Banks and Stock Exchange 3 rd November, 2009 Duration: 1 hour 30 minutes.

Banks and Stock Exchange

3rd November, 2009

Duration: 1 hour 30 minutes

Topics to be covered

Bank’s Definition

Types of Bank

Financial Institutions

Types of Banking Products

Definition of Banks

• According to the English law, bank is a person who carries out

business of banking which is specified as:

• “Engaging in the business of keeping money for savings and

checking accounts or for exchange or for issuing loans and credit

etc .”

Role of Banks

Accepting deposits

Lending money

Issue of cheques, banknotes, drafts

Processing payments by telephonic and internet transfer

Providing letter of credit, guarantees, securities underwriting and off

balance sheet exposures

Safekeeping of documents and other items in safe deposited vault

Currency exchange

Sale, distribution or brokerage of insurance and mutual funds

Types of Banks

Type of banks

• Central Bank

• Commercial Banks

• Co-operative Banks

• Foreign Banks (31)

• Public Sector Bank (SBI and associates 7,others 20)

• Private Sector Banks (21)

Central Banks

• Also called apex bank (In Indian case RBI)

• A Government monetary authority that issues currency and

regulates the supply of credit

• Main duties of Central bank are:

» Formation of monetary policy

» Controlling credit supply

» Issue of currency

Duties of Central Bank

• Government’s banker and banker’s bank

• Managing country’s foreign exchange and gold reserves

• Regulation and supervision of banking industry

• Deciding official interest rate (bank rate)

Bank rate: referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by central banks to control the money supply (Currently 6%)

Repo rate: rate at which RBI lends to banks (Currently 4.75%)

(While repo rate is a short-term measure, i.e. applicable to short-term loans and used for controlling the amount of money in the market, bank rate is a long-term measure and is governed by the long-term monetary policies of the governing bank concerned.)

Reverse repo rate: rate at which banks lend to RBI (Currently 3.25%)

Statutory liquidity ratio (SLR): SLR refers to the amount that all banks require to maintain in cash or in the form of Gold or approved securities. (Currently 24%)

Cash reserve ratio (CRR): banks are required to keep only a fraction of their deposit liabilities in the form of liquid cash with the RBI for ensuring safety and liquidity of deposits (Currently 5%)

Prime lending rate (PLR): The rate of interest at which banks lend to favored customers

Terminology

Commercial Banks

Definition: financial institution that accepts demand deposits

and makes loans and provides other services for the public

The main duties of commercial banks are

» Processing payments

» Accepting deposits

» Lending

» Issuing cheques and drafts

» Currency exchange

» Sale, distribution or brokerage of insurance and mutual funds

Type of Banks

Co-operative bank:

Co operative banks are those banks which are registered under Cooperative Societies Act

There mainly two type of co-operative banks

Urban co operative

Rural co operative

Foreign bank:

A bank which is incorporated outside India and whose majority shareholders are foreign nationals

Public sector bank:

A bank whose majority shareholders are government or financial institutions

Private sector bank:

A bank whose majority shareholders are promoters or general public

Type of Banking

Retail banking: Banking services offered to individual customers.

Corporate banking: Banking services for large corporations or firms. This type of banking is designed to deal with major financial transactions that do not generally involve individuals.

Universal banking: all services are given under one head (Banking that includes investment services in addition to services related to savings and loans)

Investment banking: A financial intermediary that performs a variety of services. This includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.

Merchant banking: Financial institution primarily engaged in offering financial services and advice to corporations and to wealthy individuals. (The chief distinction between an investment bank and a merchant bank is that a merchant bank invests its own capital in a client company whereas an investment bank purely distributes (and trades) the securities of that company in its capital raising role)

Financial Institutions

Financial institutions

Development Banks

International Financial Corporation

EXIM Bank

NABARD

State Finance Institutes

Indigenous Bank

Development Financial Institutions

Post independence period was planned development in India with

emphasis on mobilization of savings and channelising investment to

meet plan priorities

DFI were introduced with the aim of providing long term finance to

priority sectors

IDBI: Industrial Development Bank of India is one of India's lending

public sector banks, was established in 1964 to provide credit and other

facilities for development of Indian industry

ICICI: Establish in 1955, facilitated industrial development in line with

economic objectives. It evolved several new products to meet the

changing needs of the corporate sector

International Finance Corporation (IFC)

IFC promotes sustainable private sector investment in developing

countries as a way to reduce poverty and improve peoples’ lives

IFC is a member of the World Bank group and is headquartered in

Washington DC. It shares the primary objective of all World Bank

group institutions: to improve the quality of lives of people in

developing member countries

It promotes sustainable development primarily by

» Financing private sector projects located in developing world

» Helping private companies in developing world in mobilizing

finances in international financial market

» Providing advice and technical assistance to business enrolments

EXIM Bank India

Export Import Bank of India is an Indian government owned financial

institution created under Export Import Act of India, 1961

The bank’s functions are segmented into several operating groups like

» Corporate banking group

» Project finance group

» Lines of credit group

» SME group

» Export services group

» Fee-based exports

NABARD

National Bank of Agriculture and Rural Development is an

apex development bank in India

It has been accredited with “Matters concerning policy,

planning and operations in the field of credit for agriculture

and other economic activities in rural areas in India”

Role of NABARD

1. Serves as apex finance agency for the institutions providing investment and production credit

2. Takes measures towards institutional building for improving absorptive capacity of credit delivery system including monitoring, formulation, rehabilitation schemes, restructuring of credit institutions, training the personnel, etc.

3. Coordinates the rural financing activities of all institutions engaged in development work at the field level and maintains liaison with Government of India, State Governments, RBI and other national level institutions concerned with policy formulation

4. Undertakes monitoring and evaluation of projects refinanced by it. NABARD refinance is available to SCARDBS, SCBS, RRBS, CBS and other financial institutions approved by RBI

State Financial Corporations (SFC)

The group’s principal activity is to provide a range of consumer and

commercial banking services to individuals, businesses and industries.

It is a holding company of first state bank

The group also provides night depositary, travelers cheques, cashiers

cheques, domestic collection, bank drafts and banking by mail and

internet

Industrial concerns eligible for its assistance are manufacturing, mining,

transport, power generation, hotel, hospitals and any other activity

approved by IDBI

Indigenous Bank

Individual bankers like Shroffs, Seths, Sahukars, Mahajans, etc.

combine trading and other business with money lending

Vary in size from petty lenders to substantial shroffs

Act as money changers and finance internal trade through hundis

(internal bills of exchange)

Indigenous banking is usually family owned business employing own

working capital

At one point it was estimated that IBs met about 90% of the financial

requirements of rural India

Indigenous Bank

Cooperative banks have the history of more than 100 years

They are an important constituent of Indian financial system judging by

the role assigned by them, the expectations they are supposed to fulfill,

their number and the number of offices they operate

While the cooperative banks in rural areas mainly finance agricultural

activities namely farming, cattle, milk, hatchery, personal finance, etc.

along with some small scale industries and self employment driven

activities

The cooperative banks in urban areas mainly finance various categories

of people for self employment, industry, small scale units, consumer

finance, personal finance, home finance, etc.

Types of Banking Products

Types of Banking Products - Retail Banking

The main banking products can be defined as asset side products and

liabilities side products and fee based products

Asset side products includes, loans and advances, investments, etc.

Liability side includes deposits and borrowing

Fee based products include all other products which does not fit into

above category

Asset Products

Asset products can be categories into two parts

1. Funding

» Long term funding

» Short term funding

2. Investments

Long Term Funding

Following loans are included in long term funding

Term loan: Term Loans are extended for the purpose of acquisition of

fixed assets. viz., land, building, plant and machinery for setting up of

new industrial units or expansion/modernisation of existing units

Term loan could be secured or unsecured

Example: Mortgage loan

Short Term Financing Products

Overdraft

Cash Credit

Debit and Credit Cards

Bill Discounting

Types of Loans

Home loan

Car loan

Consumer durable loans

Education loan

Loan against property (LOP)

Loan against shares and debentures

Investments

Bank’s investments are:

» Investments in government securities

» Investments in other corporate bonds, stocks, mutual funds

» Investment in commodities, Real estate

» Investment in highly sophisticated products

Liability products

Deposits

» Fixed deposits or term deposits

» Recurring deposits

Borrowings

» Borrowings form other banks

Fee based products

• Fund transfer

• Bill payments

• Treasury services

• Broking services

• Safe deposit vaults

• Foreign exchanges

• Internet banking, Phone banking, Mobile banking, ATM facility

• Investments and Insurances

Thank You!

Banks and Stock Exchange 3 rd November, 2009 Duration: 1 hour 30 minutes.

Documents

Transcript of Banks and Stock Exchange 3 rd November, 2009 Duration: 1 hour 30 minutes.