Banking Foundation Training - Ready Reckoner-updated

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Banking Foundation Training - Ready Reckoner

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Contents

Banking Concepts– Retail, Corporate, Investment

Concepts of Money

Performance and Profitability Ratios

Assets and Liabilities

Advanced Banking Concepts

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Banking Concepts

Investment Banking


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Concepts of Banking – Retail/Corporate Investment1. The Credit Bureau provides information on address history and fraud activities in accounts owned by the applicant.

2. Transaction fees and account service charges mainly generate non-interest income for the bank.

3. The difference between interest earned and interest paid is called Net Interest Income. 4. A type of credit secured by a home owner that allows a lien to be placed on their home and allows for future advances to the homeowner/ consumer up to a fixed maximum amount is called Home Equity Line.

5. Interest received by the bank on the loans extended by it is an income to the bank.

6. A typical retail bank focuses on mass market consumers and small-medium enterprises (SMEs) and offers core products such as deposits, loans and payment services.

7. Current accounts are also called checking accounts, demand accounts or transactional accounts. They differ from saving accounts as they allow numerous withdrawals and unlimited deposits.

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8. Auto loans are a form of Secured Credit.

9. Unsecured credit normally has the highest interest rates.

10. Examples of open ended credit are Credit Card and Personal Line of Credit.

11. For Unsecured loans, percentage of interest rate is more than secured loans. E.g. The interest rate on a personal loan or a credit card is more than that on a housing loan.

12. When payment assurance is required, DD is preferred over a normal Cheque.

13. In a credit card transaction, the merchant gets the money from the acquiring bank. 14. RTGS (Real Time Gross Payment) is an electronic settlement of funds on a real time basis.

15. The Real Time Gross Payment (RTGS) system prevailing in the U.S. is Fedwire and in UK it is CHAPS.

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Concepts of Banking – Retail/Corporate Investment


16. Demand Drafts, Telegraphic Transfers and Travelers Cheques are examples of remittances.

17. NEFT system is used for processing low value transactions with large volumes.

18. Bank’s product portfolio, distribution channels and operational structure are largely determined by the customer segment it chooses to focus on. A typical retail bank focuses on mass market consumers and small-medium enterprises (SMEs) and offers core products such as deposits, loans and payment services.

19. No-Frill/Basic Account has no minimum balance maintenance requirement, offers limited features such as electronic funds transfer (EFT), netbanking, free cheque book issuance and charges either very less or no fee.

20. Revenue generation activities of a bank depends on the amount of capital that a bank possesses.

21. If you open a time deposit with a bank, the bank gives you interest on it. For the bank, the interest is an expense.

22. Capital, Income and Collateral are considered as sources of funds to pay off a loan balance.

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23. A bank’s product portfolio, distribution channels and operational structure are largely determined by the customer segments it chooses to focus on.

24. When the supply of goods decreases, the cost of goods increases which leads to Inflation. This inflation is referred to as Push Inflation.

25. The financial crisis has resulted in a new economic reality and regulatory environment for banks.

26. Private Banking provides banking services to high net worth customer.

27. A Central Bank is like the Banker’s bank which acts as a regulatory body and as the Government’s bank.

28. Deposits are the sources of funds, which are usually the cheapest and most preferred by banks for supporting their lending activities.

29. The central bank in each country sets a baseline interbank lending rate, which guides the rate of interest charged on short-term loans between banks.

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30. Sweep Out is a facility provided by bank by which excess funds above a limit in a low interest deposit account are automatically transferred to a higher interest earning account at the end of every day.

31. Tax Saving Fixed Deposits are those term deposits that enjoy special tax exemption from the Government, but has a relatively low interest rate compared to market interest rate.

32. The type of LC (Letter of Credit) which is used by seller to enter into a contractual agreement with the buyer is called as Back to Back LC.

33. Underwriting is a process by which the investment banks help their clients to raise capital funds.

34. Structuring of Bank card numbers follow ISO/IEC 7812 format.

35. Risk of not being able to sell assets or borrow when required is an example of Liquidity Risk.

36.The Basel II capital accord is specified by Bank for International Settlements.

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37. The loan given by a bank not being repaid by the Consumer is a Credit Risk.

38. The function of the bank which is responsible for managing interest rate risk is Asset and Liability Management.

39. Credit rating provides current opinion on credit quality and it performs isolated function of credit risk evaluation. Also, Credit rating is an issue specific view.

40. Basel II prescribes guidelines that will help banks in Capital Allocation and Risk Management.

41. Selling of Mutual Fund by a non-AMFI certified person is an example of Regulatory Risk

42. A bank that provides a fixed interest housing loan scheme, fails to protect itself against rising interest rate thereby exposing itself to Market risk.



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43. Pricing optimization means introducing market-specific pricing and personalized offers to be able to attract the right customers at the right margins. It may include pricing changes by product or segment and existing loan book re-pricing.

44. Banks lend out a percentage of the money their customers have deposited. The lending of deposited funds creates ‘new’ money as the funds are circulated throughout the financial system. This is known as the multiplier effect.

45. Banks pay a levy on deposits they hold so that in event they go bust, the government will pay back depositors the money they have lost, up to certain limits. This is called Deposit Insurance .

46. The cash that banks hold in reserve helps them maintain the liquidity they need to cope with withdrawals and be able to make new loans. When their capital reserves are running low, though, another way for them to increase their capital temporarily is through interbank lending.

47. The regulatory landscape for banks is very complex with a range of different agencies and regulatory bodies setting rules at global, regional and local levels, which makes it very challenging and costly for banks to stay on top of new requirements.



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48. Bookkeeping refers to the recording of actual financial transactions of the company, such as sales, purchase, income, receipts and payment by an individual of an organization.

49. Gross Profit is the profit earned by an organization from its core operating activities.

50. Repo rate is a rate at which bank can borrow money from the central bank. Reserve Repo Rate is the rate at which bank can lend money to the central bank.

51. A Clearing house is a physical location where the payer and the beneficiary banks exchange their corresponding checks to settle the differential amounts in terms of credit or debit totals.

52. Profits earned by the bank would result in increase in banks capital.

53. Leasing is a loan contract provided for a use or occupation of a property, equipment or a vehicle owned by the bank in exchange of the fee.



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54. Factoring is a type of financial service offered by financial institutions, whereby a company sells its accounts receivable to a financial institution at a discount and thereby transferring the risk of non-payment of receivables to the financial institution.

55. A Guarantee extended by the bank on behalf of its customer is an example of Non Funded Exposure.

56. The process where a bank pools up other banks with similar risk appetite in sharing huge borrowing program of a borrower is called Loan Syndication.

57. Various roles of Investment Banker are asset servicing, corporate finance and account opening.

58. A bank’s main source of income is the spread between interest earned on loans and interest paid on deposits .

59. Difference between interest earned and interest paid is called Net Interest Income.



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60. S.W.I.F.T is a processing system for International payments i.e. it is a payment system that settles cross border transactions.

61. In case of a secured credit card, banks keep a security deposit on these cards and customer is allowed to do transactions up to the deposit amount only.

62. SWIFT participates in the clearing scheme by facilitating the exchange of payment information between banks and it does not take part in the settlement of payments.

63.Type of cards where no credit limit given is prepaid cards.

64. The first digit in the debit/credit card number denotes Bank Card Association.

65. A bank that provides a floating housing loan scheme, fails to protect itself against rising interest rate thereby exposing itself to Market risk.

66. In Syndicate loans, two or more banks form a syndicate to provide short or long term loans. The loan amount is huge and hence risk is shared among the banks.



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67. Small Ticket Personal Loans (STPL) are the unsecured loans having small amount with higher interest rates

68. Banks generate income from interest income, fee-based income and investment/trading income.

69. When interest rates rise, the rate of inflation goes up automatically.

70. A credit rating is an evaluation of the credit worthiness of an applicant, which helps the bank to determine the customer's ability to pay back the loan and reduces the chances of loan default.

71. All Banks worldwide follow country specific banking regulations in addition to following global regulations.

72. In banking terminology, PIN stands for Personal Identification Number.




Concepts of Money – Monetary Policy / Time Value1. Fed Fund rates are fixed by the Federal Reserve.

2. M3 is a Broad Money.

3. In Foreign Exchange, rupee depreciation against the dollar would mean more rupees for a dollar.

4. Dollar denominated deposits in banks outside the USA are called Eurodollar deposits.

5. The phenomenon by which the prices falling, but consumers not willing to spend in the hope that the prices will fall further is called Liquidity Trap



Performance & Profitability Ratios of Bank



Performance & Profitability Ratios of Bank - Return on Equity1. ROE (Return of Equity) of a bank is a ratio of Net Income / Total Equity. Return on Equity is a measure of banks profitability.

2. A bank with business predominantly in mortgages and insurance is likely to have a higher ROE than a bank which is predominantly in consumer and commercial loans.

3. The revenue generation activities of a bank depend on the amount of capital that it has.

4. In the post-financial crisis era, the banking landscape led to Consumers having lost confidence, trust, and loyalty in their banks and banks are now trying to win back customer confidence with more relevant, transparent and customer-centric offerings.

5. A typical retail bank will offer services targeted toward only mass market and SME (Small and Medium Enterprise) customers.

6. The elements of a bank’s business strategy depends on the economic model, business model and operating model of a bank.



Performance & Profitability Ratios of Bank – Ratios1. Efficiency Ratio for a bank is a ratio of Non-Interest Expense / Interest Income + Non Interest Income.

2. A bank with lower Efficiency Ratio always manages its operating costs better than a bank with higher Efficiency Ratio.

3. Treasury operations in a banking setup refers to the management of the money market, partly also to meet reserve requirements such as cash reserve ratio (CRR), securities market, forex operations and statutory liquidity ratio (SLR).

4. Cash reserve ratio (CRR) is the amount of funds in CASH that the banks have to keep with the central bank.

5.An increase in CRR ratio would result in suck of liquidity from the market.

6. Capital Adequacy Ratio refers to Percentage of capital to the risk weighted Assets.

7. CAR stands for Capital Adequacy Ratio which defines the amount of capital bank should keep aside to meet time liabilities and other risks.

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Performance & Profitability Ratios of Bank – Ratios8. Capital ratios determine what percentage of deposits a bank holds in reserve (i.e., does not lend out) to maintain adequate liquidity and consumer confidence. Each bank sets its capital ratio based on minimums required by regulatory agencies and its own analysis of its risk profile

9. Capital ratio regulations means external and internal regulations are in place that defines the minimum percentage of deposit capital that must be held in reserve rather than being lent out.

10. SLR (statutory liquidity ratio) is a percentage of demand and time liabilities that bank needs to maintain as specified by a central bank in the form of cash, gold and other approved securities i.e. it refers amount that the commercial banks require to maintain in the form of gold or govt. approved securities before providing credit to the customers.

11. Reverse Repo rate is the rate at which the RBI borrows money from commercial banks

12. The rate at which the RBI lends money to commercial banks is called Repo rate.



Performance & Profitability Ratios of Bank – PV Profitability1. Both NPV (Net Present Value) and IRR (Internal Rate of Return) should be considered for analyzing the profitability of a prospective business.

2. NPV (Net Present Value) Analysis is a very effective tool for Capital budgeting of a project or business using the concept of time value of money.

3. Time Value of Money means that purchasing power of money is more today than in future.



Performance & Profitability Ratios of Bank – Inflation1. Inflation can be calculated as Consumer Price Index (CPI), which indicates price rise of goods in retail markets.

2. Inflation rate is calculated by the change in Price Index over a time period to the Previous Price Index.



Assets and Liabilities



Assets & Liabilities1. All customer accounts with credit balance are Liabilities of the bank.

2. Increase in Bank's Liabilities is the effect on Bank's balance Sheet once a customer deposits some amount in his saving Bank Account.

3. There is always a more capital requirement when a Bank has more risky assets in its balance sheet.

4. Return on Assets determines banks efficiency.

5. The higher the bank’s capital, the greater the revenue generation activities of a bank.

6. Accounting is built around the equation: ASSETS = LIABITLITES + OWNER’S EQUITY• What the business has or owns is called ASSETS,• What it owes outsiders, is called LIABILITIES,• What it owes the owner, is called OWNER’S EQUITY



Assets & Liabilities7. Profit or Loss is a calculation of : REVENUES – EXPENSES

• If Revenues are more than Expense, there is PROFIT,• If Expense are more than Revenues, there is LOSS,• Revenues increases Bank’s equity and Expenses decreases Bank’s equity.• The BALANCE SHEET reports what Assets, Liabilities and Owner’s Equity the

business has as of a certain date• The INCOME STATEMENT reports the total Revenues and Expenses and the

difference (Profit and Loss) for a specific period of time.• The Statement of CASH FLOW reports the sources and uses of Cash for a specific

period of time

8. Going Concern Concept - It implies for the business the basic declaration of intention to keep running its activities at least for the next year, which is a basic assumption to prepare financial statements. Hence, the declaration of going concern means that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.

9. Separate Entity Concept - An accounting concept which treats a business separately from its owner. The separate entity assumption states that the transactions conducted by a business are separate to those conducted by its owners. For example, if a business owner bought an asset for their personal use, the asset is not the property of the business.


Advanced Banking Concepts1. SAP Bank Analyzer comes under the preview of Accenture Finance Risk and Regulatory services.

2. Current trends in product and customer management include unbundling of products to increase transparency, customizing products & sales approaches based on customer analytics and offering multiple distribution channels.

3. The universal bank model can be profitable but involves a lot of work and comes with complications and risks. After the financial crisis, several banks with universal models survive, but many others are scaling back..4. A bank’s operating model is a representation of all of its operational capabilities. Accenture’s Logical Operating Model for banks includes seven platforms: Distribution, Assembly, Manufacturing, Corporate Core, Technology, Analytics and Business Integration.

5. Strategic cost reduction means looking at the end-to-end costs of a business and determining which parts of business operations are core capabilities that create market differentiation. It may include strategies such as process simplification and reengineering (e.g., automation), procurement rationalization, shared services implementation and the outsourcing and off shoring of non-core functions.

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Advanced Banking Concepts6. Trends driving future change in the industry include increasing globalization, the growth of emerging markets, the demand for a multi-channel distribution strategy and technology innovation.

7. Accenture offers three cross FS Business Services—Distribution and Marketing Services, Finance and Risk Services, and Technology and IT Services—and three Banking Business Services—Core Banking Services, Credit Services and Payment Services.

8. Emerging technologies such as cloud computing and virtualization can decrease banks’ capital investments in technology and improve the scalability and responsiveness of their systems.



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Banking Foundation Training - Ready Reckoner-updated

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