Banking and Insurance MODULE 2

7/30/2019 Banking and Insurance MODULE 2

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Presented by:Parima Benani (11104)Kelvin Christian (11108)

Siddharth Gandhi (11114)

Sahil Shah (11137)

Mitesh Dhoriya (11113)

Suhag Prajapati


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Banks Financial Statements PARIMA BENANI

Reserve Requirements KELVIN CHRISTIANSources of Bank Funds SIDDHARTH GANDHI

Uses of Bank Funds SAHIL SHAHCredit Delivery and Legal aspects of

lendingMITESH DHORIYA

Credit Monitoring, Sickness &

RehabilitationSUHAG PRAJAPATI


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A financial statement (or financial report) isa formal record of the financial activities ofa business, person, or other entity.

Objective The objective of financial statements is to provide

information about the financial position,

performance and changes in financial position ofan enterprise that is useful to a wide range ofusers in making economic decisions.


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They typically include four basic financialstatements, accompanied by a managementdiscussion and analysis,

1) Balance Statement

2) Income Statement

3) Statement of Retained Earnings

4) Statements of Cash Flow


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The acronym "CAMEL" refers to the fiveparameters of a bank's condition that are assessed:1.Capital adequacy2. Asset quality

3. Management4. Earnings5.Liquidity

Ratings are assigned for each component in

addition to the overall rating of a bank's financialcondition. The ratings are assigned on a scale from1 to 5.


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Debt-Equity ratio is arrived at by dividing Total

borrowings and Deposits by Net Worth. Net Worth

includes equity capital, preference capital, reserves and

surplus less revaluation reserves and miscellaneous

expenses not written off.

Debt-Equity Ratio = Debt / Equity 100


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Total Advances also includes receivables.

The value of Total Assets is excluding revaluation of all

the assets.

Advances to Assets = (Total Advances / Total

assets) 100


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It is a measure of the quality of assets in a situation

where the management has not provided for loss on

NPAs.

The lower the ratio, the better the quality of advances.

Net NPAs to Total Assets = Gross NPAs / Total

Assets X 100


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This ratio used as a tool to measure the percentage of

total assets locked up in investments, which by

conventional definitional, doesnt form part of the core

income of a bank.

Total Investments to Total Assets = Total Investments /

Total Assets 100


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Management is the most important ingredient that

ensures sound functioning of banks. With increased

competition in the Indian banking sector, efficiency and

effectiveness have become the rule as banks constantly

strive to improve the productivity of their employees.

The parameters used to assess the quality of

management gives the measurement of the efficiencyand effectiveness of management.


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The ratios of this segment are:

Net Profit per Employee

Business per Employee

Return on Net Worth


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It is arrived at by dividing the Net profit earned by the

bank by total number of employees. Higher the ratio,

higher will be the efficiency of management.

Net Profit per Employee = Net Profit / No. ofEmployee


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It is arrived at by dividing total business by total

number of employees. Business includes the sum total

advances and deposits in a particular year.

Business per Employee = Total Business / No. ofEmployee


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It is a measure of the profitability of a company. PAT is

expressed as a percentage of Average Net Worth.

RONW = Net Profit / Net Worth X 100


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The business of banking is all about borrowing andlending money. Timely repayment of deposits is ofcrucial importance to avoid a run on a bank.

Hence, banks have to ensure that they always maintainenough liquidity. Through mandatory Statutory LiquidityRatio (SLR) and Cash Reserve Ratio (CRR), RBI ensuresthat banks maintain ample liquidity.

It contains the following: Liquid Assets to Demand Deposits Liquid Assets to Total Deposits Liquid Assets to Total Assets


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This ratio measures the ability of a bank to meet

demand from demand deposits in a particular year.

Liquid assets include cash in hand, balance with RBI,

balance with other banks (both in India and abroad),

and money at call and short notice.

Liquid Assets to Demand Deposits = Liquid Assets /

Demand Deposits


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Liquid Assets include cash in hand, balance with RBI,

balance with other banks (both in India and abroad),

and money at call and short notice and capital work in

progress.

Total Deposits include demand deposits, saving

deposits, term deposits and deposits of other financial

institutions.

Liquid Assets to Total Deposits = Liquid Assets / TotalDeposits


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Liquid Assets as measured as percentage of Total

Assets.

Liquid Assets to Total Assets = Liquid Assets / TotalAssets


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Bank lending and money supply are relatedby some multiple to the level of bankreserves

Federal Reserve exercises control over bank

lending and money supply by altering thelevel of reserves in the system andinfluencing the deposit creation multiplier

Fed accomplishes these objectives by

changing the reserve requirements and bychanging the actual amount of reservesheld


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Reserve Requirements:Requirements regarding the amount offunds that banks must hold in reserve

against deposits made by their customers.This money must be in the bank's vaults or

at the closest Federal Reserve bank. Purpose of Reserve Requirements:

1. Safeguard the publics deposits.

2. Give the central bank a powerful tool.


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Federal Reserve Act of 1913 Banking Act of 1980 Garn-St. Germaine Depository Institutions

Act of 1982 All depository institutions - whether

members of the Federal Reserve System ornot - are subject to the Feds reserverequirement.

Reserves are vault cash and deposits at theFed Do no earn interest


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Transactions-Account Reserve Requirement Applied to deposits over a two-week

period: A banks average reserves over the period ending

every other Wednesday must equal the requiredpercentage of its average deposits in the two-weekperiod ending Monday, two days earlier.

Banks failing to meet the requirement are

subject to penalties


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Effect of Lowering the Reserve Requirement Automatically increases all banks excess

reserves

Increases demand deposit through multiplelending

However, the ultimate impact depends onbanks desire to make loanselement ofdiscretion

Expands the money supply


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Effect of Raising the Reserve Requirement Decrease banks excess reserves and mayforce them to take steps to correct a deficit

reserve position

Restrains lending and deposit creation

Contracts the money supply


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Even without legal reserve requirements,banks would still need to hold cash reservesas vault cash or on deposit with FederalReserve Cash to meet customer withdrawals

Balances at Fed to clear checks

Without legal reserve requirements, the multiplierrelationship between reserves and money supply

would fluctuate considerably


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Deposits Payment deposits

Term deposits

Non-deposits CP

Borrowings from foreign funds


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Primary source Creation of assets

Parameters to base fund requirement Maturity

Cost

Tax

Regulatory

Market conditions


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Deposit Insurance Deposit pricing

Key aspects

Service costs

Volume & cost v/s profits

Investment avenues

CRM

Promotional pricing


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Pricing mechanism Cost plus margin

Market penetration pricing

Conditional pricing

Upscale target pricing Relationship pricing


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Bonds vs. deposits Banks are holder of bonds & makers of deposits

Impact on performance in opposite direction

Deposits can have maturity date & also on demand


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Reasons for relying on non deposits High inflation

High interest rate

Funding gap Projected credit deposit flow

Indian scenario


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Modes of Credit delivery Priority sector lending

Credit facility for small scale industry

Lending to NBFCs

Credit to agricultural sector Flow of credit to MSMEs


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What is cash credit? What is overdrafts?

What is bills finance?

How pricing of loans is made?


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Introduction

Banks Role as Financial Intermediaries

Gains from Lending

Who needs Credit?

Features of Bank Credit


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Surplus Sectors Deficit SectorsinancialSystem

Financial

Markets

FinancialIntermediaries

Invest Cash

Get Securities

Invest CashGet Deposits

Get Cash

Give Securities

Get CashGive loans


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Types of LendingFund based lending

Most direct form of lendingSupported by prime/collateral securities

Non fund based lendingNo Funds outlay for bank at time of agreementLCBGs

Asset based lending

Emerging categorySecuritizationProject Finance

Short term loansMaturity less than a year

Financing Working Capital (WC)

Long term loansMaturity more than a year to max 10 yearsPurpose is the acquisition of assets

Revolving Credits


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Risk involved in Lending so Bank should have Control

Managers Should objectively evaluate Risk-Return trade-offs

Credit decisions impact profitability of banks

It is not at all easy

Trade off: increase portfolio and maintain loan quality

Despite of information availability; Still Credit decisions are

judgmental


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Loan objectivesVolume and mix

Credit Administration

Loan evaluation procedure

Credit Files

The loan policy

Business Developments and initial recommendations

Building a credit files

Project and financial appraisals

Quantitative analysis

Due diligence

Risk assessment

Making the recommendations

Broad steps to credit analysis

Constituents of Credit Process


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Constituents of Credit ProcessCredit Delivery and Administration

Loan Documentation

Conditions Precedent

Representations and Warranties

Affirmative Covenants

Negative Covenants

Terms and Conditions of lending

Events of Defaults

Updating the credit file and follow up

Credit review and monitoring


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Financing appraisals forcredit decisionsFinancial Ratio Analysis

Common Size ratio comparisons

Cash flow analysis


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Types of Loans

Loans

for

working

capital

Loans

forcapital

expendit

ure and

industria

l credit

Loan

Syndication

Loans for

agriculture

ProjectFinance Loans to

Consumer:

Retail

Lending

Nonfund

based

credit

Different types of loans and their features


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Loan pricing and customer profitability AnalysisStep 1: Arrive at Cost of Funds

Step 2: Determine servicing cost for the customer

Step 3: Assess default risk and enforceability of security

Step 4: Fixing the profit margin


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What are unsecured loans ? What are secured loans ?

Security and their features: Ensure adequate margin

Easy marketability

Documentation


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Pledge Hypothecation

Assignment

Lien

Mortgage


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Hypothecation Pledge MortgageWho holds thegoods Borrower With bank/constructive

possessionWith owner

Transfer ofinterest

Not done; bank

has certainrights overgoods

To bank To bank

Delivery ofgoods/property Constructive Actual ConstructiveEnforcement ofsecurity With consent of

Borrower

Bank can selland recover

dues

Throughintervention of

court

Types of goods Mfg. Goods,present & future

debts,

immovablelant &

Existing goodsImmovable

property


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What is assignment? What is bankers lien?

What is Right of Set-off?

Banking and Insurance MODULE 2

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Transcript of Banking and Insurance MODULE 2