1. 2.

3.
4. 5.

6.
7. 8.

Jayesh Darji (11110) Nagin Nadiya (11128) Jigar Sanchaniya (11136) Pritesh Chaudhary(11147) Naren Musal (11169) Rajat Gulati (11177) Jayvant Rathod (11179) Pragnesh Chaudhary (11193)

Module 3
No.
1 2 3 4 5 6 7

Chapter name
Capital Risk Risk management in bank Service and innovations

Presented By
Jayvant (79) , Naren (69) Jigar( 36) , Pritesh(47), Pragnesh(93)

Slides
3-10 11-23 24-35

Nagin(28)
International banking- Foreign exchange and trade finance Hi- tech Banking & E - banking Cash mgt and demand forecasting in ATM Merger & Acquisition in banks Rajat (77) 36-42 43-53 Jayesh (10)

JAYVANT RATHOD(11179)

Concept of Economic Capital

Risk based Capital StandardsRegulatory Control

Basel Accord 1
Basel Accord 2

NAREN MUSAL (11169)

Determination of Capital Requirement Under New Basel Plan

1. Capital requirement for Credit Risk 2. Capital requirement for Interest rate risk 3. Capital Requirement for Operational risk 4. Calculation of Capital ratio =
Capital (Credit risk + Market risk + Operational risk)

Source Book ch.11 Capital Risk , Regulation and Adequacy)

Application of Capital Adequacy to Banks in India

1. Capital funds of banks operating in India a. Tier 1 Capital b. Tier 2 Capital
2. Calculating Capital charges a. Capital Charge for Credit Risk b. Capital Charge for Market Risk c. Capital Charge for Operational Risk

Source Book ch.11 Capital Risk , Regulation and Adequacy)

(1)The changing face of banking risk

Different kind of banking risk Credit risk Exchange risk Interest risk Liquidity risk Country risk Other non-financial risk

(2) Asset liability management

To reduce the asset liability risk, it is important to use

asset liability management ALM is concerned with strategic balance sheet management Risks caused by changes in interest rates and exchange rates, credit risk and the banks liquidity position have to be monitored and mitigated. Many of banks are having Asset Liability Management Committee(ALMO) that comprises of a group of top or senior management personnel

 The responsibility of such committee is to manage the

banks asset and liability to balance the various risk exposure, to enable the bank achieve its operating objective The ALCOs primarily focus on managing the banks liquidity and interest rate risks, while a separate committee would be involved in managing credit risk The ALCOs challenge is to assess the probability with which similar event would occur and to have the minimum impact on the banks expected performance and solvency

(3)INTEREST RATE RISK MANAGEMENT

Interest rate risk arises when there is a lot of

fluctuation around interest rate Interest rate risk management can be used to enhance profitability and shareholder value The two most common perspective for assessing a banks interest rate risk exposure are
o The earning perspective that focuses on short term

earning o The economic perspective that looks at the long term economic viability of the bank

Measuring interest rate risk

Traditional GAP Analysis
Earning Sensitivity Analysis Rate Adjusted GAP

Duration GAP Analysis

(4)Managing interest rate risk

An interest rate derivative is a derivative where the

underlying asset is the right to pay or receive a notional amount of money at a given interest rate. The interest risk derivative function as tools that banks can use to actively manage interest rate risk SWAP A swap is a derivative in

which counterparties exchange cash flows of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved.

Interest rate futures An interest rate

future is a financial derivative (a futures contract) with an interest-bearing instrument as the underlying asset. Examples include Treasury-bill futures, Treasury-bond futures and Eurodollar futures. Interest rate futures are used to hedge against the risk of that interest rates will move in an adverse direction, causing a cost to the company. Forward rate agreements A forward rate agreement (FRA) is a forward contract, an over-the-counter contract between parties that determines the rate of interest, or the currency exchange rate, to be paid or received on an obligation beginning at a future start date

Interest rate option Interest Rate Options are a form of Exchange Traded Derivative whose underlying value is the rate on various Financial Interest rates, including treasury bills, and bonds. There are two types of option, Calls and Puts. Calls give the bearer the right, but not the obligation, to benefit off a rise in interest rates. A put gives the bearer the right, but not the obligation, to profit off a decrease in interest rates. Speculating on interest rates, or on any

investment, is a risky strategy. Interest rate options should only be used by sophisticated investors with a high tolerance for risk.

(5)Liquidity risk management

Liquidity is very much important for the well

functioning of both the financial market and the banking sector Liquidity problems can have an adverse impact on the banks earning and capital, and may lead to the collapse of the bank itself A liquidity crisis in a large bank could give rise to systematic consequences impacting other banks and the countrys banking system as a whole

Factors influencing bank liquidity Assess to financial markets Financial health of the bank Balance sheet structure Liability and asset mix Timing of funds flow Exposure to off-balance sheet activity Impact of other risks

Modern approaches to liquidity risk management

It is evident that liquidity risk is closely linked to the

nature of banking asset and liabilities It follows that banks should be able to manage their liquidity position both on an everyday basis as well as in the long term, to ensure that liquidity risk is effectively mitigated Similar to a banks loan policy, many banks have the practice of formulating a liquidity polity for the bank

(6) Applicability to banks in india

Interest rate derivatives in india

Indian participation in the derivative market has

accelerated since last 1990s An interest rate derivative is a derivative where the underlying asset is the right to pay or receive a notional amount of money at a given interest rate. These structures are popular for investors with customized cash flow needs or specific views on the interest rate movements (such as volatility movements)

NAGIN NADIYA (11128)

Globalisation and innovation

IMF and WTO have considerable pressure on the Indian

government to undertake the economic reform more liberal Now all bank face the some predetermined the international norm Transparency and flexibility of the operation increase No. of banks are increasing Increase in competition Globalisation has brought the structural changes Entry of foreign banks become easy through the strategic alliances or acquisition of domestic banks

Example icici

First bank which started the INTERNET banking Bank offer nomination facility, phone banking facility They offer the saving bank account, FD account, recurring deposit, power pay facility, locker facility, Bank @campus etc., Innovation through network ATMs Internet banking Port folio management service Innovation through STEPS

SBI

International banking- Foreignexchange

Introduction
commercial banks have been authorized as dealer Bank classify their international operation in to two

segment
1. 2.

Merchant segment Inter segment

Basic concept
Exchange rates
It is the price of one currency in term of another
Active currency

FOREX market
24 hour open market

World wide market

Transfer system
Telegraphic transfer(TT) Mail transfer(MT)

Demand draft (DD)

Travellers cheques(TC)

Forex transaction There are two type A. Trade transaction B. Interbank transaction Forex dealing rooms
It is a nodal point of all forex activity of the bank Dealing take place trough telephone and computer Each bank have organisational structure in three segment
A. B. C.

Front office Mid office Back office

International banking trade finance

Trade finance import Letter of credit(LC)
It an instrument of settling the trade payments and its

arrangement of making payment against the document It deals with the document not with the goods Document collection can be done through two way
A.

B.

Document against payment Document against acceptance

Parties involve in the import transaction are

Applicant Issuing bank Beneficiary Advising bank

Confirming bank
Reimbursing bank

Types of LC

Irrevocable LC Confirmed LC Unconfirmed LC Revolving LC Deffered payment LC

Payment is done in installment

Transferable LC third party Anticipatory LC Red clause LC Standby LC Guarantee given

Trade finance- export

The export credit scheme to finance exporters was

introduced in 1967 There are two type of trade finance

Pre-shipment finance B. Post-shipment finance
A.

Pre-shipment

It is short term working capital credit It is usually extended as packing credit(PC) It is granted against incentive receivable from govt, against drawback

There are two type of packing credit available A. PC in local currency

Such PC is given for period not exceeding 360 days It is granted at concessional rate Refinance can be available

B. Pre shipment credit in foreign currency(PCFC) RBI refinance is not available It is similar to the rupee export credit but it is done in the foreign currency

Post-shipment finance
It is granted by bank to an exporter of goods and

services from the date of extending the shipment of goods It can be extended in following form
Negotiation B. Purchase C. Discount of export bills under confirmed order contract
A.

RAJAT GULATI (11177)

E-Commerce
1.

E- Finance
Financial services like Insurance , Mutual Funds, Brokering

2. E- Money Prepaid payment mechanism

Benefits of Electronic Banking

For banks:

Efficiency Price Customer base Customer satisfaction and services Image

Systematic Important Payment System(SIPS) RTGS, NEFT Financial market clearing and retail payment facilities

For customers:

E- Payment: Importance of payment and settlement System

Secured and safe transfer of money and exchange in financial

claims embedded in financial instrument Central bank acts as a supervisor and regulator of payments Technology is a primary contributor

International standards :The committee on payment and settlement system set up by BIS, with objective of strengthening financial market infrastructure Formed by G10 central bank in 2001. and now includes 25 central bank in 2009.

Payment System
Paper Based :- High value clearing , checques Electronic:- RTGS, NEFT ,ECS Plastic Money :- Credit card, Debit card Other channels:

ATM Internet Banking Mobile Banking (M- BANKING) Prepaid Instrument

Security In E - Banking
Identifying Theft 2. Carding / skimming:1.

Carding is buying /selling of stolen a/c no, card no, magnetic strips Skimming is duplication of electronic data

3. Mules:- person recruited over internet for the

purpose being intermediaries for illegally acquired funds

4. Phishing:i. E mail Phishing ii. Pharming iii. Spear Phishing iv. Phlash Phishing v. Vishing (Voice Phishing ) vi. Man in the Middle vii. Man in the Browser

Jayesh Darji(11110)

 ATM has now become the medium for non cash

transaction such as payment of bills, insurance payment, printing of statement, or even using the internet facility ATM services increase the efficiency of customer as well as banks so its proper management is required ATM services help the banks to serve their customer at faster rate, it can avoid the human intervention

Why cash management required in ATM

For the following reason it is reqired 1. Idle cash 2. Shortage of cash 3. Surplus of cash 4. Optimum cash

Strategy for cash management Cash forecasting Managing cash flow Optimum level of cash holding Motive of cash holding For transaction Precaution motive Speculative motive Volatility purpose

Players in the ATM cash management

RBI

Maun branch (who is managing)

Retail branch (where ATM is attached) Delivery channel co-ordinators Out source agents who take care of the physical cash

movement( security guard) ATM vendor or supplier

Demand factor in ATM

Location of ATM
A. B. C.

Resi areas Business areas Remote areas

Nu of current and saving account No. of pension account No. of salary account Seasonal factor Total deposite and advances

Judgemental factor
Safety margin, it can be taken care of by fixing cash

retention limit Lead time for cash measurement Cash supply time to ATM Cash inflow, categorising in ATM

Maximum cash withdrawal withdraw % of ATM holding To avoid cash out situation If any ATM is used 50 to 100 time for transaction then it is called profitable otherwise loss making

Main issues in cash in ATM for branch success

Cash retention limit and categorisation of ATM, it should be reviewed frequently

Avoiding cash out situation

24 hrs security arrangement Co-ordination and control by banks

MERGER and ACQUISITION

Major Mergers
Bank of Madura and ICICI bank (March 2001)
Global Trust Bank (GTB) and Oriental Bank of

commerce (OBC) ( early 1990s) Bank of Tokyo Mitsubishi and United Financial of (UFJ Holdings)

New strategies
Objective :- Profitabilty
Interest :-Shareholder Strategies pro active

Segment :- Target banking

Business:- Fee Based NPA mgt:- Recovery mgt cell

Concentration:- Investments
Hr policy :- Hire and Fire