Introduction to Banking

- Dhanu Ravindranath

Introduction Products & Services Financial Accounting Corporate Banking

Credit Management Global Cash Management Investment Banking

Financial system can be defined as the structure which manages the flow of funds within national and/or supranational levels. It consists of institutions like Banks, Financial Institutions, Insurance Companies, Mutual Funds, Stock Brokers, etc. Financial system comprises money markets (money market is by nature a short-term market) and capital markets.

Financial System - a Schematic Presentation

Central Banking Authority Capital Markets Regulatory Authority Insurance & Pension Regulators

1. Monetary control 2. Supervision over banks, including RRBs NBFCs primary dealers financial institutions co-operative banks clearing and settlement system

Equity market and debt market supervision & control Supervision over Stock Exchanges, brokers, equity and debt raisers investment bankers (merchant bankers) foreign institutional investors mutual funds

1. Regulatory framework, including rules and regulations for running insurance business 2. Supervising all Insurance companies both in general and life insurance business PENSIONS 1. Framing rules for pension funds 2. Regulating all pension funds

Savings account Current account Cheque collection facility Standing instructions

Deposits & Loans Debit /Credit Card Remittances Securities / Custodial Services

Concept of Local clearing Controllers of Clearing in each city Clearing eligibility and participants Concept of cut off time and zones Concept of Outstation / foreign cheque collection

Account Balance Debit Entry Credit Entry Double Entry Journal Entry Ledger General Ledger

an entity to record transactions o/s amount in the account txn that reduces the balance txn that increases the balance debit & credit entry of the txn record of txn conducted Binder containing same type of a/c s Sum of all Ledgers & internal a/c s

Interest

Return on funds. Paid or Received

Exchange

Charges on Remittances

Commission

Charges on handling paper/bills,etc

Charges

P & T, etc

Income

Int Recd + Exch + Com

Expenditure

Int Paid + Costs + Provisions

Profit

Income - Expenditure

Loss

Expenditure - Income

Credit Management Fund Based: Cash Credit Term Loan Overdrafts Bill Purchase / Discounting Non-Fund based: Letter of Credit Bank Guarantee

Global Cash Management: Optimum utilization of the available fund by centralising the accounts

An investment bank is a financial institution that assists corporations and governments in raising capital by underwriting and acting as the agent in the issuance of securities. Provide ancillary services such as market making and the trading of derivatives, fixed income instruments, foreign exchange, commodity, and equity securities. Consists of Front Office, Middle Office and Back Office. Front office:
Sales & Trading: Buying and selling products on behalf of customers. Process: Sales Desk communicates with the customers . On finding an opportunity, sales desks then communicate their clients' orders to the appropriate trading desks, who can price and execute trades Corporate Finance Repo Desk

Middle Office: Risk management, financial control of the firm, Compliance Back office: Operations (trade checking), Technology

Main products & services dealt are:

shares bonds Initial Public Offer Secondary markets ( through brokers and Stock Exchanges) Appraisal , advisory services for a fee.

11

EQUITY

Capital - The money invested in the business by the owner and or banks, public Equity - The capital amount divided into equal number of tradable lots and opportunity for small investors to hold share in the company

BONDS

Issued by companies with credit rating to raise funds. A mutual fund raises money from public and invests in shares, debentures, bonds and other instruments based on scientific study and objective of funds
Portfolio Management is managing funds of corporate / High Net Worth Individuals by suggesting right type of investment opportunities depending on their requirements

MUTUAL FUNDS

PORTFOLIO MANAGEMENT

12

Banking: Accepting deposits which can be withdrawn by several means (cheque), and lending money. Universal Banking: Universal banking refers to provision of wide range of financial services e.g. commercial banking, merchant banking (or investment banking), insurance all by one bank International Banking: Banks operating offices outside the domain of home regulator and conducting banking business having cross border ramifications, and earning major portion of their revenues from cross-border banking business Retail Banking: Serving very large number of customers both for raising deposits and giving loans. Wholesale Banking: High Value-Low Volume banking Hybrid model: Combination of both wholesale and retail banking RTGS: this is a system for large-value interbank fund transfers. This system lessens settlement risk because interbank settlement happens throughout the day, rather than at the end of the day

SWIFT: It is the largest transmission system for inter-bank transactions in the world and used universally by all banks. Trade Finance: Trade finance implies financing of the movement of goods and services internationally and within ones country Cash Management: It is an inventory management procedure to get maximum utilization of the available cash/other resources for an organization. Nostro account: These are foreign currency accounts maintained by a domestic bank with a foreign bank Vostro Account: reverse direction of Nostro is Vostro. Corporate Finance: Services provided by the banks to corporate. Ex:
Advisory Services, IPO, Capital Restructuring Cash Reserve Ratio (C.R.R.) is the mandatory deposit, as prescribed percentage of their Demand and Time Liability, to be held by banks with monetary authority SLR:Statutory Liquidity Ratio (S.L.R.) is the prescribed percentage of Demand and Time Liabilities of a bank, to be held in prescribed securities, mostly government securities

Euro-dollars : Deposits denominated in U.S. dollars at banks and other financial institutions outside the United States. Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. Future: standardized exchange-traded forward contracts Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price ISIN: International Securities Identification Number is a unique identification number for a security. Security: An instrument representing ownership (stocks), a debt agreement (bonds) or the rights to ownership (derivatives). Interest rate Swap: the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap

LIBOR: (London Inter Bank Offer rate)is a daily reference rate based on the interest rates at which banks borrow funds from other banks in the London wholesale money market. Counterparty: the persons or institutions entering the contract on the opposite sides of the transaction are called the counterparties Bid Price: price a buyer is willing to pay for a security Ask Price: Price a seller is willing to accept for a security, also known as the offer price Maturity date: The date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due and is repaid to the investor and interest payments stop Settlement Date: The date by which an executed security trade must be settled. That is, the date by which a buyer must pay for the securities delivered by the seller STP: An initiative used by companies in the financial world to optimize the speed at which transactions are processed.

Treasury Bills: A short-term debt obligation backed by the U.S. government with a maturity of less than one year. Treasury note: Treasury notes (or T-Notes) mature in two to ten years. They have a coupon payment every six months. Treasury Bond: A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. On the Run: The most recently issued U.S. Treasury bond or note of a particular maturity Off the Run: All Treasury bonds and notes issued before the most recently issued bond or note of a particular maturity