MA0044 INSTITUTIONAL BANKING

Que.1 The institutional banking has its own challenges. Could you explain those challenges?

Ans. Banks are facing challenges in several areas, but there are four that stand out in todays market.

The top 4 challenges facing banks and financial institutions

1. Not making enough money. Despite all of the headlines about banking profitability,
banks and financial institutions still are not making enough return on investment, or the
return on equity, that shareholders require.
2. Consumer expectations. These days its all about the customer experience, and
many banks are feeling pressure because they are not delivering the level of service
that consumers are demanding, especially in regards to technology.
3. Increasing competition from financial technology companies. Financial
technology (FinTech) companies are usually start-up companies based on using
software to provide financial services. The increasing popularity of FinTech companies is
disrupting the way traditional banking has been done. This creates a big challenge for
traditional banks because they are not able to adjust quickly to the changes not just in
technology, but also in operations, culture, and other facets of the industry.
4. Regulatory pressure. Regulatory requirements continue to increase, and banks need
to spend a large part of their discretionary budget on being compliant, and on building
systems and processes to keep up with the escalating requirements.

5. Cyber-crime Facing the New Wave of criminal

It is now exceptional to read about a bank robbery where criminals have entered into a
bank branch and physically taken money out of the building. The introduction of more
effective security systems, such as bullet proof windows and barriers and closed-circuit
television, means that only the foolhardy would risk trying to steal from a branch.

Unfortunately, that does not mean that the banking sector is safe. On the contrary, the
banking sector is facing a more serious threat where the perpetrators do not even need
to physically enter the branch. The IT systems of the banks are now the focus of
determined criminals who can transfer millions of pounds (or indeed any currency)
within seconds to different accounts and move money across jurisdictions and borders
with a few strokes of a keyboard. The full extent of the threat of cyber-crime is only
emerging and is almost certainly going to hit the headlines in 2015. With IT systems of
the larger banks under scrutiny for failures and inadequate controls, it is open to
question whether the level of security and infrastructure will be sufficiently robust to
withstand the challenge of cyber-crime.

6. Effecting cultural change

Tracey McDermott, head of enforcement at the Financial Conduct Authority, put it most
succinctly: The cultural change we are looking for is perhaps analogous to the shift in
attitudes to drink-driving between my parents generation and my own. For my parents
and their peers, reluctance to have a drink and get behind the wheel was mainly
because they were scared of being caught For my generation, however, drinking and
 driving was presented as a moral issue. We were made to think about whether it was
right or wrong by forcing us to focus on the impact it could have on others lives.

Whilst every chief executive of every bank has spoken of their desire to put customers
first and change the culture within their organization, no one has explained how they
intend to do this in practical terms. Will next year be the one where that change
begins? It has to be if the banking sector is going to regain the trust of the public and
their customers. My prediction is that technology will be the driver for this cultural
change with every sale and every trade checked for the misdemeanours of the recent
past.

7. More stress testing

One of the conclusions reached after the banking crisis of 2008 is the notion that banks
need to have greater capital reserves to avoid being too big to fail. As a consequence
banks have undergone stress tests and required to hold ever greater amounts of
capital. This avoids dealing with the more thorny issue of the inter-relationships within
the global banking community and how one bank can be intrinsically linked to a host of
others. The weakest link may yet still be capable of threatening the stability of the
worlds banks. However, for the time being the major banks will need to comply with
the current and future requirements of capital reserves.

The full knock on effect of these requirements will come to light in 2015 particularly if
the predicted growth rates for the major economies of the world slow further.

8. Dealing with heightened regulatory scrutiny

With 2014 seeing record fines for LIBOR and FX rigging, the banking community would
like to think it has seen the last of the scandals. Unfortunately, the one thing we can
safely predict is that there will be more regulatory investigations and issues to surface
in the next year as regulators across the globe continue to scrutinise the current and
past behaviour of banks. It is likely that 2015 will see a number of individuals facing
prosecutions for their part in the major scandals of 2014.

Banks will have to continue to invest heavily in compliance and risk monitoring to
ensure that they can deal with this increasing regulatory scrutiny.

9. Facing another economic downturn?

As China faces more unrest in Hong Kong while its economy has been slowing down
coupled with Russias own economic woes, the outlook does not look promising. The
Western economies are struggling to meet predicted growth rates and instability in the
Middle East continues cause concern. Nor is it clear how long the historically low
interest rates and fiscal engineering across the globe can be maintained.

Que.2 The role of EXIM Bank is not only increasing exports but also to combine the nations
foreign trade and investment for the complete growth of the economy. Illustrate.
Ans. Export-Import Bank of India (Exim Bank) was set up by an Act of the Parliament THE
EXPORT-IMPORT BANK OF INDIA ACT, 1981 for providing financial assistance to
exporters and importers, and for functioning as the principal financial institution for co-
ordinating the working of institutions engaged in financing export and import of goods
and services with a view to promoting the countrys international trade and for matters
connected therewith or incidental thereto.

Exim Bank has two broad business streams: one, the traditional export finance typical
of export credit agencies around the world and two, financing of export oriented units
(export capability creation), which are non-traditional for export credit agencies. Since
inception, Exim Bank has been the principal financial institution in the country for
financing project exports and exports on deferred credit terms. As per Memorandum
PEM (MEMORANDUM OF INSTRUCTIONS ON PROJECT EXPORTS AND SERVICE EXPORTS)
of Reserve Bank of India, the following constitute project exports:

i. Supply of goods / equipment on deferred payment terms

ii. Civil construction contracts
iii. Industrial turnkey projects
iv. Consultancy / services contracts

Exim Bank extends funded and non-funded facilities for overseas turnkey projects, civil
construction contracts, technical and consultancy service contracts as well as supplies.
Turnkey Projects are those which involve supply of equipment along with related
services, like design, detailed engineering, civil construction, erection and
commissioning of plants and power transmission & distribution
Construction Projects involve civil works, steel structural works, as well as associated
supply of construction material and equipment for various infrastructure projects.
Technical and Consultancy Service contracts, involving provision of know-how, skills,
personnel and training are categorised as consultancy projects. Typical examples of
services contracts are: project implementation services, management contracts,
supervision of erection of plants, CAD/ CAM solutions in software exports, finance and
accounting systems.
Supplies: Supply contracts involve primarily export of capital goods and industrial
manufactures. Typical examples of supply contracts are: supply of stainless steel slabs
and ferro-chrome manufacturing equipments, diesel generators, pumps and
compressors.

Exim Bank, under powers delegated vide the PEM, provides post-award clearance for
project export contracts valued upto USD 100 million. Project export contracts valued
above USD 100 million need to be provided post-award clearance by the inter-
institutional Working Group. The Working Group is a single-window clearance
mechanism, comprising Exim Bank as the convenor and nodal agency, RBI Foreign
Exchange Department and Export Credit Guarantee Corporation of India Ltd. [ECGC]. In
the case of very large value projects, officials of Ministry of Finance, Ministry of
Commerce and Industry and Ministry of External Affairs, Government of India, are
invited to participate in the Working Group Meetings. In order to obtain immediate
clarifications for speedy clearance of proposals by the Working Group, the exporters
concerned and their bankers are also associated with the meetings. With the same
objective, participation of the main sub-suppliers, sub-contractors or other associates
and their bankers in such meetings is also encouraged, particularly in respect of
proposals for high value contracts. Exim Bank also plays the role of a financier and
provides funded and non-funded support for project export contracts of Indian Entities.
 In addition to project exports, Exim Bank also extends fund-based and non-fund-based
facilities to deemed export contracts as defined in Foreign Trade Policy of GOI, e.g.,
- secured under funding from Multilateral Funding Agencies like the World Bank,
Asian Development Bank, etc.;
- contracts secured under International Competitive Bidding;
- contracts under which payments are received in foreign currency.

Exim Bank offers the following Export Credit facilities, which can be availed of by Indian
companies, commercial banks and overseas entities.

For Indian Companies executing contracts overseas

Pre-shipment credit

Exim Bank's Pre-shipment Credit facility, in Indian Rupees and foreign currency,
provides access to finance at the manufacturing stage - enabling exporters to purchase
raw materials and other inputs.

Pre-shipment credits are usually extended by exporters commercial banks for period
upto 180 days. Exim Bank extends pre-shipment / post-shipment credit either directly
or in participation with commercial banks. In order to offer one-stop banking products to
export clients, the Bank has also been offering short-term pre / post shipment credit
either directly or through exporters bankers. Exim Bank may consider extending pre-
shipment credit and post-shipment credit for periods exceeding 180 days, on case-to-
case basis and subject to the merits of the case.

Supplier's Credit

This facility enables Indian exporters to extend term credit to importers (overseas) of
eligible goods at the post-shipment stage.

Post-shipment Suppliers Credit can be extended to Indian exporters upto the extent of
the deferred credit portion of the export contract, either in Rupees or in Foreign
currency. The period of deferred credit and moratorium will generally depend on the
nature of goods [List A and List B of Memorandum PEM] or nature of projects, as per
guidelines contained in the Memorandum PEM of RBI.

For Project Exporters

Export Project Cash-Flow Deficit Financing Programme [EPCDF]

Indian project exporters (including those under Deemed Exports category) incur
expenditure in rupee or foreign currency while executing contracts i.e. costs of
mobilisation/acquisition of materials, personnel and equipment etc. Exim Bank's facility
helps them meet these expenses for -

a) Project Export Contracts;

b) contracts in India categorized as Deemed Exports in the Foreign Trade Policy of India.

Capital Equipment Finance Programme (CEFP)

Capital Equipment Finance Programme [CEFP] has been conceived to cater to capital
expenditure for procurement of capital equipment to be utilized across multiple
 contracts. CEFP provides direct access to Exim Banks finance for eligible Indian
companies for procurement of indigenous and imported capital equipment for executing
overseas projects / deemed export projects.

For Exporters of Consultancy and Technological Services

Exim Bank offers a special credit facility to Indian exporters of consultancy and
technology services, so that they can, in turn, extend term credit to overseas importers.

Guarantee Facilities

Indian companies can avail of guarantee facilities of different types to furnish requisite
guarantees to facilitate execution of export contracts (including deemed export
contracts) and import transactions.

Advance Payment Guarantee (APG): Issued to project exporters to secure a project

mobilization advance as a percentage (10-20%) of the contract value, which is
generally recovered on a pro-rata basis from the progress payment during project
execution.

Performance Guarantee (PG): PG for up to 5-10% of contract value is issued valid

until completion of maintenance period and/or grant of Final Acceptance Certificate
(FAC) by the overseas employer/client.

Retention Money Guarantee (RMG): This enables the exporter to obtain the release
of retained payments from the client prior to issuance of Project Acceptance Certificate
(PAC)/ Final Acceptance Certificate (FAC).

Other Guarantees: e.g. in lieu of customs duty or security deposit for expatriate
labour, equipment etc.

Eligibility: Indian project exporters securing overseas or deemed export contracts.

For Overseas Entities

Buyer's Credit

Overseas buyers can avail of Buyer's Credit from Exim Bank, for import of eligible goods
from India on deferred payment terms. As per Memorandum PEM guidelines, RBI has
authorised Exim Bank to extend overseas buyers credits upto USD 20 mn for project
exports without seeking approval of RBI.

The facility enables exporters/contractors to expand abroad and into non-traditional

markets. It also enables exporters/contractors to be competitive when bidding or
negotiating for overseas jobs.

Benefits to Foreign Customers

Enables overseas buyers to obtain medium-and long-term financing
Competitive interest rate against host country's high cost of borrowing.

Que.3 Enumerate the role of Tourism Finance Corporation of India

Ans. Tourism Finance Corporation of India Ltd.(TFCI) has been set-up as an All India Financial
Institution, pursuant to the recommendations of National Committee on
Tourism set-up under the aegis of Planning Commission in 1988. The main object of
setting-up the specialised financial institution was to expedite the growth of tourism
infrastructure in the country by providing dedicated line of credit on long term basis to
tourism related projects in the country. TFCI has successfully played the role of
investment catalyst for the tourism sector and has cumulatively sanctioned assistance
aggregating Rs.7815 crore upto 30th September, 2015 to 773 projects mainly in
tourism and other related sectors. TFCI provides financial assistance by way of rupee
loan, subscription to equity / debentures and corporate loans mainly to hotel projects,
amusement parks, ropeways, multiplexes, restaurants etc. With a view to diversify in
other related areas, TFCI has expanded the scope of its activities by including financing
of infrastructure projects, real estate projects and manufacturing projects to a limited
extent, within the scope of its activities.

TFCI, as a specialised financing institution, has contributed significantly in terms of

creation of tourism infrastructure throughout the country and thereby generating direct
employment opportunities. The assistance sanctioned so far has helped in creating over
46000 rooms in approved category of hotels which represents approximately 1/3rd of
the total rooms capacity in the country. The assistance sanctioned by TFCI has helped in
catalysing investment to the tune of Rs.26425 crore in tourism sector till 30th
September, 2015 over a period of time.

The responsibility for setting-up of TFCI was initially entrusted to IFCI Ltd. in
participation with other All India Financial Institutions and Banks. Accordingly, TFCI was
set-up in 1989 with initial equity of Rs. 50 crore which now stands increased to Rs.
80.72 crore. TFCI has been operating profitably since its inception and as on 30th
September, 2015, its free reserves aggregating Rs. 426.68 crore after payment of
dividend regularly. As on date, more than 60% of its equity is jointly held by IFCI / LIC /
State Bank of India / Bank of India and other banks and financial institutions, the
majority being with IFCI who holds 39.10% of equity. TFCI raises long term resources
from the market by way of Issue of Bonds besides utilising internal accruals.

TFCI views itself as a major investment catalyst for viable projects in tourism and other
related sectors and play a dominant role in creating tourism infrastructure in the
country.

Que.4 Microfinance Institutions (MFIs) in India face many challenges. Elucidate some of these
challenges.

Ans. Challenges Before the MFIs: No doubt, microfinance programme has shown
impressive achievements, but a number of challenges are there: Did this programme reach
the underprivileged? Whether everyone in need of microfinance intervention had been
reached by any of the agencies? Even if everyone had been reached, did they get the
required quantum of assistance to have sustainability? These questions are still very
 inconvenient to be answered because there are certain challenges associated with this
programme. Some of the main challenges have been discussed in the following
paragraphs.

Quality of SHGs: The third challenge is how to ensure the quality of MFIs in an
environment of exponential growth. Due to the fast growth of the SHG-Bank Linkage
Programme, the quality of MFIs has come under stress. This is reflected particularly in
indicators such as the poor maintenance of books and accounts etc. The deterioration in
the quality of MFIs is explained by a variety of factors including:

The intrusive involvement of government departments in promoting groups;

Inadequate long-term incentives to NGOs for nurturing them on a sustainable basis; and
Diminishing skill sets on part of the MFIs members in managing their groups. In my
assessment, significant financial investment and technical support is required for
meeting this challenge [23].

Regional Disparity: It has been observed that the microfinance programme is mainly
run by formal financial institutions with the help of SHGs. As a result, microfinance
programme is progressing in those areas of the country where there is tremendous growth
of formal financial institutions. Microfinance institutions were expected to reach those
areas where the formal banking system failed to reach and the poor people have to depend
on the money-lenders in order to meet their financial requirements. But actually, many big
MFIs are activating in those states where the banking network is very strong. In the
southern states, such as Andhra Pradesh, Tamil Nadu, Karnataka and Kerala, the spread
of

SHG bank linkage programme as well as the MFI programme is very large. But the north
and north-eastern region is almost neglected. In the southern India the spread of commercial
bank branch network is the highest (27.94 per cent) and these states cover 48.15 per
cent of the countrys total SHG members and 54.77 per cent of the MFI members. So,
approximately 50 per cent of the total microfinance programme beneficiaries belong to these
four south Indian states. In contrast to this, in the north-eastern region of India, bank
branch network is very limited and the coverage of microfinance programme is just 2.93 per
cent. The table also shows the region-wise branch network and the microfinance members
covered under SHG-Bank Linkage and MFI model in these different regions.

Deserving Poor are Still not Reached: The microfinance delivery models are not
exclusively focused on those who are below the poverty line or very poor. Though the
programme is spreading rapidly but with a slow progress in targeting the bottom poor
households. About 50 per cent of SHG members and only 30 per cent of MFI members are
estimated to be below the poverty line. According to Ghate (2008), approximately 75
million households in India are poor and about 22 per cent of these poor households are
currently receiving microfinance services. In order to run the groups successively and to
achieve higher repayment rates, they generally select the non-poor people as programme
beneficiaries. The study finds that the core poor are often not accepted in group lending
programmes by other group members because they are seen as a bad credit risk [24].
 In spite of the various institutional barriers, various psychological problems relating to
the poor people restrict them to join the programme. The extreme poor often lack self-
confidence so they hesitate to join a group where they have to deal with the other group
members, bank officials and other promoting institutions. The core poor are generally
too risk averse to borrow for investment in the future. They will therefore benefit only to a
very limited extent from microfinance schemes.

Que.5 Enumerate the role of Development Financial Institutions in the growth of international
trade in India.

Ans. The development of any country depends on the economic growth the country achieves
over a period of time. Economic growth deals about investment and production and also
the extent of Gross Domestic Product in a country. Only when this grows, the people will
experience growth in the form of improved standard of living, namely economic
development.

The following are the roles of financial system in the economic development of a
country.

Savings-investment relationship
To attain economic development, a country needs more investment and production.
This can happen only when there is a facility for savings. As, such savings are channelized
to productive resources in the form of investment. Here, the role of financial institutions is
important, since they induce the public to save by offering attractive interest rates. These
savings are channelized by lending to various business concerns which are involved in
production and distribution.

Financial systems help in growth of capital market

Any business requires two types of capital namely, fixed capital and working capital.
Fixed capital is used for investment in fixed assets, like plant and machinery. While working
capital is used for the day-to-day running of business. It is also used for purchase of raw
materials and converting them into finished products.

Fixed capital is raised through capital market by the issue of debentures and
shares. Public and other financial institutions invest in them in order to get a good
return with minimized risks.
For working capital, we have money market, where short-term loans could be
raised by the businessmen through the issue of various credit instruments such as bills,
promissory notes, etc.
Foreign exchange market enables exporters and importers to receive and raise funds
for settling transactions. It also enables banks to borrow from and lend to different types of
customers in various foreign currencies. The market also provides opportunities for the
banks to invest their short term idle funds to earn profits. Even governments are benefited
as they can meet their foreign exchange requirements through this market.
Government Securities market
Financial system enables the state and central governments to raise both short-term
and long-term funds through the issue of bills and bonds which carry attractive rates of
interest along with tax concessions. The budgetary gap is filled only with the help of
government securities market. Thus, the capital market, money market along with foreign
exchange market and government securities market enable businessmen, industrialists as
well as governments to meet their credit requirements. In this way, the development of the
economy is ensured by the financial system.
Financial system helps in Infrastructure and Growth
Economic development of any country depends on the infrastructure facility available in
the country. In the absence of key industries like coal, power and oil, development of other
industries will be hampered. It is here that the financial services play a crucial role by
providing funds for the growth of infrastructure industries. Private sector will find it
difficult to raise the huge capital needed for setting up infrastructure industries. For a long
time, infrastructure industries were started only by the government in India. But now,
with the policy of economic liberalization, more private sector industries have come
forward to start infrastructure industry. The Development Banks and the Merchant banks
help in raising capital for these industries.
Financial system helps in development of Trade
The financial system helps in the promotion of both domestic and foreign trade. The
financial institutions finance traders and the financial market helps in discounting
financial instruments such as bills. Foreign trade is promoted due to per-shipment and
post-shipment finance by commercial banks. They also issue Letter of Credit in favor of the
importer. Thus, the precious foreign exchange is earned by the country because of the
presence of financial system. The best part of the financial system is that the seller or
the buyer do not meet each other and the documents are negotiated through the bank. In
this manner, the financial system not only helps the traders but also various financial
institutions. Some of the capital goods are sold through hire purchase and
installment system, both in the domestic and foreign trade. As a result of all these, the growth
of the country is speeded up.

Que.6 Illustrate the importance of globalization in banking sector in India. How far the
convergence in Basel III norms important in this regard?

Ans. The importance of globalization in banking sector in India - The concept of Globalisation infers
that the globe is a single unit which functions as one when it comes to decision-making.
In other words, Globalisation implies the free movement of goods, services and capital
throughout the world. Globalisation involves the opening up of national economies to
global markets. This naturally and simultaneously results in the simultaneous reduction in
the role of the State to shape national policies. Many Socialists define Globalisation as a
primarily economic phenomenon, which involves increasing interaction and integration of
national economic systems. This leads in turn to growth in international trade,
investment and capital flows. Moreover, there is a rapid increase in cross-border social,
cultural and technological exchanges because of the phenomenon of globalisation.

The sociologist defines globalisation as a decoupling of space and time. With the advent
of instantaneous communications, knowledge, trade and culture can be shared around the
world simultaneously. This will ultimately result in an increase in international trade,
investment and capital flows.
On the other hand, some critics define Globalisation as ''the worldwide drive towards a
globalised economic system, dominated by supranational corporate trade and banking
institutions that are not accountable to the democratic processes or national governments.
Due to Globalization, all important institutions like the nation, state, family, work, services,
trade, leisure, culture, knowledge etc. are changing. As a result of this, life styles of people
throughout the world are also changing, making the world a single unit when it comes to
decision making.
The middle and late 90s witnessed great innovations in financial reforms, restructuring,
convergence globalization etc. These were accompanied by a rapid revolution in
communication technologies. Moreover, a major development was the evolution of the
''convergence'' of computer and communication technologies, such as the Internet, mobile /
cell phones etc. The arrival of foreign and private banks with their superior, sophisticated
technology-based services forced Indian Banks also to follow the same by going in for the
latest technologies so as to meet the threat of competition and retain their customer base.
This also brought in revolutionary products and services which have been orchestrated
by the Indian Software Industry.
Software Packages for Banking Applications in India had their beginnings in the mid
80''s. This move was spurred on by RBI and the Rangarajan Committee Report
which decided to computerize the Indian Banking branches in a limited manner. This move
was aimed at promoting competition and allows an easy assessment of relative vendor
capabilities. Gradually, even those who opposed computerization in government and banks
changed their perspective and within a few years our country became a superpower in
Information technology.
The early 90s saw a fall in hardware prices and the advent of cheap and inexpensive
but high-powered PCs and servers. Banks went in for what was called Total Branch
Automation (TBA) Packages.
We are now at the point when we have accepted the use of computers in every sphere
of our activity today.
Categories of Packages:
The IT Packages and services available in India can be broadly classified into the
following 6 types:
Stand-alone branch-level packages;
Multi-branch solutions;
Foreign packages;
Packages for specialized niche areas;
Service Branch / high-volume transaction processing packages;
IT Services;
Thus, we have a wide spectrum of Banking Software available in the market to fulfill the
various needs of the banking Industry. There are number of software companies, which
are developing software for the banking industry.

The entire banking sector has undergone a restructuring during recent years as a result
of recent developments. New technologies have added to the competition. The I-T
revolution has made it possible to provide ease and flexibility in operations to customers
thus making life simpler and easier. Rapid strides in information technology have, in
fact, redefined the role and structure of banking in India. Further, due to exposure to
global trends after Information explosion led by Internet, customers - both Individuals and
Corporates - are now demanding better services with more products from their banks.
The financial market has turned into a buyer's market. Banks are also coping and
adapting with time and are trying to become one-stop financial supermarkets. The market
focus is shifting from mass banking products to class banking with the introduction of value
added and customised products.
Public Sector Banks like SBI have also started focusing on this area. SBI plans to open
100 new branches called Personal Banking Branches (PBB) this year. The PBBs will also
market SBI's entire spectrum of loan products: e.g. housing loans, car loans, personal loans,
consumer durable loans, education loans, loans against shares and financing against gold.
 Customised banking products, such as Investment Advisory Services; photo-credit
cards; cash Management services; Investment products and Tax Advisory services have
already been introduced by a few foreign and private sector banks. A few banks have
gone in to market mutual fund schemes. Eventually, the Banks plan to market bonds and
debentures, when allowed. Insurance peddling by Banks will be a reality soon. The recent
Credit Policy of RBI announced on April 27, 2000 has further facilitated the entry of banks in
this sector. Banks also offer advisory services termed as 'private banking' to "high
relationship value" clients.
The bank of the future has to be essentially a marketing organisation that also sells
banking products. New distribution channels are being used; more & more banks are
introducing services like disbursement and servicing of consumer loans, Credit card
business. Direct Selling Agents (DSAs) of various Banks go out and sell their products.
They make house calls to get the application form filled in properly and also take your
passport-sized photo. Home banking has already become common. Now, you can order
a draft or cash over the phone or internet and have it delivered home. ICICI was the first
among the new private banks to launch its net banking service, called Infinity. It allows
the user to access account information over a secure line, request cheque books and stop
payment, and even transfer funds between ICICI Bank accounts. Citibank has been offering
net banking to customers.
Products like credit cards, debit cards, flexi deposits, ATM cards, personal loans
including consumer loans, housing loans and vehicle loans have been introduced by a
number of banks.
Advantages for Corporates
Corporates are also deriving profits from the increased variety of products and
competition among the banks. Certificates of deposit, Commercial papers, Non-convertible
Debentures (NCDs) that can be traded in the secondary market are gaining popularity.
Recently, market has also seen major developments in treasury advisory services. With the
introduction of Rupee floating rates for deposits as well as advances, products like
interest rate swaps and forward rate agreements for foreign exchange, risk management
products like forward contracts, option contracts and currency exchange are offered by
almost every authorised dealer bank in the market. This list of services is still growing.

Basel III
Basel III or Basel 3 released in December, 2010 is the third in the series of Basel
Accords. These accords deal with risk management aspects for the banking sector. In a
nut shell we can say that Basel iii is the global regulatory standard (agreed upon by the
members of the Basel Committee on Banking Supervision) on bank capital adequacy,
stress testing and market liquidity risk. (Basel I and Basel II are the earlier versions of the
same, and were less stringent)

According to Basel Committee on Banking Supervision "Basel III is a comprehensive set

of reform measures, developed by the Basel Committee on Banking Supervision, to
strengthen the regulation, supervision and risk management of the banking sector".

Thus, we can say that Basel 3 is only a continuation of effort initiated by the Basel
Committee on Banking Supervision to enhance the banking regulatory framework under
Basel I and Basel II. This latest Accord now seeks to improve the banking sector's ability to
deal with financial and economic stress, improve risk management and strengthen the
banks' transparency.
Basel 3 measures aim to:
 improve the banking sector's ability to absorb shocks arising from financial and
economic stress, whatever the source
improve risk management and governance
strengthen banks' transparency and disclosures.

The Major Features of Basel III

a) Better Capital Quality : One of the key elements of Basel 3 is the introduction of
much stricter definition of capital. Better quality capital means the higher loss-absorbing
capacity. This in turn will mean that banks will be stronger, allowing them to better
withstand periods of stress.

(b) Capital Conservation Buffer: Another key feature of Basel iii is that now banks will
be required to hold a capital conservation buffer of 2.5%. The aim of asking to build
conservation buffer is to ensure that banks a cushion of capital that can be used to absorb
losses during periods of financial and economic stress.

(c) Countercyclical Buffer: This is also one of the key elements of Basel III. The
countercyclical buffer has been introducted with the objective to increase capital
requirements in good times and decrease the same in bad times. The buffer will slow
banking activity when it overheats and will encourage lending when times are tough i.e. in
bad times. The buffer will range from 0% to 2.5%, consisting of common equity or other fully
loss-absorbing capital.

(d) Minimum Common Equity and Tier 1 Capital Requirements : The minimum
requirement for common equity, the highest form of loss-absorbing capital, has been raised
under Basel III from 2% to 4.5% of total risk-weighted assets. The overall Tier 1 capital
requirement, consisting of not only common equity but also other qualifying financial
instruments, will also increase from the current minimum of 4% to 6%. Although the
minimum total capital requirement will remain at the current 8% level, yet the required total
capital will increase to 10.5% when combined with the conservation buffer.

(e) Leverage Ratio: A review of the financial crisis of 2008 has indicted that the value
of many assets fell quicker than assumed from historical experience. Thus, now Basel III
rules include a leverage ratio to serve as a safety net. A leverage ratio is the relative amount
of capital to total assets (not risk-weighted). This aims to put a cap on swelling of leverage
in the banking sector on a global basis. 3% leverage ratio of Tier 1 will be tested before a
mandatory leverage ratio is introduced in January 2018.

(f) Liquidity Ratios: Under Basel III, a framework for liquidity risk management will be
created. A new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are to
be introduced in 2015 and 2018, respectively.

(g) Systemically Important Financial Institutions (SIFI) : As part of the macro-prudential

framework, systemically important banks will be expected to have loss-absorbing capability
beyond the Basel III requirements. Options for implementation include capital
surcharges, contingent capital and bail-in-debt.