Unit – 3

Risk Management and Trends

in Banking Services
 Basel Committee
Established at the end of 1974 by Central Bank Governors
of G10 to address cross-border banking issues.
Serious disturbances in international currency and banking
markets (notably the failure of Bankhaus Herstatt in West
Germany).
Reports to G10 the central bank Governors/Heads of
Supervision
It consists of senior representatives from banking
supervisory authorities and the central banks of Belgium,
Canada, France, Germany, Italy, Japan, Luxembourg, the
Netherlands, Spain, Sweden, Switzerland, the United
Kingdom and the United States.
2 Mr. John Pradeep Kumar,
KJC
 Basel Committee
The committee was designed as a forum for
regular cooperation between its member countries
on banking supervisory matters
Its aim is to enhance financial stability by
improving supervisory know how and the quality
of banking supervision worldwide

3 Mr. John Pradeep Kumar,

KJC
 Basel Committee Contd.....
Committee formulates supervisory standards & guidelines
It recommends sound practices, it expects its members to
implement and it also monitors the progress
The Committee's Secretariat is based at the Bank for
International Settlements in Basel, Switzerland.
Currently has 28 member countries
Meetings are conducted 3 to 4 times a year
It has various sub committees like committee on the Global
Financial system, Committee on payments & market
infrastructure, etc.
4 Mr. John Pradeep Kumar,
KJC
 Basel 1
The Basel 1 accord was introduced in 1988
It is also called as the BASEL CAPITAL ACCORD
The Capital Accord established minimum
capital requirements for banks (Capital
Adequacy)

Minimum ratio: Capital

8%
Risk weighted assets

5 Mr. John Pradeep Kumar,

KJC
 Advantages of capital Accord
Provides safety and soundness
Depositor protection

Cushion against unexpected losses

Brings in discipline in risk taking

6 Mr. John Pradeep Kumar,

KJC
 The Basel Capital Accord

Focused on credit risk but formula based

Partially amended in 1996 to include market risk

Operational risk is not addressed

Simple in its application

Produced an easily comparable and

verifiable measure for bank’s soundness

7 Mr. John Pradeep Kumar,

KJC
 Basel
Basel II was released inIIJune 2004

It was called as, “The New Capital Framework”

There were many changes that ware made from BASEL I

to BASEL II

The Changes aimed at rewarding and encouraging

continued improvements in risk measurement and control

It has 3 pillars all focused on having adequate capital with

the overall bank’s risk profile

BASEL II Capital Requirement is greater than or = 9%

8 Mr. John Pradeep Kumar,
KJC
 Three pillars of the Basel II framework

Minimum Capital Supervisory

Market Discipline
Requirements Review Process

– Credit risk – Bank’s own capital – Enhanced disclosure

strategy
– Operational risk
– Supervisor’s review
– Market risk
9 Mr. John Pradeep Kumar,
KJC
 BANKS TYPICALLY FACE THREE
KINDS OF RISK
Type of Risk Example

 Risk of loss due to unexpected re- Daily price “Stocks”

pricing of assets owned by the bank, change (%)

caused by either
 Exchange rate fluctuation
 Interest rate fluctuations Unexpected
Market price volatility
 Market price of investment Time

fluctuations Default “Loans with credit rating 3”

rate (%)

Unexpected
 Risk of loss due to unexpected default
borrower default Avg.
default

Credit
Time
 Risk of loss due to a sudden reduction
in operational margins, caused by Monthly change
of revenue to cost
“Business unit A”
either internal or external factors (%)

Unexpected
low cost
utilization
Operational
Time
10 Mr. John Pradeep Kumar,
KJC
 Basel III
In December 2010, Basel committee issued
two consultative documents:

To strengthen the resilience of the banking

sector

International framework for liquidity risk

measurement and monitoring

11 Mr. John Pradeep Kumar,

KJC
 BASEL III Norms
The quality, consistency & transparency in a bank’s capital base to be
raised
Risk coverage of a bank’s capital framework to be strengthened
Introduced a leverage ratio (Greater than or equal to 3%) as a
supplementary measure to Basel II – Tier 1 Capital / Total Exposure >= 3%
Measures to promote build up of capital buffers in good times that can
be drawn upon in periods of stress
Introduced global minimum liquidity standard for internationally active
banks – Liquidity Coverage Ratio (LCR)
LCR = High Quality Liquid Assets / Total net liquidity outflows over 30 days >= 100%

12 Mr. John Pradeep Kumar,

KJC
 RBI Prudential Norms on New
Capital Adequacy and
Framework

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KJC
 What is Capital
Adequacy?
 Capital Adequacy is a measure of a bank's capital to cushion
against or to absorb a reasonable amount of losses before they
become insolvent and consequently lose depositors' funds. It
ensures efficiency and stability of a financial system by
lowering the risk of banks becoming insolvent.
 The ratio used to measure adequate capital is Capital
adequacy ratio (CAR)
 The capital adequacy ratio denotes how much capital a bank
has against its loans.
 It is
14 Mr. also called
John Pradeep Kumar, as capital risk weighted assets ratio (CRAR)
KJC
 Tier1 + Tier2 Capital
Capital Adequacy Ratio =
-----------------------------
R
isk Weighted Assets

Tier 1 Capital = Equity

Share Capital + Share Premium +
General Reserve (unencumbered)

TierMr.2JohnCapital
15 Pradeep Kumar,= Preference Share + Subordinated Debt
Bonds
KJC
+ Revaluation Reserves
 Capital Adequacy =
9%
Risk Rates:

Investment in Govt Securities –

0% Loans to Government – 0%

SLR - 0.25%

Private Sector Company Bond –

100% Public Sector Company Bond –

20%

Loans to PSU & other loans – 100%

Personal Loans & Credit Cards –

16 Mr. John Pradeep Kumar,
KJC
125%
 Example
Using the following information. Calculate Capital
Adequacy Ratio.
Exposure Risk Weight
Government Treasury held as 1,500,000 0%
asset
Loans to Corporates 15,000,000 10%
Loans to Small Businesses 8,000,000 20%
Guarantees and other non- 6,000,000 10%
balance sheet exposures

The bank's Tier 1 Capital and Tier 2 Capital are $200,000 and
$300,000 respectively.
17 Mr. John Pradeep Kumar,
KJC
 Solution
Banks's total capital = Tier one capital + Tier two capital
= 200,000 + 300,000
= $500,000
Risk-weighted exposures
= $1.5×0% + $15×10% + $8×20% + $6×10%
= $3.7 million
Capital Adequacy Ratio
= Banks's total capital/ Risk-weighted exposures
= $0.5 million/ $3.7 million
= 14%
18 Mr. John Pradeep Kumar,
KJC
 How Indian banks fare on capital adequacy ratio against global
peers
Business Standard , December 29, 2018

19
 Payment
Systems
Paper Based

Electronic Means

20 Mr. John Pradeep Kumar,

KJC
 Payment of funds by
Drafts
A demand draft is a negotiable instrument similar to a bill of
exchange.
A bank issues a demand draft to a client (drawer), directing another
bank (drawee) or one of its own branches to pay a certain sum to the
specified party (payee)
This is a mode of remittance
Generally University fee payments, exam fees, registration fees are
collected by way of a Demand draft
Payment is guaranteed as against a cheque
Valid for 3 months

21 Mr. John Pradeep Kumar,

KJC
22 Mr. John Pradeep Kumar,
KJC
 Pay order or Banker’s
Cheque
Pay order is similar to a DD
Only difference is that a pay order is payable only by
the branch that has issued it and hence to be cleared
locally
DD can be cleared by any of the branches of that
bank irrespective of the location of the issuing
branch Payment is Guaranteed
Valid for 3 months

23 Mr. John Pradeep Kumar,

KJC
 Difference between cheque and a
draftis issued by an individual whereas a draft is issued by a
A cheque
bank
A cheque is drawn by an account holder, whereas a draft is drawn by
one
branch of a bank on another branch of the same bank
In cheque the drawer and drawee are different while in a draft both
are the bank
A cheque can be dis honoured for insufficient balance whereas a draft
cannot be dis honoured
Payment of cheque can be stopped by the drawer where as the
payment draft cannot be stopped by the drawer, but can be stopped
on specific request from the applicant
A cheque can be made payable either to a bearer or order. But a draft
is always payable to order of a certain person
24 A cheque is defined
Mr. John Pradeep
KJC
Kumar, in the NI Act, 1884, whereas a demand draft has

not been precisely defined in the NI Act.

 MICR
MICR stands for Magnetic Ink Character Recognition.
It is a technology which allows machines to read and process cheques
enabling thousands of cheque transactions in a short time.
MICR code is usually a nine digit code comprising of some important
information about the transaction and the bank.
The first three digits in the MICR code represent the city code that is
the city in which the bank branch is located. In most cases it is in line
with the PIN code of the postal addresses in India. The next three digits
stand for the bank code while the last three digits represent the bank
branch code.

25 Mr. John Pradeep Kumar,

KJC
26 Mr. John Pradeep Kumar,
KJC
27
28 Mr. John Pradeep Kumar,
KJC
 Electronic Funds
Transfer
Electronic funds transfer is a much more preferred money transfer options
it allows customers to make money transfers at the comfort of their homes
using integrated banking tools such as internet and mobile banking.
Transferring funds via electronic gateway is much simpler than
the conventional methods. Can be done as below:-
1. Transfer funds into your own linked accounts of the same bank network.
2. Transfer funds into different account of the same bank.
3. Transfer funds into different bank’s accounts using NEFT.
4. Transfer funds into other bank accounts using RTGS
5. Transfer funds into various accounts using IMPS.

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KJC
 How does EFT
work?

30 Mr. John Pradeep Kumar,

KJC
 National Electronic Funds
 ItTransfer
was launched in 2005
 The messages of funds transferred are sent as structured financial
messaging solutions (SFMS) through the INFINET to the
National clearing cell (NCC) maintained by RBI
 At the NCC the messages are sorted bank wise and forwarded to the
participating banks
 The net credit or debit are passed on to the participating banks
 Finally, Banks on receiving the messages and the funds would process
the transaction on the beneficiary’s account
NEFT works on Deferred Net Settlement
(DNS) basis in batches
 IFSC code (Indian financial system code is required to transfer
31 Mr. John Pradeep Kumar,
KJC
 Settlement
Mechanism
Gross Settlement – The payments are processed
individually in gross
Net Settlement – The payments are
accumulated, processed as a batch at various
cut0ff times and then the net amount between
banks is settled through the RBI

32 Mr. John Pradeep Kumar,

KJC
 Real Time Gross
Settlement
 RTGS settlement happens as one to one basis rather than bunching
with other transactions
 The messages are sent through Inter Bank Funds
Transfer Processor (IFTP)
 The transactions are processed in First in First out (FIFO) basis in
a que and processed continuously
 Every bank has a current account with RBI. Apart from this every
participating bank opens a Settlement Account
 Funds are moved from current account to settlement account in the
beginning of the day (BOD)
 The left over balance amount in the settlement account is swept back
to the current account in end of the day (EOD)
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KJC
34 Mr. John Pradeep Kumar,
KJC
 National Electronic Funds Transfer
(NEFT) Vs
Real Time Gross Settlement (RTGS)

35 Mr. John Pradeep Kumar,

KJC
 IMPS offers an instant, 24X7, interbank electronic fund transfer service
through mobile phones.
IMPS is an emphatic tool to transfer money instantly within banks across
India through mobile, internet and ATM which is not only safe but also
economical both in financial and non financial
This facility is provided by NPCI (National Payment Corporation of
India) through NFS (National Financial Switch)
Mobile number to be registered with bank
MMID (Mobile Money Identifier) to be
generated
Mr. John Pradeep Kumar,
36
KJC
37 Mr. John Pradeep Kumar,
KJC
 Standing
A Instructions
standing order is an instruction an account holder gives to the
Bank to pay a fixed amount at regular intervals to another account.
An instruction that stands until cancelled
It can even be set for transfers to other bank accounts by way of
NEFT or RTGS
They are typically used to pay rent, mortgage or other fixed regular
payments.
It is also used for booking recurring deposits
Bill payments like phone bill, Internet broad band bills, Insurance
policy payments, gas bills can also be made

38 Mr. John Pradeep Kumar,

KJC
 Electronics Clearing
Services
 It is a mode of EFT from one bank to another bank account using the
services of National Automated Clearing House (NACH) of the
National Clearing Cell
 This is normally used for bulk transfers

39 Mr. John Pradeep Kumar,

KJC
 ECS
Credit
 ECS credit is a One-to-Many transaction
 It is making many credit entries at the destination by posting a
singly debit entry at the Sponsor (Source)
 Generally raised by a employer to make payments of salary,
corporate to pay dividends and Financial Institutions to pay
dividends or interests
 Parties involved:
 Initiator – Corporate (ECS user)
 Beneficiary - Individuals
 Sponsor - Banker of the
 Bank
Destination Bank- Banker Corporate
of the
Individual
40 NACH
Mr.
KJC
John Pradeep Kumar,
41 Mr. John Pradeep Kumar,
KJC
 ECS
Debit
 ECS debit is a Many-to-One transaction
 It is making many debit entries at the destination and giving a single
credit entry at the Sponsor (Source)
 Generally raised by an individual to make payments of insurance
premium, utility bills, credit card payments and EMI loans
 Parties involved:
 Initiator – Individual
 Beneficiary - Corporate
 Sponsor - Banker of the
 Bank Corporate
Destination Bank- Banker of the
Individual
 NACH
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KJC
43 Mr. John Pradeep Kumar,
KJC
 Flow chart of Credit/Debit card at
POS MDR –
Merchant
Discount
Rate

44 Mr. John Pradeep Kumar,

KJC
 Payment Gateway flow
chart

45 Mr. John Pradeep Kumar,

KJC
 Payment
Gateways
 Payment gateways are software and servers that transmit transaction
information to acquiring banks and responses from issuing banks
 The response would either the transaction getting approved or
declined
 It is an infrastructure that allows merchants to use credit/debit cards
and other forms of electronic payments for any purchases done
electronically
 Infact the entire process of the payment transaction gets automated
 It is usually a third party service
 Security is the main issue. The service providers need to follow
certain security standards to prevent fraudulent activities

46 Mr. John Pradeep Kumar,

KJC
 E Banking
Services

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KJC
 Online Banking
Services
 Account enquires, statements
 Electronic funds transfers and standing instructions
 Cheque book, cheque stop payment, debit card, credit
card requests
 Paper less account opening, paper less loan application
 Bill payments
 Mobile top ups/recharges, DTH top ups/recharges
 Branch/ATM locator
 Availing other services like sms alerts, DD requests, etc
 Payment of Taxes

48 Mr. John Pradeep Kumar,

KJC
 Mobile banking
 All services
the services under online banking can
be performed with mobile banking
 Either the internet banking can be accessed
on the browser in the phone
 Or, the bank account can be accessed through
the mobile application
 Banks have separate applications for android,
iPhone etc

49 Mr. John Pradeep Kumar,

KJC
 ATMS, Debit and Credit
cards
 ATM sites are being used for both cash withdrawals and
cash
deposits (ATMs & ACDs)
 Apart from these regular services, the following can be
done through ATMs:
 Funds transfers
 Balance enquires
 Mini Statements
 Cheque book requests
 Mobile top ups/Recharge
 Mobile no / Pan no updation
 Credit card payments
 Payment of Tax
 Loan application (HDFC Bank Ltd)
50 Mr. John Pradeep Kumar,
KJC
 SMS
Banking
 Availing banking services by sending code words as
sms is called as sms banking
 The following services can be done:
 Balance enquiry
 Cheque book request
 Mini Statement
 Cheque stop payment
 Statement request
 Mobile top up
 Aadhaar no and pan no updation

51 Mr. John Pradeep Kumar,

KJC
 Toll free or Missed call
banking
 Availing banking services by giving a missed call
to dedicated service numbers is called as
missed call banking
 Each service will have separate toll free
number to which a missed call to be given
 The following services can be availed:
 Balance enquiry
 Mini statement
 Cheque book request
 Credit card outstanding
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KJC
 Phone Banking
Services
 Availing banking services through telephonic conversation is
called as phone banking service
 A telephone identification number will be given similar to the
ATM pin number (4 digits). The user would be required to
enter the T-Pin to identify himself
 The following services can be availed:
 Account Transaction enquiries
 Product enquiries
 Placing product or service requests
 Registering complaints
 Demos
 Cheque book request, stop payment etc
 Registration for other e-banking services etc
53 Mr. John Pradeep Kumar,
KJC
 Video
Banking
 Availing banking service through visual media is called video
banking
 Tellers/customer service managers and relationship
managers, attend to customers through visual media with
the help of mobile phones, laptops, desktops, tablets,
ipads, ATMs, banking kiosks etc
 User gets the visual and the audio of the virtual banking
staff
 The banking turns virtually live and any transaction and
all enquiries can be done through this service

54 Mr. John Pradeep Kumar,

KJC
 DEPOSITORY SERVICES
 With a view to adding value to banking services and making available
the numerous benefits of depository system to clients, banks in India
offer Demat services through either Depositories viz. National
Securities Depository Limited (NSDL) or Central Depository Services
(India) Ltd. (CDSL) or both by becoming a sub-participant.
 It is used by customers to hold securities in electronic form or
dematerialized form
 Banks open Demat accounts for their customers
 But to trade electronically (Online), an online trading account is
required. Online trading accounts and platforms are provided by a
brokerage firm (Like ICICI direct, HDFC Securities, Kotak Securities,
Axis Direct, Sharekhan, etc)
5T5 his tMrra. JdhoinnPgdaraeecpcKomu uran, KtCJ is linked to the demat account and bank
account
 Advantages of DEMAT
Account
 Easy and convenient way to hold securities
 Immediate transfer of securities
 No stamp duty on transfer of securities
 Reduced paper work for transfer of securities
 Safer than paper shares
 Reduced Transaction cost
 Reduces risk involved in holding physical
certificates
56 Mr. John Pradeep Kumar,
KJC
 Green
Banking
 GREEN BANKING is like a normal bank which considers all the

social and environmental factors; it is also called as ethical bank.

Ethical banks have started with the aim of protecting the
environment
 Defining green banking is relatively easy. Green Banking means

promoting environmental-friendly practices and reducing your

carbon footprint from your banking activities.
57 Mr. John Pradeep Kumar,
KJC
 Green Banking
products
 Green mortgage
 Green loan
 Green credit cards
 Green checking accounts
 Green CDs
 Green money market
accounts
 Mobile banking
 Online banking

58 Mr. John Pradeep Kumar,

KJC
 Benefits of Green Banking
 Basically Green banking avoids as much as paper work, you

may go green credit cards, go green mortgages and also all

the transactions done through online.

 Creating awareness to business people about environmental

and social responsibility enabling them to do a

environmental friendly business practice.

59 Mr. John Pradeep Kumar,

KJC
 Benefits of Green Banking
Cont…
 They follow environmental standards for lending, which is really a

good idea and it will make business owners to change their business
to environmental friendly which is good for our future generations.
 The interest of the loan is comparatively less with normal banks,

because ethical banks give more importance to environmental

friendly factors they do not operate with high interest rates.

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KJC
 Green
Funding
 It is the raising of grants for protection and improvement of

environment, granted by government, corporate houses and

other organizations.

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KJC
 Need for Green
Funding
 Whole world is posing threats to clean green environment
by

increasing air, water, land pollution.

 Green funds are raised to protect the nature

from these pollution evils to execute green projects

62 Mr. John Pradeep Kumar,

KJC