Introduction to Banking and Net Interest Margin

Introduction to Banking

• A bank accepts public deposits and creates lending opportunities.
• The Reserve Bank of India (RBI) regulates the Indian banking sector.

Assets and Liabilities

• Lending makes banks' assets, generating interest income through personal, corporate, mortgage, and housing loans.
• Liabilities arise from having to give interest on deposits made by customers.

Net Interest Margin (NIM)

• NIM represents the gap between assets and liabilities.
• For instance, banks charging 9% on loans and giving 4% on deposits have a 5% NIM, which becomes the profit.
• NIM is critical for a banking system's survival.
• Some private banks, along with the State Bank of India (SBI), can achieve a +3% NIM, a benchmark for profitable banking operations.
• Most public sector banks struggle with NIMs of 2.2 to 2.7%.
• Banks should reduce the cost of funds to achieve higher margins.

Types of Accounts and Nomination

Savings Account

• Savings accounts especially suit individuals and small businesses, fostering a savings culture.
• Resident Indians above 18 are typically eligible.
• Savings accounts earn interest rates ranging from 2.7% to 3%.
• Electronic Clearing Service (ECS) facilitates regular payments for loans.
• No tax applies to yearly interest income on saving bank accounts up to Rs 10 lakh.
• Since April 1, 2020, interest is calculated daily.
• Minimum balance requirements differ by bank, usually Rs 500 (without cheque book) and Rs 1000 (with cheque book).

Current Account

• Current accounts for firms and companies support business operations.
• These accounts typically do not accrue interest.
• Banks impose service charges on current account holders.
• Savings and current accounts are demand deposits
• Savings/Current Accounts are demand deposits, accessible at any time.

CASA Ratio

• The CASA ratio represents the proportion of current and savings deposits relative to total deposits
• CASA ratio should exceed 40% for banks.

Inactive or Dormant Accounts

• Accounts inactive for over 24 months classify as dormant.
• Unclaimed deposits exceeding 10 years transfer to the RBI maintained Depositor Education and Awareness Fund (DEAF).

Fixed Deposit (FD)

• FDs can be operated for durations from 7 days to 10 years
• Interest is applicable as per the contracted rate for the agreed period
• Loan facilities are available up to 90-95% of the outstanding principal and accrued interest.
• TDS is applicable with a rate of 10% on fixed deposit interest exceeding Rs 40,000 per financial year

Nomination Facility

• Nomination (Banking Companies Rules of 1985) allows paying dues to a nominee upon a depositor's death.
• Nomination is available for savings, fixed and recurring deposits, or only in some current accounts.
• It is advisable to record ‘nominee’ for any bank transaction.
• Nominee: legally entitled to the grant

Recurring Deposit (RD)

• RDs carry features of Fixed Deposits
• RDs involved a monthly deposit with the bank
• They accrue interest at intervals
• Designed to induce small savers to save
• RDs usually run between 6 months and 10 years.

Bulk Deposit

• Deposits above Rs.3 crore and above are now bulk deposits

Tax Deductions on FDs

• Banks provide Form 16A to depositors confirming tax deductions for their IT returns.
• Depositors, not in the Income Tax purview, avoid 'TDS' using Form 15G or 15H.

Types of Fixed Deposits

• Standard Fixed Deposit Account:
  • Interest paid every 3/6/12 months.
  • Principal is only paid when the term ends.
• Cumulative Fixed Deposit Account:
  • Interest is accumulated and given till maturity.
  • Interest and principal will be accumulated till maturity

Types of risks in banking

• Financial risk is the potential for loss from banking transactions.
• Market risk centers on losses from market price movements, prominent in investment banking.
• Credit risk is the potential for a bank borrower or counterparty to fail their commitments.
• Interest rate risk stems from interest rate fluctuations, affecting earnings, asset values, and cash flow.
• Liquidity risk is the potential inability to meet obligations due to assets not being realized into cash.
• Operational risk from day-to-day activities including both internal and external failures plus fraud and technological risks
• Capital risk arises when the companies' capital comes under risk
• Foreign exchange risk occurs when adverse exchange rate movements lead to losses
• Systemic risk is the risk of cascading failure within a financial system, leading to financial crisis
• Reputational risk refers to the publics loss of confidence in a bank because of a negative perception
• Reputational risk value is usually measured in brand value loss

Financial Inclusion and Banking Ombudsman

No-Frills Account

• It is a zero-balance account.
• As of August 2012, No-Frills accounts were converted to Basic Savings Bank Deposit Accounts (BSBDAs).

Basic Savings Bank Deposit Account (BSBDA)

• Access to ATM with debit card for free.
• There is no limit on depositing
• Only four monthly withdrawals at bank or ATMs.
• Banks can decide the account fee structure, KYC (Know Your Customer) norms being mandatory.
• A BSBDA is treated like a Small Account if KYC is not satisfied,
• Customers can not have multiple BSBDA accounts at the same bank.

Pradhan Mantri Jan Dhan Yojana (PMJDY) Account

• PMJDY provides life insurance (Rs 30,000) to all the account holder
• Facility of overdraft after 6 months of satisfying operation
• Rupay card free of cost
• With no minimum balance, a Prime Minister Jan Dhan Yojana(PMJDY) was launched by Narendra Modi on 28th August 2014.
• Interest on Deposit and Accident insurance covers Rs 2,00000 to all the account holders.

Small Account

• Customer accounts with restricted restrictions and multiple restrictions that happens when KYC norms are not satisfied.
• Deposits must not exceed Rs 1 lakh per Annum
• Total withdrawals should not exceed Rs 10,000 per month
• The max balance should not exceed Rs. 50,000 at any time
• Withdrawals performed with a withdrawal slip or loose leaf at the base branch only
• extended after 12 months and for another 12 months if proof had been applied for an ODV
• Small accounts cant credit foreign remittances without a credit completion of normal KYC
• Can only be opened at CBS branches or in branches where manual monitoring is possible

Banking Ombudsman

• RBI appoints senior officials to redress consumer complaints regarding banking deficiencies.
• Section 35A of the Banking Regulation Act 1949 governs this.
• The Banking Ombudsman Scheme started in 1995.
• 22 Banking Ombudsmen operate in state capitals.
• The scheme covers all scheduled commercial banks
• Customers complaint against:
  • Non-Payment
  • Delays of checks
  • Payment of drafts/bills.
• The central bank later added Net banking, debit cards ,and digital/mobile banking too.

To complain

• Consumer first approach bank for grievances

• If the problem continues after 30 days the customer can reach Banking Ombudsman within one year

• Plain complaints can be lodged on plain paper or through email

• Rs.20 lakh maximum amount could be paid in case of credit issues including card complaints

Know Your Customer (KYC)

• KYC(Know Your Customer) - process of customer identification, before the opening of any account.
  • ‘identity’ and “address" are verified.
  • To prevent use in money laundering section 35 a is used as regulation guidelines.
  • KYC should be verified periodically after 10 years for low-risk, every 8-year medium, and high-risk in 2.
  • Can still open an account with a small account known as OVD but need specific OVD

Types of ATMs

• Onsite ATMs are within Bank Permission.
• White Label ATMs:
  • RBI allows non banking people to set up but with their names.
  • A fully owned TCS communications launched first white ATM (India cash)
• Brown label ATMs mean that hardware and license of the ATM but banks provides management. Other types:
• Green means agrilculture.
• Orange means banking
• Yellow means e-Commerce
• Pink is women access points

NRI Accounts and Payment Facilities

• NRI - Is an Indian who lives outside of India A NRO account is a account from a foreign resident Account facts on the NRE:
• Is in indian ruppees
• Can deposit foreign money
• Term deposit
• Should be Indian resident for Joint

CLASSIFICATION OF CENTERS (TIER 1 - TIER 6)

    Tier 1 - centers - population of 1,00,000 and above.
    Tier 2 - centers - population between 50,000 to 99,999.
    Tier 3 - centers - population between 20,000 to 49,999.
    Tier 4 - centers - population between 10,000 to 19,999.
    Tier 5 - centers - population between 5,000 to 9,999.
    Tier 6 - centers - population of Less than 5000

NRO Account, (Non-Resident Ordinary Rupee Account)facts include,

• Account will be in Indian rupees and by banks authorized.
• Joint account. FCNR:
• Minimum term of 5
• Maintained in approval in foreign currencies

LIBOR/DTAA

• LIBOR- London Interbank Offered Rate
• Primary benmark fot term rates
• DTAA - double agreement to avoid avoid taxation
• NRI must subkmit residency annually

SNRR, External Commercial Borrowing

• Person residing outside india who want to put to the rooee

DEMAT

Stands for dematerialized accounts

Other Important Terms

• Nostro Account is an Indian banks is foreign bank
• Vostro Accounts - Held by foreign in rupee
• Dormant banking term. That is not been used by the bank
• Escow - Third party temporary used between banks

Paymaent Types

• Standing is a order from bank holder ATM

Quantitative Credit Controls

1. Policy Rates • Bank Rate • Repo & Reverse Repo Rates
2. Reserve Ratios • CRR • SLR
3. Open Market Operations

Qualitative Credit Controls

QUALITATIVE (SELECTIVE) CREDIT CONTROLS

1. Margin requirements
2. Rationing of credit
3. Regulation of consumer credit
4. Moral suasion
5. Direct action
6. RBI guidelines

Disinvestments/Privatization

• If the government has more than a 51% stake in a company or organization, then it is known as a a % decrease percentage for it. In it The Department of Disinvestment was set up as a separate Department in 1999 and was later renamed as Ministry of Disinvestment in 2001. Since 2004, the Department of Disinvestment falls under the Ministry of Finance. The Department of Disinvestment was renamed as Department of Investment and Public Asset Management (DIPAM) in 2016.

Fund Based Support

i)Vehicle loan ii)Agriculture loan iii) Personal loan iv)Creditor v)Overdraft Account vi)Cash Credit Account

Non-Fund Based Support

i)Bank Guarantee (or) Performance Guarantee ii) Letter of credit

Basel Norms

• The Basel Committee on Banking Supervision (BCBS) was formed in 1974 by a group of central bank governors of G-10 countries. It was established on 17th March 1930.Head office in Basel, Switzerland. It acts as Bank for Central Banks.

BASEL 1 Norms

     Introduced in 1988(India adopted Basel 1 guidelines in 1999)
     Started capital measurement system called Basel capital accord also called Basel 1
     The minimum capital requirement was fixed at 8% of risk-weighted assets (RWA)
     RWA - the minimum amount of capital that must be held by banks to reduce the risk of insolvency

(insolvency is the situation where a bank cannot raise enough cash to meet its obligations) #### BASEL 2 Norms Introduced in 2004 Acknowledged as refined and reformed versions of Basel I accord Basel II norms in India and overseas are yet to be fully implemented. #### BASEL 3 Norms Introduced in 2010. (In India it was implemented on March 31st, 2019) These guidelines were proposed in acknowledgment of the financial emergency of 2008. BASEL – III recommended that the Capital Adequacy Ratio(CAR) was 8% internationally, while in India it is 9%. Basel Norms have four Vital banking Paramenters which: - Capital adequacy - Leverage Ratio - Net stable funding ratio - Liquidity ratio

Types of money

Dear Money ,

"The money which is available at high-interest rates and hence restricts expenditure by companies." o “ Due to restricted money supply, interest rates will be pushed up. Hence, it is very difficult to raise money during this period of dear money.”

Barren Money

o Money that does not earn any interest

• Hot money o That have high interest and are high O hard o safe haeven global currency"

types of banking

• Branch Banking Involes businrss banking.
• Para Banking
• Universal, that can do financial activity
• Net banking

Institutions

• RBI
• RBB
• NBAD
• REFANCE

Differentiated Banks -NBFC

Small banks

1998

Credit schemes to farmers - Aim and recommendations

List Of 1998 for Lorms