MBA 3 MA0038 II Completed

7/29/2019 MBA 3 MA0038 II Completed

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SEMESTER- ASSIGNMENT-02

Name : SRIRAM C

Roll No. : 511238384

Learning Center Code : 2851

Course/Programme : MBA - Banking

SEMESTER :

Subject code : MA 38 SET 2

Date of submission :

Marks awarded _____________________

_____________ _____________

Signature of Center Head Signature of Evaluator


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Master of Business Administration - Semester 3

MA 0038: BANK MANAGEMENT

ASSIGNMENT- Set 2

1. Write a note on the following:

a. Transfer pricing b. pricing of consumer loans

Ans:

Transfer Pricing:

Transfer pricing refers to the setting, analysis, documentation, and adjustment ofcharges made between related parties for goods, services, or use of property(including intangible property). Transfer prices among components of an enterprise

may be used to reflect allocation of resources among such components, or for otherpurposes. OECD Transfer Pricing Guidelines state, Transfer prices are significant forboth taxpayers and tax administrations because they determine in large part theincome and expenses, and therefore taxable profits, of associated enterprises indifferent tax jurisdictions.

Over 60 governments have adopted transfer pricing rules. Transfer pricing rules inmost countries are based on what is referred to as the arms length principle that is to establish transfer prices based on analysis of pricing in comparabletransactions between two or more unrelated parties dealing at arms length. TheOECD has published guidelines based on the arm's length principle, which arefollowed, in whole or in part, by many of its member countries in adopting rules. The

United States and Canadian rules are similar in many respects to the OECDguidelines, with certain points of material difference. A few countries, such as Braziland Kazakhstan, follow rules that are materially different overall.

The rules of nearly all countries permit related parties to set prices in any manner,but permit the tax authorities to adjust those prices where the prices charged areoutside an arm's length range. Rules are generally provided for determining whatconstitutes such arm's length prices, and how any analysis should proceed. Pricesactually charged are compared to prices or measures of profitability for unrelatedtransactions and parties. The rules generally require that market level, functions,risks, and terms of sale of unrelated party transactions or activities be reasonablycomparable to such items with respect to the related party transactions or

profitability being tested.

Most systems allow use of multiple methods, where appropriate and supported byreliable data, to test related party prices. Among the commonly used methods arecomparable uncontrolled prices, cost-plus, resale price or markup, and profitabilitybased methods. Many systems differentiate methods of testing goods from thosefor services or use of property due to inherent differences in business aspects ofsuch broad types of transactions. Some systems provide mechanisms for sharing or


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allocation of costs of acquiring assets (including intangible assets) among relatedparties in a manner designed to reduce tax controversy.

Most tax treaties and many tax systems provide mechanisms for resolving disputesamong taxpayers and governments in a manner designed to reduce the potentialfor double taxation. Many systems also permit advance agreement between

taxpayers and one or more governments regarding mechanisms for setting relatedparty prices.

Many systems impose penalties where the tax authority has adjusted related partyprices. Some tax systems provide that taxpayers may avoid such penalties bypreparing documentation in advance regarding prices charged between thetaxpayer and related parties. Some systems require that such documentation beprepared in advance in all cases.

b) Pricing of Consumer Loans:

Almost everyone agrees that the demand for consumer loans is inelastic to changesin prices. This belief may be based on sophisticated arguments about the timepreference pattern of consumer spending or on the role of secondary charges inoptimizing decisions. Or it may be based merely on intuitive judgements aboutconsumer behavior or the lack of consumer knowledge.

6. Explain CAMELS rating.

Ans:

Definition of 'CAMELS Rating System'An international bank-rating system where bank supervisory authorities rate

institutions according to six factors.

The six factors are represented by the acronym "CAMELS."

C - Capital adequacyA - Asset qualityM - Management qualityE EarningsL LiquidityS - Sensitivity to Market Risk

Bank supervisory authorities assign each bank a score on a scale of one (best)

to five (worst) for each factor. If a bank has an average score less than two it isconsidered to be a high-quality institution, while banks with scores greaterthan three are considered to be less-than-satisfactory establishments. The systemhelps the supervisory authority identify banks that are in need of attention.

The CAMEL ratings system is a method of evaluating the health of credit unions

by the National Credit Union Administration (NCUA). The rating, adopted by the

NCUA in 1987, is based upon five critical elements of a credit union's operations. An


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international bank-rating system where bank supervisory authorities rate

institutions according to six factors.

This rating system is designed to take into account and reflect all significant

financial and operational factors examiners assess in their evaluation of a credit

union's performance. Credit unions are rated using a combination of financial ratiosand examiner judgment.

The purpose of CAMELS ratings is to determine a banks overall condition and toidentify its strengths and weaknesses

Financial

Operational

Managerial

CAMELS rating

Each element is assigned a numerical rating based on five keycomponents

Strong performance, sound management, no cause for supervisory concern

Fundamentally sound, compliance with regulations, stable, limited

supervisory needs

Weaknesses in one or more components, unsatisfactory practices, weak

performance but limited concern for failure

Serious financial and managerial deficiencies and unsound practices. Need

close supervision and remedial action

Extremely unsafe practices and conditions, deficiencies beyond management

control. Failure is highly probable and outside financial assistance needed

Based on the ratings of each element, a composite rating of 1 through 5 is assignedto the bank. All the factors reflected in the key components ratings are consideredin assigning the composite rating.

Rating 1 is characterized by:

Capital levels and ratios exceed all regulatory requirements

Strong earnings performance

Well managed and controlled growth

Competent management able to analyze the risks associated with the

activities in determining appropriate capital levels

Reasonable dividends and ability to raise new capital

Low volume of problem assets

Rating 2 is characterized by similar criteria as 1, but experiencesweaknesses is one or more of the factors. For example:


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Capital and solvency ratios exceed regulatory requirements, Problem assets

relatively high

Management inability to maintain sufficient capital to support risks

Rating3 indicates that the bank complies with capital adequacy and

solvency regulatory requirements, but has major weaknesses in in one or morefactors:

High level of problem assets in excess of 25% of total capital

Bank fails to comply with regulatory regulations

Inability to raise new capital to meet regulatory requirements and correctdeficiencies

It requires regulatory oversight to ensure management and shareholders

address the issues of concern

Rating 4 means that the bank is experiencing severe problems resultingin inadequate capital to support risks associated with the business andoperations:

High level of problems generating losses in all area of activities

Problem loans in excess of 50% of total capital

Insufficient capital

Non compliance with regulatory requirements

Rating5 indicates that the bank is insolvent:

Strong regulatory oversight is needed to mitigate the loss to depositors and

creditors

Very slight possibility that actions from management will prevent the demiseof the bank

Only shareholders may be able to prevent the failure

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4. What is the need for a credit policy?

Ans:

Credit Policy refers to the policies banks and financial institutions in the country

follow before granting loan to people. They may check a few things like, your salary,

job type, job security, business profile, assets etc before granting you a loan.

Importance of Credit Policy

Credit policy is very important for a bank to plan their future lending. For anybusiness selling goods or services, giving credit to its customers is critical; its acatalyst for growth in the business. Extending credit is business for some (banks,credit card companies) and for some, one way to compete and stay in business.


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Credit immediately increases the buying power of a consumer. Imagine an

individual with not-so-good credit get a credit card with a $5,000 limit, or that you

approved a modest credit limit to a firm with which you recently started working.

The good part is that the credit generated an immediate sale, but the negative is

that it could potentially result in bad debt. Uncontrolled credit could lead to collapse

due to overbuying, overexpansion and overselling. The recent problems due to sub-prime loans are a case in point, as many in the stone industry from importer to

distributor to fabricator can clearly attest. Credit application is the foundation of a

good credit policy. It facilitates the process of determining whether or not to grant

credit and to determine the limit. Credit application collects important information

for review and can also be produced in court as evidence of the terms of sale and

application of credit/loan. (And, the information should always be treated as

confidential.)

Key importance of credit policy in banks:

To enable decision makers to screen out loan

Reject/Accept

Loans that can be sanction without reference to top level management or

vice-versa

Due compliance of all regulatory requirements

To increase the non-fund based income

To strengthen and improve the reliability of the risk manager

To ensure healthy growth of loan portfolio

To simplify systems procedures

To ensure that aggregate risk is not allowed to increase

Bank provides a wide range of financial services to individual, small or mediumsized firms and corporate clients through its net-work of branches.

In all its branches Bank offers a range of retail banking services including current,saving, call and deposit accounts in all the major currencies as well as issuance ofcredit cards. Through its own branches and a strong correspondent banks network,the bank is able to offer efficient and fast remittance services for transferring fundsto any part of the world and in all major currencies at the most competitiveexchange rates. The Bank offers trade financial services such as Import L/C, Letterof Guarantees, Pre and Post shipment finance for exporters, Bridge financing and

loan against imported merchandise. The bank also offers a full range of foreignexchange, treasury, capital market services, including sale and purchase of goldand silver.

It is understood that the nature and scope of the credit review policy and proceduredepends on the size and nature of business of each bank.


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The Manual serves as a guideline for the Department to carry out its day to dayfunctions and to follow steps necessary to take prior to making commitments onbehalf of the bank.

3. Explain the applicability of marketing mix for banks in India.

Ans:

Definitions of Marketing Mix

1. According to W. J. Stanton, "Marketing mix is the term used to describe the

combination of the four inputs which constitute the core of a company's

marketing system: the product, the price structure, the promotional

activities, and the distribution system."

2. According to Philip Kotler, "A Marketing mix is the mixture of controllable

marketing variables that the firm uses to pursue the sought level of sales inthe target market."

Features of Marketing Mix

1. Combination of four marketing variables: Marketing mix is a

combination/integration of four basic marketing variables namely, product,

price, promotion and place. These variables are interdependent.

2. Useful for achieving marketing targets: Marketing mix aims at achieving

marketing targets in terms of sales, profit and consumer satisfaction. It is

rightly said that marketing mix is the marketing manager's instrument for

attainment of marketing objectives/targets.

3. Flexible and dynamic concept: Marketing mix is not a rigid combination of

four variables. It is in fact a flexible combination of variables. It is necessary

to adjust the variables in the mix from time to time as per the changes in the

marketing environment. It is the continuous monitoring of the marketing mix

which facilitates appropriate changes in the mix.

4. Periodical adjacent of variables necessary: Marketing mix variables are

interrelated and need suitable adjustments from time to time. Updating of

marketing mix is essential for making it a powerful tool for achieving

marketing targets. Updating is also essential due to environmental changes

taking place within the firm.5. Marketing manager acts as a mixer of ingredients: A marketing manager has

to function as a mixer of marketing ingredients and has to achieve desired

results through skillful combination of four Ps. He needs maturity, imagination

and intelligence for appropriate blending of the variables.


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6. Customer is the focus point: The main focus of marketing mix is the

customer. His satisfaction and support are important. Variables of marketing

mix are for giving more satisfaction and pleasure to consumers.

7. Variables are interrelated: Marketing mix variables are interrelated. Decisions

in one area affect action in the other areas. An integrated approach is needed

while making changes in the marketing mix variables.8. Consumer-oriented activity: Marketing mix is a consumer-oriented activity as

its purpose is to give satisfaction and pleasure to consumers. Here, the needs

and expectations of consumers are given special attention and 4 Ps are

adjusted accordingly.

9. Four Ps of sellers correspond to four Cs of customers: Four Ps in the

marketing mix represent the sellers' view of the marketing tools available for

influencing buyers. Each tool is designed to deliver a customer benefit.

The sellers' four Ps correspond to the customers' four Cs as shown above.

Elements / Ingredients of Marketing Mix
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1. Product: Product is the article which a manufacturer desires to sell in the

open market. It is the first element in the marketing mix. The product mix

includes the following variables.

a. Product line and range,

b. Style, shape, design, colour, quality and other physical features of a

product,

c. Packaging and labeling of a product,

d. Branding and trade mark given to the product,

e. Product innovation, and

f. Product servicing.

Managing product component involves product planning and development.

Here, the decisions are required to be taken regarding product range,

branding, packaging, labeling and other features of the product. The product

manufactured for market should be as per the needs and expectations of

consumers.

Product is the most powerful competing instrument in the hands of the

marketing manager. It is the heart of whole marketing mix. If the product is

not sound /attractive to the customers, no amount of sales promotion,

appropriate channel selection or price reduction will help to achieve the

marketing target. Hence, durability, quality, uses, etc. of the product are

important from the marketing point of view.
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Various Aspects of Product Decisions in Marketing: In the marketing

process, various decisions regarding the product are required to be taken.

Marketing will be easy and quick if the decisions taken on various aspects of

a product are appropriate. AU such decisions need to be taken by the

marketing division of the Organisation. Such decisions should be based on

current marketing environment, nature of market competition, consumerexpectations, information available through marketing research and so on.

Cooperation of other departments is also necessary in marketing decision-

making.

Production or product is rightly treated as the heart of the marketing mix.

Customers purchase a product because of its attributes, features and

benefits. These are the selling points of a product. They should be adjusted to

the buying motives of consumers. A consumer/customer considers the total

package of benefits available from the product and takes a decision to

purchase the product. This suggests that various decisions regarding the

product to be marketed need to be taken correctly. As a result, the product

offered in the market will be a quality product. In addition, it will be utility

oriented, attractive, convenient, property designed and branded. Even

attractive packaging decision facilitates sales promotion.

The following aspects of a product need careful attention in marketing

decision-making.

Product line and range,

Style, shape, design, colour, quality and other physical features

of a product,

Packaging and labeling of a product,

Branding and trade mark given to a product.

Product servicing and channel of distribution.

Product pricing.

Guarantees and warranties of the product.

Product innovation.

Special features of the product from the marketing point of view.

Decisions on these aspects of a product are important as marketing is

directly related to these aspects. Sales promotion measures will be useful but

their role will be supplementary/ supportive. Such measures may not be

effective if the product to be marketed is not of standard quality or if the

brand or package is not attractive or if the product is not as per the

requirements/expectations of consumers. This suggests that decisions

relating to product are important /crucial in the marketing of a product.


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Distribution channel (Place): Physical distribution is the delivery of goods at the

right time and at the right place to consumers. Physical distribution of product is

possible through channels of distribution which are many and varied in character.

Physical distribution (place mix) includes the following variables:

Types of intermediaries available for distribution,

Distribution marketing channels available for distribution, and

Transportation, warehousing and inventory control for making the

product available to

consumers easily and economically.

For large-scale distribution, the services of wholesalers, retailers and other

marketing intermediaries are required. A marketing manager has to select a

channel which is convenient, economical and suitable for the distribution of aspecific product. For instance, large numbers of outlets are required for the

distribution of products of mass consumption such as soaps and oils. On the

other hand, for the marketing of speciality products like refrigerators and TV

sets, selective distribution through authorized dealers is quite convenient.

1 Promotion: Promotion is the persuasive communication about the product

offered by the manufacturer to the prospect.

2 Promotion mix includes the following variables:

Advertising and publicity of the product, Personal selling techniques used,

Sales promotion measures introduced at different levels,

Public relations techniques used for keeping cordial relations with

dealers and consumers,

Display of goods for sales promotion.

Promotional activities are necessary for large scale marketing and also for

facing market competition effectively. Such activities are varied in nature and

are useful for establishing reasonably good rapport with the consumers.

Advertising gives information and guidance to consumers. Brand names are

made popular through advertising. Along with advertising, personal selling is

also useful for motivating the customers to buy a specific product.


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In addition to advertising and personal selling, a manufacturer has to use

other sales promotion techniques at the consumer level and at the dealer

level. The techniques at consumer level include displays, exhibitions,

discount coupons, small gifts and free samples, attractive container and

consumer contests. Consumer psychology is favorable for extensive

use of such sales promotion techniques. After-sales services are alsouseful for promoting sales of durable good.

3 Price: Price is one more critical component of marketing mix. It is the

valuation of the product mentioned by the seller on the product.

4 Price mix includes the following variables:

Pricing policies,

Discounts and other concessions offered for capturing market,

Terms of credit sale, Terms of delivery, and

Pricing strategy selected and used.

Pricing has an important bearing on the competitive position of a product.

The marketing manager may use pricing as a tool for achieving the targeted

market share or sales volume. Pricing can also be used for capturing market

and also for facing market competition effectively. Pricing decisions and

policies have direct influence on the sales volume and profits of the firm.

Market price of a product also needs periodical review and adjustments. The

price charged should be high enough to give adequate profit to the company

but low enough to motivate consumers to purchase product. It should also be

suitable to face market competition effectively. Basic elements of marketing

mix is shown in below point number 9 on this page

5. What are the strategies to manage non-interest expenses?

Ans:

Definition of 'Noninterest Expense'

Fixed operating costs that a financial institution must incur, such as anticipated baddebt provisions. Noninterest expenses can include employee salaries and benefits,

equipment and property leases, taxes, loan loss provisions and professional service

fees. Companies will offset noninterest expenses by generating revenue through

noninterest income.


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Employee compensation (salaries and benefits) typically comprise the largest

portion of an institution's noninterest expenses. Usually these expenses relate to

activities that are not associated with targeting customers to deposit funds in the

bank.

STRATEGIES FOR ACHIEVING REDUCTION INNON-INTEREST EXPENSES

This is one area which provides a great scope tocorporate for reduction in bankcharges/fees/commission etc and the discretionavailable to Banks is to be exploited.

For the purpose of focusing on cost reduction onnon-fund based facilities, we need to classify theexposures as short-term and long-term as perparticulars below.

Short-term

Import LCs

Negotiation/discount/purchase of export Bills

Exchange margin payable

LC retirement charges

Other bank charges

Long-term

Guarantee performance and financial

Deferred Payment Guarantee(DPG)

Letter of Comfort(LOC)/Letter of

undertaking(LUT)

2. Describe the phases of Indian banking system

Ans:

Without a sound and effective banking system in India it cannot have a healthyeconomy. The banking system of India should not only be hassle free but it shouldbe able to meet new challenges posed by the technology and any other external


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and internal factors.

For the past three decades India's banking system has several outstandingachievements to its credit. The most striking is its extensive reach. It is no longerconfined to only metropolitans or cosmopolitans in India. In fact, Indian bankingsystem has reached even to the remote corners of the country. This is one of the

main reason of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividendswith the nationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters forgetting a draft or for withdrawing his own money. Today, he has a choice. Gone aredays when the most efficient bank transferred money from one branch to other intwo days. Now it is simple as instant messaging or dial a pizza. Money have becomethe order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till

today, the journey of Indian Banking System can be segregated into three distinctphases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector

Reforms. New phase of Indian Banking System with the advent of Indian Financial &

Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase IIand Phase III.

Phase I:

The General Bank of India was set up in the year 1786. Next came Bank ofHindustan and Bengal Bank. The East India Company established Bank of Bengal(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent unitsand called it Presidency Banks. These three banks were amalgamated in 1920 andImperial Bank of India was established which started as private shareholders banks,mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians,Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank,Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experiencedperiodic failures between 1913 and 1948. There were approximately 1100 banks,mostly small. To streamline the functioning and activities of commercial banks, theGovernment of India came up with The Banking Companies Act, 1949 which waslater changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No.


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23 of 1965). Reserve Bank of India was vested with extensive powers for thesupervision of banking in india as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermathdeposit mobilisation was slow. Abreast of it the savings bank facility provided by thePostal department was comparatively safer. Moreover, funds were largely given to

traders.

Phase II

Government took major steps in this Indian Banking Sector Reform afterindependence. In 1955, it nationalised Imperial Bank of India with extensive bankingfacilities on a large scale specially in rural and semi-urban areas. It formed StateBank of India to act as the principal agent of RBI and to handle banking transactionsof the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on19th July, 1969, major process of nationalization was carried out. It was the effort of

the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks inthe country was nationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in1980 with seven more banks. This step brought 80% of the banking segment inIndia under Government ownership.

The following are the steps taken by the Government of India to Regulate BankingInstitutions in the Country:

1949 : Enactment of Banking Regulation Act. 1955 : Nationalisation of State Bank of India. 1959 : Nationalisation of SBI subsidiaries. 1961 : Insurance cover extended to deposits. 1969 : Nationalisation of 14 major banks. 1971 : Creation of credit guarantee corporation. 1975 : Creation of regional rural banks. 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India roseto approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith andimmense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sectorin its reforms measure. In 1991, under the chairmanship of M Narasimham, acommittee was set up by his name which worked for the liberalisation of bankingpractices.


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The country is flooded with foreign banks and their ATM stations. Efforts are beingput to give a satisfactory service to customers. Phone banking and net banking isintroduced. The entire system became more convenient and swift. Time is givenmore importance than money.

The financial system of India has shown a great deal of resilience. It is shelteredfrom any crisis triggered by any external macroeconomics shock as other East AsianCountries suffered. This is all due to a flexible exchange rate regime, the foreignreserves are high, the capital account is not yet fully convertible, and banks andtheir customers have limited foreign exchange exposure.

MBA 3 MA0038 II Completed

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