The critical role of managing risks has now come into the open, especially against the experience of the recent East Asian crisis, where markets fell precipitously because banks and corporate did not accurately measure the risk spread that should have been reflected in their lending activities. Nor did they manage such risks or provide for them in their balance sheets. In India, the Reserve Bank has recently issued comprehensive guidelines to banks for putting in place an Asset Liability Management System. The emergence of this concept can be traced to the mid 1970s in the US when deregulation of the interest rates compelled the banks to undertake active planning for the structure of the balance sheet. The uncertainty of interest rate movements gave rise to interest rate risk thereby causing banks to look for processes to manage their risk. In the wake of interest rate risk, came liquidity risk and Continue reading
Bank Management
Bank Draft – Meaning and Definition
A bank draft is an order from one branch to another branch of the same bank to pay a specified sum of money to a person named therein or to his order. A draft is always payable on demand. Banks issue drafts at the request of the customers on their branches at the place of destination for remitting money from one place to another place. Any person who wants to remit money has to purchase a draft from the bank by paying the amount in advance to the bank. The purchaser of the draft then sends the draft to the payee’s place of residence by post or courier for the purpose of encashment at the drawee branch of the bank. The bank issuing the draft charges some commission depends upon the amount of the draft. The purchaser need not be a customer of the bank. The bank draft is like Continue reading
Open Market Operations by the Central Bank
The open market operations as a method of quantitative credit control are interpreted in two ways. In a broad sense, it refers to the buying and selling of government securities as well as other eligible papers like bills and securities of private concerns by the central bank. In a narrow sense it means the buying and selling of only government securities by the central bank in the money market. The process of open market operations affects the volume of credit, the level of business activity and the internal price level. The process is explained below. Suppose in an economy there is inflationary tendency and the expansion of credit is very high and the central bank wants to control this. Then the central bank will start selling securities in the open market to both the banks as well as the private individuals. When these securities are bought, payment is made in Continue reading
Definition of Development Banks
Development banks are those financial institutions engaged in the promotion and development of industry, agriculture and other key sectors. In the words of A.G. Kheradjou “A development bank is like a living organism that reacts to the social-economic environment and its success depends on reacting most aptly to that environment”. Kheradjou assigns an important task to the development banks. He feels that these banks should react to the socio-economic needs. They should satisfy the developmental needs of the economy and their success is linked to the satisfactory growth of the economy. In the views of William Diamond “A development bank has the opportunity to promote enterprises i.e. to conceive investment proposals and to stimulate others to pursue them or itself to carry them through, from ‘conception’ to ‘realization’. In principle, a development bank is well suited to assume this kind of role. Yet, enterprise creation is fraught with costs Continue reading
Development of Bank Payment Systems
As there is no single recipe for effective development of a national payment system, countries undergoing a reform process are frequently faced with questions relating to issues such as involvement and initiative for development of national payment systems, infrastructures needed and the supporting institutional arrangements, areas of priorities and so on. In order to give the necessary assistance and advice on the planning and implementation of reforms in national payment systems to the concerned authorities, the Committee on Payment and Settlement Systems (CPSS) has brought out a Report on Payment Systems Development (final Report in Jan 2006). The Report underlines that payment system development is a complex process that should be principally needs-based, not technology-based. Payment system reforms depend on parallel development of the banking system, institutional arrangements for payment services and payment infrastructures, and should therefore be a cooperative effort among the banking sector, regulatory agencies and other relevant Continue reading
Functions of Commercial Banks
The main functions of commercial banks are accepting deposits from the public and advancing them loans. However, besides these functions there are many other functions which these banks perform. Paul Samuelson has defined the functions of the Commercial bank in the following words: “The Primary economic function of a commercial bank is to receive demand deposits and a honor cheques drawn upon them. A second important function is to lend money to local merchants farmers and industrialists.” The major functions performed by the commercial banks are: 1. Accepting Deposits This is one of the primary functions of commercial banks. The commercial banks accept different types of deposits, the deposits may be broadly classified as demand deposits and time deposits. The former refer to the deposits which are repayable by the banks on demand by the depositors, while the time deposits are accepted by the banks for a fixed Continue reading