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Q1 Write short notes on i) CRR ii) SLR and iii) CRR.

Answeri) CRR - The present banking system is called a fractional reserve banking system, as the banks are required to keep only a fraction of their deposit liabilities in the form of liquid cash with the central bank for ensuring safety and liquidity of deposits. The Cash Reserve Ratio (CRR) refers to this liquid cash that banks have to maintain with the Reserve Bank of India (RBI) as a certain percentage of their demand and time liabilities . For example if the CRR is 10% then a bank with net demand and time deposits of Rs 1,00,000 will have to deposit Rs 10,000 with the RBI as liquid cash. CRR was introduced in 1950 primarily as a measure to ensure safety and liquidity of bank deposits, however over the years it has become an important and effective tool for directly regulating the lending capacity of banks and controlling the money supply in the economy. When the RBI feels that the money supply is increasing and causing an upward pressure on inflation, the RBI has the option of increasing the CRR thereby reducing the deposits available with banks to make loans and hence reducing the money supply and inflation. The RBI has the authority to impose penal interest rates on the banks in respect of their shortfalls in the prescribed CRR. According to Master Circular on maintenance of statutory reserves updated up to June 2008, in case of default in maintenance of CRR requirement on daily basis, which is presently 70 per cent of the total CRR requirement, penal interest will be recovered at the rate of three 3% per annum above the bank rate on the amount by which the amount actually maintained falls short of the prescribed minimum on that day. If shortfall continues on the next succeeding days, penal interest will be recovered at a rate of 5% per annum above the bank rate. In fact if the default continues on a regular then RBI can even cancel the banks licence or force it to merge with a larger bank. The CRR is applicable to all scheduled banks including the scheduled cooperative banks and the Regional Rural Banks (RRBs). The present level of CRR is 6.5%. Previously, there was a floor of 3% and ceiling of 20% on the CRR that could be imposed by the RBI; however since 2006 there is no minimum or maximum level of CRR that needs to be fixed by the central bank of India. At present, the RBI does not pay any interest to the banks on the CRR deposits. Prior to 1962, a separate CRR was fixed in respect of demand and time liabilities, however after 1962 the separate CRRs were merged and one CRR came into effect for both demand and time deposits of banks with RBI.

ii) SLR - Statutory Liquidity Ratio (SLR) is a term used in the regulation of banking in India. It is the amount which a bank has to maintain in the form of cash, gold or approved securities. The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the liabilities of the bank which are payable on demand anytime, and those liabilities which are accruing in one months time due to maturity) of a bank. This percentage is fixed by the Reserve Bank of India. The maximum and minimum limits for the SLR are 40% and 25% respectively. Following the amendment of the Banking regulation Act(1949) in January 2007, the floor rate of 25% for SLR was removed. Presently the SLR is 24% with effect from 8 November, 2008. The objectives of SLR are: 1. To restrict the expansion of bank credit. 2. To augment the investment of the banks in Government securities. 3. To ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India. The SLR is commonly used to contain inflation and fuel growth, by increasing and decreasing it respectively. This acts by decreasing or increasing the money supply in the system respectively. Indian banks holdings of government securities (Government securities) are now close to the statutory minimum banks are required to hold to comply with existing regulation. When measured in rupees, such holdings decreased for the first time in a little less than 40 years (since the nationalisation of banks in 1969) in 2005-06. While the recent credit boom is a key driver of the decline in banks portfolios of G-Sec, other factors have played an important role recently. These include: 1. Interest rate increases. 2. Changes in the prudential regulation of banks investments in G-Sec. Most G-Sec held by banks are long-term fixed-rate bonds, which are sensitive to changes in interest rates. Increasing interest rates have eroded banks income from trading in GSec. Recently a huge demand in G-Sec was seen by almost all the banks when RBI released around 108000 crore rupees in the financial system. This was by reducing CRR, SLR & Repo rates. This was to increase lending by the banks to the corporates and resolve liquidity crisis. Providing economy with the much needed fuel of liquidity to maintain the pace of growth rate. However the excercise became futile with banks being over cautious of lending in highly shaky market conditions. Banks invested almost 70% of this money to rather safe Govt securities than lending it to corporates. Statutory Liquidity Ratio or SLR refers to the amount that all banks require to maintain in cash or in the form of Gold or approved securities. Here by approved securities we mean, bond and shares of different companies.

This Statutory Liquidity Ratio is determined as percentage of total demand and percentage of time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers on there anytime demand. The liabilities that the banks are liable to pay within one month's time, due to completion of maturity period, are also considered as time liabilities. In India, Reserve Bank of India always determines the percentage of Statutory Liquidity Ratio. There are some statutory requirements for temporarily placing the money in Government Bonds. Following this requirement, Reserve Bank of India fixes the level of Statutory Liquidity Ratio. At present, the minimum limit of Statutory Liquidity Ratio that can be set by the Reserve Bank is 25%. There are some reasons behind introducing Statutory Liquidity Ratio. The main objectives for maintaining the Statutory Liquidity Ratio are the following: Statutory Liquidity Ratio is maintained in order to control the expansion of Bank Credit. By changing the level of Statutory Liquidity Ratio, Reserve bank of India can increase or decrease bank credit expansion. Statutory Liquidity Ratio in a way ensures the solvency of commercial banks. By determining Statutory Liquidity Ratio, Reserve Bank of India, in a way, compels the commercial banks to invest in government securities like government bonds. If any Indian Bank fails to maintain the required level of Statutory Liquidity Ratio, then it becomes liable to pay penalty to Reserve Bank of India. The defaulter bank pays penal interest at the rate of 3% per annum above the Bank Rate, on the shortfall amount for that particular day. But, according to the Circular, released by the Department of Banking Operations and Development, Reserve Bank of India; if the defaulter bank continues to default on the next working day, then the rate of penal interest can be increased to 5% per annum above the Bank Rate. iii) Capital Adequacy Ratio (CAR)-It is a ratio that regulators in the banking system use to watch bank's health, specifically bank's capital to its risk. Regulators in the banking system track a bank's CAR to ensure that it can absorb a reasonable amount of loss. Regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system. Capital adequacy ratio is the ratio which determines the capacity of a bank in terms of meeting the time liabilities and other risk such as credit risk, market risk, operational risk, and others. It is a measure of how much capital is used to support the banks' risk assets. Bank's capital with respect to bank's risk is the most simple formulation, a bank's capital is the "cushion" for potential losses, which protect the bank's depositors or other lenders.

The ratio is calculated by dividing Tier1 + Tier2 capital by the risk weighted assets. Capital Capital Adequacy Ratio = -----------Risk Tier1 + Tier2 capital = ----------------------------Risk Weighted Assets * 8% Two types of capital are measured for this calculation. Tier one capital is the capital in the bank's balance sheet that can absorb losses without a bank being required to cease trading. Tier two capital can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. Minimum standard set by the Bank for International Settlements (BIS) is 8% (comprising 4% each of Tier 1 and Tier 2 capital). In early phases of Basel implementations, bank's capital adequacy was calculated as assets times ratio. This approach did not take risk profiles of assets into account. It is obvious that a bank should keep more capital in reserves for riskier assets. Since different types of assets have different risk profiles, CAR primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk assets. So, for example, in the most basic application, government debt is allowed a 0% "risk weighting". This also means that government debt is subtracted from total assets for purposes of calculating the CAR. On the other hand, investments in junior tranches of instuments collateralized with subprime mortgages are very risky, and woudl be assigned 100% risk weighting. Capital adequacy ratio (CAR) is often also called Capital to Risk (Weighted) Assets Ratio (CRAR). Tier 1 Capital: This is the bank's core capital comprising of share capital, disclosed reserves and minority interests. Some institutions expand this definition to include restricted forms of "equity-like" capital instruments. Tier 2 Capital: This includes supplementary Capital consisting of general loan loss reserves and revaluation reserves on investments and properties held for investment purposes.

Upper Tier 2 Capital: This is more stringent than that defined under BIS standards. This capital includes funds raised from hybrid and long-dated subordinated debt instruments which satisfy MAS conditions and a limited portion of the banks' unencumbered general provisions. Revaluation surpluses of bank's holdings in properties and equities are not allowed. Conventional subordinated debt or shorter term Tier3 debt instruments are also not allowed. Risk-Weighted Assets: This includes the total assets owned. The value of each asset is assigned a risk weight (for example 100% for corporate loans and 50% for mortgage loans) and the credit equivalent amount of all off-balance sheet activities. Each credit equivalent amount is also assigned a risk weight. Q 2 Define the following types of risksa)credit risk b) liquidity risk c)market risk d)operational risk e) interest rate risk Risk in a way can be defined as the chance or the probability of loss or damage. In the case of banks, these include credit risk, capital risk, market risk, interest rate risk, and liquidity risk. These categories of financial risk require focus, since financial institutions like banks do have complexities and rapid changes in their operating environments. a) Credit risk: The risk of counter party failure in meeting the payment obligation on the specific date is known as credit risk. Credit risk management is an important challenge for financial institutions and failure on this front may lead to failure of banks. The recent failure of many Japanese banks and failure of savings and loan associations in the 1980s in the USA are important examples, which provide lessons for others. It may be noted that the willingness to pay, which is measured by the character of the counter party, and the ability to pay need not necessarily go together. The other important issue is contract enforcement in countries like India. Legal reforms are very critical in order to have timely contract enforcement. Delays and loopholes in the legal system significantly affect the ability of the lender to enforce the contract. The legal system and its processes are notorious for delays showing scant regard for time and money that is the basis of sound functioning of the market system. Over two million cases are pending in 18 High Courts alone and more than 200,000 cases are pending in the Supreme Court for admission, interim relief or final hearing. This is not the full story. Since thousands of cases are pending in the lower courts, legal experts suggest that the average time taken by Indian courts for deciding a civil I case is around 7 to 10 years (Shah, 1998), if not more. The right of the lessor to repossess the leased asset, in case of default by the lessee was not very clear until the Bombay High Court ruled (and the Supreme Court upheld) that the lessor has a right to so repossess (in the case of Twentieth Century Finance Corporation vs. SLM Maneklal Industries Ltd.). Hence the required rate of return due to feeble contract enforcement mechanisms

becomes larger in countries like India. Therefore, a good portion of non-performing assets of commercial banks in India is related to deficiencies in contract enforcement mechanisms. Credit risk is also linked to market risk variables. In a highly volatile interest rate environment, loan defaults could increase thereby affecting credit quality. The expansion of banking sector was phenomenal during the 1970s and 1980s. Mobilization of deposits was one of the major objectives of commercial banks. To that extent, performance appraisal and incentive system within the banking sector was more based on deposit mobilization and achievement of deposit targets rather than on lending practices and credit risk assessment mechanisms. Hence, it is important that the banks reorient their approach in terms of reformulating performance appraisal systems, which focus more on lending practices and credit risk assessments in the changed scenario. Credit rating to some extent facilitates the understanding of credit risk. But the quality of financial information provided by corporates leaves much to be desired. In the case of the unincorporated sector, namely a partnership and proprietorship firm, the task of credit risk assessment is more complicated because of lack of reliable and continuous financial information. b) Capital risk: One of the sound aspects of the banking practice is the maintenance of adequate capital on a continuous basis. There are attempts to bring in global norms in this field in order to bring in commonality and standardization in international practices. Capital adequacy also focuses on the weighted average risks of lending and to that extent, banks are in a position to realign their portfolios between more risky and less risky assets. c) Market risk: Market risk is related to the financial condition, which results from adverse movement in market prices. This will be more pronounced when financial information has to be provided on a marked-to-market basis since significant fluctuations in asset holdings could adversely affect the balance sheet of banks. In the Indian context, the problem is accentuated because many financial institutions acquire bonds and hold it till maturity. When there is a significant increase in the term structure of interest rates, or violent fluctuations in the rate structure, one finds substantial erosion of the value of the securities held. d) Interest rate risk: Interest risk is the change in prices of bonds that could occur as a result of change: n interest rates. It also considers change in impact on interest income due to changes in the rate of interest. In other words, price as well as reinvestment risks require focus. In so far as the terms for which interest rates were fixed on deposits differed from those for which they fixed on assets, banks incurred interest rate risk i.e., they stood to make gains or losses with every change in the level of interest rates. As long as changes in rates were predictable both in magnitude and in timing over the business cycle, interest rate risk was not seen as too serious, but as rates of interest became more volatile, there was felt need for explicit means of monitoring and controlling interest gaps. In most OECD countries (Harrington, 1987), the situation was no different from that which prevailed in domestic banking. The term to maturity of a bond provides clues to the fluctuations in the price of the bond since it is fairly well-known that longer maturity bonds have greater

fluctuations for a given change in the interest rates compared to shorter maturity bonds. In other words commercial banks, which are holding large proportions of longer maturity bonds, will face more price reduction when the interest rates go up. Between1970s and the early part of 1990s, there has been a substantial change in the maturity structure of bonds held by commercial banks. During 1961, 34% of the central government securities had a maturity of less than 5 years and 27% more than 10 years. But in 1991, only 9% of the securities had a maturity of less than 5 years, while 86% were more than 10 years (Vaidyanathan, 1995). During 1992, when the reform process started and efforts taken to move away from the administered interest rate mechanism to market determined rates, Financial institutions were affected because longer maturity instruments have greater fluctuations for a given change in the interest rate structure. This becomes all the grimmer when interest rates move up because the prices of the holding come down significantly and in a marked-to-market situation, severely affect bottomlines of banks. Another associated issue is related to the coupon rate of the bonds. Throughout the 1970s and 1980s, the government was borrowing from banks using the statutory obligation route at artificially low interest rates ranging between 4.5% to 8% (The World Bank, 1995). The smaller the coupon rate of bonds, larger is the fluctuation associated with a change in interest rate structure. Because of artificially fixed low coupon rates, commercial banks faced adverse situations when the interest rate structure was liberalized to align with market rates. Therefore, the banking industry in India has substantially more issues associated with interest rate risk, which is due to circumstances outside its control. This poses extra challenges to the banking sector and to that extent, they have to adopt innovative and sophisticated techniques to meet some of these challenges. There are certain measures available to measure interest rate risk. These include: Maturity: Since it takes into account only the timing of the final principal payment, maturity is considered as an approximate measure of risk and in a sense does not quantify risk. Longer maturity bonds are generally subject to more interest rate risk than shorter maturity bonds. Duration: Is the weighted average time of all cash flows, with weights being the present values of cash flows. Duration can again be used to determine the Sensitivity of prices to changes in interest rates. It represents the percentage change in value in response to changes in interest rates. Dollar duration: Represents the actual dollar change in the market value of a holding of the bond in response to a percentage change in rates. Convexity: Because of a change in market rates and because of passage of time, duration may not remain constant. With each successive basis point movement downward, bond prices increase at an increasing rate. Similarly if rates increase, the rate of decline of bond prices declines. This property is called convexity. In the Indian context, banks in the past were primarily concerned about adhering to statutory liquidity ratio norms and to that extent they were acquiring government securities and holding it till maturity. But in the changed situation,

namely moving away from administered interest rate structure to market determined rates, it becomes important for banks to equip themselves with some of these techniques, in order to immunize banks against interest rate risk. e)Liquidity risk: Affects many Indian institutions. It is the potential inability to generate adequate cash to cope with a decline in deposits or increase in assets. To a large extent, it is an outcome of the mismatch in the maturity patterns of assets and liabilities. First, the proportion of central government securities with longer maturities in the Indian bond market, significantly increasing during the 1970s and 1980s, affected the banking system because longer maturity securities have greater volatility for a given change in interest rate structure. This problem gets accentuated in the context of change in the main liability structure of the banks, namely the maturity period for term deposits. For instance in 1986, nearly 50% of term deposits had a maturity period of more than 5 years and only 20%, less than 2 years for all commercial banks. But in 1992, only 17% of term deposits were more than 5 years whereas 38% were less than 2 years (Vaidyanathan, 1995). In such a situation, we find banks facing significant problems in terms of mismatch between average life of bonds and maturity pattern of term deposits. The Ministry of Finance as well as the RBI have taken steps to reduce the average maturity period of bonds held by commercial banks in the last few years. In other words, newer instruments are being floated with shorter maturities accompanied by roll over of earlier instruments with shorter maturities. In order to meet short-term liability payments, institutions have to maintain certain levels of cash at a!' points of time. Thus managing cash flows becomes crucial. Institutions could access low cost funding or could have assets that have sufficient short-term cash flows. Hence, banking institutions need to strike a reasonable trade off between being excessively liquid and relatively illiquid. The recent failure of many non-banking financial companies can be ascribed to mismatch between asset-liability maturities, since many of them have invested in real estate type of assets with short-term borrowings. Particularly in a declining real estate market, it becomes difficult for non-banking financial companies to exit and meet obligations of lenders. In such a context, liquidity becomes a much more significant variable even at the cost of forgoing some profitability.

Q 3 What do you understand by asset liability management in banks?


Answer- The post liberalization period in India saw a rapid industrial growth, which has further stimulated the fund raising activities. Over the past decade, there has been a remarkable shift in the sources of funds and its application. Funds are now being mobilized from investment

institutions, provident funds, charitable trust, quasi-government bodies and the household sector. Even the portfolio of assets for financial intermediaries is widening. For a business, which involves trading in money, rate fluctuations invariably affect the market value, yields/costs of the assets/liabilities and a consequent impact on net interest income (NIM). Tackling this situation would have been easy in a set up where the interest rate movements are known with accuracy. However, in an economy, which is just opening out, increased capital market volatility makes predicting interest rates a rather difficult task. But risk is an inherent quality in the business of commercial banks and financial institutions. With the widened resource base, service range and client base, risk profile of these financial entities has further broadened. The most prominent financial risks to which these entities are exposed are classified into interest rate risk, liquidity risk, credit risk and forex risk. Since risk is embedded in the business of banking, its efficient management holds key to the performance of banking companies.

The income of banks comes mostly from the spreads maintained between total interest income and total interest expense. The higher the spread the more will be the NIM. There exists a direct correlation between risks and return. As a result, greater spreads only imply enhanced risk exposure. But since any business is conducted with the objective of making profits and achieving higher profitability is the target of a firm, it is the management of the risk that holds key to success and not risk elimination. There are three different but related ways of managing financial risks. The first is to purchase insurance. But this is viable only for certain type of risks such as credit risks, which arise if the party to a contract defaults.

The second approach refers to asset liability management (ALM). This involves careful balancing of assets and liabilities. It is an exercise towards minimizing exposure to risks by holding the appropriate combination of assets and liabilities so as to meet earnings target of the firm.

The third option, which can be used either in isolation or in conjunction with the first two options, is hedging. It is to an extent similar to ALM. But while ALM involves on-balance sheet positions, hedging involves off-balance sheet positions. Products used for hedging include futures, options, forwards and swaps.

It is ALM, which requires the most attention for managing the financial performance of banks. Asset-liability management can be performed on a per-liability basis by matching a specific asset to support each liability. Alternatively, it can be performed across the balance sheet. With this approach, the net exposure of the banks liabilities is determined, and a portfolio of assets is maintained, which hedges those exposures. Asset-liability analysis is a flexible methodology that allows the bank to test interrelationships between a wide variety of risk factors including market risks, liquidity risks, actuarial risks, management decisions, uncertain product cycles, etc. However, it has the shortcoming of being highly subjective. It is up to the bank to decide what mix would be suitable to it in a given scenario. Therefore, successful implementation of the risk management process in banks would require strong commitment on the part of the senior management to integrate basic operations and strategic decision making with risk management. The scope of ALM function can be described as follows: Liquidity risk management. Management of market risks. Trading risk management. Funding and capital planning Profit planning and growth projection.

The objective function of the risk management policy in financial entities is two fold. It aims at profitability through price matching while ensuring liquidity by means of maturity matching. Price matching aims to maintain interest spreads by ensuring that deployment of liabilities will be at a rate more than the costs. This exercise would indicate whether the institution is in a position to benefit from rising interest rates by having a positive gap (assets > liabilities) or whether it is in a position to benefit from declining interest rates by a negative gap (liabilities > assets). The gap between the interest rates (on assets/liabilities) can therefore be used as a measure of interest

rate sensitivity. These spreads can however, be achieved if interest rate movements are known with accuracy. Similarly, grouping assets/liabilities based on their maturity profile ensures liquidity. The gap is then assessed to identify future financing requirements. However, there are often maturity mismatches, which may to a certain extent affect the expected results. SBI- Maturity pattern for FY01 (Rs bn) Maturing within 1-14 days 15-28 days 29 days-3 months >3<6 months >6<12 months >1<3 years >3<5 years > 5 years Total (A) Assets Liabilities 207 38 95 82 161 604 218 713 2,118 184 37 69 102 149 Gap Cumulative gap 22 1 27 -20 12 22 23 50 29 41 -639 -803 -144

1,284 -680 382 -164 54 659 2,262 -144

As can be seen from the above table, within each time bracket there are mismatches depending on cash inflows and outflows. While the mismatches upto one year would be relevant since these provide early warning signals of impending liquidity problems, the main focus should be on the short-term mismatches viz., 1-14 days and 15-28 days. Banks are however, expected to monitor their cumulative mismatches (running total) across all time periods by establishing internal prudential limits with the approval of the ALCO (asset liability committee). Thought SBI has managed a positive gap in the short tem duration, in the medium term duration (1-3 years), its liabilities are more than assets. If interest rates come down further from the current level, it would benefit by re-pricing these liabilities. The gap of Rs 680 bn is about 30% of total liabilities. In case interest rates rise, SBI is likely to see a steep fall in profitability, as over a quarter of its liabilities are not having a similar asset maturity, which could lead to a liquidity risk for the bank. HDFC Bank- Maturity pattern for FY01 (Rs bn) Maturing within 1-14 days 15-28 days 29 days-3 months >3<6 months >6<12 months Assets Liabilities 22 6 31 11 9 25 5 13 15 20 Gap Cumulative gap -3 1 18 -4 -11 -3 -2 16 12 1

>1<3 years >3<5 years > 5 years Total (A)

29 7 6 121

48 4 0 129

-19 4 6 -8

-18 -14 -8

While SBI has positive gap till the one-year maturity, HDFC Bank has negative spread in the first 28 days. (As a prudent measure, banks have been advised to operate within negative gap of 20% of cash outflows during 1-14 days and 15-28 days time periods.) HDFC Banks negative spread of Rs 3 bn in the first maturity period is 12% of cash outflows. In the 1-3 year period also, its negative spread of Rs 19 bn is 15% of total liabilities. This is relatively less than that of SBI. Consequently, low risk in case of volatile interest rates. For many Indian banks, investment in securities represents a strategy of deployment of liabilities. In the absence of a variety of products, flexibility for ALM is reduced and banks tend to book profits or show losses on the securities portfolio regardless of the underlying liability. Floating rate instruments are still not popular in the Indian markets. Moreover, short selling of securities is not permitted. Further, the banking provision which states that banks can have only one prime lending rate (PLR) and another long-term PLR constrains effective application of ALM. However, recently banks have started lending at sub PLR to attract the borrowers. Thus, ALM technique aims to manage the volume mix, maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole. This is to attain a predetermined acceptable risk/reward ratio. ALM helps in enhancing the asset quality, quantifying the risk associated with assets and liabilities and controlling them. In short the ALM process will involve the following steps: Reviewing the interest rate structure and comparing the same to the pricing of both assets and liabilities. This would help in highlighting the impending risk and the need for managing the same. Examining loan and investment portfolio in the light of forex and liquidity risk. Due consideration should be given to the affect of these risks on the value and cost of liabilities. Determining the probability of credit risk that may originate due to interest rate fluctuations or otherwise, and assess the quality of assets.

Reviewing the actual performance against the projections made. Analyzing the reasons for any affect on the spreads.

As Alan Greenspan, Chairman of the US Federal Reserve observed, risk taking is a necessary condition for wealth creation. Risk arises as a deviation between what happens and what was expected to happen. Banks are no exception to this phenomenon. As a result managements have to create efficient systems to identify, measure and control the risk and ALM is just one component of the overall cluster. Q4 What do you understand by CAMELS ratings?

The proposal to increase transparency in the banking sector by making public the risk assessments of individual banks made by their regulator, the RBI, should be adopted straightaway. It will act as a check on dodgy banking practices and improve efficiency of credit markets. The RBI uses two supervisory rating models for rating banks: CAMELS and CACS. While the former acronym stands for Capital Adequacy, Asset Quality, Management Quality, Earnings, Liquidity and Sensitiveness (to market risk), the latter stands for capital, asset quality, compliance and systems & control. Based on crucial prudential parameters, these tools help the RBI assess a banks state of safety and identify points of stress. While the first is used to evaluate domestic banks, the latter is used for foreign banks. During an on-site bank exam, supervisors gather private information, such as details on problem loans, with which to evaluate a bank's financial condition and to monitor its compliance with laws and regulatory policies. A key product of such an exam is a supervisory rating of the bank's overall condition, commonly referred to as a CAMELS rating. This rating system is used by the banking supervisors and other financial supervisory agencies to provide a convenient summary of bank conditions at the time of an exam. The acronym "CAMEL" refers to the five components of a bank's condition that are assessed: Capital adequacy, Asset quality, Management, Earnings, and Liquidity. A sixth component, a bank's Sensitivity to market risk, was added in 1997; hence the acronym was changed to CAMELS. (Note that the bulk of the academic literature is based on pre-1997 data and is thus based on CAMEL ratings.) Ratings are assigned for each component in addition to the overall rating of a bank's financial condition. The ratings are assigned on a scale from 1 to 5. Banks with ratings of 1 or 2 are considered to present few, if any, supervisory concerns, while banks with ratings of 3, 4, or 5 present moderate to extreme degrees of supervisory concern. Rating 1 - Indicates strong performance that consistently provides for safe and sound operations. Rating 2 - Reflects satisfactory performance that consistently provides for safe and sound operations.

Rating 3 - Represents performance that is flawed to some degree and is of supervisory concern. Performance is marginal. Rating 4 - Refers to poor performance that is of serious supervisory concern. Key performance measures are likely to be negative. Rating 5 - Considered unsatisfactory performance that is critically deficient and in need of immediate remedial attention. Such performance, by itself or in combination with other weaknesses, directly impairs the viability of the credit union. All exam materials are highly confidential, including the CAMELS. A bank's CAMELS rating is directly known only by the bank's senior management and the appropriate supervisory staff. CAMELS ratings are never released by supervisory agencies, even on a lagged basis. While exam results are confidential, the public may infer such supervisory information on bank conditions based on subsequent bank actions or specific disclosures. Overall, the private supervisory information gathered during a bank exam is not disclosed to the public by supervisors, although studies show that it does filter into the financial markets. CAMELS ratings in the supervisory monitoring of banks-Several academic studies have examined whether and to what extent private supervisory information is useful in the supervisory monitoring of banks. With respect to predicting bank failure, Barker and Holdsworth (1993) find evidence that CAMEL ratings are useful, even after controlling for a wide range of publicly available information about the condition and performance of banks. Cole and Gunther (1998) examine a similar question and find that although CAMEL ratings contain useful information, it decays quickly. For the period between 1988 and 1992, they find that a statistical model using publicly available financial data is a better indicator of bank failure than CAMEL ratings that are more than two quarters old. Hirtle and Lopez (1999) examine the usefulness of past CAMEL ratings in assessing banks' current conditions. They find that, conditional on current public information, the private supervisory information contained in past CAMEL ratings provides further insight into bank current conditions, as summarized by current CAMEL ratings. The authors find that, over the period from 1989 to 1995, the private supervisory information gathered during the last on-site exam remains useful with respect to the current condition of a bank for up to 6 to 12 quarters (or 1.5 to 3 years). The overall conclusion drawn from academic studies is that private supervisory information, as summarized by CAMELS ratings, is clearly useful in the supervisory monitoring of bank conditions. CAMELS ratings in the public monitoring of banks-Another approach to examining the value of private supervisory information is to examine its impact on the market prices of bank securities. Market prices are generally assumed to incorporate all available public information. Thus, if private supervisory information were found to affect market prices, it must also be of value to the public monitoring of banks.

Such private information could be especially useful to financial market participants, given the informational asymmetries in the commercial banking industry. Since banks fund projects not readily financed in public capital markets, outside monitors should find it difficult to completely assess banks' financial conditions. In fact, Morgan (1998) finds that rating agencies disagree more about banks than about other types of firms. As a result, supervisors with direct access to private bank information could generate additional information useful to the financial markets, at least by certifying that a bank's financial condition is accurately reported. The direct public beneficiaries of private supervisory information, such as that contained in CAMELS ratings, would be depositors and holders of banks' securities. Small depositors are protected from possible bank default by FDIC insurance, which probably explains the finding by Gilbert and Vaughn (1998) that the public announcement of supervisory enforcement actions, such as prohibitions on paying dividends, did not cause deposit runoffs or dramatic increases in the rates paid on deposits at the affected banks. However, uninsured depositors could be expected to respond more strongly to such information. Jordan, et al., (1999) find that uninsured deposits at banks that are subjects of publicly-announced enforcement actions, such as cease-and-desist orders, decline during the quarter after the announcement. The holders of commercial bank debt, especially subordinated debt, should have the most in common with supervisors, since both are more concerned with banks' default probabilities (i.e., downside risk). As of year-end 1998, bank holding companies (BHCs) had roughly $120 billion in outstanding subordinated debt. DeYoung, et al., (1998) examine whether private supervisory information would be useful in pricing the subordinated debt of large BHCs. The authors use an econometric technique that estimates the private information component of the CAMEL ratings for the BHCs' lead banks and regresses it onto subordinated bond prices. They conclude that this aspect of CAMEL ratings adds significant explanatory power to the regression after controlling for publicly available financial information and that it appears to be incorporated into bond prices about six months after an exam. Furthermore, they find that supervisors are more likely to uncover unfavorable private information, which is consistent with managers' incentives to publicize positive information while de-emphasizing negative information. These results indicate that supervisors can generate useful information about banks, even if those banks already are monitored by private investors and rating agencies. The market for bank equity, which is about eight times larger than that for bank subordinated debt, was valued at more than $910 billion at year-end 1998. Thus, the academic literature on the extent to which private supervisory information affects stock prices is more extensive. For example, Jordan, et al., (1999) find that the stock market views the announcement of formal enforcement actions as informative. That is, such announcements are associated with large negative stock returns for the affected banks. This result holds especially for banks that had not previously manifested serious problems.

Focusing specifically on CAMEL ratings, Berger and Davies (1998) use event study methodology to examine the behavior of BHC stock prices in the eight-week period following an exam of its lead bank. They conclude that CAMEL downgrades reveal unfavorable private information about bank conditions to the stock market. This information may reach the public in several ways, such as through bank financial statements made after a downgrade. These results suggest that bank management may reveal favorable private information in advance, while supervisors in effect force the release of unfavorable information. Berger, Davies, and Flannery (1998) extend this analysis by examining whether the information about BHC conditions gathered by supervisors is different from that used by the financial markets. They find that assessments by supervisors and rating agencies are complementary but different from those by the stock market. The authors attribute this difference to the fact that supervisors and rating agencies, as representatives of debt holders, are more interested in default probabilities than the stock market, which focuses on future revenues and profitability. This rationale also could explain the authors' finding that supervisory assessments are much less accurate than market assessments of banks' future performances. In summary, on-site bank exams seem to generate additional useful information beyond what is publicly available. However, according to Flannery (1998), the limited available evidence does not support the view that supervisory assessments of bank conditions are uniformly better and more timely than market assessments.

Q5What do you mean by a) Universal Banking b)E Banking and c) Mobile Banking? Answer a) Universal Banking It includes not only services related to savings and loans but also investments. However in practice the term 'universal banks' refers to those banks that offer a wide range of financial services, beyond commercial banking and investment banking, insurance etc. Universal banking is a combination of commercial banking, investment banking and various other activities including insurance. If specialized banking is the one end universal banking is the other. This is most common in European countries. Universal Banking is a multi-purpose and multi-functional financial supermarket (a company offering a wide range of financial services e.g. stock, insurance and real-estate brokerage) providing both banking and financial services through a single window. Definition of Universal Banking: As per the World Bank, "In Universal Banking, large banks operate extensive network of branches, provide many different services, hold several claims on firms(including equity and debt) and participate directly in the

Corporate Governance of firms that rely on the banks for funding or as insurance underwriters". In a nutshell, a Universal Banking is a superstore for financial products under one roof. Corporate can get loans and avail of other handy services, while can deposit and borrow. It includes not only services related to savings and loans but also investments. However in practice the term 'universal banking' refers to those banks that offer a wide range of financial services, beyond the commercial banking functions like Mutual Funds, Merchant Banking, Factoring, Credit Cards, Retail loans, Housing Finance, Auto loans, Investment banking, Insurance etc. This is most common in European countries. For example, in Germany commercial banks accept time deposits, lend money, underwrite corporate stocks, and act as investment advisors to large corporations. In Germany, there has never been any separation between commercial banks and investment banks, as there is in the United States. THE CONCEPT OF UNIVERSAL BANKING The entry of banks into the realm of financial services was followed very soon after the introduction of liberalization in the economy. Since the early 1990s structural changes of profound magnitude have been witnessed in global banking systems. Large scale mergers, amalgamations and acquisitions between the banks and financial institutions resulted in the growth in size and competitive strengths of the merged entities. Thus, emerged new financial conglomerates that could maximize economies of scale and scope by building the production of financial services organization called Universal Banking. By the mid-1990s, all the restrictions on project financing were removed and banks were allowed to undertake several in-house activities. Reforms in the insurance sector in the late 1990s, and opening up of this field to private and foreign players also resulted in permitting banks to undertake the sale of insurance products. At present, only an 'arm's length relationship between a bank and an insurance entity has been allowed by the regulatory authority, i.e. IRDA (Insurance Regulatory and Development Authority). The phenomenon of Universal Banking as a distinct concept, as different from Narrow Banking came to the forefront in the Indian context with the Narsimhan Committee (1998) and later the Khan Committee (1998) reports recommending consolidation of the banking industry through mergers and integration of financial activities. UNIVERSAL BANKING PROS AND CONS The solution of Universal Banking was having many factors to deal with, which can be further analyzed by the pros and cons. Advantages of Universal Banking

Economies of Scale. The main advantage of Universal Banking is that it results in greater economic efficiency in the form of lower cost, higher output and better products. Many Committees and reports by Reserve Bank of India are in favor of Universal banking as it enables banks to exploit economies of scale and scope. Profitable Diversions. By diversifying the activities, the bank can use its existing expertise in one type of financial service in providing other types. So, it entails less cost in performing all the functions by one entity instead of separate bodies. Resource Utilization. A bank possesses the information on the risk characteristics of the clients, which can be used to pursue other activities with the same clients. A data collection about the market trends, risk and returns associated with portfolios of Mutual Funds, diversifiable and non diversifiable risk analysis, etc, is useful for other clients and information seekers. Automatically, a bank will get the benefit of being involved in the researching Easy Marketing on the Foundation of a Brand Name. A bank's existing branches can act as shops of selling for selling financial products like Insurance, Mutual Funds without spending much efforts on marketing, as the branch will act here as a parent company or source. In this way, a bank can reach the client even in the remotest area without having to take resource to an agent. One-stop shopping. The idea of 'one-stop shopping' saves a lot of transaction costs and increases the speed of economic activities. It is beneficial for the bank as well as its customers. Investor Friendly Activities. Another manifestation of Universal Banking is bank holding stakes in a form: a bank's equity holding in a borrower firm, acts as a signal for other investor on to the health of the firm since the lending bank is in a better position to monitor the firm's activities.

Disadvantages of Universal Banking

Grey Area of Universal Bank. The path of universal banking for DFIs is strewn with obstacles. The biggest one is overcoming the differences in regulatory requirement for a bank and DFI. Unlike banks, DFIs are not required to keep a portion of their deposits as cash reserves. No Expertise in Long term lending. In the case of traditional project finance, an area where DFIs tread carefully, becoming a bank may not make a big difference to a DFI. Project finance and Infrastructure finance are generally long- gestation projects and would require DFIs to borrow long- term. Therefore, the transformation into a bank may not be of great assistance in lending long-term. NPA Problem Remained Intact. The most serious problem that the DFIs have had to encounter is bad loans or Non-Performing Assets (NPAs). For the DFIs and Universal Banking or installation of cutting-edge-technology in operations are unlikely to improve the situation concerning NPAs.

UNIVERSAL BANKING IN INDIA In India Development financial institutions (DFIs) and refinancing institutions (RFIs) were meeting specific sect oral needs and also providing long-term resources at

concessional terms, while the commercial banks in general, by and large, confined themselves to the core banking functions of accepting deposits and providing working capital finance to industry, trade and agriculture. Consequent to the liberalization and deregulation of financial sector, there has been blurring of distinction between the commercial banking and investment banking.

Reserve Bank of India constituted on December 8, 1997, a Working Group under the Chairmanship of Shri S.H. Khan to bring about greater clarity in the respective roles of banks and financial institutions for greater harmonization of facilities and obligations. Also report of the Committee on Banking Sector Reforms or Narasimham Committee (NC) has major bearing on the issues considered by the Khan Working Group. The issue of universal banking resurfaced in Year 2000, when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an universal bank. Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance, its proposed policy for universal banking, including a case-bycase approach towards allowing domestic financial institutions to become universal banks. Now RBI has asked FIs, which are interested to convert itself into a universal bank, to submit their plans for transition to a universal bank for consideration and further discussions. FIs need to formulate a road map for the transition path and strategy for smooth conversion into a universal bank over a specified time frame. The plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period. b) Mobile Banking- Mobile banking (also known as M-Banking, mbanking, SMS Banking etc.) is a term used for performing balance checks, account transactions, payments etc. via a mobile device such as a mobile phone. Mobile banking today (2007) is most often performed via SMS or the Mobile Internet but can also use special programs called clients downloaded to the mobile device. mobile banking is defined as:
"Mobile Banking refers to provision and availment of banking- and financial services with the help of mobile telecommunication devices.The scope of offered services may include facilities to conduct bank and stock market transactions, to administer accounts and to access customised information."

According to this model Mobile Banking can be said to consist of three inter-related concepts:

Mobile Accounting Mobile Brokerage Mobile Financial Information Services

Most services in the categories designated Accounting and Brokerage are transactionbased. The non-transaction-based services of an informational nature are however essential for conducting transactions - for instance, balance enquiries might be needed before committing a money remittance. The accounting and brokerage services are therefore offered invariably in combination with information services. Information services, on the other hand, may be offered as an independent module The advent of the Internet has revolutionized the way the financial services industry conducts business, empowering organizations with new business models and new ways to offer 24x7 accessibility to their customers. The ability to offer financial transactions online has also created new players in the financial services industry, such as online banks, online brokers and wealth managers who offer personalized services, although such players still account for a tiny percentage of the industry. Over the last few years, the mobile and wireless market has been one of the fastest growing markets in the world and it is still growing at a rapid pace. According to the GSM Association and Ovum, the number of mobile subscribers exceeded 2 billion in September 2005, and now exceeds 2.5 billion (of which more than 2 billion are GSM). According to a study by financial consultancy Celent, 35% of online banking households will be using mobile banking by 2010, up from less than 1% today. Upwards of 70% of bank center call volume is projected to come from mobile phones. Mobile banking will eventually allow users to make payments at the physical point of sale. "Mobile contactless payments will make up 10% of the contactless market by 2010.[2] Many believe that mobile users have just started to fully utilize the data capabilities in their mobile phones. In Asian countries like India, China, Bangladesh, Indonesia and Philippines, where mobile infrastructure is comparatively better than the fixed-line infrastructure, and in European countries, where mobile phone penetration is very high (at least 80% of consumers use a mobile phone), mobile banking is likely to appeal even more. This opens up huge markets for financial institutions interested in offering value added services. With mobile technology, banks can offer a wide range of services to their customers such as doing funds transfer while travelling, receiving online updates of stock price or even performing stock trading while being stuck in traffic. According to the German mobile operator Mobilcom, mobile banking will be the "killer application" for the next generation of mobile technology. Mobile devices, especially smartphones, are the most promising way to reach the masses and to create stickiness among current customers, due to their ability to provide services anytime, anywhere, high rate of penetration and potential to grow. According to Gartner, shipment of smartphones is growing fast, and should top 20 million units (of over 800 million sold) in 2006 alone.

In the last 4 years, banks across the globe have invested billions of dollars to build sophisticated internet banking capabilities. As the trend is shifting to mobile banking, there is a challenge for CIOs and CTOs of these banks to decide on how to leverage their investment in internet banking and offer mobile banking, in the shortest possible time. The proliferation of the 3G (third generation of wireless) and widespread implementation expected for 20032007 will generate the development of more sophisticated services such as multimedia and links to m-commerce services.

Mobile banking business models


A wide spectrum of Mobile/branchless banking models is evolving. However, no matter what business model, if mobile banking is being used to attract low-income populations in often rural locations, the business model will depend on banking agents, i.e., retail or postal outlets that process financial transactions on behalf telcos or banks. The banking agent is an important part of the mobile banking business model since customer care, service quality, and cash management will depend on them. Many telcos will work through their local airtime resellers. However, banks in Colombia, Brazil, Peru, and other markets use pharmacies, bakeries, etc. These models differ primarily on the question that who will establish the relationship (account opening, deposit taking, lending etc.) to the end customer, the Bank or the NonBank/Telecommunication Company (Telco). Another difference lies in the nature of agency agreement between bank and the Non-Bank. Models of branchless banking can be classified into three broad categories - Bank Focused, Bank-Led and Nonbank-Led. a)Bank-focused model The bank-focused model emerges when a traditional bank uses non-traditional low-cost delivery channels to provide banking services to its existing customers. Examples range from use of automatic teller machines (ATMs) to internet banking or mobile phone banking to provide certain limited banking services to banks customers. This model is additive in nature and may be seen as a modest extension of conventional branch-based banking. b)Bank-led model The bank-led model offers a distinct alternative to conventional branch-based banking in that customer conducts financial transactions at a whole range of retail agents (or through mobile phone) instead of at bank branches or through bank employees. This model promises the potential to substantially increase the financial services outreach by using a different delivery channel (retailers/ mobile phones), a different trade partner (telco / chain store) having experience and target market distinct from traditional banks, and may be significantly cheaper than the bank-based alternatives. The bank-led model may be

implemented by either using correspondent arrangements or by creating a JV between Bank and Telco/non-bank. In this model customer account relationship rests with the bank

c)Non-bank-led model
The non-bank-led model is where a bank does not come into the picture (except possibly as a safe-keeper of surplus funds) and the non-bank (e.g telco) performs all the functions.

Mobile Banking Services


Mobile banking can offer services such as the following: i)Account Information 1. 2. 3. 4. 5. 6. 7. 8. 9. Mini-statements and checking of account history Alerts on account activity or passing of set thresholds Monitoring of term deposits Access to loan statements Access to card statements Mutual funds / equity statements Insurance policy management Pension plan management Status on cheque, stop payment on cheque

ii)Payments, Deposits, Withdrawals, and Transfers 1. 2. 3. 4. 5. 6. 7. 8. Domestic and international fund transfers Micro-payment handling Mobile recharging Commercial payment processing Bill payment processing Peer to Peer payments Withdrawal at banking agent Deposit at banking agent

Especially for clients in remote locations, it will be important to help them deposit and withdraw funds at banking agents, i.e., retail and postal outlets that turn cash into electronic funds and vice versa. The feasibility of such banking agents depends on local regulation which enables retail outlets to take deposits or not. A specific sequence of SMS messages will enable the system to verify if the client has sufficient funds in his or her wallet and authorize a deposit or withdrawal transaction at the agent. When depositing money, the merchant receives cash and the system credits the client's bank account or mobile wallet. In the same way the client can also withdraw

money at the merchant: through exchanging sms to provide authorization, the merchant hands the client cash and debits the client's account. iii)Investments 1. Portfolio management services 2. Real-time stock quotes 3. Personalized alerts and notifications on security prices iv) Support 1. Status of requests for credit, including mortgage approval, and insurance coverage 2. Check (cheque) book and card requests 3. Exchange of data messages and email, including complaint submission and tracking 4. ATM Locatio v)Content Services 1. General information such as weather updates, news 2. Loyalty-related offers 3. Location-based services Based on a survey conducted by Forrester, mobile banking will be attractive mainly to the younger, more "tech-savvy" customer segment. A third of mobile phone users say that they may consider performing some kind of financial transaction through their mobile phone. But most of the users are interested in performing basic transactions such as querying for account balance and making bill payment. Who can avail Mobile Banking services? To avail Mobile Banking services you must have:

an account in a Bank that offers Mobile Banking service e.g. HDFC Bank you must be a subscriber of any of the Cellular Service Providers which have tie up with your Bank You have to Apply for Mobile Banking through an appropriate Application Form with your bank Most of the Banks offer Mobile Banking service absolutely FREE. Although SMS Charges for outgoing messages would be charged as usual by your mobile phone Service Provider.

Mobile Banking Alerts Some banks also provide the facility of Mobile Banking Alerts where you can get regular updates of transactions in your account as they happen. These include:

Credits to your account ( you choose a threshold credit amount, above which you'd like to be alerted ) Debits to your account ( you choose a threshold debit amount, above which you'd like to be alerted ) Cheque returned ( Get to know every time a cheque deposited in your account is returned )

c) E-banking- Internet banking (or E-banking) means any user with a personal
computer and a browser can get connected to his bank -s website to perform any of the virtual banking functions. In internet banking system the bank has a centralized database that is web-enabled. All the services that the bank has permitted on the internet are displayed in menu. Any service can be selected and further interaction is dictated by the nature of service. The traditional branch model of bank is now giving place to an alternative delivery channels with ATM network. Once the branch offices of bank are interconnected through terrestrial or satellite links, there would be no physical identity for any branch. It would a borderless entity permitting anytime, anywhere and anyhow banking. The network which connects the various locations and gives connectivity to the central office within the organization is called intranet. These networks are limited to organizations for which they are set up. SWIFT is a live example of intranet application.

Internet banking in India


The Reserve Bank of India constituted a working group on Internet Banking. The group divided the internet banking products in India into 3 types based on the levels of access granted. They are: i) Information Only System: General purpose information like interest rates, branch location, bank products and their features, loan and deposit calculations are provided in the banks website. There exist facilities for downloading various types of application forms. The communication is normally done through e-mail. There is no interaction between the customer and bank's application system. No identification of the customer is done. In this system, there is no possibility of any unauthorized person getting into production systems of the bank through internet. ii) Electronic Information Transfer System: The system provides customer- specific information in the form of account balances, transaction details, and statement of accounts. The information is still largely of the 'read only' format. Identification and authentication of the customer is through password. The information is fetched from the bank's application system either in batch mode or off-line. The application systems cannot directly access through the internet. iii) Fully Electronic Transactional System: This system allows bi-directional capabilities. Transactions can be submitted by the customer for online update. This system requires high degree of security and control. In this environment, web server and application systems are linked over secure infrastructure. It comprises technology covering computerization, networking and security, inter-bank payment gateway and legal infrastructure. Automated Teller Machine (ATM):

ATM is designed to perform the most important function of bank. It is operated by plastic card with its special features. The plastic card is replacing cheque, personal attendance of the customer, banking hours restrictions and paper based verification. There are debit cards. ATMs used as spring board for Electronic Fund Transfer. ATM itself can provide information about customers account and also receive instructions from customers - ATM cardholders. An ATM is an Electronic Fund Transfer terminal capable of handling cash deposits, transfer between accounts, balance enquiries, cash withdrawals and pay bills. It may be on-line or 0ff-line. The on-line ATN enables the customer to avail banking facilities from anywhere. In off-line the facilities are confined to that particular ATM assigned. Any customer possessing ATM card issued by the Shared Payment Network System can go to any ATM linked to Shared Payment Networks and perform his transactions. Credit Cards/Debit Cards: The Credit Card holder is empowered to spend wherever and whenever he wants with his Credit Card within the limits fixed by his bank. Credit Card is a post paid card. Debit Card, on the other hand, is a prepaid card with some stored value. Every time a person uses this card, the Internet Banking house gets money transferred to its account from the bank of the buyer. The buyers account is debited with the exact amount of purchases. An individual has to open an account with the issuing bank which gives debit card with a Personal Identification Number (PIN). When he makes a purchase, he enters his PIN on shops PIN pad. When the card is slurped through the electronic terminal, it dials the acquiring bank system - either Master Card or VISA that validates the PIN and finds out from the issuing bank whether to accept or decline the transactions. The customer can never overspend because the system rejects any transaction which exceeds the balance in his account. The bank never faces a default because the amount spent is debited immediately from the customers account. Smart Card: Banks are adding chips to their current magnetic stripe cards to enhance security and offer new service, called Smart Cards. Smart Cards allow thousands of times of information storable on magnetic stripe cards. In addition, these cards are highly secure, more reliable and perform multiple functions. They hold a large amount of personal information, from medical and health history to personal banking and personal preferences. You can avail the following services through E-Banking.
Bill payment service

You can facilitate payment of electricity and telephone bills, mobile phone, credit card and insurance premium bills as each bank has tie-ups with various utility companies, service providers and insurance companies, across the country. To pay your bills, all you need to do is complete a simple one-time registration for each biller. You can also set up standing instructions online to pay your recurring bills, automatically. Generally, the bank does not charge customers for online bill payment.
Fund transfer

You can transfer any amount from one account to another of the same or any another bank. Customers can send money anywhere in India. Once you login to your account, you need to mention the payees account number, his bank and the branch. The transfer will take place in a day or so, whereas in a traditional method, it takes about three working days. ICICI Bank says that online bill payment service and fund transfer facility

have been their most popular online services.


Credit card customers

With Internet banking, customers can not only pay their credit card bills online but also get a loan on their cards. If you lose your credit card, you can report lost card online.
Railway pass

This is something that would interest all the aam janta. Indian Railways has tied up with ICICI bank and you can now make your railway pass for local trains online. The pass will be delivered to you at your doorstep. But the facility is limited to Mumbai, Thane, Nashik, Surat and Pune.
Investing through Internet banking

You can now open an FD online through funds transfer. Now investors with interlinked demat account and bank account can easily trade in the stock market and the amount will be automatically debited from their respective bank accounts and the shares will be credited in their demat account. Moreover, some banks even give you the facility to purchase mutual funds directly from the online banking system. Nowadays, most leading banks offer both online banking and demat account. However if you have your demat account with independent share brokers, then you need to sign a special form, which will link your two accounts.
Recharging your prepaid phone

Now just top-up your prepaid mobile cards by logging in to Internet banking. By just selecting your operator's name, entering your mobile number and the amount for recharge, your phone is again back in action within few minutes.
Shopping

With a range of all kind of products, you can shop online and the payment is also made conveniently through your account. You can also buy railway and air tickets through Internet banking. Advantage of Internet banking As per the Internet and Mobile Association of India's report on online banking 2006, "There are many advantages of online banking. It is convenient, it isn't bound by operational timings, there are no geographical barriers and the services can be offered at a miniscule cost." Through Internet banking, you can check your transactions at any time of the day, and as many times as you want to. Where in a traditional method, you get quarterly statements from the bank. If the fund transfer has to be made outstation, where the bank does not have a branch, the bank would demand outstation charges. Whereas with the help of online banking, it will be absolutely free for you. Security Precautions Customers should never share personal information like PIN numbers, passwords etc with anyone, including employees of the bank. It is important that documents that contain confidential information are safeguarded. PIN or password mailers should not be stored, the PIN and/or passwords should be changed immediately and memorised before destroying the mailers. Customers are advised not to provide sensitive account-related information over unsecured e-mails or over the phone. Take simple precautions like changing the ATM PIN and online login and transaction passwords on a regular basis. Also ensure that the logged in session is properly signed out.

Q 6 Explain the role and functions of Reserve Bank of India in context of Indian Banks. Answer- The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the begining. The Government held shares of nominal value of Rs. 2, 20, 000. Reserve Bank of India was nationalised in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of cooperative and indigenous banks. The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted for the need of following:

To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.

Functions of Reserve Bank of India


The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank the Reserve Bank of India. Bank of Issue Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the

Second World War and the post-war period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system. Banker to Government The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters. Bankers' Bank and Lender of the Last Resort The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort. Controller of Credit The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so through changing the Bank rate or through open market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a licence from the Reserve Bank of India to do banking business within India, the licence can be cancelled by the Reserve Bank of certain

stipulated conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank. As supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers: (a) It holds the cash reserves of all the scheduled banks. (b) It controls the credit operations of banks through quantitative and qualitative controls. (c) It controls the banking system through the system of licensing, inspection and calling for information. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks. Custodian of Foreign Reserves The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d. though there were periods of extreme pressure in favor of or against the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country. Supervisory functions In addition to its traditional central banking functions, the Reserve bank has certain nonmonetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation.

The RBI is authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them. The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realisation of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation. Promotional functions With economic growth assuming a new urgency since Independence, the range of the Reserve Bank's functions has steadily widened. The Bank now performs varietyof developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialised financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to promote saving habit and to mobilise savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this field has become extremely important. The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages and to route its short term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers.

Classification of RBIs functions


The monetary functions also known as the central banking functions of the RBI are related to control and regulation of money and credit, i.e., issue of currency, control of bank credit, control of foreign exchange operations, banker to the Government and to the money market. Monetary functions of the RBI are significant as they control and regulate the volume of money and credit in the country. Equally important, however, are the non-monetary functions of the RBI in the context of India's economic backwardness. The supervisory function of the RBI may be regarded as a non-monetary function (though many consider this a monetary function). The promotion of sound banking in India is an important goal of the RBI, the RBI has been given wide and drastic powers, under the Banking Regulation Act of 1949 - these powers relate to licencing of banks, branch expansion, liquidity of their assets, management and methods of working, inspection, amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the working of banks has greatly improved. Commercial banks have developed into financially and operationally sound and viable

units. The RBI's powers of supervision have now been extended to non-banking financial intermediaries. Since independence, particularly after its nationalisation 1949, the RBI has followed the promotional functions vigorously and has been responsible for strong financial support to industrial and agricultural development in the country.

ASSIGNMENT ON BANKING

SUBMITTED TO MR. N.K.TOTLA -RUHI AGRAWAL MBA FT III SEM

ROLL NO 33084

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