Banking Services Operations

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Biyani's Think TankConcept based notesBanking Services Operations(MBA IV Sem Paper M-406)Prof. B.K JainDean MBABiyani Institute of Science and Management, Jaipur1

Published by :Think TanksBiyani Group of CollegesConcept & Copyright :Biyani Shikshan SamitiSector-3, Vidhyadhar Nagar,Jaipur-302 023 (Rajasthan)Ph : 0141-2338371, 2338591-95 Fax : 0141-2338007E-mail : acad@biyanicolleges.orgWebsite :www.gurukpo.com; www.biyanicolleges.orgEdition: 2011New Edition: 2012While every effort is taken to avoid errors or omissions in this Publication, anymistake or omission that may have crept in is not intentional. It may be taken noteof that neither the publisher nor the author will be responsible for any damage orloss of any kind arising to anyone in any manner on account of such errors andomissions.Leaser Type Setted by:Biyani College Printing Department2

SYLLABUSM-406BANKING SERVICES OPERATIONCourse/Paper: 402MBA Semester-IVMax. Marks: 70Time: 3 Hrs.Objective:The objective of the cours e is to develop the skills required for understanding India‟s most challenging and importantfinancial services sector. Banking services operation will enable the management studen t to have an insight to thebanking sector and how it works.Section-AIndian financial system: the financial system-nature-evolution and structure-th e functions of financial intermediaries– financial instruments – the role of financial system in economic development – th e Indian financial system.Deposit products: types of bank deposits, computation of interest on deposits, deposit schemes, composition of ba nkdeposits. Credit policy: Need for credit policy, credit policy components of credit policy, credit policy pursued by thegovernment, credit culture.Retail banking: basics of retail banking, forms of retail banking and emerging issues. Corporate banking: The natureof corporate banking, developments in corporate banking, consortium finance, multiple banking managements, andloan syndication.Rural banking and Micro finance: sources of rural finance, credit delivery mechanism in rural finance to cooperative, agricultural and rural developmen t banks (CARDB) - regional rural banks (RRBS), service area approa ch(SAA)-National Bank for Agriculture and Rural Development (NABARD), microfinance.Follow up and recovery: NPA‟s classification, securitization, SARFAESI Act etc.Securitization: meaning of securitization, process of securitization.Fee-based services: the fee-based services of banks, letter of credits, bank guarantees, subsidiary services, off balancesheet activities, bancassurance.Introduction of banking operations: the changing nature of banking operations, importance of customer relations hipmanagement in banks – different types of products and services offered to customers – role of technology in bankingoperations – the need for Asset-Liability Management. Introduction to electronic banking: electronic banking:market assessment, e-banking: an introduction, internet: e -commerce, e-banking in India, internet banking strategies,risks in e-banking. : Payment and settlement systems, RTGS and clearing house:Section-BCase and ProblemsDean, Rajasthan Technical University, Kota/2008 -2009/Prof. Surendra Kumar Vyas, Chairman BoS, Department ofManagement & Technology, Engineering College, Bikaner3

Think Tank MaterialonBanking Services Operations(MBA IV Sem Paper M-406)CONTENTSItem No. ofSyllabusParticular of item1.Indian Financial System2.Deposit Products3.Retail/Corporate Banking4.Rural Banking & Micro Finance5.Follow up & Recovery6.Fee based services7.Introduction to banking operations & electronicbankingANNEXURES1.Other questions2.Key Terms- Their meaning in brief3.Bibliography4.Multiple Choice Question/Fill in the blanks5.Answers of RTU Question Papers (major and minor)for the year 2009, 2010, 2011RTU Question Paper major minor for year 20126.4

Indian Financial System1.Explain in brief evolution and growth of financial system/institutions in IndiaAns. This growth of financial system/institutions can be discussed in two parts i.e.I.Post independence1. Nationalization (Public ownership of financial institutions)- RBI was nationalized in 1948- SBI was nationalized in 1956- 14 commercial banks were nationalized in 1969 and 6 more banks in 1980- LIC was nationalized in 1956- GIC was nationalized in 19722. Establishment of development banks- NABARD in 1982 for agriculture and rural development- National Housing Bank (NHB) in 1986 for housing development.- Export Import Bank (EXIM) in 1982 for promoting international trade.- Many national level organizations for industries such as IFCI, IDBI, IRBI,ICICI & state level institutions like SFC, SIDC etc.3. Credit rating agencies for the benefit of investors.4. Legal reforms for protection of investors.- Indian companies Act 1956- Securities Contract Regulation Act 1956- MRTP Act 1972- FERA Act 19735. Regulatory Bodies- SEBI in 1988- IRDA in 1999- RBI in 1948 (established under RBI Act 1934, started working in 1935 andnationalized in 19486. Participation of financial institutions in corporate management started to- Control on erring management- Loan to corporate on the basis of nominees of financing institutions in theboard of management.5

II.Post Nineties1. Privatization of financial institutions- Organizations like IFCI, IDBI started take private equity- Many private sector banks emerged under guidelines issued by RBI- Many private sector insurance companies emerged-some of them incollaboration with foreign insurance companies.- Many private mutual fund companies came it to picture2. Protection of Investors- SEBI was made statutory body in 1992 to project interest of investors- IRDA in 1999 came up to protect the interest of policy holder. More privateinsurance companies came in both life and not life insurance as per guidelinesof IRDA3. Liberalization- In banking sector as more private sector banks came up.- In insurance sector more insurance companies both in life and non life cameup- Economic liberalization policy started- Many tax reforms came up- Disinvestment in public sector undertakings- Legal reforms by way of changes/amendments in Indian companies Act- Globalisation2.Explain in brief Indian Financial System & its key components.Ans. Financial system refers to the system of borrowings and lending of funds or demand andsupply of funds of all individuals, institutions, companies and of the government. IndianFinancial System includes many institutions and the mechanism that effect the generationof savings, mobilization of savings and distribution of savings amongst all those whodemand these funds for investment purpose.Indian Financial System thus covers/consists of the following:1.2.Financial marketFinancial institutions and financial intermediaries3.Financial assets/Financial instruments.The financial market can be classified or sub divided into:(i)(ii)(iii)Money MarketCapital MarketGovernment Security Market6

Financial Institutions/intermediaries can be sub divided into following:(i)(ii)Regulatory InstitutionsBanking intermediaries(iii)Non-banking intermediariesFinancial assets/instruments can also be divided into following:(i)(ii)PrimarySecondaryDetailed explanations of Financial Assets/Instruments and Financial Intermediaries havebeen explained separately in this hand book.3.Explain in brief financial instruments and their main kinds.Ans. Financial Asset/Instrument is a liability of issuer towards holder. It is a claim against aperson/institution for payment at future date and a periodic payment in the form ofinterest or dividend. A financial instrument helps the financial market and the financialintermediaries to perform the important role of channelizing funds from lenders toborrowers. They differ in terms of marketability, liquidity, types of options, return, risk andtransaction cost.Examples of Financial Instrument are:--Currency notes issued by RBI, Govt. of India.SharesMutual Funds unitsDebt Instruments such asBondsDebenturesDeposits-Insurance policies issued by Insurance companiesKinds of Financial Instruments1. On the basis of marketabilityMarketable such as shares, debentures, CD, CP, Commercial Bills Non-marketable suchas Bank deposits, insurance policies.2. On the basis of natureCash securities- Such as currency notesDebt Securities- Such as shares, debentures3. Types of instrument/asset7

Physical – Created not for earning profit e.g. residential houseFinancial- Created for income generation e.g. shares, debentures.4. Direct and Indirect also known as primary & secondaryPrimary/direct- e.g. shares, debenturesSecondary/Indirect- e.g. mutual fund, insurance policies5. Capital Market & Money Market instrumentsMoney Market- e.g. Treasury bill, CDCapital Market- e.g. Shares, debentures, bonds Govt. securities4.What do you understand by financial intermediaries?Ans. Financial intermediaries are institutions that mediate between ultimate lenders andultimate borrowers or between those who have surplus money and those who wish to usethe money to finance their deficit budgets. The best examples of such financialintermediaries are:-BanksInsurance CompaniesProvident FundUnit Trust of India etc.The key function of these FI‟s is to collect surplus/savings and lend them to deficitspenders. Banks collect savings from public at large; invest these savings in to loans andadvances and investments. Their main source of earning is the difference in borrowing rateand lending rate. They also earn money on various services provided to customers. Sameis the case with Insurance Companies as they also collect savings though selling insurancepolicies.Advantages to Lenders:(i)(ii)(iii)(iv)Low risk – Risk of capital loss or interest loss to lender is minimumGreater liquidity – The FI‟s offer greater liquidity and lender can convertinvestment in cash any time.ConvenienceOther ServicesAdvantages to Borrowers(i)(ii)(iii)Demand of funds can be met as FI‟s have big pool of funds.Certainty of availability of fundsRate of interest is reasonable.8

(iv)5.At times, small borrowers get preferential treatment.Explain in brief role of Indian Financial System in economic development.Ans. Economic development means development of all sectors of economy such as-AgricultureIndustryInfrastructureService sectorA well developed financial system helps in the development of all core sectors of economyby way of making available required funds for growth and development. The role offinancial system can be discussed in following broad heads.I.II.-III.-Economic angle of developmentFinancial system leads to more savingMore savings leads to more capital formationAvailability of more money for infrastructural developmentIncrease in production of goods & servicesMore exports after meeting local needsFavourable balance of paymentIncrease in image in worldSocial angle of developmentIncrease in national income & per capita income further leads to:Increase in per capita consumptionRise in standard of livingIncrease in expenditure onImproving skillsTechnological developmentHealth careEducation, recreationIncrease in life expectancy.Widening mental horizons of peopleOverall development of civic society creating civilized citizensTransformation of economy after economic/social development.From developed to developing & developed economyFrom agrarian to industrialized or highly industrially developed economyFrom rural dominated to urbanized economyFrom low saver to high saver economy.9

IV.Innovative & promotional schemes of financial institutions - Operating in--financial system.Innovative product and schemes of financial institutions such as lead bank scheme,priority sector lending, branches in rural areas, project preparation and projectloans, innovative financial instrument suiting to different categories ofclients/investors.Promotional activities such as project guidance, consultancy, education & trainingthrough institutions, helping govt. in formulation of policies etc.Financial literacy by RBI, SEBI, IRDA.10

Deposit Products6.Write in brief about deposit products and deposit schemes of banks in India.Ans. One of the key activities performed by banks is accepting deposit from public.Important features of bank deposit are--Bank deposits are safe asBanks are under control of RBIBank deposits are covered under DICGCHighly liquid-even fixed deposits can be taken back on demand.Loans can be raised against bank depositsInterest rate differ from deposits to depositInterest rate are subject to regulation by RBIDeposit accounts with bank can be opened by different categories of customers suchas-I.Individual accountJoint accountPartnership accountSole ade Unions Deposit schemes can be broadlyclassified asDeposit accounts of Indian residents which include.Saving deposits to motivate and attract savings from public. Interest on saving-is now 4% on daily balance.Current amount which generally opened by businessman and banks do notallow any interest on this deposit.Fixed Deposit- Deposit for a fixed period. Interest depends upon period.Recurring Deposit- Depositing small amount every month maturing after fixedperiod say 5 years.Special deposit schemes of banks- For senior citizens- For specified period say 555 days, 333 days, 444 days- Tax saving schemes e.g. fixed deposits for 5 years.11

II.Bank Deposits for Non-Resident-Indians (NRI‟s)(i)Non Resident Ordinary (NRO – Account to be open by NRI taking(ii)(iii)(iv)(v)(vi)employment in a foreign country. Amount credited is not repatriable andsubject to tax deduction at source and covered under General/specialregulation by RBI.Non-Resident External (NRE)- Accounts for person employed in foreigncountries in firms owned by NRI‟s at least 60%. Deposits are accepted inforeign currency and freely repatriable, interest is exempted from tax.Foreign Currency Non-Resident (FCNR) - Accounts such account are likeNRE account but they are maintained in designated foreign currency atapproved dealer. These currencies are US Dollar, Pond Sterling, Euro andJapanese Yen. Accounts are in the form of term deposits only.Resident Foreign Currency (RFC) Account- Can be opened by a NRI whowas in a foreign country for at least a year. Account may be in the form ofcurrent, saving, term deposit. No loan against & deposit balance outstandingcan be transferred to NRE/FCNR accounts.Escrow Account- Account opened with the approval of RBI for adjustment ofvalue of goods imported or exported. Account is opened in US Dollar in thename of overseas organization, no overdraft or loan is permitted.Other accounts such as-a. Foreign currency accounts of Airline Shipping companies.b. Foreign currency accounts of overseas buyers.c. Foreign currency accounts of foreign Embassies/Missions/Diplomats.Deposits order National Saving Schemes-III.-After passing Government Savings Banks Act 1973, Post Office saving bank of Indiacame in to existence. Governments saving banks were merged with Post OfficeSaving Bank (POSB). Different deposit schemes areNational Small Saving Fund- All deposits are credited to NSSF- withdrawals arepermitted-amount in credit is invested in government securities.National Saving Certificates (NSC‟s) - Certificates are issued by post offices-maturing after 5 years with tax benefit. Loan can be taken from banks againstpledging these NSC‟sPost Office Monthly Income Account- Can be opened with a minimum of Rs.1000--and maximum of Rs. 3 lakh for single and 6 lakhs for Joint Account. Depositor getsmonthly interest.Public Provident Fund Account- Another saving plan with minimum of Rs.500and maximum of Rs. 70,000 per month. Deposits qualify for deduction of incometax under section 80-C of Income Tax Act.12

Composition of Bank Deposits. Composition of different type of bank deposits in totaldeposits is changing fast as is clear from the following tableShare of different types of depositsi.Current Depositsii.Savings Depositsiii.Fixed s composition has changed due to increasing awareness amongstcustomers about earning interest on deposits, increase in banking habit increase inthe rate of return on deposits, increase in bank credit and inflow of deposits fromNRI‟s. Bank wise contribution in deposits as on 31.3.12 was as follows1.2.3.Public Sector BankPrivate Sector BankOthersTotal7.74.618.27.2-------100--------What do you understand by credit policy? Explain its key objectives.Ans. Credit Policy is a part and parcel of economic policy. It consists of all those measuresthrough which Central Bank of the country i.e. BRI controls the supply of money to attaingeneral economic objectives such as:-Price stabilityExchange rate stabilityFull employment-Economic developmentIn India, credit policies are announced by RBI and following are key objectives of CreditPolicy.--To encourage savings and mobilize savings for capital formation and development.To encourage investment and create environment for investments in plannedprogrammes.Supply of adequate credit to meet increasing demand of activities so that overalleconomic development is encouraged.To control inflationary pressure and maintain price stability.-To encourage economic development without financial hindrance.-13

The RBI formulates and implements the credit policy and monitors it through various toolsand techniques. These are general quantitative techniques and qualitative selectivetechniques.Quantitative Techniques used are:-Bank rateOpen Market Operations-Change in CRR/SLRQualitative methods of Credit Control are:8.-Rationing of creditChanges in Margin requirementsRegulation of consumer creditDirect action-Moral suasionWrite a brief note in “Credit Culture”.Ans. Credit culture is the unique combination of policies practices, experiences and managementattitude that defines the lending environment and determines the lending behavio uracceptable to the bank. Broadly, credit culture is the system of behavior belief, philosophy,thought, style and experience relating to management of credit function. Credit culture ismade of principles that need to be communicated. The role of credit culture is to create arisk management climate that will foster good banking.Bank ground objectives of credit culture may beTo improve present performanceTo improve long term profitabilityTo improve market shareTo reduce risk-For all this lenders haveCredit organizationRisk management through CAR/CRARCredit standardsPolicy of Soft/Strict credit.Credit quality to avoid credit becoming NPA. Here 5 C‟s play import role. These 5C‟s are character, capacity, capital, collateral & conditions.14

Retail/Corporate Banking9.What do you understand by term Retail Banking?Ans. Retail banking is typical mass market banking where individual customers use localbranches of commercial bank. Retail banking refers to banking in which bankinginstitutions execute transactions directly with consumers rather than corporations or otherbanks. Services offered include saving bank account, current account, fixed deposit/termdeposit account, recurring deposit account etc. Transactions in term of loans like housingloan personal loans, education loans, gold loans, vehicle loans, agriculture l oans, Mortgageloan etc. Similarly products like debit cards, credit cards, insurance products, pension plansetc.Retail banking is banking service that focuses towards individual consumers and consumermarkets. Retail banking is a high volume business with many service providers compilingfor market share. The difference between retail and wholesale banking is essentially one ofsize. Retail banking basically deal with a large number of small value transactions wherewholesale banking deals with smaller number of large value transactions.Retail banking provide an ideal combination of higher margin business as well as fairdegree of risk diversification and helps in better customer relationship and attracting newcustomers.Retail B

Biyani Institute of Science and Management, Jaipur . 2 Published by : Think Tanks Biyani Group of Colleges . Banking services operation will enable the management student to have an insight to the banking sector and how it works. . - National Housing Bank (NHB) in 1986 for housing development.

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