Basic Banking Upload

7/31/2019 Basic Banking Upload

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SymbioConsulting Basic Banking 1

A Program on

Introduction to International Banking

Facilitator : C Rajanikanth, Symbio Consulting

[email protected] , +94442 92542


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Program Overview

Session 1: Introduction to Banking

Session 2: Banking Products

Session 3: Central Bank & Regulations

Session 4: Payments - General

Session 5: Payments UK practices


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Session 1: Introduction to Banking

Why Banks are needed? (Evolution)

Different segments of Banking

Product Overview Making sense of it all

Banking terminologies


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Banking

Loans & Deposits

Electronic fund transfer

Foreign Exchange

Cheque Clearing

Current /Savings ACs

Shares / BondsMoney Market

Letter of Credit

Private BankingInvestment Banking Custodial Services


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Banking (Contd..)

SWIFT

RTGS systems

Mortgages

Capital Market

Underwriting

Interest Rates

Fixed / FloatingDerivatives

Trade Finance

Asset ManagementCollections Nostro Accounts


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Different Banking segments

Retail Banking

Commercial Banking

Investment Banking

Private Banking


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How Banks Came about?

Evolution Problems with Bartering

Need and Evolution of Money Gold

Goldsmith Banking

Fractional Reserve Banking Early Day functions of a Bank

Deposit, Loan and Payment services

Why Banks will remain a Regulated industry?


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Banks as Financial Intermediary

Trade in money

Issues Faced when Borrowers /Lenders come together Credit Risk / Counterparty Risk Higher Transaction Cost

Maturity Mismatch Liquidity Risk

Issue of Aggregation

Lenders Borrowers


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Lender and Borrower mitigated most of their risks

discussed before Transfer of Risk to Bank

Depositor(Lender)

BorrowerBANK asFinancial

Intermediary


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Retail Products - Loans

Secured Loan

Unsecured Loan

BANK CUSTOMER

Start: Cash

Start: Collateral

End: Collateral

End: PrincipalPlus Interest

BANK CUSTOMER

Start: Cash

End: PrincipalPlus Interest


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Basic Risks transferred to the Bank Credit Risk

Liquidity Risk

Asset / Liability Mismatch

Need for Asset Liability Management (ALM) Role of Money Market

Introduction to Interest Rate risk faced by Banks

Looks like all are happy (Lenders, Borrowers, Bank)


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Alternate model to Bank as intermediary

Need for an alternate model Interest rate for deposits given by Bank / Interest rate charged by Bank

for borrowers

But needs to overcome problems (Discussed before)

Evolution of Credit rating agencies Need

How it works?

How to overcome Liquidity Risk for Lenders and

Borrowers


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Alternate model to Bank as intermediaryCapital Market

Investor

(Lender)

Issuer

(Lender)

Investor(Lender)

Primary Market(e.g. IPO)

Secondary Market(e,g. Trades inStock Exchange)


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Putting it all togetherSources and Uses of Funds

Sources of Funds Shareholders Capital

Deposits

Accounts (Savings / Current)

Time deposits / Fixed Deposits

Borrowings

Money Market borrowings

Borrowings through Capital Market (e.g. Bonds)

Interest Earned from Loans

Fees, Charges and commissions earned from services

Fees for payment related services Advisory roles, Brokerage, Underwriting

Commissions from issuing LC, Guarantees etc.

Trading Profits


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Putting it all togetherSources and Uses of Funds

Uses of Funds Loans

Retails Loans Housing Loan, Personal Loan, Vehicle Loan etc.

Commercial Loans Term Loan, Working Capital etc.

Trade finance related loans (Bill discounting, Negotiating, etc.) Money Market Placements

Investment

Shares, Bonds and other financial instruments

Interest Paid on deposits

Trading Loss Loan write-off (NPA)


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Session 2Banking Products

Retail Products

Corporate Lending

Trade Finance

Foreign Exchange Money Market

Capital Market

Cash Management


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Retail Products

Services provided by Banks primarily to individuals Mass Market

Via Branch Network

Different types of Accounts Current Account

For people / entities with commercial or business interests

Typically overdrafts are allowed

Ability to withdraw more than the balance treated like a loan for theperiod of overdraft

No Restrictions on number of transactions Typically does not carry interest (Exceptions are there!!)


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Retail Products

Savings Account

For individuals

Pays interest on the balance

Overdrafts are not allowed

Restrictions on access, no of withdrawals etc.

In some countries do not have Cheque books, ATM facility etc.

Fixed deposits

For a fixed maturity period

Typically carries interest higher than savings account

Increases as the fixed period increases

Can be broken in between typically with penalty


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Retail Products - Loans

Collateral may have to be transferred physically to Banks For e.g. Gold jewellery

Collateral may have to be assigned / hypothecated For e.g. Vehicles

Unsecured loans are more risky and hence wouldtypically carry higher interest than secured loans Housing loans carry less interest than personal loans

Interest computation


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Retail Product - Loans

Interest Rates Fixed Interest

Interest rate is fixed for the term of the loan

Floating rate

Varies during the term of the loan Benchmark rate (+ or - )Spread

Reset Frequency

For e.g. LIBOR 3M + 0.75 reset every 3 months.


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Retail ProductAccount services

Funds Transfer

Demand Drafts / Bankers cheque

Standing instructions

Cheque issuance / Stop cheque services Bill payments

Locker services

Account statements


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Retail Products - Payments

Covered in details under Payments which is a latertopic


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Corporate Lending

Basic principals of Lending common for Retail as well ascorporate lending Secured / Unsecured

Fixed interest rate / Floating interest rate

Term Loan / Working Capital / Overdraft Depends on the basis of requirement

Credit worthiness

Collateral provided


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Corporate LendingCredit appraisal workflow

Loan Workflow Borrower seeking loan applies for Bank assistance

Details regarding Borrower, purpose, amount etc. are furnished in the application

Bank scrutinises and assesses the following

Purpose of loan and its cost

Promoters contribution

Loan requirement

Term Loan

Working Capital

Viability

Profitability

Collateral for assistance

Cash Flow

Credit Report.


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Corporate LendingCredit appraisal workflow

On satisfactory assessment, Bank sanctions limits (Facilities) for LongTerm loan and / or Working Capital assistance.

Revolving / Non-Revolving facility

Loan Agreement is executed between Bank and borrower. It sets theterms and conditions of assistance.

While financing projects, Bank will disburse the loan amount in one ormore tranches depending on the need and progress of project.

Bank monitors end use of funds, periodically reviews operations in theloan account, visits borrower premises, inspects production and plantmaintenance, ensures availability of insurance cover and checks

sufficiency of collateral. Repayments could be Bullet or Scheduled

In retail loans typically amortized - EMI


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Syndicated Loan

Syndicated Loan Loan granted to a client by a group of Banks

Primarily because of the size of the loan e.g. $500 Million

Agreed Loan Amount

USD500,000,000.00

Bank A Bank B Bank C

Bank D Bank E

Client


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Trade Finance

Involved in case of international trade Need for international trade

Different resourcesImpossible and unproductive to be Self-sufficient

Concept of specialization Benefits

Clients needs Importer Buyer of Goods

Is worried whether goods will be delivered according to specification

By agreed time at agreed location

Exporter Seller of Goods

Is worried whether the importer would pay-up upon delivery


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Trade finance

Banks Roles in Trade finance Issue LC to importer If importer is a Client

Advises exporter on receipt of LC If exporter is a Client

Arranges to fund the imported , if needed

Arranges to fund the exporter Bill discounting Manage the foreign exchange component involved


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Trade financeImport LC process

Import LC workflowLetters of CreditImport

Seller/Exporter Buyer/Importer

Sellers Bank

record LC

Buyers BankLC creation

contract

LCapplication

2

1

3

LC issuance4

AdviseLC

6

5

shipment7

Documents

8

Documents9

Payment12

Documents

13

Usual

ABN

role

Payment

15

Doc Checking10

Collect goods14

Debit client11


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Trade financeExport collections

In some cases LC may not be involved Bank acts just as a collecting agent on behalf of the exporter

Export

Collections

Seller/Exporter Buyer/Importer

Sellers Bank

Receive Documents

Sellers Banks

Overseas BranchReceive Documents

contract1

6

Documents5

4

shipment2

Documents

3

Payment9

Documents

7

Payment

8

Payment

10

Usual

ABN

role


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Participants in Trade finance workflow

Participants Importer / Exporter

Transportation companies e.g. shipping company

Insurance companies

Governments Import export controls /licenses Customs and excise Duties

Professional goods inspection companies

Sellers and buyers Banks

Sellers and Buyers agents


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Trade financeOther aspects

Documentation involved Import relies a lot on documents

Bill of Lading

Inspection certificates

Insurance documents Key terms with respect to shipping e.g.

FOB Free on Board

EXW - Ex-works