Corporate Banking

Introduction
• Corporate Banking is responsible for the overall
relationship management of major corporate and
institutional clients. This involves working closely
with a variety of product specialists to deliver a
comprehensive range of services, such as treasury
and capital markets, transaction banking, and
strategic advisory and investment management.
Additionally, Corporate Banking is responsible for
the origination and ongoing management of the
credit and lending product
• Corporate Banking delivers a comprehensive range
of financial products and services to many of the
world’s top-tier corporate and institutional clients
 Scope and Functions of Banks
Creating Money
• This is accomplished by the lending and
investing activities of commercial banks in
co-operation with the central bank. This
results in elastic credit system which is
necessary for economic growth. It helps in
expansion of productive facilities and
operations
Scope and Functions of Banks(contd…)
Creating an optimum money supply
• Banks play an important role in the
implementation of policies of the Central Bank
regarding money supply. If RBI wants to include
money supply, banks will be encouraged to lend
more as the objective of the Central bank is to
provide a money supply commensurate with the
national objectives of stable prices, sound
economic growth and employment. If the money
supply is excessive, it will result in inflation
Scope and Functions of Banks(contd…)
Transfer of funds
• Banks help in financial transactions by
transferring funds by means of cash,
cheque, demand deposits, bearer’s order,
Electronic transfer of funds, ATM’s etc.
Scope and Functions of Banks(contd…)
Pooling of Savings
• Banks help in transfer of savings to
profitable investments. The savers are
paid interest on savings which are diverted
to business that may use them for
expansion of their productive capacity and
to consumers for such items as housing
and consumer goals.
Scope and Functions of Banks(contd…)
Extension of Credit
• Banks lend for agricultural, commercial
and industrial activities of a country. This
helps in increasing production, capital
investments and in the standard of living.
Scope and Functions of Banks(contd…)
Financing of foreign trade
• They help in making payments in the
currency the foreign country example in
Francs, Marks, Lira or Pounds by selling
foreign exchange. They also issue letter of
credit when the importer is not paid
immediately by exporter which is more
often the case. They also issue Travellers
Cheque to international tourists.
Scope and Functions of Banks(contd…)
Trust Services
• Banks help in distribution of assets/property
before death. They may act a executors of wills
after the person dies. They acts as trustees
under which the trust department has the
responsibility of investing and caring for the
funds and distribution of proceeds as per the
trust agreement. They may act as administrators
of pension and profit sharing plans. Banks act as
registrar for corporates. They can also redeem
and issue stocks and bonds on behalf of
corporates.
Scope and Functions of Banks(contd…)
Safekeeping of Valuables
• They provide a vault for safekeeping of
valuables/securities.
Scope and Functions of Banks(contd…)
Merchant-banking services
• Banks are engaged in issue management
through their subsidiaries
Scope and Functions of Banks(contd…)
Brokerage Services
• They deal in buying and selling of securities for
customers. They also provide portfolio management
services to handle large investments of institutional
investors.
• They finance the government through the purchase of
government securities.
• They finance the priority sector, sick units and
agriculturists.
• They also provide advisory and information based roles
for all types of clients.
• As part of their overseas trade related banking services
such as negotiation and collection of bills, opening of LC,
channelizing foreign inward remittances and mobilization
of savings of Indians abroad.
 Credit Functions of Banks
Forms of Bank Finance
• Overdraft
• Cash Credit
• Purchase or discounting bills
• Working Capital Loan
• Letters of Credit
 Overdraft
• The banks lend funds in excess of balance
in his current account upto a certain
specified limit during a stipulated period.
The interest rate charged is higher
because the credit is not purpose oriented
and the securities may not tangible.
 Cash Credit
• The bank lends upto a sanctioned credit limit. It
opens a CC account for the borrower who borrows
and deposits funds in this account by way of sales.
The credit limit is backed by security and collaterals.
The bank also levies a commitment charge on the
unutilized portion of the CC limit. As per the new
system, for borrowers having credit limit greater than
20 crores, the assessed working capital requirement
of the borrower will be delivered as two-
components-loan component called the working
capital demand loan (WCDL) upto 80% of credit limit
an CC component forming remaining 20%.
Purchase or Discounting of Bills
• This is obtaining credit against bills. Bill financing occurs when
bills of exchange drawn by the borrower are discounted by the
bank. Bills can be clean bill, documentary bills or supply bills.
• Clean bills are not backed by any documents of title to goods.
• Documentary bills are backed by documents of title to goods
like lorry receipts, railway receipts, airway bills and bill of
lading. Documentary bills can be documents against payment
and documents against acceptance.
• Supply bills are like debt and raised only when the buyer is the
govt. or a large corporation. The bank finances the supplier on
the basis of invoice and the buyer’s certification of acceptance
of goods.
 Working Capital Loan
• This is a temporary loan in excess of
sanctioned credit limit to meet unforeseen
contingencies. The rate of interest is
above the normal rate of interest
 Letters of Credit
• Through LC, the supplier insures that the
buyer’ bank makes the payment in case
the buyer fails to do Sales Officer.
 Security Required by Banks
• Hypothecation-Possession remains with the
borrower.
• Pledge- Possession is transferred to the bank.
• Mortgage- The charge is against immovable
property. Possession remains with the
borrower and the lender gets full legal title.
• Lien- The right to retain property belonging to
the borrower until the debt is repaid.
 Most Banks India deal with the following products
as a part of their corporate banking function:

• Working Capital Finance

• Project Finance
• Exports Credit
• Foreign Currency Loans
• Deferred Payment Guarantees
• Corporate Term Loans
• Structured Finance
• Equipment Leasing
• Loan Syndication
• Financing Indian Firms Overseas Subsidiaries or JVs
 Working Capital Finance
• This is given as cash credit facility,
working capital demand loan, overdraft,
overdraft facility, purchasing and
discounting of bills, and commercial paper.
 Project Finance
• This is asst based financing. Banks
finance the project in the form of debt,
syndicate loans or through subscription to
issues of project companies.
 Export Credits
• These are given as packing credits or post
shipment credit. The rates are market
determined and linked to LIBOR.
 Foreign Currency Loans
• These are given as external Commercial
Borrowings(ECBs) which include
syndicated loans, stand-alone loans,
buyers' credit and seller's Credit, bilateral
loans in all major currencies, FRNs/Euro
bonds, Pre-bid and post bid facilities for
project exports and FCNR(B) Loans. They
are also LIBOR linked.
 Deferred Payment Guarentees
• This is non-fund based lending by the
bank. The bank is called upon to pay the
counterparty or beneficiary if the borrower
fails to pay.
 Corporate Term Loans
• Are generally used to finance projects or
asset purchases. The maturity of these
loans is more than one year, the average
ranging between 3 and 5 years and they
are structured on the basis of future cash
flows. The amount and structure of these
loans will closely match the transaction
being financed.
 Structured Finance
• These can be short term loans with
maturity of 1 year or less.
 Equipment Leasing
• This is asset based financing and bank
collects lease rentals
 Loan Syndication
• Arranging a syndicate loan allows the lead
bank to meet its borrower’s demand for
loan commitments without having to bear
the market and credit risk alone. Two or
more banks agree jointly to make a loan to
a borrower. The lead bank also earns an
arrangement fee.
• Financing Indian Firms Overseas
Subsidiaries or JVs
 The Credit Process
• Credit Analysis
• Credit Delivery and Administration
 Credit Analysis
• The first step is to collect all pertinent information on the
borrower including call report summaries, past and present
financial statements, cash flow projections and plans for the
future, relevant credit reports, details of insurance coverage,
fixed and other assets, collateral values, and security
documents.
• The second steep is project and financial appraisal.
• The third step is to assess the quality of the management
team.
• The fourth step is dong due-diligence to check the borrower’s
address, inspection of his work place and interviewing his
suppliers, customers and employees.
• The fifth step is assessing the risk associated with the
proposed credit.
• The final step is making the recommendation based on a
thorough analysis of the project. The credit officer
recommends the credit terms including the loan amount,
maturity, pricing, repayment schedule, security to be provided
and other terms ad conditions.
 Credit Delivery and Administration
• Once a loan is approved the loan
agreement is signed by borrowers and
guarantors. The documentation is
completed. The credit is then monitored
continuously and credit audit periodically
by external or internal auditors
 Assets and Liabilities of Banking
System
• Bank’s Assets are the funds mobilised by bank
through various sources.
• -Cash and Bank balances with Reserve Bank
of India.
• -Balances with banks and money at call and
short notice.
• -Investments (securities)
• -Loans
• -Fixed Assets
• -Other Assets
 Assets and Liabilities of Banking
System
• Bank’s Liabilities
• -The sources of funds for the lending and investment
activities constitute liabilities side of balance sheet.
• Capital
• Reserves and Surplus
• Demand Deposits
• Savings deposits
• Time deposits
• Inter-bank deposits
• Money market deposits
• Borrowings (short term and long term)
• Other Liabilities and Provisions
• Contingent Liabilities.
 Financial Analysis of Banking
Organizations
• Banking industry is like trading company, where banks
trade on capital or funds.
• Unlike manufacturing industry, there is not much of
processing. While some of the ratios are not relevant,
there are ratios which require some modification. For
instance, we compute profit margin without considering
interest expenses. For SBI, the ratio works out to 68% for
2003. Is it possible for a firm to report such a huge profit
margin? The ratio is high because the principal expense
namely interest expense is omitted for computing the
ratio. Interest expenses are minor for a manufacturing
industry whereas for banking industry, it is a major
expense item. Considering the special nature of banking
industry, following ratios are relevant for the banking
industry.
• a) Return on Equity
• b) Return on Investments
• c) Leverage or Debt to Equity or Debt to Capital
• d) Interest Income to Average Assets
• e) Interest Expenses to Average Assets
• f) Net Interest Income to Average Assets [(d) ñ (e)]
• g) Non-interest income to Average Assets
• h) Non-interest income to Total income
• i) Income from Treasury activities/Investments
• j) Operating Expenses to Average Assets
• k) Provision for Loans and losses to Average Assets
• l) Growth Rate of Assets
• m) Growth Rate of Net Worth
• n) Cash dividends to PAT
• o) Provision for NPA to Total Loan
• The analysis of Bank’s financial
statements consists of a mixture of steps
and pieces that interrelate and affect each
other. It would lead to wrong conclusion
and strategy if the analysis is done on a
piecemeal basis. For instance higher
interest spread does not mean that the
bank is in good position. It could be simply
due to aggressive lending leading to
higher NPA or simply on account of higher
asset-liability mismatch. We need to look
for five important things when we analyze
the financial positions of the bank.
• a) Whether the bank is growing or not? We use trend
analysis to answer this question.
• b) Whether the bank is able to get leverage that is equal
to industry average? Since profitability of bank is
primarily on account of ability to use leverage, this ratio
assumes importance.
• c) Whether the bank is able to increase non-fund based
income (i.e. fee based income)? This shows the
capability of offering services and leveraging customer
base for such services.
• d) Whether the bank is able to contain the cost of its
operations?
• e) Whether the risk of the bank is within limits? Though
not discussed here, measures like Value-at-Risk (VAR)
are used.
• The net profit made by banks as a percentage of working
capital has always been low in India.
Profitability of banks is affected by:

• External Factors
• Internal Factors