
Ans. The ALM is defined as "managingboth assetsand liabilities simultaneously
for the purpose ofminimizing the adverse impact ofinterest rate movement, providing
liquidity and ernhancing the market
value of equity. It is also defined as "planning
which accounts for all assets and liabilities of a bank by rate, amount and
procedure
maturity."
The features of this approach are:

on volume, mix and return / cost of both assets and

(a) It focuses more control

liabilities.

(b) Effective coordinationon both, the assets and liabilities,

to maximize the spread,
and
Revenues and costs affect both sides of the balance sheet.
(c)
to enforce the risk management
The initial focus of the ALM functionwould be
the risks involved. The objective of
discipline viz. managing business after assessing
will evolve into a strategic
good risk managament systems should be that these systems
tool for bank management.
ALM Process
ALM three pillars:
The processrests on
ALM Information Systems
*
Management Information Systems
* Information availability, accuracy, adequacy and expediency

ALM Organisation
*Structure and responsibilities
* Level of top management involvement

ALM Process
Risk parameters
Risk identification
* Risk measurement
 8-2014 Sixth Semester,Management of Commercial Banks

Risk management
Risk policies and tolerance levels. conditions
r

(a) ALM Information Systems: ALM has to

be supported by
and tolerance limits. This framewo
amanagemen bank's inter
The A
philosophy which clearly specifies the risk policies
needs to be built on sound methodology with necessary information system as back risk-return
that varied risks. Each
Thus, information is the key to the ALM process. It is, however, recognised
and private sector as well as those of the decisio
business profiles of banks in the
public foreign

ALM System for all banks feasible. Thera should ens

banks do not make the adoption of a uniform busin
The
are va:ious methods prevalent world-wide for measuring risks. These range from the fo
Risk Adjusted pricing
simple Gap Statement to extremely sophisticated and data intensive incremen
the central element for the entire ALM
Profitability Measurement methods.However, bank, the-
exercise is the of adequate and accurate information with expedience and
availability decisions
the existing systemsin many Indianbanks do not generateinformation the manner in
interest
required for ALM. Collecting accurate data in a timely manner will be the biggest view. In
challenge before thebanks, particularly those having wide network of branches but on sourc
lacking full scale computerisation. However,the introduction of base informationsystem develop:
for risk measurement and monitoring has to be addressed urgently. As banks areaware, mixes be=
internationally, regulators have prescribed or are in the process of prescribing capital vs capita
adequacy for market risks. A pre-requisite for this is that banks must have in place an wil hav
efficient information system.
Compo
Considering the large networkof branches and the lack of (an adequate) support- The
system to collect information required for ALM
which analyses information on the busines
basis uf residual maturityand
behavioural pattern, it will take timefor banks in the
Manag
the requisite information. The problem ofALM needs to be addressed
to
present state get head t
ABC i.e. analysing the behaviour of assetand liability products
byfollowing an approach Planni-
in the sample branches
accounting for significant business and then making rational and Ee
assumptions about the way in which assets and liabilities would
behave in other Techno
branches. In respectof foreign exchange, investment
portfolio and money market compu
operations, in view of the centralised nature of the
functions, it would be much easier to Comn
collect reliable
information. The data and can then be refined over time as
the bank
assumptions
management gainexperience of
The spread of conducting business within an ALM framework.
will also consti
computerisation help banks in accessing data.
(b)ALM its fu
Organisation:
Successful
implementation of the risk management
commitment on the processwould require strong
part of the senior in the bank, to
operations and
management
strategic decision integrate basic
have overall making with risk management. The Board
responsibility
should
for management of risks and
management policy of should decide the risk
and equity the bank and set limits for
liquidity, interest rate, foreignexchange
price risks.

The Asset-Liability Committee (ALCO)

management including CEO consisting of the bank's senior
set by the Board should be liqu
as well asfor responsiblefor
ensuring adherence to the limits
the business risk
and liabilities sides) in line deciding strategy of the bank (onthe
with the bank's asset
objectives. budget and decided risk
managemen
heALM Support Groups consisting
analysing, monitoringand of operating
therisk staffshould be
prepare forecasts reporting responsible
profiles to the ALCO.
(simulations)
showingtheeffects The staff
ofvarious shouldal pre
possible in
changes rket
mai*
 1P University-(BRA)
Akash Rooks 2014-9
conditions related to the balance sheet and recommend the action needed to adhere to
bank's internal limits
.TheAlCO is a decision
making unit responsible for balancesheet
-returm
planning from
risk perspective including the strategic management of interest rate and
liquidity
risks. Each bank will have to decide on the role of its ALCO, its
responsibility as also
the decisions to be taken by it. The businessand risk management strategy of the bank
should ensure that the bank operates within the limits / parameters set
by the Board
The business issues that an ALCO would consider, inter alia, will include product
pricing for both deposits and advances, desired maturity profile and mix of the
incremental assets and liabilities, etc. In addition to monitoring the risk levels of the
bank. the ALCO should review the results of and progress in implementation of the
decisions made in the previousmeetings.The ALCO would also articulate the current
interest rate view of the bank and base its decisions for future businessstrategy on this
view. In respect
of the funding policy, for instance,its responsibility would be to decide
on source and mix of liabilities or sale of assets. Towards this end, it will have to
develop a view on future direction of interest rate movements and decide on funding
mixes between fixed us floating rate funds,wholesale vs retail deposits, money market
vs capital market funding ,domestic vs foreign currencyfunding,etc. Individual banks
will have to decide the
frequéncy for holdingtheír ALCO meetings.
Composition of ALCO
The size (number of members) of ALCO would depend on
the size of each institution,
business mix and organisational complexity. To ensure commitmént of the Top
or the ED should
Management and timely respons to market dynamics, the CEO/OMD
head the Committee. The Chiefs of Investment, Credit, Resources Management or
Banking
Planning, Funds Management/Treasury (forex and domestic),International of the
In the Head
and Economic Research can be members of the Committee. addition,

be an invitee for kuilding up of MIS and related

Technology Division should also
banks may even have Sub-committees and Support Groups.
computerisation. Some
Committee of Directors
other Specific Committee
The Management Committee of the Board or any
oversee the implementation ofthe system and review
constituted by the Board should
its functioningperiodically.
be described as follows:
(c)ALM Process: The scope of ALM function can
risk management
Liquidity
risks
Management ofmarket
Trading risk management
Funding and capital planning
Profit planning and growth projection
are profit planning.
The broad objectives of the ALM Policy
Objectives ofALM: FOREX risk management, equity
interest risk management,
liquidity management,
risk management
risk management and commodity price (7.5+7.5)
notes on:
Q.5. Write the short
of commercial banks
Q.5. (a)Efficiency there are variety ofratios:
ofcommercial banks
Ans. To measure the efficiency ratio that refers to
how much
(ROE): ROE is a financial
1. Return on Equity equity invested
to amount
the total ofshareholder
profitr company earned compared
 10-2014 Sixth Semester,Management of Commercial Banks

or found on the balance sheet. ROE is what the shareholderslook in return for tha

investment. A business that has a high return on equity is more likely to be one thatt
ia
the ROE the better the compan
capable of generating cash internally. Thus, the higher
is in te ms
ofprofit generation. It ir fiurther explained
by Khrawish (2011)that ROR
the ratio of Net Income after Taxes divided by Total Equity Capital. It represents the
in the bank by its stockholders. ROE
rate
ofreturnearned on the fundsinvested reflecta

how effectively a bank management is using shareholders' funds. Thus, it can be deduced
from the above statementthat the better the ROE the more effective the management
in utilizing the shareholders
capital
2. Return on Asset (ROA):ROA is also another major ratio that indicates the
its total asset. It measures the ability
profitability of a bank. It is a ratio of Income to
of the bank management to generate income by utilizing company assets at their
disposal. Inother words,it shows how efficiently the resources of the company
are used
of a company
efficiency of themanagement
to generate the income. It further indicates the

in generating net incomefrom all the resources of the

institution.
A higher shows ROA
that the company is more efficientin using its resources.

3. Net InterestMargin (NIM): NIM is a measure ofthe difference between the

interest incomegenerated by banks and the amountofinterest paid out to their lenders
(for example,deposits), relative to the amount of their (interest earning) assets. It is

usually expressed as a percentage of what the financial institution earns on loans in a

specifictime period and other assets minus the interest paid on borrowed funds divided
by the average amount of the assets on which it earned income in that time period (the
average earning assets). The NIM variable is defined as the net interest incomedivided
by total earnings assets. Net margin measures the gap between the interest
interest
the loans and and interest cost ofits borrowed funds.
income bank receives on securities
It reflects the cost of bank
intermediation services and the efficiency of the bank. The
higher the net interest margin, the higher the bank's profit and the more stable the
bank is.
Q.5. (6) Scheduled and Non-scheduled commercial banks
according to RBI
Norms:
Ars. Scheduled banks:
Scheduledbanks are those banks
in the second scheduleof the Reserve which hasbeen included
Bank of India Act, to be eligible for this
inclusion, a bank must 1934
satisfy the three following condition:
Itmust have a paid up capital and reserves for an
5,00,000. aggregate value of at least Rs.

It must satisfy the RBI, that its affairs arenot conducted in a

to the interest of its manner detrimental
depositors; and
It must be a corporation and not a
partnershipor a singleowner firm.
Scheduled banks
enjoy certain privileges such
facilities as free/concessional
through the offices ofthe RBI and remittance
RBI. In its agents and
return, the scheduled are borrowing facilities from the
under obligation to:
1.
Maintain an
average daily balance of cash
stipulated by it; and reserves with the RBI at
rates
2.3ubmit
periodical returns to the
of India RBI under various
Act, 1934 and the
time). Banking Regulation Act 1949 provisions of Reserve Bank
(as amended from time
to
 1.P
University-(BBA)-Akash Books 2014-11
Scheduled Commercial Banks are grouped under following categories
1. State Bank of India and ita ARRociates

2. Nationalised Banks
3. Foreign Banks
4. Regional Rural Banks
5. Other Scheduled Commercial Banks.

Non-Scheduled Banks: Non-scheduled banks also function in the Indianbanking

space. in the form of Local Area Banks (LAB). As at end-March 2009 there were oniy 4
LABs operatingin India. Local area banks arebanks that are set up under the seheme
announced by the government India in 1996, for the establishmentof new private
of

banks of a local nature;with juriediction over a maximum of three contiguous districts.

LABs aid in the mobilisationof funds of rural and semi urban districts. Six LABs were
onginally licensed, but the license of one of them was cancelled due to irregularities in
operations, and the other was amalgamated with Bank of Baroda in 2004 due its

weak financial position.

UNIT III
Q.6. What is liquidity risk? Explain various theories of liquidity risk
(15)
management.
Ans. Liquidityrisk is therisk that a company
or bank be unable meet
may to short
term financial demands. This usually occurs due to the inability to converta security or
risk that
hard asset to cash without a loss ofcapital and/or income in the process. The
arises from the difficulty of selling an asset. An investment may sometimes need to be
sold quickly. Unfortunately,an insufficient secondarymarket may preventthe liquidation
are highly liquid
or limit the funds that can be generated from the asset. Some assets
as a traded company), while other
and have low liquidity risk (such stock of publicly
as a
assets are highly illiquid and have high liquidity risk (such house).

Howit works/Example:
when a businessor individual with immediate cash
Liquidityrisk generallyarises
it can not trade or sell at market value due
to a lack
needs, holds a valuable assetthat and sellers
to bring buyers
ofbuyers,or due to an inefficient market where is
it difficult

together.
with no buyers. The home obviously has
For example, considera $1,000,000 home In
at the time,there may be no interested buyers.
value, but due to market conditions the
better economic times when market
conditions improve and demand increases,
due to the home owner's need of cash
house may sell for well above that price. However, have no
to meet near term financial demands,
the owner may be unable to wait and
the
market at a significant loss. Hence,
other choice but to sell the house in an illiquid
this asset.
liquidity risk of holding

Theories of liquidity risk management: can be

holds that a bank's liquidity
1.Anticipated Income Theory: This theory made by
and structuring of the loan commitments
managed through the proper phasing scheduled loan payments
a bank to the customers.Here the liquidity can be plannedAccording
if the
to Nzotta (1997)the
a customer are based on the future of the borrower. borrower as the
and the credit worthinessof a
by
the earning potential
theory ephasizes liquidity.
Nwankwo (1991) posits that the
ultimate guarantee for ensuring adequate
 Sixth Semester, Management of Commercial Banks
12-2014

theory points tothe movement towards self-liquidating commitments

nents by hant
banks.
commercial banks to adopt a ladder effects in
theory has encouraged many ectsin inve Thi
port folio. investment
2. Shiftability Theory: This theory posits that a bank's liquidity is maintain
it holds assets that could be shifted or sold to other lenders or nedit
investors for cash.
point ofview contendsthat a bank's liquidity could be enhanced ifit
T
always has asse.
to sell and
provided the Central Bank and the discount Market stands
ready to purcha.
the asset offered for discount. Thus this nase
theory recognizesand contends that
marketability or transferability of a bank's assets is a shiftabili
basis for
theory further contends that highly marketable
ensuring liquidity. Thie
of
securityheld by a bank is an
source liquidity. Dodds (1982) contends that to excellent
ensure convertibility without
and appreciable loss, such assets delay
must meet three
Theory Liquidity management requisites.Liability
theory accordingto Dodds (1982) Management
nvolved in obtaining funds from consistsofthe
activities
depositors and other creditors
specially) and determining the (from the market
point of view contends appropriate mix of funds fora
that liability particularlybank. This
uestions: How do we obtain funds management must seek t answer the
from depositors? How do following
other creditors? -What is
the we obtain funds from
examines the activities appropriate mix ofthe fundsfor
involved in any bank?
Management
through the use of borrowed supplementing the liquidity needs of
funds. The the bank
liability side ofbank liquidity management
balance sheet.This theory focuses on the
could be derived theory contends that
from theliabilities supplementary liquidity
of a bank.
argues that since banks can According to Nwankwo (1991)the
buy all the funds theory
liquidity on the asset side they need, there is no need to
(liquidity asset)of the store
been subjected to balance sheet.
critical review Liquidity theory has
during the period of
by various authors. The
distress, a general consensus is that
since the confidence bank.may find it difficult to obtain the
ofthemarket
would may have seriouslyaffectedand desired liquidity
invariably be credit worthiness
lacking. However, for a
market funds and healthy bank, the liabilities
other creditors)
3. constitutean (deposits,
Commercial Loan important source of
Theory: This theory has been liquidity.
by Dodds (1982) and
Nwankwo (1992). From the subjected to various criticisms
limitation is that
thetheory is various points of
inconsistentwith the view, the major
especially for demands of economic
developing countries since
engine of growth. The it excludes development
theory also long term loans which
(loan and
emphasizesthe are the
investments)and not maturity structure of
assets. necessarilythe bank assets
marketability or the
Also, the shiftability of the
theory assumes that
bank would be sufficient to repayment from thè
deposit withdrawals provide for self-liquidating assets of the
and liquidity. This
adversely. meeting credit ignores the fact that
Moreover, the request could affect seasonal
inthe theory fails to the
liquidity reflect in the liquidity position
consideration. normal
.7.Whatisinterest stability of demand
deposits
raterisk?
Ans.Interest How itis
rate risk
exists in an
managed by commercial
due to the banks. (15
possibility of a interest-bearingasset,such
interest rates. change in the asa
Interestrate risk asset'svalue loanor a
instrumentshave resulting from the bona
you tó been management has
ways thatboth developed to deal with become very variability
interest rate businesses and important,and
interestrate risk.
derivative consumers This article assorte
instruments. manage interestrate riRK ISlintroduce
rious
 1.P.University-(BBA)-Aknsh Booka 2014-13
be managed where f1uctuations in interest rate
Interest rate risk should
impact on
the organisation's profitability. In an organisation where the core operations are
something other than financial services, such financial risk should be appropriately
managed, so that the focusoftheorganisationis on providing the core goods or services
without exposing the business to financial risks.
An adverse movement in interest rate risk may potentially:
increase borrowing costs for borrowers;
reducereturns forinvestors
reduce profitability of financialservices providers such as banks; and
Reduce the net present value (NPV) of organisationsdue to the effect of changes
in the discountrate (interest rate) on the value of financial instruments,hedges and the
return on projects.

Sources of interest rate risk Interest raterisk can arise from anumberof sources:
whereinterest costs fluctuateaccording to interest rate movements during the
life of the loan;

resetting of interestrates on an entity's loans from banks or other lenders;

resetting of interest rates on short-term investments such as bank deposits,
commercial paper, bank bills and so on;
the impact of interestrate changes on the value of long-termfinancial assetsand
fall as interest rates increase
liabilities. For example, the value of a bond will
benefit from a decrease in interest rates
investurs in such instruments will initially
suffer an economic loss as
and similarly borrowers of long-term funds may initially
and losses will
rates fall because their liabilities will increase.These economic gains
otherwise the
investment or liability isrealised prior to maturity
only be realised if the
or a loss at the time that interest
economic gain or loss represents an opportunity gain
rates changed;
derivatives e.g. interestrate swaps
-
the value of these instruments will change
or a loss (orreal gain
as interestrates change, representing either an opportunity gain
to maturity);
or loss where the transactionis finalised prior
offered
and received. For example, discount rates
early payment discount -offered cost
than the organisation's of funds;
forearly payment by debtors may be higher
differential between domestie
forward foreignexchange ratesare affected by the rates increase
For example, as Australian interest
interest rates and foreign rates. increaseand the cost of
offshore rates, then the cost ofhedging imports will
relative to

hedging exports will fall; and

the interest rates on assets
financial institutionsare concerned about risk or repricing
as mismatch
liabilities resetting
at different times. This is known its liabilities
on its assets increase more than
For example, if the interestrates
risk.
will increase,and vice-versa.
then theorganisation'sprofit
in interest rates on organisations
Impactof adverse movements
about rates
Borrowers-in general concerned rising

Increased cost of funds

=
profitability
= market value
to undertake capital expenditure
ability
 14-2014 Sixth Semester, Management of Commercial Banks

ability to pay dividends

chance ofa breach of borrwing covenants
ratios
borrowing margins due to deterioration in financial
T (initially) NPV (net worth) due to a higher discount rate being applied to fixe
nterest loans and associated hedges (the opposite applies where
rates fall)

rates
Investors-in general concerned about falling
Reduced cost of funds =
profitability = market value
is a trust
stakeholders e.g. unit holders
ability topay returnsto
investors
competitive returns = ability toattract

initually) NPV inet worth/unit prices )due to the lower discountrate being applied
to investments and associated hedges (the opposite applies when rates increase)

ability to meet future outgoings e.g. superannuation.

Methods to measure interestrate risk:
There are many ways to measure interest rate risk which can range from very
simple measures to very sophisticated measures which are mathematically complex
and require significant computing power. This guide provides some examples of the
simplermeasures which can be applied and understood by most organisations.
Sensitivity analysis
a
Simple analysis measurement of the impact of small changes of interest
rates on the accounting income or economic value. For example, ifinterest rates increase

by per cent now, what will be the impact on the accountingincome? Usually calculated
1

on spreadsheets
-
bi Advanced measurement of the impact of multiple changes in interest rates
and other related variables on the
entity's financial health.For example,if the entityis
50per oent hedged and interest rates increase
by 1 per cent and earnings beforeinteres
tax.
depreciation and amortisation(EBITDA) fall
by 10 per cent, what will be the
impact on the entity's interest cover ratio? This
information may be presented in a
Labular
form
(c) Stress test
modelling the impact of large
borrowings or investments in
a
change in interest rates on
accounting terms or risk outcomes.
measu ementis frequently used by financial This type of
institutions.
Repricing profiles (graphical
liabilities over time) - For entities representation of the interest reset of assets and
this
repricing ofassets or
may be a graphical
liabilities over representation of the interest
time.
Methods to
manage interest raterisk:
Before using
financial
instruments to
should develop a policy after manage interest rate risk, the
directors. determining the risk organisation
Guidance in this appetite of key stakeholders
and regard can be found in the such as
Managing Financial Risk. There CPA publication,
managed. are many Understandin8
ways that interest rate risk
can De
A
of its
simple method is when
loan for theborrower
it can
theperiod of requests itslenderto
theloan. - fix the interest
protect itself
om
from
rising
Where a borrower has
has a floating
floating rate
ratecost of
ra
sing interestrates u
or funds,
through an interest rate or tion. cap opto
 L.P. University-(BBA)-Akash Books 2014-15

Bssentially this is like insuringagainstrising rates. If the rates rine, the borroweri
Esse
anotected If rates tall, the borrower retains the henefit of the clenrance in interest

rates As a borrower you pay premiun

a for this protection from rising interest
rates
An alternative product for a borroweron floating rates would be to consider using

anint rest rate swap This product allows the borrower to lock in its loatng rates fur
ane to five years with its own bank, or another bank if it has the credit limits. Though
vou do not pay an upfront fee, if the rate falls below the fixed swap rate you have
to
pay
the counterpartythe difference.
Similarly borrowers can converta fixed rate loan
back to a floating loan using a

derivative, such as an interest rate swap.

Investors can invest in fixed rate assets or alternatively invest in floating rate
assets and fix the rate using
an interest swap. Fixed rate assets may offer investors a
better rate of return. However, investors
should be aware that they may experience
losses on fixed rate assets should interest rates increase and they terminate
significant
the investment prior to its maturity.
UNIT IV
Financial Institution?Discuss their role and
Q.8. What are Non-Banking (15)
related to them in our country.
explain RBI guidelines
a full banking license and
Ans. NBFI is a financial institution that does not have
NBFIs do facilitate alternative financial
cannot acceptdeposits from the public. However, financial
(both collective and individual), risk pooling,
services, such as investment
NBFIs are a sourceof
brokering, money transmission,and check cashing.
consulting, institutions
banks). Examples ofnonbank financial
consumer credit (alongwith licensed some microloan
currency exchanges,
include insurance firms, venture capitalists,
institutions provide services
and pawn shops.These non-bank financial
organizations,
serve as competitionto banks, and specialize
that are not necessarily suited banks,
to

in sectors or groups.
intermediariesis from the
clear
The role and importance of non-bank financial
of the NBFls are as
theseinstitutions. Major functions
various functions performed by
follows:
non-bank
The most important functionof the
1. Financial Intermediation: the investors.
is the transfero funds
from the savers to
financial intermediaries
to both smallbusinesses
is economicaland less expensive
Financial intermediation
and small savers, stocks and
it is difficult to sell
to small businessesfor which
(a) It providesfunds
bonds because of high transaction costs, their
and diversifying
(hi It also benefits the
small savers by pooling their funds

investments. by financial
Intermediation: Handling offunds
2. Economic Basis of Financia! wealth
than that by the individual
more efficient
is more economicaland
intermediaries
intermediation is based on
owners because of the fact that financial
and
(a)the law of large numbers,
in management.
(6)economies ofscale portfolio on the basis of the
Financial intermediaries operate
(4) Law of Large Numbers: the creditors will withdraw
to this law not all
statistical law oflarge numbers. According
 16-2014 Sixth Semester, Management of
Commercial Banks
their firnds from theRe institutions.
Moreover, if some creditors are
Rome others may he cash. Again, the financial withdrat
depositing
regular interest payments on loans or
investments made
intermediarieg alKC
enable the finaneial intermediaries
to keep in cash
by them. AIL #h
a small
ec
only
provided by the creditors and lend or investthe ofL
fractionof
rest. the"act
ii) Economies of Scale: fun
Large size of the asset
intermedia. ies to reap various portfolios enables
the fins
economies of
economies are: scale in portfolio
management, Tho.
(a reduction
of risk through
ma
portfolio diversification:
(b)
employmentofefficient and
professional
c) low administrativecost managers;and
of large loans
and
(d) low costs of
establishment,information
3. Inducement to and transactions.
Save: Non-bank
role in
promoting savings in the financial intermediaries
savingsin. These country.Savers need play an
institutions stores of value important-
and make available provide a wide range to hold
of their
expert financial assets as store
financial assets have services to thefinancial of value
certain
special savers.As stores of
physical capital, advantages over the value, the
inventoriesof tangible assets (such
easily divisible, and goods,etc.). They are
less easily as,
risky. In fact, storable,more
financial liquid, more
institutions saving-income ratio is
outof and positively relatedto
the same level of realfinancialassets;financial both
income. progress.induces
4. larger savings
Mobilisation of
hold Saving: Mobilisationof
savings in the form of
insurance currency,bank savings takes place when
policies, bills,
the savers
bond's deposits, post office
mechanism for equity shares, etc. savings deposits,life
mobilising savings. There NBFI
mobilisation of are two provides highly
savings; types of NBFTs efficient
(a) involved in the
Depository
mutual Intwrmediaries, such as
saving banks etc. savingsand loan
These
liquidity of funds. institutions mobilise associations, credit
small unions,
(b savings and
Contractual provide high
funds,pension Intermediarie8, such aslife
funds,etc. These insurance
them various companies, public
typesof benefits institutions enterinto contract
6. over the with savers provident
Investment long periods. and
the mobilised of Funds: The main provide
savings.For this objective ofNBFls is
to earn
policies. For purpose,these profits by
example, savings and institutions follow investing
mortgages,while loan different
insurance associations, mutual investment
RBI companies investin saving banks invest
guidelines related to bonds and in
The Reserve NBFIs: securities.
Bank of India is
supervising the entrusted with the
ill B Non-Banking Financial
oftheReserve Bank ofIndia responsibility of
isto: Companies by virtue of regulating and
Act, 1934.The powers vestedin
(a) ensure regulatoryand Chapter
health.y supervisory objective,
(6)ensure growth ofthe
that these financial
the policy companies;
companies functionas
to framework, in such a a
systemic manner that their part of the financial
aberrations; and existenceand system within
that
functioningdo not lead
 I.P.University-(BBA-Akash Books 2014-17

Lch the quality ofsurveillance and supervision exercised by the Bank over the NBFCs
by keeping pace with the developments that take place in this sector of the
issustained
system.
financial
of NBFIs:
Regis'ration
In terms of Section45-IA of the RBI Act, 1934,no Non-banking Financial company
commence or carry on business of a non-banking financial institution
without a)
can of from the Bank and without having a Net Owned
a certificate registration
ahtaining
two However, in terms of the powers
Eunds of Rs. 25 lakhs (Rs
crore since April 1999).
of NBFCs which are
to the Bank. to obviate dual regulation, certain categories
riven
other regulators are exempted from the requirement of registration with
regulated by
Fund/Merchant Banking companies/Stockbroking com panies
RBI viz. Venture Capital of Registration
with SEBI, Insurance Company holding a valid Certificate
registered
Nidhi companies as notified under Section 620A of
the Companies Act,
issued by IRDA, Chit Funds Act,
as defined in clause (b) of Section 2 of the
1956, Chit companies Bank, Stock Exchange
1982, Housing
Finance Companies regulated by National Housing
or a Mutual Benefitcompany
for with RBI
registration
Requirements and desirous of commencing
under the Companies Act, 1956
Acompany incorporated as defined under Section45 Ia) of the
financial institution
businèss of non-banking
with the following:
RBI Act, 1934 should comply Act, 1954
under Section3 ofthe companies
(i) it should be a company registered
200 lakh. (The minimum net
have a minimum net owned fund of Rs
(ii) It should
like NBFC-MFIs, NBFC-Factors,
for specialized NBFCs
owned fund (NOF) required NBFCs)
in the FAQs on specialized
CICs is indicatedseparately for
tothe Reserve Bank Registration?
Procedure forapplication online and submit a physical copy
of
is required to apply of Reserve
The applicantcompany to the RegionalOffice
the
the necessarydocuments
theapplication along with be submitted online by accessing
RBI's secured
can
Bank of India. The application will not need to
this stage, the applicantcompany
website https://cosmos.rbi.org.in.At and hence user ids are not required.. The company
on to the COSMOS application of the COSMOS
log on the login page
can click on "CLICK" for Company Registration for download would
Excel application form
available
A window showing the form (i.e. NBFC or
Application. then download suitable application
can The
be displayed. The company the application form.
key in the data and upload "C-8"
in the field
SC/RC) from the above website, name ofthe Regional Office
note to indicate the correct form. The company
company may Particulars" in
the Excel application filed
of the "Annex-Identification Number for the CoR application
Application Reference form
would'then get a Company to submit the hard copy of the application
the company has with the supporting
on-line. Thereafter, Reference Number, along status of
the online Company Application can then check the
(indicating Office. The company the
documents, to
the concerned Regional by keying in
the above mentioned secure address,
the application from
number. submitted to RBI by
acknowledgement with and documents to be
to be complied from RBI as NBFC
Requirements certificate and Registration
Companies for obtaining
1. Minimum
NOF requirement Rs. 200 lakh. sets tied up properlyin two separate
submitted in two separate
2.Applicationto be
numbered.
tiles and properly page
 18-2014 Sixth Sementer,Management of Commercial Banks

3. 1dentification particulars (Annex I.P.

).
4 Statement on norms (Annex II). of Bo-
prudentinl
25. Certified copy
5. Informntionaboutthe manngement (Annex II)
26. Statutory Auditors
Public Deposit
6. Detals 6fchange in the management of the company during last financial. not holding
tH date if any and rensons thereof. yea 27. StatutoryAuditor
7. Certified copies and Certificate of NBFC activity.
NB
of Certificate of Ineorporation Commencen
of Businessin case
of publiclImited companies.
eany 28. StatutoryAuditc
and Articles ofAssoci tion.
8. Certified copies of up-to-date Memorandum ciationof applicr
the Details of Auth-
company. 29.
the p

9. Details of clauses in the memorandum relating to financial business. company including I-

pattern,
if undergone.
0.Detats ofchanges in the Memorandum and Articles of Association duly certified
statutory auditor
their
a
1L Copyof PAN/CIN allotted to the company. Also, provide details
12. Annex II to be submitted 30. Copy of Fixed
duly signed by the director/Authorizedsignatory an
certified by
th@statutoryauditors. in support of NOP
13. 31. Detailsof inf=
Annexdirectors' profile) to be separately filled up and signed by each director
Care shouldbe return of allo-
taken to give details ofbankers in respect offirms/companies/entities copy of
in
which directors have substantial interest. 32. Details of t"
c
of4.In
case the
directors' areassociated with or without substantialinterest (indicats branch bans, 10a1 c
holding in egch company firm)in other 33. Details of u-
companies, indicateclearly the activity of
the companies and details of their durin
regulators if any. the directors)
15. Certificate
from the respectiv NBFC/s where the Directors have gained NBFC certified by the Au
experience.
34. A certifica
16. Copy of PAN and DIN allotted to the Directors. subsidiary/holdin
17. CTBIL Data
pertaining to Directors of the
company Q.9. Write sk
18. Financial
Statements ofthe last 2
years of Q.9. (a)Man
groupwhere the directors Unincorporated Bodies,if any.in the
may be holding
19. Certificate
directorship with/without substantial
interest.
Ans. When
ofcompliance with section45S of
regarding unincorporated Chapter IIIC of the RBI Act, 1934 products to ther
bodies with
20. Whether which director/s of the exchange mean=
any prohibitory order was company are associated.
other
NBFC/RNBC with which the issued in the past to the i) deposits
details there company or any
of, drectors/promoters etc. were (i) drafts
associated? If yes,
21. Whether drawn in India
the
case, including company or any of its
under section directors was/is
involved in (iin) drafts
138(1)of the any criminal
thereo Negotiable Instruments
Act? Ifyes, details institutions o
22. Board
Resolution The Fore
its
contentsand specifically
approvingthe
authorising submission ofthe of India "to co
23. Board signatory. appliction and
Resolution to the of facilitatin
deposit, in the effect that
the
past
(specify company has not and maintes
will not
accept the same in period)/does not hold any accepted any session ofP
in
writing. future without public deposit as pubn
the prior onthedate This act ma
24.Board approval ofReserve an
resolution
Bankot Inae whole of I
stopped NBFC statingthatthe
activity and will companyisnot liberalisat
registration from not carrying on any
on/commence the any NBFC
NBFC
RBI carry activity/ manageme
ame before actviue
same Organisat.
getting
getting
Money La
 I.P.University-(BBA)-Akash Books
2014-19

25.
ied copy of Board resolutionfor formulationof"Fair Practices Code"
atutory Auditors Certificate certifying that the
company is/does not accept/is
Public Deposit.
ho ng
not
an StatutoryAuditors Certificate
certifying that the not carrying on
company is
tivity.
acti
any
NBFC
oG Statutory Auditors Certificate certifying net owned fund as on date of the
tion.
applic
o4. Details Authorised Share Capital and latest
of
shareholding pattern of the
nany includingthe percentages.Documentary evidencefor change in shareholding
undergone. Ifthere are any NBPC corporateshare holders, certificates from
if
netern.
atutory auditors regarding the adequacy of statutory NOPNOF post
post investment.
investment.
their statu
provide
details aboutthe line of activity ofother uOy
corporatestake holders.
Also,

30. Copy ofFixed Deposit receipt &bankers certifñicate of no lien indicating balances
ofNOF
in support
31.Details of infusionofcapital if any during last financial year togetherwith the
eDDV ofreturn
of allotment filed with Registrar of Companies.

32. Details of the bank balances/bank accounts/complete postal address of the

branch/bank,loan/credit facilities etc. availed.

33.Details of unsecured loans if any, raised by the company from others (including
the directors) during the year and ifthesefall in the exempted category
ofPublic deposits

certified by the Auditor.

34. A of Chartered Accountant regarding

certificate details of group/associate/

subsidiary/holding/related companies is submitted.

(7.5+7.5)
Q.9.Write short notes on:
Q.9. (a)Management of foreign exchange.
Ans. When a business enterpriseimports goods from other countries, exports
its

products to them
or makes investments abroad, it deals in foreign exchange. Foreign
exchange means foreign currency'and includes:

i) deposits, credits and balances payable in any foreign currency

credit or bills of exchange, expressed
or
(i) drafts, travellers'cheques, letters of
and
drawn in Indian currency but payable in any foreign currency;
letters of credit or bills of exchange
drawn by banks,
iiu) drafts, travellers' cheques,
institutions or persons outside India,
but payable in Indian currency.
is an Act Parlianment
Act, 1999(FEMA) of the
The Foreign Exchange Management with the objective
to foreign exchange
of India "to consolidate and amend the law relating
and for promoting the orderly development
o1 external trade and payments in the winter
facilitating India". It was passed
and maintenance of foreign exchange market
in
Act (FERA).
Exchange Regulation
ofParliament in 1999, replacing the Foreigm
Session civil offenses. It extends to the
act makes offences related to foreignexchange with the pro-
nis
whole of India.(1 repl acing
FERA, which had become incompatible new
of India.It enableda foreign exchange
policies of the Government of the World Trade
Deralisation framework
with,the emerging
gement regime consistent
for the introduction
of the Prevention of
(WTO). It also paved the way 1 July 2005.
Eanisation effect from
Oney Laundering Act 2002, which came into
 20-2014 Sixth Semester, Management of Commercial Banks

Unlike other laws where everything is permitted unless

specifically prok
underthis acteverything was prohibited unless specifically permitted. Hence
and tone of the Act was very drastic. It required inmprisonmenteven for
minor of
Under FERA a person was presumed guilty unless he proved himself SEC
innocent. w
under other laws a persor. is presumed innocentunless he is
proven guilty. anyamo-
FEMA Is
regulatory mechanism that enables the Reserve Bank of
8a and repE
India and e
Central Government to pass regulations and rules SEC
relating to foreign
with the Poreign Trade exchange int
policy of India. Authori=
i

Main featuresofFEMA are: dealer,

authoriz
(a)Anyperson may sell or draw foreign
later on inform RBI. This
exchange,withoutprior permissionand
d ca
SEC
makes it a more can
positive feature. ofAdjuc
b) Under
nature.

(c) FEMA
this act Enforcement Directorate

the possibility
(F, D) will
bemore investigating in dSE
and the
notifica
recognized
classifies ofeven the Capital Account
foreign convertibility i.e.
exchange transaction and current account Directo-
transactions.
d)The violation of FEMA is a civil
Directo
offence.
Q.S
(e)Above all
FEMAis more concerned with the
Exchange Regulation Act)was more management instead
FERA(Foreign
An
concerned about
BROAD exchange regulation or control.
SCHEME OF THE FOREIGN failing

1999 EXCHANGE MANAGEMENT

NT ACT lost pri
ACT, oss
loss ma
me
SECTION 3-Prohibits
dealings in foreign
person. This section states
that no exchange except through an authorised
the RBI person can, without of cred
generalor special
permission of
(a) Deal in
or transfer
an authorized any foreign exchange or
being foreignsecurities to
person. any person not
(b) Make
any payment to or for the
any manner. credit of any
person resident outside
India in
(c) Receive
otherwise
through an authorized
behalf of any person person,any
resident outside payment by order or on
Indiain any
(d) Enter
into any
manner.
financial its loa
with transaction in Indiaas
acquisition or creation or considerationforor in credit
anyperson. transfer ofa association
right to acquire
any asset outside India loans,
by
SECTION4- Restrains
any person resident
possessing or in India
from
transferring any foreign acquiring,holding,owning, expos
propertysituated exchange,
outsideIndia foreignsecurity or opera
opera-
Toreign
exchange"and except as any immovabie
specifically Conce
The Central "foreign security"are definedin provided in the Act. The
of the Act.
Govt.has sections2(n) and terms
Transactions)
madeForeign 2o)
Rules, 2000. Exchange respectiveiy curre
Management (CurrentAccoun curre
SECTION6- dealswith (sove
(sove
todraw or sell capitalaccount
foreign transactions.This macro
exchangefrom or to an section allowsa
ransaction.RBI in
capital consultation authorised pers
account with Central person for a
transactionsin Govt.has capital profit
terms of issued various accou
SECTION sub-section valua
furnish tó 7-deals with (2) and regulations
(3)ofsection 6.
theRBI xportof
export of
orany goods
goods and
other and services.
services.Every
authority,a Every exporter
exporter isis ired to
require
declaration,etc., requ
ng full
regarding füllexport value
exporu
 PUaivernity- qNAAkanh Hooka 014 21
.NcaRts theresponaibilty on the peraons reaident
8eastsexehange in Indin wh huvn
THON foreign due or neerued in their favour
hange due t get, the Hane renlisaee
udia within the apecifie and the mnnner
period aperified hy H
re,wtrixted nd 12- denls with duties and linbilitiesofthe authwrized perwri
SATONS has bee en defined in See.24e) of the Act which menns nn huthuorier
1send person
chnger, ott shore banking uit or nny other pernon for the time be:I114
in fore exchange or foreign securities.
to deal
rid
-of the Act deal with penulties and enlorcementof the urders
TIONS 13 and 15 as well to contraventions under the Act
power compound
audicating Authority
of Directorate of Enforcement
the establishment
to S7 - to
RCTION 36pertains
SE to investigate the violation of any provisions
of Act, rule, regulation,

the powers Act. The

directions or order issued in exercise of the powers under this
fcations.
and other officers ofEnforcement not below the rank of Asst.
ttor ofEnforcement
to take up investigations.
have been empowered
Director
Credit risk.
Q.9. (6) default on any type of debt by
risk refers to the risk that a borrower will
Ans. Credit The primarily risk is that of the lender and includes
required payments. collection costs.
The
to make
failing to cash flows, and increased
and interest, disruption For example:
lost principal
partial
and can arise in a number of circumstances.
be complete or credit card, line
lossmay due on a mortgage loan,
to make a payment
consumer may
fail
A
other loan
ofcredit, or debt
asset-secured fixed or floating charge
is unable repay to
A company
not pay a trade invoice
when due
or consumer does due
A business earned wages when
does not pay an employee's
A business
Types ofereditrisk:
be as follows: to pay
Credit risk can classified from a debtor being unlikely
loss arising due on any material
Credit defaultrisk-The risk of than 90 days past
thedebtor is more
or
in full transactions,
including
its loan obligations all credit-sensitive
default risk may impact
Ccredit obligation; of
and derivatives. orgroup
loans, securities associated
with anysingleexposure
a bank's core

Concentration
risk-The risk enough
losses to threaten
or industry
produce large
to
name concentration
with the potential
form of single
exposures arisé in the
operations.
It may state freezing foreign
concentration.
from a sovereign on its obligations
risk-The risk of loss arising or when it defaults
Country risk) with the country's
(transfer/conversion associated
urrency paymentsthis type
of risk is prominently
stability. risk and
OVereign
risk);
and its political thelevel ofcredit and
macroeconomic performance to assess
In order risk measurement
methods: credit
measurement the Bank uses different
redit risk
of loan portfolios,
Ontability including:
valuat on methods,
(PD)
Frobabilityof Default
Expected Loss (EL),
at Risk (CVaR),
Credit Value
 Banks

Management
ofCommercial
ccuracy Ratis
Ratio)
END
(Accuracy
Sixth Semester, methodologies
used in scoring to IAS),
22-2014
effectiveness
measures
ofimpaired
loans (according
allowances
(coverage
ratio), MANA
share
and structure loanswith
ratio ofimpaired ofmanain. ngt
is the process
coverage
risk managementCredit risk itself refers to.th 3 Hrs
cost ofrisk. credit Time: an
loan reserves. Mana
Credit
risk management:
and the loss of debtof any kind. nagin
Note:Attempt
to repay
assets
of banks a borrower
fails
a competitive edge. each unit.
capital losses if and attaining from
of negative eficiency s
Q.1. Write
ikelihood
risk is a way ofimproving
credit
Ch=
Objectives
ofcredit risk Q1. (a)
Ans. The ro
level
At the transaction risk environment
credit
Establishan appropriate process These changes
under asoundcredit approval
Operate measurement and monitorin policy being fo
credit administration, proce
Maintain an appropriate practices,
in India have
be
evaluation oni
procesa to enable continuous risk no-
Employ sophisticatedtools/techniques 1991. They
scientific basis willing ready t-

risk-return relationship
Adequate pricingto optimize The chang
At the portfolio level
fron 1. Better
and norms to evaluate and mitigate risks arising
Develop methodologies
etc.
2.Mobile
concent ation by industry,group
Ensure adherence to regulatory guidelines 3. Banka
4. Portfol
5.Issue
6.Unive-
7. Autor
8. Inter
9.Enco
10.Enc
11. Mar
12.Soc-
The ab-
let's discus-
1.Bet
was yeru
 END TERM EXAMINATION
SIXTH SEMESTER JUNE 2015
[BBA||B&I
MANAGEMENT OF COMMERICIAL
BBA (B&)-308] BANKS

Time:
3Hrs five questions including MM:75
anyfive Q.no.I which is
Attempt compulsory. Select one
Note: Question
each unit
frm short notes on the following
Write
Q.1. [3x5 15]
) Changing role of commercial banks.
Q.1.
Tae role ofbanks in India has changed a lot since
economicreforms of 1991.
Ans. e
came due to LPG, i.e. liberalization, privatization and
Thesechanges
followed by GOI. Since then most traditional and outdated
globalization
concepts,
rOcedures and methods of banking have changed
procedu; significantly.Today, banks
practices,
become nmorecustomer-focused and service-oriented than they were before
have
in India
a1They now also give a lot of importance to their rural customers. They areeven
elp them and serveregularly the banking needsof country-side India.
to hel
ready
willing
banks in Indiacan
The changing role of be glancedin points depicted below.

1. Better customer service,

2.Mobile banking facility,

3. Bank on wheels scheme,

4. Portfolio management,
5.Issue ofelectro-magneticcards,

6. Universalbanking,

7. Automated teller machine (ATM),

8. Internet banking,
to bank amalgamation,
9. Encouragement
10. Encouragement
to personal loans,

11. Marketing of mutual funds,

12. Social banking, etc. is

changing.
Now
banks in India
the role of
indicate
The above-mentioned points after day.
much better day

as
.
let's discuss how banking

Better Customer
very poor. There
in India is getting

some bank
(lines)
the
to
overall service

were very long queues staffs were very rude to their

of banks in

Service: Before 1991, receive payment forcheques

of
India
and to
customers.
1991.
noney. In those days, economiereforms
u after Indian service has
all this changed remarkably focus. Their
EVer very customer
and service
is due to
change mostly
India have now become This positive Scheme by
S 1n and customer-friendly. initiation
of Ombudsman
e
quick, efficient
from new private
banks and
out
COmpetition can easily carry
RR customers
service,
mobile banking or mobiles.
obileBanking: Under their cell phones
by simply using
dnkingtransactions
 2-2015 Sixth Semester,Management of Commercial Banks

Hee, first A Customer needs to activate this service by contacting his bank c
bank officer asks the customer to fill a simple form to register (authorize)
jenera
his
number After registration, this service is activated, and the customer is nroMo
R 1sernameand passwond. Using secret.credentials and registered provided
phone.cu
now comfortably and securely, find his bank alance, transfer money from custome
another &sk frr a cheque book.stoppayment of a cheque, etc.
his
his ace
accoun
Thday, almost all banks in India provide a
mobile-banking service.
3. Bank on Wheels: The 'Bank on Wheels' scheme was
introduced in the
East Region of India. Under this scheme, banking services are
people staying in the far-fiung
made accessiNort
(remote) areas of India. This
to serve scheme is a gen
attempt banking needs of rural India.
4. Portfolio
Management: In portfolio management,banks do
work of their all the
clients. investma
men
Banks invest their clients'
money in shares,debentures, fixed
first enter a contract with their deposits,ete. Th
clients and charge them
a fee for this service.
have the full
power to invest or disinvest their Then ths
clients' money.
safety and profit to their However, they have
clients. to g
5. Issue of
Electro-Magnetie Cards:Banks in India
Electro-Magnetic Cards to their customers. have already started
These issuis
transactions, make an online cards help to carry out
ATM facility,book a
purchase,avail cash-le
Banks issue railway ticket, et
many typesof
electro-magneticcards, which are
1. Credit
cards help customers as follows:
to spend
previously settled by the money (1loaned up to a
bank) which they don't certainlimit
statementof their have in hand.
purchases and withdrawals.Along with They get a monthi
statementalso includes the
theinterest and service fee. transacted amount,thi
the statement
of credit card) must The entire amount (as
but before due be paidback to the bank reflectedi
date. eitherfully or in
2.Debit instalment
cards
help customers to
in their spend that money
individualbank accounts. which they have
card to make a They need not saved (credited
carry cash butinstead
No interest is purchase (for shopping) and/orwithdraw can usea debt
charged on the money (getcash) from an
3. usage of debit cards. ATN
Charge cards are used
end of the to
month, customer spend money up to a
had to pay a gets a statement. certainlimitfora
small fee. Ifhe has a month. Atth
However, if he sufficient
grace period (which is doesn't have a balance,then he onl
generallyof necessary
4. Smart 25 to 50days) to repay the balance, he is given
cards are
services. In currently being used as money.
India,this covers an
card has an alternativeto avail
Railways, State publictranspo
integrated circuit (IC) Transport and City
specified by ISO. embedded in its (Loca!)Buses.
plastic body. Itis Sma
5.Kisan madeas pernor
credit cards are
Indian farmers used forthe
(kisans)can use benefitofthe
this card to rural .Th
consumption.These buy population of India.
cards are
6. issued by both agriculturalinputs and
Universal Commercial and goods 1o self
recognition after Banking: In
year 2000.The India, the concept of Co-operativeban
customers can universal banking has gaine
get all banking and no noriice
 IP.University-{BBALAkash Books
2015-3
rsal bank
bank is like a super store. It offers a wide
range of services,
lnmversal er financial services like
te oof other insurance, merchant banking, ete
and
nkingTeller Machine (ATM):There are many
bNnking. advantages of ATM. As a
vndina" up ATM centres to offer convenience to their
have opened customers.
banks
7.Automated ATM centres not only in their branches but also at
a rating publie
ATe opeat etc. Some banks have joined together and
railway stations, hotels,

Ainksairports, M
ATM centres all over India.
up common
setun
to set
to
uJNN banking is also called asan E-banking or net banking
Banking: Interneti
anking transactions through the medium of the internet
TYYY or
&Internet can do bani this
The customer need not visit
ustomer the bank's branch. Through
The
Her,
the
web (WWW).
(1 about bank balance, transfer funds, request for
r can easily
inquiry
wide
rld the customer. offer this service to their tech-savvy customers.
ty: ete. Most
st large banks
book, Failure of banks is well-protected
que to Bank Amalgamation:
ragement So depositors need not worry about
their deposits.

9. cility of amalgamation. by stronger banks, it is called amalgamationof

Encouragementa
the banks areabsorbedi
weaker
When of Indian
Loans: the purchasing power
Today,
henks. ement to Personal them easy personal
loans.

10. Encourageme
becausebanks give is calculated
dramatically Interest
mers has increased by the banks on such loans is very high.
like one crore.
Some
a amount
interest charged
consui
offer loans up to huge
banks on the spot deserving
to
Generally, balance. Large a loan is sanctioned
on reducing Mela (Fair) where
Loan
hanks even
organise documents. from many
submit proper
after they
A mutual fund collects money market
of Mutual Funds:
candidates
bonds, short-termmoney or
11. Marketing in shares, and dividend
invests the money income by interest
investors
and funds earn The rate of
dividend
etc. Mutual
assets; to subscribers. started selling
It pays a
gold
Now banks have
dividend
instruments,
its investments. fund investments. bank deposits.
both from like other
with the
income on mutual arenot insured funds, growth
fuctuates These funds closed-ended
their own names. funds,
in
these funds funds such asopen-ended
different types of
There are ete. to alleviatepoverty
income funds, system the banks
funds, the banking
funds, balanced uses initiated by
The government are support
12. SocialBanking: programmes on finaucial
social development depends scheduled
Many of these programmesto farmers, artisans,
and unemployment.The success and people iving
rom time to time. a lot of finance youth
supply
PrOV1ded by the
banks. Banks families,
unemployed
tribe (ST)
scheduled
sTesthe (SC and line (BPL).
below poverty orcurrency
rate risk
in a
Q.1. (b) Foreign
curreney risk FX risk, exchange
is denominated also
known as risk
risk (also transaction
exchange
Ans. Foreign« exchange when a financial Foreign a currency
exists in
risk) is a inancial
risk that ofthe company. statements
base currency financial that there may
currencyother than
of
that of the maintains The risk is
ofa firm entity. in relation
currency and
exists v the foreign subsidiary ofthe consolidated denomination Investors
othert
nen currency rate ofthe is completed.
the reporting
be an an in the exchange the transaction
date when or making foreign
investments
erse movement
to th the
before
goods
and services
asecurrency
or importing
ES exporting
4-2016 Sixth Semester, Management of
Commereial
Banks8
have an exchangerate risk which can have severe financial
ial consa
be taken to manage (i.e., reduce)the risk.
consequences;
Forein Exchange when a bank holds
risk arises
assets o steps
can
currencies and impacts the earnings and
capital of bank
theexchange rates. No one can predict what the due to the
ilities in
fore.
it can move in exchange rate fluct forei
period, either upward or
downward direction otegn
luctuatior
estimates and were. This uncertain regardi.In tha
predictions
earnings and movement
capital of bank, if such a poses what
movement is is in
unanticipated direction. in to
the
Foreign Exchange Risk can be either
undesired
Transactional or it and
When the exchange rate
changes unfavourably it can h
the name
implies because of transactions give rise to
in Transaetnslational
Translational
using different Foreign Cu onal
techniques. Other one
arising because of the Translational
translation of theassets
Currencies, can
Risk is an ac be
Risk
Risk, s
held in accountir hedged
Foreign Exchange Risk in foreign ingrisk
currency or
deal in Commercial Banks: abroad
oad.
foreign currencies
are holding assets
and habilities in Commercial banks.
continuously arti
exposed to Foreign foreign actively
commercialbank comes Exchange Risk.
isk. denominated curre
from its very Foreign
Foreign
trade and Exchange Risk
Exchange mdes,
non-trade Riskoof of
ForeignExchange services. a
Trading Activities
1. The (Saunders &
Cornett,
purchase and saleof 2003)include:
complete international foreigncurrenciesto allow
commercial trade customers to
2.The transactions. partakein and
purchase and saleof
institution itself)to foreigncurrenciesto
take allow
positions in customers (orthe
3.ThePurchase foreignreal and financial
and sale financial
(or FI of investments.
itself) foreigncurrencies for
exposurein any hedging purposes to
4. to
given currency. offset customer
purchase and sale of
forecasting or foreigncurrencies
expecting future for
The above movements in speculative purposes based on
mentioned Trade Foreign Exchange
rates.
exchangerisk as a Activities do not
result of all
ofthe above. expose a
exchange risk only
up to the The commercialcommercial bank to toreign
Whereverthereis extent to bank isexposedto
any which it has not torelg
financial uncertainty that the hedged or covered
instruments, future its
Exchange risk does
there lies the exchangerateswill affect pos ue of
not lie foreign
exchange risk ofa the v
instrumentsand where the future commercial gn

The above
tools by the
bank. exchange rate is bank
predefinedby using
ent
bank and all of mentioned trade
these activities are
activities
thetypical trade
activities are
doneby the do not activities of a commera
involverisk
the bank. The fir 1 &2
activities
exchange risk is commercial bank on 0sure
expos of
case. transferred to the behalf of its he foreign
Third activity customers as the customerS a
bank ofbank bank takes lein this
Role
has hedged its risk involveshedging and Ageny the
institutions by there isno T risk in this as well as
which using pre-determining the
may result different exchange rate wiu ther financial
are in thegainfinancial instruments. The fourth
Swap the or loss due to
foreign principal FX one
exchangegiverise related contractsunexpectedpected outcome. Ready, forward&
i
to whereas services
non-traded farni banking produe and
 1.P. University-[BBA-Akash Rooks
2016-5

rreney sWaps
.1e)Curreney
.1. ncy swap (or a cross curreneyswap) is a foreign exch
exchangederivative
A currency to exchange the principal and/orinterest paymentaof a loan
orin
Ans. instit
institutinns net preso
in el present value terms, in another currency
two e uivalent amounts,
for
ren
ecurrency are motivat
com"
by comparative advantage.A currency swap should be
ed by
swaps te swap, for in curreney swap, both principal and interest
interoet
from to another party for mutual benefit. Curreney
Currency from one party
Isexchanged
histinguished nter(OTC)derivatives.
ofloa
areover-the-counter in which currency swaps can exchange
different ways
SWaps th
three
are
There
with the
structure is to exchange only the principal
loans: currency swap rate agreed now. Such an agreement
in the future at a
1.The simple
a cified point The cost of finding a
at to a forward or futures contract.
and drawing up an agreement
a nction oequivalent
counterparty
or through an intermediary),
directly rarely
than alternative derivatives (andthus
erforms
perlo (either
nterparty esswaps more expensive for a longer term
rates. However,
makes term forwardexchange
withthem, t fix shorte
to for alternative derivatives,
as a method 10 years, where spreadsarewider forward rates.
used) up to asa cost-effectiveway to fix
commonly re often used
are
currencyswapsalso known as an FX-swap.
future,

is
incipal-only
ofcurrencyswap ofloan principal, as
This type to combine theexchange
structure is flows are not
netted
currencyswap such a swap, interest cash
2,Another rate swap. In
rate
an interest would be ina vanilla interest
with (asthey
above, to the counterparty As each party effectively
they are paid in different currencies. loan.
before as a back-to-back
because they are denominated of swap is also known
swap) this type
the other's behalf, interest payment
borrows on is to swap only
not least important, a swap,the
but certainly as this is currency
3. Last here, same size and term.Again, and soarenot
netted. An example
cash flows
on loans of the denominations for floating8
in different payments
cash flowsare US dollar interest
a
exchanged offixed-rate also known
as cross-currency
is the exchange of swap is
ofsuch a swap This type
in Euro.
rate interest payments
or cross currencyswap.
interest rate swap, of
uses:
have three main available
rate regardless
Curreney swaps at the
best
a back-to-back-loan).
debt (by borrowing
10 secure cheaper
for debt in desired currency
using

and then swapping rate fluctuations.

currency exchange a liquidity
to)
o hedge against(reduceexposure a countrybeset by
allowing
turmoil by
againstfinancial with its own currency.
1s aefend
others
o borrow money from levels of
of capital. efficient
on maintaining to
Q1. (d)Management focusing
in respect
strategy current liabilities,
flow in
Ans. managerial accounting current assets and cash
A
bothcomponentsofwork orking capital,
ensures
a company
has sufticient
expenses.
each other. Working capital management and operating an effective
order to meet its short-term debt
obligations Implementing to improve
neet
CapitalManagement': companies
BREAKING DOWN Working is an excellent way formany
working
system
capital
capita management
6-2015 Sixth Semester, Management of Commercial Banka

their earnings. The two main aspects of working capital managementa

and management of individual components of working capital. ratio

analysis
A key performanceratios of a working capital management s.
few

working capital ratio, inventory turnoverand the lection ratio.Ratio

stem
lead management to identify areas focus such as areth
of inventory mano.analysis
management, accounts receivable and payablemanagement.
management,
cash
Thelong-term investmentswe make todaywill determine the
valuone.
tomorrow. In order to make long-term investmentsin new our
productlines, ne
and other assets, managers must know the cost of business
obtaining funds to
assets. The cost associated with different sources acqequipment
of funds is called
Cost of the cao these
Capital represents the rate a businessmust bf
pay for each source
preferred stock, common stock, and retained offundsapital.
earnings.Since we
existing values, cost of capital is
market want to m -debt,
the minimum acceptable maintain
long-term investments. If the business earns
more than its cost of rate ofreturn for
value of the business will capital, the mo
increase. Likewise,if returns
below the cost of on long-term
capital, market values will decline. investments
This leads us to a
obiective within financial very fundamc
management -maximizing values for
business. the owners ental
of the
Therefore, how we manage capital is
objective of increased extremely important to
shareholdervalue fulfilling the basie

Considerations:Now that we
how we understandthe
manage capital within an importance ofcapital, let's focus
organization. The overall on
"optimal" capital structure -the objective is to
right mix of capital find an
minimizes the overall
cost of
sources (debt and
of the capital and maximizes equity) that
business). When we raise values to the
capital, we have shareholders(owners
Debt is two choices -issue debt or
represented by bonds which are issuestock.
the
ownershipinterest of the business long-terminstruments sold to investors.
is

and Stock
stockholders will have
certain
depending upon the rules of
rights. Therefore,we incorporation,
management by looking at start our
capital: the advantages and understanding ofcapital
disadvantages of the two sources of
Someadvantages to
using stock are:
are
No fixed payments are required to
available. investors; dividendsare paid only as
earnings
No maturitydateon the
security, the invested
Improves the credit capital does not
worthinessof haveto be repaia.
Some thecompany.
disadvantages to using stock
are:
Dilutes theearnings
per share to
Issuancecosts are shareholders.
higher than debt.
Issuing more stock can
increase the overall
Dividend cost of
payments to shareholders capital.
Some are not tax
advantages to using debt deductible.
Interest are:
payments are tax
deductible.
Does not dilute
earnings per shareor
control within
the copany.
 Books 2015-7
P. University-[BBAJ-Akash
do not change.
and principal
and
interest principa
1nterest
Cost
isfixed; stors are usually lower than stock.
retu
to using debt are:
to
Expected
disadvantages
dis or cash flow.
Some be paid regardless of availableearnings
charges must
Fixe to tthe business.
more risk must be repaid to investors.
Adds date and the capital invested
ity
a maturity
Has in economic development.
commercial banks
01. (e)Roleof asdealers in money but also the
al banks are considered not merely
Commercial not only the store houses ofthe country's
Ans.
economic development. They are
in for economicdevelopment.
reservoirs of resources necessary
elth but also the of a country. A well-
role in the economic development
an important ofa country. The
They play is essential for the economicdevelopment
banking system not have been possible
oveloped in Europe in the
19th century would
Revolution"
Tndustrial of commercial banking. to
a sound system are considered
without like the commercialbanks
India, economie
of developing countries to a country's
In case banks can contribute
of the economy.
Commercial
be the backbone
in thefollowing ways
most
Capital
formationis the
development Formation:
the Rate of Capital The basic problem
of a developing
Accelerating economic development. formation. They
determinant of Banks promote capital
important formation.
slow rate of capital
economy is among people.
the habit ofsaving Economic development
encourage for production purposes. formation.
idle resources capital to
They mobilise resources from consumption
diversion of economic them for productive
the and mobilising
depends upon encouraging saving
in this direction by
Banks help
are a very important
uses. Commerciai banks
Finance and Credit: trade. Credit is a pillar of development.
Provision of for and
and credit industry
source of finance
commerce and
trade.
areinstruments
Credit lubricates
all
and trade. Banks
the nerve centre of all commerce
Banks become trade.
by the
internal as well as external is characterised
for developing economy sector is
An underdeveloped
Monetisation ofEconomy:sector. The existence of this non-monetised
a non-monetised
existence of large of the country. the
in theeconomicdevelopment areas can promote
a hindrance rural and backward
branches in in the economy.
The banks, by opening of debt into money)
ofmonetisation (conversion development.
process foreconomic
are an essential prerequisite countries.
Innovations
Innovations: financed by
bank credit in the developed
are mostly in new ventures
These innovations hesitate to invest
countries, entrepreneurs
But in underdeveloped due to lack of funds. on
innovations largely to step up their investment
and undertake
enable the entrepreneurs
Facilities of bank
loans and increase productive capacity
new methodsof production
adopt
innovation activities,
ofthe economy.
 8-2015
Sixth Semester,
Management of Commercial Banks
Implementation of Monctary Poliey: Economic
appropriate monetary development
pment needs
forthe policy. 1But a
well-developed banking i8 a
effective
mplementationof the monetary necessary
implemer policy.
pre-condis
Controland tion
the active regulation of credit
by the monetary authority is not
co-operation ofthe possible wit
banking system in the country.
thout
Encouragement to Right Type
resources to the
other right type ofi
inputs. In this

Development of
way the
ofIndustries:Banks
industries to secure the
they influence the nature and
generally provide
necessarymaterial,: ,
finanei.

volume of industrTnachinesand
strial
cial

agricultural Agriculture: Underdeveloped economies production.

areas.
economie are
Majority of the
population in these economies primarilu
liv
live in
Therefore, economic rural
agriculture and small development in these economies
scale requires the
So far banks industries in rural
in
areas. development of
and underdeveloped
commerce and have countries have been
loansto almost paying more attention
neglected and to
agriculture for agriculture trade
industry. Banks must
In recent development and
years, the modernisationof provide
shortterm, StateBank of agriculture.
Indiaand other
medium-term and commercial banks are
long term loans to
Regional agriculture and small-scale granting
balanced Development: Banks can also industries.
from the development in different play an
regions of the important role in
developed regionsto country. They achieving
needed. the less transfer
developed regions, where surplus capital
it is
This scarce and
reallocation of most
funds between
underdeveloped areasof the regions will
country. promote economic
Promote development in
some Industrial
countries, Development:
term loans also.commercialbanks Industrial
Loan or credit is encouragedindustrial development needs finance. In
In a pillar to development by
and underdeveloped development. grantinglong-
countries like
medium-term loans to India,
and industries. commercialbanks are
debenturesby They are also
industrial granting short-term
capital for their concerns. This
helps underwritingtheissue of
establishment, industrial
concernsto shares
Commercial banks expansionand secure
are also modernisation. adequate
equipment from helping
foreign
payments. Thus, banks countries under manufacturers to sacure
promote or instalment machinery
system by and
Promote encourageindustrial guaranteeing
than a Commercial Virtues:The deferred
preacher. The development.
forethought, businessmen should businessmen are more
honesty and have certain afraid ofa
punctuality. business banker
These qualities are qualities like
economic called industry,
The banker is "commercial
Banks areprogress. in virtues"
called
"public abetter position towhich are essential for
conservators of rapid
Fulfilment of commercial promote
virtues."
commercial virtues.
particularly in Socio-economie
socio-economic
developing Objectives:Inrecent
countries, have
objectives laid
down by the been called uponyears, to commercial
state. help achieve banks,
certa
 LP.
University-{BBAJ-AkashBooks
2015-9
ample,nationalised
ex bank in India have framed
For special innovative schemes
to help smallagri
agrieulturists,
dit self-employed personsand retailers through loans
ofcre ances at concessional rates of interest.
Banking is thus used to achieve the
nd nal policy objectives of reducinginequalities of income and
ationa. wealth, removal of
Terty and elimination of unemployment in the
country.
Thus, banks in a developing country have to play a dynamic role. Economic
olopment places heavy demand on the resources and ingenuity
eve of banking the system.
to the multifarious
Te has to respond economic needs ofa developing country. Traditional

yiews and methods may have to be discarded.

"An such as
Institution, the banking system, which touches and should touch the
lives
of has necessarily to be inspired by a larger social purpose and has to sub
millions,
serve national priorities and objectives." A well-developed bankingsystem provides a

firm and durable foundationfor the economic development of the country

UNITI

Q.2. What do you understand by Social Responsibility ofBanks? Why do you

think there is a growing emphasis on this aspect? (15)

Ans. Introduction:An ethical bank, also known asa social, alternative, civic,
of
or sustainablebank, is a bank concerned with the social and environmental impacts
its investments and loans. The ethical banking movement inçludes: ethicalinvestment,
impact investment, socially responsible investment, corporate social
responsibility,

and is also related to such movements as the fair trade movement,ethical consumerism,
and social enterprise.
and regulations to which
Other areas, such as fair trade, have comprehensive codes
must adhere. Ethical banking has
all industries that wish to be certified
as fair trade
to create a concrete definition
not developed to this point; because of this it is difficult
what it is that sets an ethical bank apart from conventional
distinguishing exactly
same authorities as traditional banks and
banks. Ethical banks are regulated by the
there are differences betweenethical banks,
have to abide by the same rules. While and
set of principles, the most prominent being transparency
they do sharea common sometimes
the projects they finance. Ethical banks
social and/or environmental aims of have
than traditional ones, and therefore they may
work with narrower profit margins is considered
or mail. Ethical banking
few offices and operate mostly by phone, Internet,
one of several formsof alternative banking.
of stakeholders in a community
without caring needs and expectations
Management in the 21st century. Demand
for
with those who do
will not be competitive compared become
sectors has
from both public and private
accountability and transparency survival and Nowadays,
is seeking for profits.
the olden days, management
soaring. In results with awareness of
financial and non-financial
management concerns managing (CSP)
of As a result,corporate social performance
risk and maintenance transparency.
financial performance (CFP).
has possessed equal importance of corporate
the last decades
in India originated in
CSR Practicesin Indian Banks: Banking Bank of India in 1786 and the
establishment of General
of the 18th century with the now defunct). The
in 1870 (however both of the banks are
Bank of Hindustan set up authority
of India and the apex regulatory
oldest bank existing
in India is the State Bank
the commercial banking
of Indian banking sector is Reserve
Bank of India. At present,
10-2015 Sixth Senmester, Management of Commercial Banks

structure in Scheduled Commercial Banks & Unscheduled Ban.

India consists of
anks
Since independence,banking in India has evolved through four distinct phases:
in 1969),
Foundation phase (1950s till the nationalization of banks

Expansion phase (mid-60s to 1984),

Consolidation phase (1985 to 1991)and

Reforms phase (since 1992).
Importance of CSR: In the recent years Corporate Social Responsibility (CSR
has witnessed tremendous increase in awareness and control in the global arena.CSR
that emerged in 1960 was an attempt business with society. Corporate social
to link
responsibility (CSR)refers to strategies that Corporations or firmsemploy to conduct
their business in a way that is ethical, society friendly
and beneficial to community in
terms of development.It is a concept where Business organizations apart from
their
growth show interest in societal and environmental welfare by
profitability and taking
the
responsibility of impact of their activities on stakeholders, employees, shareholders,
customers, suppliers, and civil society. It takes into consideration the social and
environmentalimplications of corporate financial decisions. With the need
increasing
for economic
development across the globe, there is demand for Financial Institutions
to take central role in the efforts to eliminate
poverty, achieve equitable and accountable
sy'stems of governanceand ensure environmental
security. In this regard, actions taken
by corporate houses and regulatory authorities operating in nations are
developed
quite satisfactory. However in developing nations the situation of CSR
activities by
financial institutions is not so
flourishing. In this reference the presentpaper
to analyze the CSR
attempts
practices in Indianbanking sector
1. Satisfied
employees. Employees want to feel proud of the organization they
work for. An employee with a positive attitude towards the
company, is less likely to
look for a job elsewhere. It is also likely you will receive more
that job applications
becausepeople want to work for you.

More choice means a better workforce. Because of the

high positive impact of CSR
on employee wellbeing and motivation, the role of HR in CSR managing
is projects
significant.

2. Satisfied customers:
Research shows that a strong record of CSR improves
customers' towards the company. If a customer likes the
attitude
will buy more company, he or she
products or services and will be less
willing to change to another brand.
Relevant research:
IBM study *Attaining Sustainable Growth
through Corporate Social
Responsibility': The majority of business executives
believes that CSR activities are
giving their firmscompetitive
advantage,primarily due to favorable
responses from
consumers.
Better Business Journey,UK Small
Business Consortium: "88% of consumers
said they were more from a company that
likely to buy
to improve supports and engages in activities
society.
3.Positive PR: CSR
provides the opportunity to share
positive stories online and
through traditional media. Companies no
longer have to waste money on
advertising campaigns.Instead expensive
they generatefree publicity
mouth marketing. and benefit from worth or
 1.P. University- BBAJ-Akash Books 2015-11

reductions:Yes, you
read this correctly. A CSR program doesn't have to
If conducted properly a
4.Costs ry.
On the contrary company can reduce costs through
money:
reduce costsby:
Companies
staff hire and retention
More efficient
.Implementing energysavings programs

.Managing potential risks and liabilities more effectively

Less investmentin traditional advertising

A CSR program requires an open, outside oriented

5.More businessopportunities: and
nroach. The business
must be in a
constant dialogue with customers, suppliers
spp with other
that affect the organization. Because ofcontinuous interaction
ather parties
business will be the first to know about new business opportunities.
parties. vour
not something for the short term.
6. Long term futureforyour business: CSR is businesses
all about achieving long term
results and business continuity. Large
It's

refer to: 'shaping a more sustainable society

the implementation of CSR is at a
Benefits of implementing CSR: Although
of companies that have successfuily
the financial performance
high cost to banks,
been high.
implemented CSR practices has historically
reasons:
can be expiained by two logical
The high performance of ethical firms
CSR are healthy firms that strive to
Companies atthe forefront of implementing
of new social and environmental challenges
shapethe future in light
to attract new
CSR new businesses, and has allowed firms
is a way to create

investors and new growth opportunities

of SRI and
two main threats from the development
However,we can also identify
CSR. CSR inn
and some companies may set-up
CSR and SRI may not always align
instead of implementing
CSR due to a genuine beliefin
order to meet SRI requirements ESG rating, companiesmay
If an investmentis based
on a company's
its principles. confidence.
to increase investor
seekto improvetheir sustainability performance
for new arising regulations,
is
supporting
thegrowth.Nevertheless to
Regulation assessment will have to be performed
studies and in-depth from
cost/benefit impact might turn away
will not harm business otherwise companies
ensure regulations
CSR/SRI
of RBI? Discuss the following
are the reasons for nationalization
Q.3. What bank (ii) supervision of
of the reserve bank of India: (i) banker's
functions (15)
banks. one of the
banks in July 1969 was
of major commercial
Ans. THE nationalisation the
Gandhi.For many years,
the then Prime Minister, Indira
crucial decisions taken by demanded nationalisation
andsome radical Congressmen had persistently for
Left parties to mobilise more resources
t of wealth inprivate hands and
to preven concentration
did not favour outright nationalisation
The government,however, to shareholders
of
development.
economic of large-scale compensation
Decause that would involve payment
 Management of Commercial Ranl.
12-2015 Sixth Semester,

other complications due to the lack ofoi

hanks, and wonld ereate
fechnical personnel The Govrrnment, tlherefore, decided to introda nd
owning these institutions. competen
them without actually
control
Ranking industry represent atives argued that social contrd over
the Roserve Rank oflndia had been vested with
effective and out
oer almost every aspect of banking,including
of credit. The RBI could managenment,
epansion and control supervision,
a
bank and terms appoint or dismiss regu powers
direstor of lay
down the and service any chgulation of
Tt ould inspect banks thoroughiy,
conditions for the
us airmanor
nare and above to any borrower.and approvalwas necessary for alchiefe
It could odl
regulate the
formation of mergers and direct all opening. of
aspects of the
credit policies nches Ra
The record of commercial anks in offs andt
serving the
claimed to be commendable. They economy by
had also stimulati
provided timely and ating
small-scale sector. But these saving
arguments did not adequate was
it wanted to enfeeble the
private ustrial
convince Indira Gandhi's
credit o the
with banks. sector, which
had built up
close ment,
Social control: he main connectio
featuresof the
octahlishment of a National social control
Credit
and
representatives of Council, with the Finance Minister
schem wereeme
agrieulture, trade, asthe the
RBI was given industry, b anks
additional
powers,and the boards and Chairman
with a ofdirectors professional
majority of groups.The
non-industrialists. of banks were
The social control reconstitutei
came into force
Banking Laws Amendment from
Bill. February 1,
1969,with the
before the Bill Butthe banks
of Rs. 25
became law.
crores and
By the beginning of started implementing enactment
the scheme
ofthe

above, which were July 1969,all the 15banks even

whole-time required to with
chairmen, had done so. deposits
deposit business in These banks reorganisetheir boards and
the private represented 77 per cent of appoint
iated the sector. The the total
necessary changes to other Indian and
comply with foreign banks also
Amendment Act. the init
regulationsof the
The Indian Banking Laws
over banks. public generallyseemed
But the Left satisfied with the
all-India parties continued to working of the social control
Congress Committee agitate for
meeting in Faridabad in nationalisation. In fact,
stoutly opposed this atthe
She made it clear proposal.She pleaded for a fair trial April 1969, Indira Gandhi
that she was not to the
scheme of social control.
there was not opposed to
enough manpower to run the nationalisation but pointed out that
banks if they were
Though Indira Gandhi nationalised.
expressed such views in
nationalisationof in the April, in July she advocated the
banks note submitted to
meeting held in the Al1-India
Bangalore. Her actual words Congress Committee
feeling in the on
country regarding the this'subject were: "There is a
can considerthe nationalisation of great
nationalisation of a few private commercial banks. We
ofbanks should be top banks or
issuedirections that the
reserved to a
larger extentfor resource
Indira Gandhi public purposes."
suggested that the banks'
raised on the investment in
average forboth slackand
thatthis would make busy seasonsby aboutgovernment securities
5per cent. She
availableabout Rs.
might be utilised for 200 crores forthe estima
public sector. Thisamou
rural electrification quick-yielding schemes, such as minor
and fisheries. irrigation
mes,
progral
 IP.University-[BBAJ-AkashBooks 2015-13
Banks said that even after the new policy of social control and reconstitution
Gandhi
Indira theformer industrial chairmen ofthebank still continued on
quate and di
fdirectors,
of
1ce boards influenced the present chairmen who had previously been genera
social ofthe and int we
competent
control
over
the "We
boards may examine",she said, "whetherthrough legislation or otherwise
of the banks
was not nanagnt such men from continuing on the board. The chief executives
preve, to the former chairmen and they may be expected t o take
nd can then feel obliged
necessary not been favoured nationalisation. But
extensive will line in regard to lending." She, therefore,
ision, powers independent the
s any regulation
hechief
of
chairman or
ri
Morari
Desai, Finance
Minister and Deputy Prime Minister, opposed

on July 10, he said: "Recent experience does not suggest

proposal.
that the
In a note issued
to do somethingwhich they are not
all executives. need to be taken over so as to be made
lorge banks to do what the
advances of
is no reason why, under
social control, they cannot be made
branches and Rs. doing. There
Nor is it right that the State
the Bank is doing if that is in the national interest.
ommercial banks, State concerned with the safety of
be expected to do what banks, as institutions
ating
savings
Bank should
will not provide m ore resources."
uate credit towas their depositors'
funds,cannot do. Mere nationalisation
the
hi's Other reasons: and
government; the funds for the needy
loseconnections It was the need of the hour to direct
1. Social Welfare: small and village
Sector such as agriculture,
sectors of theindian economy.
required and further economicdevelopment
in need of fundsfor their expansion
neme were the industries were banks were
the Prior to nationalisation many
Chairman, 2. Controlling Private Monopolies families. It was necessary
to check
houses and corporate
nalgroups.The controlled by private
business desirable
a smooth supply of
credit to socially
e reconstituted in order to ensure
these monopolies
of banks
like Indiathe numbers
sections.
of Banking: In a large country
actment ofthe 3. Expansion It was necessary to spread banking
those days were certainly inadequate. new
scheme even existing
be done through expandíng bankingnetwork(by opening
with deposits It could
across the country.
branches)in the un-banked areas.
sand appoint bank like India where
we have a urban-
t of the total Imbalance: Ina country where the banking
4. Reducing Regional in the rural areas
for banks to go
nks also init rural divide; it was necessary imbalancenationalisation
not available. In order to reduce this regional
nking Laws facilities were
activities
was justified: sector and its allied
In India, the agriculture labeled as the
cial control 5.Priority Sector Lending: were
to the national
income.Thus these
fact,at the were the largest contributor due sharein the credit.
they were deprived of their
sectors. But unfortunately funds to them.
ira Gandhi priority needed for catering
was
ial control. Nationalisation
urgently
70% population used to stay
Habits: In India more than such a large
d out that 6.Developing Banking the banking habit among
to develop
It was necessary
in rural areas.

ocated
the population.
ommittee FUNCTIONS:
is
a great Banker's bank: the central
(1)
We Banks: Broadlyspeaking, of
anks. Bank as Banker to Commercial (0) as custodian
Central banks in three capacities:
esources banker to commercial (iii) as clearing
bank functionsas of last resort; and
(ii) as lender
banks;
be cash reserves of commercial
rities system of the
agent. leader ofthe banking
stimated
bank acts, asa conductorand banks.
central
amount Thus, the and guide to commercial
ammes, It acts as a friend, philosopher,
country.
 14-2015 Sixth Semester, 1agementof

) Custodian of cash reservesofcommercial banks:

conenient to kecp their reserve requirementswith the
cent
Commercial Banks

mmercial
C.
command the greatest confidence and prestige and th bank anks
d the se find
becaus
transactions are conducted by this institution.
Thus, every government's its it
in
a ot their cash
keep certain percentage reserves with the cont.
country, comm note
law centralbank banking
ommercial
by
In fact, the establishment banka
custom
to secure the
ofcentra
banks makes
advantagesofntralised cash
it ot
by
possible forthe
cash reserves lies in the reserves. The
following facts:
significance ing
of c
(a) Centralisation system
ofcash reserves in
ankingsystem ofthe thecentral centralised
country as it bank isaa
commercial banks. inspiresthe sourceof
confidenceof the greatstre
(b) alised cash
reserves can publie
credit structure than
those
form thebasisbasis oofa
int
s
cattered
among numerous much
(c) longer and
Centralised cash reserves more
those banks which
aslender of the

the
(d)
are in

Centralisation ofcash
increaied
credit structure
elasticity and
temporary
last resort on
enable

the basis

reservesis
the

ofthe
central bank
difficulties. In

conducive
fact,
individual
to
the
centralised cash

to the
provide
commercial elastie
additional
centralbank
reserveswith functic
banka
funda
can dsto
it.
.
nction

in liquidity of the growth

general. banking system in of theeconomy
(e) andth
Centralisation of particular and of
control credit cash the
creation of reserves also enables
of the commercial the
latter, that is, banksby centralbank
through the to
increasingor
i) Lender of the technique ofthe decreasingthecash
influence and

the central last variable

resort:As lender reserveratio. reserves
bank gives of last
rediscounting their temporary financial resort, in
the modern periods of credit
eligible bills. The eccommodation
credit central bank to stringency,
central bank system. The is the commercial banks
assumesthe function of the ultimate source of by
demands for lender of last money in
responsibility of resort
accommodation from meeting or implies that the
The cental directly
commercial banks. indirectly all
bank'sfunction reasonable
function aslender
to De
during of last resort has
emergency
Kock, lies in the periods. The real evolved out ofits
credit fact that it significance of rediscounting
structure. By increasesthe rediscount
assets of
banks.It providing a ready medium for elasticity and
function, according

degree of helpsto maintain the liquidity of the entire

economy in the use of their conversion in cash of
liquidity. Italso
large volume of cash makes certain
business with the reserves, since possible a considerable
(iii)
same reserve and commercial banks can conduct a
of Clearing Agent: As the capital.
commercial banks, it is central bank
house for other but logical becomes the
banks. As all for it to custodianofcash
claims of banks act as a
banks have
againsteach other their settlement bank or a reserves
accounts. are settled accountswith the clearing
by simple central
bank, n
This method of transfers from and to
settling En
convenient,is economicalas accounts
accounts,thereis
usuallyno need
through the
regardsthe use of central
for cash. It cash.Sinceclaimsare
also
bank, apart
from
adjusted
strengthensthe banking tn
h eing

sys
 LP.University-[BBA-Akash Books 2015-15

it keeps the central bank

ofcash in times of crisis. Furthermor
vithdrawals
wit of commercial banks in regard to their assets.
ut the state of liquidity
reducing about
informed
ofbank:
Supervisions Supply and Credit
.Controller of Money
bank plays an important role in controlling the
economy, the central
In a planned RBI has to regulate the claims of
system and inflationary tendency.
ner currency
and credit. RBI also needs to meet
the credit
banks on money supply
mpeting
comp of the rest of the banking system.
requirements and maintain price stability
ensure promotion of maximum output,
RBI needs to RBI uses
To perform these functions effectively,
a high rate of economic growth.
and
instrumentssuch as
-

several control

Open Market Operations

for banks
in statutory reserve requirements
Changes
policies towardsbanks
Lending
.Controlover interest rate structure

ration of banks
Statutory liquidity and
Controller: RBI manages exchange control,
Exchange Manager and of the international Monetary
Fund {IMF]. Exchange
India as a member World Jar II started and
represents 1939 when
control was first imposed
on India in September and payments of
was imposed on both receipts
continues till date. Exchange control

foreign exchange. whetheron

all foreign exchangereceipts,
to foreign exchange regulations, whether of private
According or capital receipts,
earnings,
account of export earaings, investment or through authorized
must be sold to RBI either directly
or government accounts, dealers of RBI.
banks areauthorized
dealers. Most commercial and provides all
Data and Other Data: RBI maintains
Publisher of Monetary and critically evaluating the
and other economic data, formulating and
essential banking
to perform this function,
RBI collects, collates
India. In order RBI
economic policies in the weekly statements, the
can avail this data in
data regularly. Users and other periodic publications.
publishes
on currency and finance,
monthly bulletin,annual report
UNIT II

in India
the commercial banks
in detail, the problem faced by (15)
Q.4. Explain thesebe reduced?
non assets. How could
due to performing of a robust
essential compónents
is one of the most
Ans. The banking system networks in the world, has
the largest banking
system, one of last ten years. The
windsof
economy. India's banking and reform over the
of growth of
witnessed a dynamic period sector liberalization, deregulation
been brought about by the banking
change have and a monumental
stake in public sector banks
of government
interest rates, dilution
banks.
increase in the
market shareof private sector entices
for consumer and
commercialcredit that
demand that
Despite the increasing also the impending challenges
for growth, there are
banks with huge potential not alwaysbe
economy where data provided may
come with lending in a developing
 of Commercial Banks
16-2015 Sixth Semester, Management

the financial system and

morebanking licenses mo
reliable. Deregulation of neans
and a greaterneed to outperform competitors.
increased competition
au.
News from the Reserve
credit gnwth rate is at
Bank of India (RR)has also been sombre. The
10% after reaching a low of 9.4% in February (the lous e
to 14.7% last year,
2014. This 18 still quite far away from a haalet
vears) compared thy
be in the 15-20% range lor a developing country such ac ndia.
gTOwth rate which should
have been more resilient and have had reagonoLt
The private sector banks however,
credit growth from the
consumer sector. They have also better managed D1e
r non-
assets (NPAs) in both commercial and consumer credit.
performing
Credit and Risk Framework of Indian Banks: Credit is the backbone of tha
rates tor credit with
banking structure. Diminishing growth rising NPAs are not s
in easures need to be put in good
news for the banking system general. place to arrestthis
downward side,and the deceleration of lending is definitely not the answer
The future of thebanking system will
depend largely on the risk
management
dynamics and the management ot credt risk 1s the most critical
component of that
framework. As Indian banks move into the new high-powered
world of financial
operations and trading, there will be a requirement for more
sophisticated and consistent
models of risk assessment as well as
post-disbursement monitoring. Credit
risk is
about 70% of a bank's total risk, the rest ofthe 30%
being shared between market
and operational Risk. Not much can be done about risk
market risk, but
and credit risk must be managed by banks. operationalrisk
As presented in a study done
by Standard &
Poor's,
medium-sized mid-corporate and small and
enterprise (SME) lending are the key areasof
The challengefor Indian Banks.
non-performingloans of thesesegments range between
8-12% per annum.
There are severalkey reasons banks
be outlined as follows:
possess such a high rateof NPAs -
which ca

Speculation -Investing in
High Risk Assets
Default

Fraudulent practices
Diversion of
funds
Internal factors such as
technology
inefficient management, and inappropriatesystems and

External factors
The question
going forward really is: what can be
issues? doneto address these
Managing Risk: A Proactive
Approach: The following list of measures is a
suggestedintervention
program to bring about change that ensuresthatIndian
create healthyand banks
sustainableloan
portfolios:
A stable and standard
international credit assessment framework:
banks would need to Indian
adopt a standard,international credit
which is designed to take assessment
into accountall elementsof framework
credit risk,
risk, operational risk, including: business
industry risk and market risk. Despiteeach
unique needs,thebanking country market's
sector's credit risk assessment must be of a
global standard.
3anks

ing
rs. licenses
means
mbre. The I.P.University-[BBA-Akash Books
2015-17
y (the The DNA of the bank:preventive measures or curative
average
lowest
ay from a in 18 measures: The two
dimensionsof managing are preventivemeasures and curative
risk
measures. Preventive
ntry such healthy
as measures include pre-disbursement policies, risk assessment, risk
e had India.
measurement, and
risk-based pricing. These are worth much more in their
weight than any curative
naged reasonable
their measures, which are a reactionary form of risk
management. The preventive measures
non- and credit assessment framework should become
partofthe bank's DNA and the curative
measures should be utilised only in unforeseen circumstances
backbone of
PAs are the Post-disbursement loan monitoring: Credit risk is not
not entirely addressed at the
ce to good time a loan is disbursed.
While preventive measures will have a
arrest
this great impact on
iswer. improving loan quality, early detection and
fundamental to ensuring a high
management of problem loans is
quality, sustainable credit portfolio. Appropriate tools
for post-disbursement loan
management monitoring must become an essential part
ponent of that assessment framework. ofthe credit risk
d of
financial Training of credit and sales personnel:
and Training is required to help bank
consistent employees understand and implement an
objective credit risk assessment framework.
Credit risk is To encourage
transformation, organisations will need to invest in
training.First, bank
market employees are required to understand core
risk credit principles,bank growth objectives,
rational risk and customers business goals and
challenges.Second, staff must be able to apply this
knowledge effectively to better serve customers, armed with
specific techniques required
to drive
d small and profitable business opportunities. Third, staff must be able to differentiate
themselves and their bank from the
lian Banks. competition. This can be achieved through the
deployment of proven-effective training solutions and a thorough
num. training culture.
-which Alignment ofinterests between credit and sales staff: It isas important that
ca
front-line staff such as salespeople, relationship managers,
and branch managersare
well-versed the as their underwriting and credit
with credit decisioning process
colleagues. Sales team revenue-and-reward models should account for
management
portfolio quality, not purely sales volume.
If Indian Banks were to consider looking at all these five measures, the future
probability of an expanding NPA volume is likely to be reduced.
HOW TO REDUCE NPA:
emsand How to reduce NPA? - Non some
Performing Assets can be reduced by taking
major steps by the banks. Some steps are as follows by which bank can reduce
NPA
1. SARFAESIACT 2002:TheSecuritisationand Reconstruction of Financial Assets
these and Enforcement ofSecurity Interest Act,2002 (SARFAESI)empowersBanks/Financial
Institutions to recover their non-performing assets without the intervention of the

Court.
s is a
The Act provides three alternative methodsfor recovery of non-performing assets,
panks
namely:

edian i)Securitisation
.
work Ci) Asset Reconstruction
ness the intervention of the Court.
of Security without
et's

ard.
. (ii) Enforcement

The provisions
1.00 lac. NPA loan

Lerest arenot
of this Act are applicable
acounts
to be dealt with
eligible
only for

where the amount

under thisAct.
NPA loans with outstanding above
is less than 20%of the principal and
 18-2015 Sixth Semester, Management of Commercial Banks

Non-performing assets should be backed by securities charged to

of hypot hecation or mortgageor assignment. Security Interes he
erest by Bank
ofCPoLien,by
hire purrhase and lease not liable under sec.60 waye
forattachment
under this Act PC, arenot
The Act empowers the Bank: covere

()To 1ssue demand notice to the defaulting borrowerand

them to discharge their dues in full within 60 days from the guaranto
m tor,
date ofthe calling
ui) To give notice to any person who has otice. upo
acquired any offt
the secured
borrower to surrender the same to the Bank. assets
fromthe
(izi) To ask any debtor of the
borrower to pay any sum due or
borrower. becoming due
(ir)Any Security Interest created
over Agricultural Land
cannotbe proceedoa
Ifon receipt of demand notice, the
borrowermakes any
objection, authorised officer shall consider such representation or rain.
and ifhe comes to the representation or objection
conclusion that such any
or
or tenable, he shall representation objection is not acran
communicate the reasons for non
ofreceipt of such representation or objection. acceptanceWITHIN ONE eptable WB
WEEK
A borrower/guarantor
aggrieved by the action
DRT and then with DRAT, but not with of the Bank can file an
any civil court. The borrower/ appeal-
with
deposit 50% ofthe dues before an guarantor hast
appeal. with DRAT. to
Ifthe borrower fails to comply with the
notice, the Bank may take
more of the following measures: recourse to one or
()Take possessi on of
the security
(ii) Sale or lease or
assign the right over the
security
iii) Manage the same or
appointany person to
2. Lok Adalats: Lok manage the same
Adalat is for the
recovery of small loans.
guidelines issued in 2001, According to RBI
they cover NPA up to Rs. 5
filed are
covered. lakhs,both suit filed and non-suit
3.
Compromise Settlement: It is a scheme
for
NPA. It is applied to
recovery of
which provides
advances below Rs. 10 simple mechanisma
4. Credit Crores.
Information Bureau: A
Credit Information
maintaining a data of an Bureau help banks by
individual defaulter
to a
banke sothat and provides this
they may avoid information
lending to him/her.
6. DEBT
RECOVERY
TRIBUNALS:The debt récoverytribunal act was aSsed
by Indian Parliamentin
1993 with the pase
institutions for objective offacilitating the
speedy recovery of banks and tina
and above. dups in cases where the loan
amount is Ks. 1
Q.5. Asset
the statementLiability management issaid to be the Evaluate
with brief life line of
banking.
explanation. banking (15)
Ans.
a INTRODUCTION: AssetLiability
mechanism to address gement(ALM)
(ALM)Ca can be dei
liabilities
either due to
the risk faced
liquidity or
by a Management
bank due to a mis
nismatch betweern assets
changesin interest rates.
and
n
nstitution's
Liquidity 1sa
 LP. University-[BBAJ-Akash Books 2015-19

either by borrowing or converting assets. Apart from

ts liabilities
its liabilitis
meet a due to changes in interest rates as banks
to
also
nave mismatch
ability a bank may short term (fixed or floating) and lend long
term (fixed or
liquidity,
D to horrOw
borrow
tend
typically and
framework focuses on bank profitability long-
floating)
ALM policy
ALM
A comprehensive e net interest
the margin (NIM) ratio and Net Economic
targeting
by these
term viability to balance sheet constraints. Significant among
subject
NEV), subject needs and obtaining
alue (NEV), credit quality, mneeting liquidity
maintaining
are maintaining
constraints
sufficient
capital.
ALM is simply combines portfolio management
that it
viewof into a coordinated process.
An insightful t,liability and spread management)
(that is,asset, - -
ALM is the coordinated and not piecemeal management
techniques theme of
the
the central
hus, balance sheet.
entire from the simple
ofa bank's it has evolved
tool,
ALM is not a relatively new planning time horizons into a
Although various
of assets and liabilities across variable-
maturity-matching
idea of concepts such as duration matching,
that includessophisticated
framework simulation.
and the use of static and dynamic the following
rate pricing,
ALM function to a larger extent covers
SCOPE: The scope of the
the bank is unable
processes risk arising when
the current and prospective the bank's financial
1.Liquidity risk: due without adversely affecting risk ofthe
asthey come
to meet its obligations is on thefunding liquidity
the focus and
an ALM perspective, future cash-flow obligations bank
conditions. From its current»and the
meet includes
its ability to This missionthus
bank, meaning and unexpected.
both expected
collateral needs, in the market. in interest
benchmark price from movements a
liquidity's
risk: The risk of losses resulting
because a bank may have
2. Interest rate on future cash-flows. Generally on either side
of the
their impact rates instruments and
rates and of fixed or variable bank deposits
in terms of
amount causes is mismatches
disproportionate One oftheprimary in
balance-sheet. movements
of losses resulting from in
loans. The risk aredenominated
and liabilities
risk management: assets
3.Currency that cash-flow
To theextent the
rates. to ensure
exchanges the mechanism
currencies. all and ongoing
different As is a dynamic
and capital management: basis. It
coordinated
with
4. Funding on a continuous needs and is
of2
of adequate capital capital time-horizon
maintenance and longer-term a
both short- (usually
prospective

process considering and planning cycles

a bank's overall strategy
is also
function
years). and growth. risk asthis and
to credit
5.Profit planning related
cash,investments,
ALM dealswith aspects (including is handled
credit portfolio theloan portfolio,
6.In addition, of the entire in
theimpact specifically main datacontributors
credit risk, one ofthe
ta aanage sheet.The and represents
on thebalance function
loans) riskmanagement
by a separate
team.
to the ALM
 Semester, Management of Commercial Banb
20-2015 Sixth

The Al.M prmress rests on three pillars:

ALM Information Systems
Msnagrment InformationSystems
Information availability, arcuracy, adequacyand expediency
(i)ALM Organization
Structure and responsibilities
Level of top management involvement
(ii ALM Process

Risk parameters
Risk identification
Risk measurement
Risk management
Risk policies and tolerance levels

AlM invol ves identification of Risk parameters, Risk

identification D:
surement and Risk manegement and iraming of Risk
nea
Risk
policies and
tolerance lel.
ALM is all about managing three central risks: Is

.Interest Rate Risk: The phased deregulation

ofinterest rates andthe
flexibility given to banks in pricing most of the assets operational
and liabilities have exposed the
banking system to InterestRate Risk.
the risk where changes in
Interest rate risk is
market interest rates might adversely
affect a bank's financialcondition. in
Changes interést rates affect both the
current
earnings (earnings perspective) as also the net worth of the bank
(economicvalue
perspective). The risk from the earnings'perspective can be measured as
changesin the
Net Interest Income (Nil) or Net Interest

Liquidity Risk: It transcends individualinstitutions, as liquidity shortfallin

one institution can have repercussions on the entire system. Bank
management should
only the liquidity positions banks on an ongoing basis but also examine
measure not of
how liquidity requirements are likely to evolve under crisis scenarins.
Experience shows that assets commonly considered as liquid like Government
securities and other money market instruments could also become illiquid
when the
market and players are Unidirectional.Therefore liquidity has to be tracked through
maturity or cash flow mismatches.
in 1s
Foreign currency risk: Floating exchange rate arrangement has brought
balance
wake pronounced volatility adding a new dimension to the risk profile of banks' have
sheets.The increased flows across free economies following deregulation
capital
contributed to increase in the volume oftransactions
the banks' balance
with the volatility has rendered
Large croSs border flows together
sheets vulnerable to exchange rate movements.
as also risks.
in different currencies: It brings opportunities then
Dealing same currency,
in one exceed the level of assets in the nents.
l1abilities currency the currency move are
upon
can add value or erode value depending an
currency mismatch
if

risk is to ensure
that mismatches,
The simplest way to avoid currency
reduced to zero or near
zero.
 L.P
University-[BBA-Akash Pooks 2015
Banks undertake
operationsin exchange like acepting deposits, ma-
foreign
loans and advances And quoting
prices for foreign
exchange transactions. Irrespecti-
to eliminate currency mismato
the strategies adopted,
it may not be possihle

altogether. Besides,some of the institntions may take proprietary trading position.

a conseious businessstrategy. Managing Currency Risk is one more dimension of Ast
Liability Management.
Mismatched hesides exposing the balance sheet to movement
currency
position
to country risk and settlementrisk. Ever since the R-
exchange rate also exposesit
introduced the concept of end of the day near saus
(Exchange ('ontrol Department)
banks have been setting up overnight limits and selectively undertobi
position in 1978,
active day time trading.

SIGNIFICANCE OFALM:
.Volatility

Product Innovations & Complexities

Regulatory Environment
Management Recognition.

UNIT-III

Q.6. What are the fundamental objectives of investment management?

Explain the various riskinvolved in this. (15)

Ans. Investment Management Meaning: Investmentmanagement is the

professional asset management of various securities (shares, bonds and other securities)
and other assets real estate) in order to meet specified investment goals for the
(e.g.,

benefit of the investors. Investors may be institutions (insurance companies, pension

funds,corporations, charities, educational establishments etc.) or private investors

via collective investment
(both directly via investmentcontracts and more commonly
schemes e.g. mutual fundsor exchange-traded funds).

is often used to refer to the investment management

The term asset management
of collective investments, while the more generic fund managementmay refer to all
for private
as well as investment management
forms of institutional investment
investors.

Objectivesof Investment Management:

in finance are as follows:
The main objectives of investment management
or minimization of risks
Investment:Investment safety
1. Securityof Principal management. Investment
investment
most objectives of contributes
is one of the important but
intact also
the investment
not only irvolves keeping The motive of a financial
management over the period.
its purchasingg power safe. Other
towards the growth of that the investment
is absolutely
is
is to ensure
after the safety ofinvestment
investmentmanagement are considered only
growth, etc.,
factors such asincome,
the
ensured. also ensures to provide
management and good
of Returns:Investment returns in profitable
2.Consistency the same earned returns should
of returnsby reinvesting returns. The earned
stability to yield steady
The investmenthelps invested.
investments. cost of the funds
the opportunity
compensate
 of (Commercial Banka
Sieth Semester.Management
29-2015

Security of Principal
Investment

2.
Consistency of Returns

3. Capital Growth

4.
Marketability

5.
Liquidity.

6. Diversification of
Portfolio.

7. Favourable tax
Status

Objectives of Financial
Portfolio management

s.CapitalGrowth: Investment
management guarantees the
reinvesting ingrowthsecurities or by the growth of capital hu
purchase ofthe
shall appreciate in value, in order to growth securities. A investnmo
safeguard the investor from nent
purchasing power due to inflation and any erosion :n
other economic factors. A
consist of those investment must
investments,which tend to
inflation.
appreciate in real value
after
adjusting fo
4.
Marketability:Investment
nvestment consists ofsuch management ensures theflexibility to the
investment,which can be marketed and investment.
if
your investment containstoo traded. Suppose,
many unlistedor inactive
problems to do trading like shares,then there
switching from one investment would be
recommended to invest to another. It is
only in those shares and always
stock securities which are
exchanges,and also,which are listed on
major
actively traded.
5.
Liquidity: Investment
to take management isplanned in such a
maximum advantage of way that it facilitates
The investment various good
should alwaysensure opportunities upcoming in the market.
notice to take care
that there are
of the investor's enough funds available at short
liquidity
6. requirements.
Diversification of Investment:
to reduce the
risk of loss of Investment
management is purposelydesigned
capital and/or income
Becurities availablein
a wide range of by investing in different
fact that there is no industries.The investors types o

investment give
such thing asa
zero risk
investment. Moreover
shallbe aware o
relatively low rss
u
correspondingly a lower return to
their financial
7.Favorable Tax investment.
Status: Investment
increase the effective
minimizing thetax burden,
yield an investor management is planned in such way
yield can be
gets from his surplus
invested funa
t

By aR
give a favorabletax shelter nld
to the effectively improved. A good
considering income investors. The investmeoter
tax,capital gains investment should be
tax,and other evalual
taxes.
 Books 2015-23
I.P. University-[BBAJ-Akash
are applicable to all financial
The objectives of investment management
a proper analytical approach
results in
These objectives, if considered,
investments. overall risk needs to be maintained
the growth of the investment.Furthermore,
towards
a balanced and efficient investment. Finally
the acceptable level by developing
at
often satisfies all objectives ofinvest t
investment of growth stocks
good
management.
in investment management:
Various risk involved
in varying degreesin different typesof nents.
are present
Seven major risks
of all investment risks. The risk
is the most frightening
Default risk: This the interest. For all unsecured lnon.
of non-
to both
the principal and
pavment refers
notes, risk is
based on promissory company deposits, ete., this very high. Sincethere is
no security attached, you can do nothing except,
of course, go to a court when there is a
in refund of accrued Given the present
default capital or payment of interest.
circumstances of enormous delays in our legal systems, even if you do go to court and
en win the case, you will still be left wondering who ended up being
better off- you, thhe
borrower, or your lawyer!

So,do look atthe CRISIL/ICRA credit ratings for

thecompany before youinvestin
company deposits or debentures.
Business risk: The market value of your
investment in equity sharesdepends
upon the performance ofthecompany you invest in. If a company'sbusiness suffers and
the company does not perform well, the market
value of your sharecan go down sharply.
the of shares of companies
This invariably happens in case which hit theIPO market
issues at high when the is in a good condition and the stock
with premiums economy
markets are bullish. Then if these companies could not deliver upon their promises,
theirshare prices fall drastically.
When you investmoney in commercial,industrial and business enterprises, there
is always the possibility of failure of that business; and you may then get nothing, or

very little, on a pro-rata basis in case of the firm's

bankruptey
recentexample of abanking company where investors
were exposed to
A business
risk was of Global Trust Bank. GlobalTrust Bank, promoted byRamesh Gelli, slipped
the
into serious problems towards the end of 2003 due to NPA-related issues. However,
was
Reserve Bank of India's decision to merge it with Oriental Bank of Commerce
the interests of stakeholders such as depositors, emrployees,
timely. While this protected
of investors, especially smallinvestors
creditors and borrowers was protected, interests
were ignored and they lost their money.
is the promoter
The greatestrisk of buying shares in many budding enterprises
the business.
himself, who by overstretching or swindling may ruin
available to you
has only a limited value if it is not readily
Liquidity risk: Money called
the ready availability of money is
as and when you need it. In financial jargon, but also reasonably
liquidity.
An investment should not only be safe and profitable,
liquid. into cash quickly,
said to be liquid ifit can be converted
An asset or investment is investor not
value. Liquidity risk refers to the possibility of the
and with little loss in because the
happen either
when required. This may
being able to realize its value or becausethe resultant
or prematurelyterminated,
Security
cannot be sold in themarket
 24-2015 Sixth Semester, Management of Commercial Bant.
nks
loss in value may he unrealistically high.Current and 8avinoa
National Savings (ertificates, actively traded equity shares and counts in a
deb
In the case of a bank fixed deposit, vou coentureg.n
fairly liquid investments.
754 to 90% ofthe value of the deposit; and to that raise etc
extent,it is
Some banks offer attractive loan schemes againstsecurity
urityof
of anns
upt
stment
ike selected company shares,debentures, National Savings Co approved
investn
Such options add to the liquidity of investments.
The relative liquidity of differerit investments is ete
highlightedin Tabi. .
Table 1:Liquidity of e1.
Various Investments
Liquidity SomeExamples
Veryhigh Cash, gold,silver,
savings and current
banks, G-Secs accounts in
High Fixed deposits with
banks, shares of listed
companies that are
actively traded,
fund shares units,mutual
Medium Fixed
depositswith
companies enjoying high
rating,debentures of
good companies that arecredit|
activelytraded
Low and very low
Deposits and debentures of
loss-making and cash
strapped companies,
inactivelytraded shares,
unlisted shares and
debentures, real estate
Don't,howeyer,be under
the impression thatall
equally liquid assets. Out of listed shares and
the 8,000-plus listed debentures ae
only around 1,000 stocks. stocks,active trading is limited to
A-group shares are more
secondarymarket for debentures is liquid than B-group shares.
The
stuck with PSU not very liquid in India. Several
stocks and PSU bonds due to mutual funds are
lack of
liquidity.
Purchasing power risk orinflation risk:
ofmoney in Inflation means
being broke with alat
your pocket. When prices shoot
down. Some economists up, the purchasing power
consider inflation to be a of your money goes
of disguised tax.Given the
inflation,it'maysound present rates
surprising but among
given good marks foreffective developing countries,Indiais often
management of inflation. The
India has
been less than 8% p.a. during the last average rate of inflation m
two decades.
However, the recent trend of
rising inflation across the
challenge to the governments and central globe is posing seriou
the wholesale prices, which banks, In India's
case,inflation, in terms or
remained benign
up from June 2006 onwards and during the last few years,began
topped double firmn
The skyrocketing prices digits in the third week
of in of June
now the two major concernscrude
oil
internationalmarkets as well as food items
facing the global
economy,including India.
Ironically, relatively "safe"
fixed income and
small savings investments, such as bank
instruments, etc., are more depos
rising prices erode the prone to ravages of
purchasing power of inflation riskh
equity shares are more your capital. "Riskier"
likely to investmendiu
term. preserve the value of
your capital over
 1.P. Books
University-{BBA-Akash 2015-25

risk: In this deregulated era, interest rate fluctuation is a common

Interest rate
with its conseqnent impact. on
ohenomenon investment values and yields. Interest rate
fixed income securities and refers to the risk of a change in the value of your
risk affects
as a result of movement in interest rates.
investment
Suppose have investedin a security yielding 8 per cent p.a. for 3 years. If the
yyou
rates move up to 9 per centone year down the line, a similar security
can then
interest
the value of your security gets
be issued only at 9 per cent. Due to the lower yield,
reduced.
powers to affect the economy;
it

Politicalrisk: The government has extraordinary

have
some industries or companies in which you
may introduce legislation affecting to certain sections of society,
or it may introduce legislation granting debt-relief
invested,
of ete.
fixing ceilings property,
different set of political
another come with a totally
One government may go and industries and companies
the process, fortunes of many
the
and economic ideologies. In risk.
is reason for political

Change government policies one

in
undergo a drastic change. become panicky. Nervous
of war, financial markets
Whenever there is a threat In case a war actually
breaks out, it often
prices plummet. markets become
selling begins. Security markets. Similarly,
in the financial to wait and watch,
leads to sheer pandemonium The market prefers
elections are round the corner.
hesitant whenever
rather than gamble on poll predictions. on the domesticscene,
also have an impact
political developments by the aftermath
This was amply demonstrated
International
what with markets becoming
globalized. 2003.Through
to the Iraq war early in
the USA and in the countdown to events in
of 9/11 events in political
to become much more prone
increased world trade, India likely
is

its trading partner-countries. in security prices

due to factors
is the risk of movement The most
risk
Market risk: Market Natural disasters can
be one such factor.
as a whole. are going
that affect the market (bearish
or bullish) the markets due
is the phase prices
these factors are affected by rising and
falling
important of and bond markets
markets
through. Stock Thus:
bullish and bearish periods:
to alternating
economic recessions.
precede
Bearish stockmarkets usually rates, which,in
from high market interest
result generally
Bearish bond markets ofinflation.
by high rates
turn, arepushed and boom periods.
economierecovery
Bullish stock markets are witnessed during low rates
ofinflation.
low interest rates and
Bullish bond markets result from commercial
How is it managed by
risk?
Q.7. What do you mean by credit (15)
from a borrower
banks? on a debt that may arise
is the risk of default the lender and
Ans. A credit risk resort,
the risk is that of
In the first
to make required payments. to cash flows,
and increased coilection
failing
a number ofcircumstances,
and interest, disruption
includes lost principal or partial and can arise in
be complete
cOsts. The loss may line
card,
loan, credit
for example: due on a mortgage
to make a payment
consumer may
fail
A loan.
of credit, or other
 Management of Commercial Banks
26-9015 Sixth Semester,

A oompanris unable repay

to asset-secured fixed or floating
loating hcharge debt.
consumer does not pay a trade when due
A bnsiness or in voice
A business does not s
pay anemployee earned wages when due.
bond issuer does not make a
A bus ness or government paymernt
principa parment when dute. acoupon or
An insolvent insurancecompany does not pay a policy obligation
An insolvent bank wont returm funds to a depositor.
Agevermment bankruptey
grants toan
protection
insolvent
To reduce the lender's credit the lender consumer or
risk, may perform a business
nrnspective borrower. may requure the borrower to take credit cherk
c martgage insurance, or seek security over some
out
appropriateinewe the on
assetsof
from a third party. The lender can theborrower oror a
also takeout insurance
debt to anothercompany. In general,th againsttherisk or guarantee
risk or on-
rate that the debtor will be
higher the risk, the on-sell the
asked to pay on the higher will be the
debt. Credit int
erest
bo:Towers unable to pay due risk
willingly or mainly ariseswhee
unwillingly. en
Types of credit risk-
A credit risk can be of the
following types:
Credit default risk:The
riskof
loan loss arisingfrom a debtor
obligations in full orthe debtor is
its

more than 90 being unlikelyto

obligation; defaultrisk days past dueon pay
may impact all credit-sensitive any material
loans, securities and derivatives.
transactions,
including
Concentration risk: The risk
exposures with the associatedwith
potentialto produce any single
large enough losses to exposure or
operations. It may arise in group of
the form of threaten a bank's
concentration single name core
concentration or
industry
.Country risk: The risk
curreney payments oflossarisingfrom a
(transfer/conversionrisk) or sovereign state
(sovereign risk); this type when it defaults onfreezingforeign
of risk is its
obligations
macroeconomic prominently associated
performance and its with the country's
political stability.
Requirements of Effective Credit
Accord identifies Risk
that effective Management in Banking: BaselII
bank's overall credit risk
risk management is a critical
any banking management strategy and is component of a
essentialto the
organization.Overall, the long-term success of
ActiveBoard and components of effective credit risk
senior
management oversightsufficient comprise.
Adequate risk policies,
measurement, monitoring proceduresand limits
Comprehensive internalcontrols. Management information systems
RBI
Expectations from Bankson Credit
Risk
RBI expects that Management
banks take specific
measures, mainly at the
implementing appropriate Credit Risk Corporate
will involvethe Management Systems in the bank. Level,for
following: The policy
Policy framework
Credit rating framework
Credit risk models
 I.P. University-[BBA-Akash Books 2015-27

Portfolio management and Risk Limits

Risk in Inter-Bank Exposure
Managing Credit

.Credit Risk in Off-Balance Sheet Exposure

Country Risk
Loan Review Mechanism/Credit Audit
return on capital) pricing/Economic profit
RAROC Risk adjusted
II Accord:
Basel
forCredit Risk Management
Implications
The banks are required to
functions considers the above issues as
their Risk Management
Ensure that This will ensure
bank and put in place appropriate structures/systems.
to the
applicable
(RBS)is effective.
that Risk Based Supervision
Framework to suit their requirements
Credit Rating
Each bank must have a ofcredit risk should
The management
Encompasses:
Credit Risk Management and the process
shouldencompass:
attention
receive the top management's
credit rating/scoring;
Measurement of risk through
Risk pricing ona scientific basis; and portfolio
Loan Review Mechanism
the risk through effective
Controlling
and the amount of
management; loan losses i.e.
the risk throughestimating expected
Quantifying
over, achosen time horizon(throughtracking
loan losses that
bank would experience i.e. the amount by
more years) and unexpected loan losses
behavior over 5 or of losses or
loss (throughstandard
portfolio deviation
the expected loss
which actual losses exceed losses and some selected target credit
the difference
between expected loan

quantile).
Banks/Lenders
of Credit Risk by
Mitigation methods:
credit risk by using several
Banks/Lenders mitigate
a high interest rate to borrowers
Lenders generally charge
(E) Risk-based pricing: Lenders consider
a practice called risk-based pricing.
to loan-to-value ratio
who are more likely default,
credit rating and
loan as loan purpose,
factors relating to the such
and estimate the effect on yield (credit spread).
write on the borrower, called covenants,
stipulations
(ii)Covenants: Lenders may
into loan agreements:
condition
Periodically report its financial
or other
shares, borrowing, further,
Refrain from paying dividends, repurchasing
financial position
that negatively affect the company's
voluntary actions as
in certain events such
specific,

Repay the loan in the full , at the lender's request,

ratio or interest coverageratio.
changes in the borrower's debt-to-equity
Lenders and bond holders may
(ii)Credit insurance and credit derivatives:
or credit derivatives. These
risk by purchasing credit insurance
hedge their credit
seller (insurer) in exchange for payment.
the transfer risk from the lender to the
contracts
The most common credit derivative is the credit default swap.
 Sixth Semester, Management of Commercial Banke
28-2016
can reduce credit risk by reducina #l.
(irTightening:.Ienders he
in total or to certain For example, a
extended. either borrower 's. di amount of
products to a troubled
retailer may attempt to lessen credit
w
risk by ibutor
selling
terms from net 30 to net 15.
reducing ita

(-)Diversification: Lendersto a small number payment

ofborrowers (orbi.
ofunsystematiceredit risk, called concentration
face a high degree
riel of
by diversifying the borrower pool.
this risk borrowe
(i)Deposit insurance: any governments establi
guarantee hank deposits of insolvent banks. Such deposit
from withdrawing money (when a bank is protection insurance
becoming insolvent,to discourag s to
encourages consumers to holding heir avoid a nsumers
savingsin the bank
Generally the issues related to redit Risk are banking system run),
and
instead. incash.
Bank's policy namely -
Loan Policy, Credit
addressed in the
policies
Risk Management Policy, Collate monitoring Policy,Real Estate stated inthe
Risk Policy,
Policy Management Policy, Credit
Recovery Policy, Treas
easury
UNIT IV
Q.8. Explain the functions of
non-banking financial
intermediaries
Ans. A non-bank (NBFIs
financial
not have a full institution (NBFI) is a financial (15)
banking license or is not institution that
bankingregulatory
agency. NBFIs supervised by a national does
facilitate or
investment, risk
pooling, contractual bank-related financial international
include insurance savings,and market services, such as
firms,pawn shops, brokering.Examples of
cashier's
payday lending, check issuers, these
currency exchanges, and check
microloan cashing
strengtheningan locations,
economy, as they organizations.Role of
economy's savings into provide multiple NBFIs in
capital investment alternatives to
primary form of [which] act as transform an
intermediation fail. backup facilities shouldth
The role and
various functions importance of non-bank financial
performed by these intermediaries is clear from
institutions. the
Major functionsofthe
NBFIs are as
1.
Financial follows:
financial
Intermediation: The most
intermediaries is the important function of the
transferof non-bank
Financial funds from the savers to
intermediation is the investors.
and small economical and less
savers, expensive to both small
(a)It businesses
provides funds to small
bonds because businesses for which it
of high is difficult
transaction costs, to sell stocks and
(b) It also
benefits the small
savers by
investments. pooling their funds and
diversifying their
2.Economic
Basis of Financial
Handling offundsby financial Intermediation:
than that by the intermediariesis more
individual wealth economical and more
intermediation is based on owners because of etficie
the fact that ial
(a)The law of financa
large numbers, and
(b)Economies of
scalein
portfolio
management.
 L.P.
University-/BBA-Akash Books 2015-29

Law of Large Numbers: Pinancial intermediaries operate on the basis of the

ietical law oflarge numbers. According to this law not all the creditors will withdraw
s funds from these institutions. Moreover,if some creditors are withdrawing cash,
ohers be cash. Again, the financial intermediaries also receive
ome may depositing
on loans or investmentsmade by them. All these factors
regular interest payments
the financial intermediaries to keep in cash only a small fraction of the funds
enable
provided by the creditors and lend or invest the rest.

(i)Economies of Scale: Large size of the asset portfolios enables the financial
to reap various economies of scale in portfolio management. The main
intermediaries
economies are
(a) Reduction ofrisk through portfolio diversification:
(b) Employment of efficient and professional managers; and
(c) Low administrative cost of iarge loans and
(d) Low costs of establishment, information and transactions.

3. Save: Non-bank financial intermediaries play an important

Inducement to
Savers need stores of value to hold their
role in promoting savings in the country.
in. These institutions provide a wide range of financial assets as store of value
savings
and make available expert financial services to the savers. As stores of value, the
financial assets certain special advantages as,
have over the tangible assets (such
inventories etc.). They are
physical capital, of goods, easily storable, more liquid, more
easily divisible, and less risky. In fact, saving-
income ratio is positively related to both
financial institutions and financial assets; financial progress. Induces larger savings
out of the same level of real income.

4. Mobilization of Saving: Mobilization of savingstakes place when the savers

office savings deposits, life
hold savings in the form of currency, bank deposits, post
insurance policies, bills, bond's equity shares,
etc. NBFI provides highly efficient
mechanism for mobilizing savings. There are two types of NBFTs involved in the
mobilization of savings;

(a) Depository such as savingsand loan associations,

Intermediaries, credit unions,
mutual saving banks etc. These institutions mobilizesmall savings and provide high
liquidity of funds.

(b) Contractual Intermediaries, such as life insurance companies, publicprovident

pension funds, ete. These institutions enter into contract with savers and provide
funds,
them various types of benefits over the long periods.
5. Investment of Funds: The main objective of NBFIs is to earn profits by investing
the mobilized For this purpose,these institutions follow different investment
savings.
policies. For example, savings and loan
associations, mutual saving banks invest in
mortgages, while insurancecompanies investin bonds and securities.

Q.9. What are the roles of

Q.9. (a)Insurance companies
Ans. Insurance business is
divided into four classes:
(1) Life Insurance
busines
(2) Fire

(3)
Marine
 of Commercial Banks
30-2015 Sixth Semester,Management

Insurance. the rest is transacted

by

1
(4) Miscellaneous
transact life insurancebusiness; Genera
Life insurers

Insurers attachedto an.

means defraying risks

The business of Insurance

essentially
between variousentities, bot
avity
the risks
and sharing in finan persons
ancial marke
over time (including life) are important players as
and organizations. Insurance companies Insuranceproduducts are multip
and invest large amounts of premium. rpose
they collect
and offer the following benefits:
1. Protection to the investor

2.Accumulatesaving
huge long term investments.
3. Channelize savings into sectors needing

CONTRIBUTION TO INDIAN ECONOMY

long term savings
Insurance is the only sector which garners
Insurers are increasingly introducing innovative products to meet the specific need.
of the prospective policyholders. insurancesector is of vital importancefo
An evolving
a
economic growth. While encouraging savings habit it also provides safetynet to both
enter prisesand Individuals.

Insurance Companies receive, without much default, a steady cash stream nt

premium or contributions to pensionplans. Various actuarystudies and models enable
them to predict, relatively accurately, theirexpected cash outflows.
Liabilities of Insurance companiesbeing long-term or contingentin nature,
liquidity
is excellent and their investmentsare also long-term in nature. Since they offer more
than the return on savings in the shape of life-cover to the investors, the rate of
retun
guaranteed in their insurancepolicies is relatively low. Consequently,the need to seek
high rates of returns on their investnentsis also low. The risk-return trade off is
heavily tilted in favourofrisk.
As a combined result of all this,
investments of insurance companies have been
largely in bonds floated by GOL, PSUs, state governments,local bodies,
and mortgages oflong corporate bodies
term nature.
Generates Long term funds for infrastructure
and strong positive correlation
betweendevelopment
of capital markets and
insurance/pensionsector.
For GDP to grow at8to
10%, qualitative improvement in infrastructure is
Estimates offunds essential.
required for developmentofinfrastructure
of 6,19,600 crore
is anticipated in the
vary widely. An investment
next 5 years. Tenure of
infrastructure normally funding required for
ranges from 10to 20years. The insurance
crucial financial industryalse provides
intermediary services,
transferring funds from the insured to
investment, critical for continued capital
economic expansion and
generating long-term fundsfor growth, simultaneously
infrastructure
In fact infrastructure development.
investmentsare ideal for
insurance asset-liability matching for life
companies given their long term
estimates published liability profile. According to
by the Reserve Bank of preliminary
financial India, contribution of
savings was 14.2 per cent in insurance funds
market prices. 2005-06,viz., 2.4 percent ofthe
Development of the insurance GDP atcurren
necessary to supP rt
continued economic sector is thus
from a transformation. Social
mature insurance security and pension reforms too
industry. DE
 L.P University-(BBAJ-AkashBooks 2015-31

in India, which was opened up to private participation in the

The insurance sector
With an average
Har 1999,has completed over sevenyears in a liberalized environment.
of 37 per cent in the first yearpremium in the life segment and 15.72 per
annual growth
the number of life insurance
cent growth in the nonlife segment, together with largest

in force, the potential of the Indian insurance industry is still large.

policies
1990-91. During
Lifeinsurancepenetration in India was less than 1 per cent till
2001 was over 2 per cent. In 2005
1990s,it was between and 2 per cent and from
1
it
the
it had inereased to 2.53 per cent.
less
in rural areas and amongst socially
Spread of financial services
privileged
minimum business to be done
IRDA Regulations provide certain

in rural area
in the socially weaker sections
are spread over nearly
1400centres. Presence of representative
Life Insurance numbering over
offices

- in rural areas. Insuranceagents

in every tehsil deeper penetration - No. of policies
55
(2004-05)
Policies sold in rural areas
6.24 lakhs in rural areas. - No. of lives covered 2003-04 17.4
crores. Social security
lakhs. Sum assured 46,000
42.1 lakhs
lakhs 2004-05
increased employment
Life insurance industry provides
Employment generation: 31st 2005 is around2 lakhs.
in insurame sector as on March,
2004
opportunities. Employees No. of agents on 31st March
depend on insurance for their livelihood. extra
Many agents establishmentsprovide
- agents,training
15.59 1akhs. Brokers, corporate are in rural sectors.
Many of these openings
employment cpportunities.
finance companies
Q.9. (6) Hire purchase through making
Hire Purchase: Amethod of buying goods
Ans. DEFINITION of in the U.K., and is
over time. The term
hire purchaseoriginated
a
installment payments in the United States. Under
what are called "rent-to-own" arrangements
similar to and does not obtain ownership
the buyer is leasing the goods
hire contract,
purchase
amount of the contract is paid.
until the full

roles of hire purchase companies:

Following are the
as installments over the period
agreement. of
Rental payments are paid
for hiring the asset. This means
Each rental payment is considered as a charge to take back the
on any payment,the seller has all the rights
that, if the hirer defaults
assets.
are
between both the parties involved
All the required terms and conditions
documentedin a contract called Hire-Purchase agreement.
may be annual,half-yearly, quarterly, monthly,
The frequency of the installments
etc. according to the terms of the agreement.

are instantly delivered to the hirer

as soon as the agreement is signed.
Assets
the option to purchase, the assets are passed to him after the
If thehirer uses
last installment is paid.
assets any time and
not want to own the asset, he can return the
If the hirer does after the return.
is not required to pay any installment that falls due
 32-2015 Sixth Sementer, Management. of Cornnereinl Banks

However, once the hirer returna theaANGLM,he Canngt, claim back

any tav
an they are the chargen townrdn the hire snd ue of the aKseta
alrendy paid
.The hirer cannot pledge, sell or mortgage the anneta an hes isnottheouner ofv
assets the last payment is made.
til1l

.The hirer, usually, pays a certain amount an an initial

deposít while nigning th
agreement.
.Generally, the hirer can terminate the hire purchase agreement
any time beire
the ownership rights pass to him.

Advantages of Hire Purchase

Hire Purchase has the following advantages
Immediate use of assets without paying the entire amount.
Expensive assets can be utilized as the payment is
spread over a period oftime.
Fixed rental payments make budgeting easier as all
the expenditures are known
in advance.

Easy accessibility as itis a secured financing.

No need to worry about the asset depreciating
quickly in value as there is no
obligation to buy the asset.
Disadvantages ofHire Purchase;
Hire Purchase suffers from the
following disadvantages:
Total amount paid towards the asset will be
higher than the cost of the asset.
Long duration of the rental payments.
Ownershiponly at the end of the agreement. The hirer cannot modify the asset
till then.
Addition ofany covenants increases the cost.
Ifthe hired asset is no longer needed because of any change in the business
strategy, there may be a resulting pénalty.