Basic Banking Concepts

Basic Banking Concepts, terms and terminologies.

Read: Main functions of a commercial bank

Read: Types of bank accounts, loans offered by banks

Role of Various Departments in a Bank

Wealth Management involves providing financial and investment advice as well as reviewing and re-balancing a company or an individual’s portfolio from time to time to ensure the financial plans are in line with the goals.

Professionals who work in treasury manage the liquidity of a business. They manage and monitor cash inflow and outflow, ensuring sufficient cash balance to fund a company’s operations and ensure its sustainability. Treasury helps a company manage its financial risks as well.

Future of Banking: School Project

• Traditional Banking moves towards e-banking with increased penetration of Internet. Traditional Banking moving towards Internet & mobile banking. Economy moving from ‘Cash’ to ‘cash-less’

• Reduce dependency on paper (pay-slips, cheque books, cash)

• Banks now offer multiple channels for convenience of customers: Bank, ATM, Internet, Apps, Credit/Debit cards

• Mobile payment becoming popular, witnesses increased transactions

• Use mobile phone to pay bills, buy grocery, buy movie tickets, buy medicine, enjoy food, book tickets, shopping, mobile recharge and more.

• Several Mobile Payment Apps available (Paytm, Airtel Money, Paypal, etc.)

• With increased dependence of internet, banks focus on tightening security

Definition of a Bank (thanks to banking scams)

New definition of a Bank which is being circulated on Whatsapp, after the several Banks cams that were unearthed.

A bank is a broker between the middle class and the rich. The only place where the two meet is in a bank. The middle class brings the money, through saving, and the rich takes it, through borrowing.

A middle class person saves the money because they have more money than their thinking capacity. So they keep the money in the bank so they can go and think what to do with the money they saved.

On the other side, the rich people come to pick that money, through borrowing, because they have more ideas than the money they have.

On a practical side, please show me one billionaire who got rich through saving and I will show you a million Indians who have money saved in the banks and are still renting the houses that the Millionaires and billionaires built using the savings of the middle class people, which the rich borrowed from a bank.

This one should definitely get people thinking.

Various Scenarios – OD and Interest Accrued

Here’s a scenario on OD (overdraft) and interest accrued and payments.

A business opens a current account and has got an FD of say 10 lakh rupees. Against 10 lakh he would get an overdraft of let’s say 80 percent, which is 8 lakhs.

It means he can use up to 8 lakhs in his transaction.

1. Bank will pay him interest on 10lakhs at the end of every month

2. Bank will charge him interest on money used up to 8 lakh rupees every month.

Now this money used in OD may be 1lkah, 1.5 lakh, or 3 lakhs or x amount up to 8 lakhs depending on his business transactions.

1. How is the amount of interest calculated in the software?

2. There are these amounts lying in current account utilized which the bank keeps reversing and investing in to various schemes and they promise interest to the customer. They say your idle money is safe plus they are utilized in ULIP based transactions

How does the software decide this?

For example, the 2 lakhs which is a gap in the above transactions is used by the banks for their other purposes and the customer is paid on ulip transaction…how is that charged?

These are two different scenarios.

1) Fixed deposit or time deposit accrue interests based upon the maturity period. These range from 3 months to 1 year depending on the tenor agreed. Interests are calculated on daily basis and credited to the users current it savings ac as per the tenor.

In case the client wants to withdraw the amount before the tenor expires, the interests calculated as on that date with a penalty fee.

Every bank runs End of Day (EOD) jobs typically starting at 10 pm to 3 am to calculate and deposit the accounts. You may have seen when you pay the credit card bills using Internet banking applications, the changes will reflect the next day morning only. This is due to the EOD (End of the day) runs.

Many ATMs will not work during this period and if they work the statement enquiry will show the balance of previous day.

Nowadays you have fast transactions supported by all banks. IMPS, RTGS in India support almost instant funds transfer debit and credit within 15 secs locally and 1 hour International. These transaction details are stored in temp caches and get updated during EOD runs so the accounts balances are reflected currently.

Reversals would require manual processing and would require an officer to verify and approve. And hence it may take 2 to 3 days. Based on the date and time interests are calculated and debited to the account, the banking software will ensure all dependencies are taken care of.

Assuming that a small branch of the bank has close to about a 100 crores OD given and at any point of time the average loan given is suppose 90crores.

Whenever a lag period of 3 days happens in reversal of the wrong debits, or excessive debits, or weekend lags.

On 90 cr ©6% for 3 days the banks makes 90 x6x3/365, approximately 1.2 lakhs.

Similarly for credit card late deposits of manual cheques with a lag of 1 week they make approx 1 lakh per 1000 customers ..these are actual software-based transactional frauds that gets siphoned by the trustees in India as they have to tally the amounts in their audit at the end of the year.

This is debited to a particular suspense account. Then that’s sipphoned off?

Well, it’s not possible because such cases (potential frauds) should be easily detectable with the daily reconciliation reports. Also, internal auditing will capture all these discrepancies. Also, regulators do auditing to ensure no frauds allowed.

Besides, the banks don’t really care much about losing a bit of money due to some errors, because most of these issues can easily be fixed and the amount can be reversed (in case of error, which anyways happens very rarely).

What most banks fear most is the loss of reputation, due to which they may lose clients.

I have seen banks call the client personally and credit amount to clients and offer perks like waiving off interests etc. But they don’t want the bank’s name to get ruined. In some countries, banks value client relationships a lot.

Often, the client may request the bank to waive off late fees, finance charges or annual membership fees. The banks usually oblige if the clients have good records.

Also, the government must ensure that banks don’t do false promises or provide attractive interests which are just not practical.

Assignment Questions

Question. Recent failures and near failures in the Indian banking system have shed a harsh but realistic light on the importance of good governance, management quality and integrity, structural soundness and related issues vital for the efficient running of banks and financial institutions. Analyse which elements of the CAMELS approach were tested and found wanting in the banks listed below. Assess their current status and how far – if at all – they have succeeded in their efforts to emerge from their respective crises: a. ICICI Bank, b. YES Bank, c. PMC Bank, d. Lakshmi Vilas Bank.

As an impartial financial analyst, what are your recommendations to ensure that they are never repeated? In your view, what lessons do these crises have for other Indian banks as adherents to the CAMELS framework and to the Reserve Bank of India as the Regulator?

Question: The Covid-19 pandemic still continues to keep the world on the edge and the economic impact in the long term is fearful and hard to measure. To mitigate the crisis and restore stability, the RBI implemented various liquidity, monetary, regulatory and supervisory measures such as interest rate cuts, liquidity infusions, debt moratorium, and provided leeway to manage stressed assets. While the RBI as the regulator, is leading from the front, it is vital for the banking sector to introspect and work on measures for long term stability of the system and to strengthen their ability to withstand existential shocks such as from the pandemic.

Examine the threats and challenges being faced by the banking sector in areas such as credit growth, rising Non Performing Assets, the overall economic climate, the ability of existing business models to cope with the changed market conditions and health hazards for staff and clients to name a few. Analyse and make your recommendations as to what reorienting do banks need to consider in order to survive and grow in a Post-Pandemic world?