The Narasimham committee (1991) assumed that the financial resources of the commercial banks from the general public and were by the banks in trust and that the bank funds were to be deployed for maximum benefit of the depositors. This assumption automatically implied that even the government had no business to endanger the solvency, health and efficiency of the nationalized banks under the pretext of using banks funds for social banking, poverty eradication, etc. Accordingly, the Narasimham committee aimed at achieving three major changes in the banking sector in India; Ensuring a degree of operational flexibility. Internal autonomy for the banks in their decision making process. Greater degree of professionalism in banking operations. Towards this end, recommendations of Narasimham committee covered such subjects as directed investments, directed credit programmes, structural of rate of interest, structural reorganization of the Indian banking system, and organization, methods and procedures of banks in India. Continue reading
Indian Banking System
Lead Bank Scheme
A milestone in the history of banking in India is the nationalization of the 14 major commercial banks in 1969. This process was undertaken with the main objective of involving the banking sector in a big way in the nation building and economic development. To help to achieve this commendable objective, two committees were set up viz., National Credit Council Study Group with D.R. Gadgil as the Chairman and the Committee of Bankers under the chairmanship of Nariman. These committees independently went into their terms of reference and recommended an ‘area approach’ for involving the banks in economic development. This paved the way for giving a concrete shape to the Lead Bank Scheme. As nationalization of banks took place to extend and expand the banking services to all the non-banked areas especially the rural areas, Continue reading
Maturity Gap Analysis and Duration Gap Analysis in IRR Calculation
Maturity Gap Analysis The simplest analytical techniques for calculation of IRR exposure begins with maturity Gap analysis that distributes interest rate sensitive assets, liabilities and off-balance sheet positions into a certain number of pre-defined time-bands according to their maturity (fixed rate) or time remaining for their next repricing (floating rate). Those assets and liabilities lacking definite repricing intervals (savings bank, cash credit, overdraft, loans, export finance, refinance from RBI etc.) or actual maturities vary from contractual maturities (embedded option in bonds with put/call options, loans, cash credit/overdraft, time deposits, etc.) are assigned time-bands according to the judgement, empirical studies and past experience of banks. A number of time bands can be used while constructing a gap report. Generally, most of the banks focus their attention on near-term periods, viz. monthly, quarterly, half-yearly or one year. It is very difficult to take a view on interest rate movements beyond a year. Continue reading
Ethical Issues in the Banking Industry
Over the years, banks have undergone tremendous growth in many aspects of their operations, starting with the type of customers they deal with to the manner in which information is received, recorded, transformed, and finally used. Ultimately, banks have unraveled the whole mystery of discrimination as to what customers to offer services to or not by categorizing their clients in terms of their income structure. This classifying of customers is meant to assist in the decision making process as to what customer receives what treatment, but it is also meant to assist the banks in understanding the type of customers to offer better services to. Therefore, regulated by their policy of information non-disclosure, banks would obtain very crucial information about various customers (their age, sex, race, employment status, as well as income level) with a notion that they are adhering to the Know Your Customer policy. This information is supposed Continue reading
Asset and Liability Management (ALM)
In banking, asset and liability management (ALM) is used to manage the risks that arise due to mismatches between the assets and liabilities (debts and assets) of the bank. Banks face several risks like liquidity risk, market risk, interest rate risk, credit risk, and operational risk. Asset Liability Management (ALM) is a strategic management tool to manage interest rate risk and liquidity risk faced by banks, other financial services companies, and corporations. Banks manage the risks of Asset liability mismatch by matching the assets and liabilities according to the maturity pattern or matching the duration, by hedging and by securitization. Asset and liability management remain high-priority areas for bank regulators, with an emphasis on the management of market risk, liquidity risk, and credit risk. Asset/liability managers face the challenge of keeping pace with industry changes as new areas of risk are identified and new tools and models are developed to Continue reading
Different Products and Services Offered by Banks
Broad Classification of Products Offered by Banks The different products in a bank can be broadly classified into: Retail Banking. Trade Finance. Treasury Operations. Retail Banking and Trade finance operations are conducted at the branch level while the wholesale banking operations, which cover treasury operations, are at the head office or a designated branch. Retail Banking: Deposits Loans, Cash Credit and Overdraft Negotiating for Loans and advances Remittances Book-Keeping (maintaining all accounting records) Receiving all kinds of bonds valuable for safe keeping Trade Finance: Issuing and confirming of letter of credit. Drawing, accepting, discounting, buying, selling, collecting of bills of exchange, promissory notes, drafts, bill of lading and other securities. Treasury Operations: Buying and selling of bullion, Foreign exchange. Acquiring, holding, underwriting and dealing in shares, debentures, etc. Purchasing and selling of bonds and securities on behalf of constituents. The banks can also act as an agent of the Government Continue reading