BANKING

AN OVERVIEW

BY :- CHETAN SHARMA
LINKEDIN PROFILE
EMAIL LINK
TELEGRAM
CONTACT - 8095224411
 INTRODUCTION TO BANKING
✓ A bank is an entity which provides banking services with an profit
making intent. the main function of banking is to mobilizes the saving
towards investment.
✓ Banks are able to offer benefits and services on account of their risk
financial leverage. Leverage is primarily through deposit acceptance.
Leverage also helps banks perform the critical function of financial
intermediation, through which depositors have greater investment
choices and borrowers have a wider range of sources of credit. This
results in more efficient resource allocation and has been the key driver
in the development of the economic systems.
✓ In addition to the primary activities of accepting financial services to
make additional profits. These ancillary services include selling
insurance products, investment products or stock brokering, renting
safe deposit boxes, etc.
 FUNCTIONS AND CHARACTERISTICS OF
A BANK
Banking is defined as “Acceptance of deposits of money from public for the purpose of Lending or
Investment, repayable on demand or otherwise and withdraw able by cheque, draft, or otherwise”
(Banking Regulations Act of India, 1949). Primary functions includes

1. Accepting Deposits

➢ Saving Deposits (Time Deposits)

➢ Fixed Deposits ( Fixed interest rate till maturity)
➢ Current Deposits
➢ Recurring Deposits
 CONTINUED.
2. Lending
• Banks lend money to its customers and charge interest on these
borrowings.
3. Credit
• it’s the total amount of cash that can be obtained from certain type of
credit line. (Example: The cash credit limit in a credit card)
4. Overdrafts
• This is a credit facility given to its customers by a bank. This allows a
customer to write checks and withdraw cash, even when no balance in the
account.
5. Loans
• Lending of money for a specific purpose in exchange of future repayment
along with principal amount and interest is termed as loan. (Examples:
Housing loan, Vehicle loan, Agricultural loan, etc.)
 SECONDARY FUNCTIONS (AS A
AGENT BANK)
There are lot of services provided by Bank to their customers or to others on
behalf of their customers. Bank acts as an agent to its client.
1. Fund Transfers
• Fund transfer refers to transfer of fund from one account to another. (Example,
transfer of funds from customer’s account to customer’s credit card for credit
card payment)
2. Cheques Collection
3. Periodic Payments / Collections
• Collection of interest, dividend, rent according to the customer’s instructions.
4. Portfolio Management
• Professional management of securities and other assets for the customers.
(Example, wealth management, estate planning)
5. Other functions
• act as a trustee to the client, Advisor to the client, etc.
 SECONDARY FUNCTIONS
(UTILITY FUNCTIONS:)
Banks offer utility services as a secondary function
1. Drafts & letter of credit: Issue of drafts, Letter of Credits, etc.
2. Locker facility
3. Underwriting: Underwriting of shares and debentures
4. Foreign Exchange
• Assisting in foreign trade through dealing in foreign exchange transactions.
5. Other Utility Functions
• such as collection and publishing of economic data related to the banking industry
 SOURCE OF INCOME

The various sources of income for a bank are discussed below:

• Spread/Margin - Banks pay interest on the deposits made by the customers. In

turn, they charge interest on the loans availed by the customers. The difference
between the interest earned and paid is called as Spread or Margin. Banks generally
borrows at a lower rate of interest and lends at a higher rate of interest. The yields
from the loans make the major portion of the bank’s income.

• Fee Based Income - Commission for services/utilities. Examples , Forex

BANKING AS AN INTEGRAL PART OF FINANCIAL
SYSTEM

The financial system in a country involves several institutions and agencies. They include:

Capital Market – Capital market brings both the investors and the people who are in need
of capital together. There are two types of markets: primary and secondary markets.
• The primary market is where fresh capital is directly accepted from investors by an
entrepreneur.
• Investors can trade (buy or sell) their investments in existing companies with other investors in
the secondary market
• Stock exchanges provide a convenient mechanism for this.

Securities Market - Securities market is the market where securities such as stocks, bonds
are traded. The government issues Bonds and Treasury Bills for the public to buy. Similarly, local
self-government entities (such as municipalities) and companies also issue bonds and debentures.
These securities can further market.
 CONTINUED.

Financial Institutions - These are specialized institutions, whose business is to

provide loans to persons who need it. They do it out of their own capital as well as by
taking deposits from the public. They basically provide long term finance. Apart from
institutions, an informal market of moneylenders and their clients are also a part of
the system.

Money Market- Money markets enable participants to borrow and lend for short
term spanning from several days to not more liquidity and very short maturity are
traded in these markets. Certificate of deposits, bankers acceptances, treasury bills,
commercial paper, repos, etc. are examples for money market securities.

Foreign Exchange Market - This market enables the participants to buy, sell
and exchange currencies. These markets are believed to be the most efficient market
among all the financial markets in the whole system because of its size and liquidity.
 CONTINUED.
Insurance Companies- While the business of
insurance companies is to provide insurance cover,
they also invest the large amount of money they
collect as premium so that they become important
players in the financial system.
Types of Banks
• Banks can be classified according to the
ownership, functions they perform and the
services they offer as Scheduled, Non Banks,
Commercial banks:, Private Banks, Retail banks,
Investment banks, Rural banks, Co-operative
banks, Industrial banks.
 TYPE OF BANKS

Retail Banking –

• Retail bank is a typical mass-market bank where, individual customers

use local branches of larger commercial banks
• Services offered by these banks include - savings, checking accounts,
mortgages, personal loans, debit cards and credit cards, consumer
durable loans, loans against equity share, loans for subscribing to initial
public offers (IPO), bill payment services, mutual funds, investment
advisory services.
• It provides services also to small and medium size enterprises.
• The major success factors for the banks that are moving towards the
retail sector include wider distribution network, low cost of funding, low
cost of inter-mediation, marketing capability, large portfolio of financial
products, higher service level in providing the loans, etc.
 TRENDS IN RETAIL BANKING
Micro-marketing - The mantra now for the banks is “customer orientation”.

Convergence – cross-selling, up-selling : refers to the near elimination of the

boundaries, once separating the various components of the industry – Banking,
Insurance and financial services, and also the various service providers. With the
rapid growth of new financial products, financial institutions are increasingly
combining the characteristics of banking, insurance, and securities products under
one roof.
Consolidation - Consolidation could be in terms of market size, position,
economies of scale, diversification or simply for geographic scale. However, it is
usually in the form of merger or acquisition. A merger and acquisition is defined as
the transfer or change of ownership on which one company increases the stake on
other company by 50 percent or more.

Newer Delivery channels

 TRENDS IN RETAIL BANKING
Micro-marketing - The mantra now for the banks is “customer orientation”.

Convergence – cross-selling, up-selling : refers to the near elimination of the

boundaries, once separating the various components of the industry – Banking,
Insurance and financial services, and also the various service providers. With the
rapid growth of new financial products, financial institutions are increasingly
combining the characteristics of banking, insurance, and securities products under
one roof.
Consolidation - Consolidation could be in terms of market size, position,
economies of scale, diversification or simply for geographic scale. However, it is
usually in the form of merger or acquisition. A merger and acquisition is defined as
the transfer or change of ownership on which one company increases the stake on
other company by 50 percent or more.

Newer Delivery channels

 TYPE OF BANKS

• Wholesale Banking – Wholesale banking refers to the banking services

provided to other financial institutions. Informally, they can be called
“business-to-business” banking or B2B Banking.
• Retail bank is a typical mass-market bank where, individual customers use local
branches of larger commercial banks
• It is focused on financing the working capital and investment needs of medium
to large-sized companies.
• Service focuses on strategies and technologies that the banks use to target their
corporate client bases.
• Today, large corporate customers and downstream correspondents demand
increasingly sophisticated products from their banks, at lowest possible cost.
• These challenges have created fierce competition in the wholesale banking
arena, spurring major competitors to grow ever larger and making corporate
treasurers even more difficult to satisfy. Additionally, the cost of these conflicting
demands and competitive pressures has created the need to find new sources of
revenue.
 KEY SERVICES
• Corporate banking
• Funding services/Project financing/loan syndication
• Payments & Clearing – Sales and Purchasing
• Trade Finance
• Cash Management
• Treasury activities
• Lending
• FI Advisory
• Custody
• Securities Services
• Commercial lending
• Foreign exchange
 TYPE OF BANKS

Private Banking –

• also known as Private wealth management is a terminology

generally used for bankers who offer customized financial
services to wealthy.
• Private bankers provide personal financial services and sophisticated
investment management techniques to their high net worth investors
• The largest private bank is Union Bank of Switzerland (UBS) of
Switzerland with a market share of 21.6%. Merrill Lynch Global Pvt.
Client Group is ranked second with 17.2% and Credit Suisse is third
with 8.8% market share.
• These are the banks which offer convenient, responsive and
personalized services to individuals with above average net worth.
•
 TYPE OF BANKS

Investment banks – These Banks help corporations and

governments in raising capital, primarily by drawing funds from the
public through the capital market by acting as underwriters and agents in
issuing securities.

• An investment bank does not take deposits

• They are highly involved in consulting companies regarding mergers
and acquisitions, divdivestment, privâte placements, etc
• Secondary functions include sales and trading of derivatives, research
to review companies, global transaction banking, merchant banking,
risk management, investment management, corporate strategy, etc.
These are the banks which offer convenient, responsive and
personalized services to individuals with above average net worth.
•
 VARIOUS FUNCTIONS

Investment Business -This is the function of an investment bank where it

generates financing opportunities for various corporations or governments
through
• Issuing of various debt instruments
• Selling of Equity Shares
• Issuing of various convertibles(for eg convertible notes, convertible bonds ,
convertible debentures)
Trading Business –
Client Trading - Here an investment bank acts as an intermediary of the client and
sells and purchases securities and other financial assets.
• While trading Investment banks operate in two business units:
1) Equity
2) Fixed Income, Currency and Commodities
• Helps to provides various research documents investing clients.
 CONTINUED..

Proprietary Trading and Principal Investing.

• They manage investments in equity, bonds, convertibles and
derivatives in a manner similar to hedge funds and private equity

Asset Management Business –

• As options for asset management investment banks provide
services like Equity, Fixed income, alternative investments and
investments money market investment products to institutional and
individual clients.
• In alternative investments investment banks co-invests along with
clients in ventures like hedge funds, real-estate funds, private equity
etc.
 TYPE OF BANKS

Islamic Banking –
• Islamic banking is a banking activity which follows Islamic
principles and economics (Shariah, also known as Fiqh-al
Muamalat). The purpose of Islamic banking is the same as that for
traditional banking, but it needs to follow Islamic rules.
• The foundation for Islamic finance is ban on interest payment and
collection (known as Riba).

Rural Banking –
 CENTRAL BANKS

Central Bank – has the responsibility of a nation’s or a group of nations’

monetary policy. While a central bank’s focus is on maintaining stability of
money supply and national currency, it also has some key such as, controlling
interest rates and acting as a lender of “last resort” to banks. In addition, it
could have regulatory powers over the banking and finance sector of the country.
Examples are:

• Bank of England
• Reserve bank of Australia
• European central bank
• Bank of Canada
• US Federal Reserve
• Reserve Bank of India
 FUNCTIONS OF A CENTRAL BANK
• Acts as a Currency Authority
• Functions as a Banker to the Government
• Is a Banker of the Banks
• Issues and maintains Public Debt
• Is involved in monetary regulation by declaring monetary policy
• Regulates and supervises commercial Bank
• Manages and controls exchange management
• Is involved in developing and maintaining Payment Systems
• Plays developmental role by offering industrial, export and rural credit
• Plays a proactive role in market development

CAMELS’ Model: - An international bank authorities rate institutions accords to six factors.
The six areas represent Capital Adequacy, Advances, Management, Earnings, Liquidity and
Systems (CAMELS).
 CENTRAL BANK IN INDIA

RBI -The Reserve Bank of India is the central bank of the country
entrusted with monetary stability, the management of currency and the
supervision of the financial as well as the payments system. Established in
1935, its function and focus has evolved in response to the changing
economic environment. Its history is not only intrinsically interwoven with
the economic and financial history of the country, but also gives insight
into the thought processes that have helped shape the country
The Bank was constituted to

• Regulate the issue of banknotes

• Maintain reserves with a view to securing monetary stability and
• To operate the credit and currency system of the country to its advantage
 CENTRAL BANK IN US

The Central Bank of U.S.A is known as the Federal Reserve. The Federal
Reserve System was brought into action by enactment of the Federal
Reserve Act on December 23, 1913.
The Federal Reserve consists of the following:
• A 7 member Board of Governors who determines the reserve
requirements for member banks of the Federal Reserve and also
regulates the discount rates determined by the 12 Federal Reserve
Banks.
• 12 Federal Reserve Banks
• Federal Open Market Committee
• the Consumer Financial Protection Bureau (CFPB)
• Thousands of member banks spread all over the country regulated by
the Federal Reserve.
 CENTRAL BANK IN UK
The Bank of England is the central bank of the United
Kingdom. Sometimes known as the 'Old Lady' of Thread
Needle Street, the Bank was founded in 1694, nationalized on 1
March 1946, and gained independence in 1997. It was founded
by William Patterson and started as a very small organization
of twenty people. Standing at the center of the UK's financial
system, the Bank is committed to promote and maintain
monetary and financial stability as its contribution to a healthy
economy.
It has been the Government's banker and, since the late 18th
century, it has
been banker to the banking system more generally the
bankers' bank. As well as providing banking services to its
customers, the Bank of England manages the UK's foreign
exchange and gold reserves.