What is a Bank ?

• Bank is a financial institution that does business with a product called “Money”.
• Bank is a service industry that provide services to its customers who deposit their money and / or Borrow money from the Bank.
• Bank helps us to keep our money safely with them in a banking account, which is a contract between the bank and the customer.
• Bank encourage us to save money with them, by paying a percentage on our monies called interest.
• Bank also charge a percentage called Interest, on the monies they lent to the borrowers.
• A depositor keep their money with the bank, respectively, Banks open an account that, involves opening a  contract with the depositor.
• Customer when making a deposit, is making a loan to the bank (Debtor), it becomes bank’s money which the bank is then entitled to deal with as it sees fit.
• If Banks’ keep these monies in safe vaults with them until called for,  then where would the profit come from ?
• So Bank’s seek out a Creditor and lend these monies to them for their financial investments.
• These creditors could be Individuals who want to borrow to invest in buying Home (Home Loans), House hold items (Consumer / Personal Loans),  Vehicles (Auto loans), Fees for higher education (Education loans) etc., or could be corporates  who need funding for purchasing land, building, machinery, / need short term funding for their day to day operations (Working Capital finance)
• Banks’ earn fees or Commission for various services they provide.

Note : Thus, companies seek financial assistance from Banks. So, this shows finance is the basic necessity in Commerce, Trade & Industry.

Transformation of Banks

• Banks have transformed over the years from their traditional way of banking.
• Banks are competing among themselves to retain customers and are continuously investing in Technology, introducing new Business processes & innovative products to cater to the growing demands of the customers nationally & internationally.
• Types of Banks’ have emerged in the market depending upon purposeful & diversified financial opportunities & customer services.

Types of Banks

1. Commercial Banks
2. Retail Banks
3. Investment Bankings
4. Specialized Banks
5. Central Banks

We will read more about Types of Banks in details

Commercial Banks

• Commercial banks were traditionally focused to help entrepreneurs and business men and provide short term financial needs to Trade, Industry & Agriculture.
• Variety of services extended by commercial banks has increased significantly due to the advent of Information & communication technology resulted into services like Payment Services.
• Main functions of Commercial Banks are
  • Payment Services,
  • Financial Intermediation by collecting funds from depositors and giving it to borrowers.
  • Financial services like Investment Banking, Insurance related services, Foreign Exchange businesses, Government related businesses, Wealth Management services.
• Bank’s profitability lies in the income earned on these services.
• Collecting different types of bank deposits from customers, in financial terms this is Bank’s liability.
• Disbursement of loans and Investments made by Banks are their Assets.

Retail Banks

• Retail Banks focus on providing basic banking services to Individual customers (that is non corporates).
• Retail Banking does direct banking transactions like Savings, Term Deposits, Recurring Deposits, Home Loans, Education Loans, Safe deposit lockers etc.,with consumers, so retail banking also called as Consumer Banking.
• Range of Retail Banking services also has extended significantly due to adoption of Information & communication technology like
  • Channel Banking,
    • Mobile Banking, Internet Banking, Phone Banking, Teller Operations, ATM, Credit Cards, Kiosks
• Account Opening & Administration services & Archives
• Domestic & Cross Border Electronic funds Transfers
• Remittances in terms of paper instruments & Wire Transfers
• Inter Bank & Intra Bank Cheque Deposits & With drawls

Investment Banking

• An Investment bank is a financial institution.
• Investment Bank clients are
  • Corporates in sectors like Energy, Retail, Construction, Technology, Media, Healthcare, Food & drinks, Chemicals & any financial service organizations.
  • Funds: They pool investors’ assets, by an investment strategy, like Pension funds, Hedge funds, and Private equity funds.
  • Sovereigns: Governments & Export credit agencies.
  • High net worth individuals: those individuals who are capacitated with investable assets worth over say for example “$1 million”.
  • The bank itself: Bank’s trading and investment activities are conducted to make profits for itself.

To these clients, Investment Banks

• Advice on buying and selling companies, Financial affairs structuring / re-structuring & How to raise money? ; Where & How much to invest in various financial products?
• Advice to High net worth individuals & corporates on managing their assets
• Providing financing: By making loans & purchasing corporate shares and guide them in finding other parties to do so.
• Trading: on buying & selling shares, debt products, commodities, derivatives, foreign exchange etc., on behalf of clients and to make money for the bank.
• Perform research activities to monitor industry trends, Economic developments for the bank’s own purposes also for its clients.
• Advice on mergers and acquisitions and management of public assets.

Investment banks get their income on

• Fees for providing advice, providing finance, arranging financing for clients from other parties, trading services, investment services, and research.
• Income in terms of Dividends from investments made in shares.
• Income by means of Interest from loans made.
• Profits from investments made.
• Profit made from buying and selling securities.

Specialized banks:

Banks that provide some unique services to their customers. Such as, Foreign exchange banks, Development banks, Industrial banks, Export Import banks etc.

Central bank:

Banker’s bank in any country is a central bank

• In India, the Reserve Bank of India is the central bank.
• The Federal Reserve in USA
• The Bank of England in UK

These central banks of a country does not deal with the public but it deals with other banks , makes various monetary policies, controlling the other banks in the country, manages the foreign exchange rate and the gold reserves and also issues paper currency in a country.
The principal responsibility of Central Bank is thorough control on currency of a country.

Credit unions

They are nonprofit, cooperative financial institutions in United States. Traditionally, people with a common bond have formed them — they work in the same industry or are members of a particular workers’ union, share the same religion, etc. Many credit unions simply require that you live or work in a certain geographic area in order to become a member. The vast majority of credit unions in the United States are federally chartered or state chartered credit unions that are federally insured.
Credit unions frequently offer higher interest on deposit products than   banks; and they have a tendency to offer loans at lower rates. Credit   unions are exempt from federal taxation.
The National Credit Union Administration is the federal agency that   charters and supervises federal credit unions and insures deposits in   federal credit unions and state credit unions that are federally insured.

Online banks

They have no physical branches, they gained attention by offering higher rates on deposit products than traditional banks.

Industrial Banks / Development Banks

Industrial / Development banks collect cash by issuing shares & debentures and providing long-term loans to industries. The main objective of these banks is to provide long-term loans for expansion and modernization of industries.

Land Mortgage / Land Development Banks

Land Mortgage or Land Development banks are also known as Agricultural Banks because these are formed to finance agricultural sector. They also help in land development.

Co-operative Banks

Co-operative banks generally give credit facilities to small farmers, salaried employees, small-scale industries, etc. Co-operative Banks are available in rural as well as in urban areas. The functions of these banks are just similar to commercial banks.
 

Types of Deposits & Loans

The various deposit products offered by the Bank can be categorized broadly into the following types.

• Demand deposits means a deposit received by the Bank which is redeemed on demand;
• Savings deposits means a form of demand deposit which is subject to restrictions as to the number of withdrawals as also the amounts of withdrawals permitted by the Bank during any specified period;
• Special Term deposit means a deposit received by the Bank for a fixed period redeemed only after the expiry of the fixed period (Ex:-Monthly Income Schemes, Tax Planner Deposits etc.)
• Current Account means a form of demand deposit where from withdrawals are allowed any number of times depending upon the balance in the account or up to a particular agreed amount and will also include other deposit accounts which are neither Savings Deposit nor Term Deposit.
• Notice Deposit means term deposit for specific period but redeemed on giving at least one complete banking day’s notice;
• Call Deposit refers to a specific type of interest bearing investment account that allows a person to withdraw their money from the account without a penalty.
• Term deposits a deposit received by the Bank for a fixed period redeemed  after the expiry of the fixed period. Bank gives the flexibility to customers to get interest amount paid with Monthly , Quarterly, Half Yearly or on the day of maturity of the deposit.
  • Interest earned on the Term deposits paid in frequent internals are called Simple deposits and at the end of the period of the deposit, customer get back the principal invested with / without less of taxes.
  • Interest earned on those Term deposits paid to customer only on maturity are called Reinvestment deposits, customer gets back the proceeds with Principal invested, Interest earned with or without less of taxes.
• A recurring deposit  make a fixed investment every month. This monthly investment earns  fixed rate of interest for fixed period, Thus, making equal periodic payments, we get back with interest as a lump-sum at the time of maturity.

Money Markets

The money market is the interbank market for trading short-term financial instruments. Most of the transactions in the money market have terms up to 3 months, some up to 1 year or more
The most important money market products are:

• Interbank loans / deposits
• Certificates of deposit (CDs)
• Bills of exchange
• Commercial papers (CPs)
• Repurchase-agreements (Repos)

Types of Loans

A loan is an asset for a bank as the interest payments and the repayment of the principal create a stream of cash flows. It is from the interest payments that a bank makes its profits.
There are two types of Loans

• Secured Loans are those kind of loans like Home loans where the customer (borrower) pledges an asset (e.g. a car or property or Government issued securities like NSC Bonds or Bank Fixed Deposits etc.) as collateral for the loan
• Unsecured Loans – Based on the customer’s creditworthiness loan is issued like Personal loans where there is no pledging of collateral.

The following are the Assets that generate income to the bank

• Loans
• Discount of Bills
• Mortgages
• Cash Credits
• Overdrafts
• Collaterals

Branch Operations

The following are the Teller Operations at Branch.

• Account Opening, Account Administration & Closing of Account
• Cash Deposits & Cash With drawls
• Issuance of Remittance through Demand Drafts / Pay orders
• Issuance of Domestic Outward Remittance by RTGS / NEFT / ECS
• Issuance of Cross Border payments through SWIFT messages
• Cheque Management
• Issuance of Traveler’s Cheque
• ATM Reconciliation
• Stop Payment of Cheque
• Activating deactivated accounts
• Branch accounts reconciliations
• Maintenance of Standing Instructions & Sweeps

What is Channel Banking how it serves as a window to Banking ?

Channel Bank is a device that facilitates Banking services to customers using telecommunication networks

• ATM is an Automated Teller Machine which is an electronic banking outlet, facilitates customers to access their Bank accounts and perform banking transactions like Cash with drawls, Mini statements etc.
• Phone Banking is a telephone banking service provided by Banks, enables customers to access their accounts & perform banking transactions
• Mobile Banking is a facility offered by Banks to easily and securely perform financial transactions using mobile devices like cell phones
• Internet Banking is Online Banking allows customers to perform financial transactions by accessing to their accounts by using a secure website

Payments

Payment is transfer of funds from one party to another and is usually made in exchange for the provision of goods & services

Types of Payments: Domestic Payments

Domestic Payments

• Large Value Transactions
  • Real Time Gross Settlement (RTGS)
• Retail Value Transactions
  • National Electronic Funds Transfer (NEFT)
  • Electronic Clearing System (ECS)
  • OTC Funds Transfers
  • Standing Instructions
  • SWEEPS
  • Cash Payments
  • Cheque Payments
  • Cheque Truncation
  • Credit Card Payments
  • Debit Card Payments
  • Demand Drafts
  • Banker’s Cheque
  • Gift Payments
  • E-Money
  • Straight Through Processing (STS/STP)
• Online (Electronic) Payments
  • Online Credit Card Payment System
  • Online Electronic Cash System
  • Electronic Cheque System
  • Smart Cards
• Offline (Non Electronic) Payments
  • Collections involving (Cheques /Demand drafts/Pay orders)
• Cross Border Payments
  • SWIFT Payments [Society of Worldwide Inter bank Financial Telecommunication]
  • SEPA Payments [Single Euro Payments Area]
  • Travelers Cheque
  • International Debit Cards
  • International Credit Cards
  • Foreign currency Collections involving
  • (Foreign Currency Demand Drafts, Foreign Currency Cheque)
• SEPA – Single European Payments Area
  • All payments in euros within European Union will be regarded as Domestic Payments even in Cross-Border junctions.
  • Does not have distinguish between cross-border and domestic payments within Europe.
  • Will be effectively implemented on
    • Single Currency
    • Single Account
    • Single Data Format
    • Standardized Payment Instruments
• PAN European – SEPA Instrument Types
  • SEPA Credit Transfers (Standard Credit Transfers)
  • SEPA Direct Debits (Standard Direct debits / automatic debit transfers)
  • SEPA Cards framework

Payment Instruments

Types of Payments	Payment Instruments	Payment Channels
Domestic Payments
Real Time Gross Settlement (RTGS)	—–	• Net banking • Branch / Teller • Phone Banking
National Electronic Funds Transfer (NEFT)	—–	•Net banking • Branch / Teller • Phone Banking • ATM
Electronic Clearing System	—–	• Through Banks by ECS Debit / ECS Credit
OTC Funds Transfers	—–	• Net banking • Branch / Teller • Phone Banking • ATM • Mobile Banking
OTC Funds Transfers	—–	• Customer access through Internet • Customer access through Straight Through Processing Systems • Through Bank systems
Standing Instructions	—–	• Customer Provide one time instructions until further notice to effect funds transfer with Fixed Amount, Date, Payee Name & Address which is effected by Bank Systems
SWEEPS	—–	• Customer provide Debit SWEEPS / Credit SWEEPS which is effected by Bank systems
Cash Payments	•Cash Deposit Payments •Cash With drawl Payments	•ATM •Bank Branch / Teller Services
Cheque Payments	•Inward Bound Cheques to Debit existing account holders (Cheques belonging to Same Bank)	•Clearing & Settlement House
	•Outward Bound Cheques  to Credit existing account holders (Cheques belonging to  Different Banks)	•Clearing & Settlement House
Credit Cards	• VISA Credit Card • Master Credit Card • Various Credit Cards offered by Banks (List)	• Payment Gateway
Debit Cards	• Visa Electron Cards • Various Debit Cards offered by Banks (List)	• Payment Gateway
Real Time Gross Settlement (RTGS)	Not an Instrument	• Customer access Net banking and provide instructions to Bank to effect RTGS • Customer go to Branch / Teller and provide instructions to Bank to effect RTGS •
National Electronic Funds Transfer (NEFT)	Not an Instrument	•Customer access Net banking and provide instructions to Bank to effect NEFT • Customer go to Branch / Teller and provide instructions to Bank to effect NEFT
Electronic Clearing System	Not an Instrument	• Through Banks by ECS Debit / ECS Credit
OTC Funds Transfers	Not an Instrument	• Customer access through Internet • Customer access through Straight Through Processing Systems • Through Bank systems •

 

Payment Networks

• ACH
  • Automated Clearing House
• SWIFT
  • Society of World wide Inter bank Financial Telecommunication
• CHAPS
  • Clearing House Automated Payment System
• CHIPS
  • Clearing House Interbank Payment System

Basic Concept in Foreign Exchange

• If American exporter from New York USA, exports machinery to Indian importer, then the American exporter want to get the payment in USA currency (US dollars) which is the currency of his country. Payment in Indian currency (Indian Rupees) will not serve their purpose because Indian currency cannot be used in their country-USA.
  • Likewise, the Indian importer have their savings and borrowings in
  • Indian currency (Indian Rupees).
• Thus the exporter requires payment in the currency of the exporter’s country whereas the importer can pay only in the currency of the importer’s country.
• Thus a need arises for conversion of the currency of the importer’s country into that of exporter’s country.

Foreign Exchange:
Foreign exchange is a mechanism by which the currency of one country gets converted into the currency of another country.
Foreign exchange instruments

• SPOT
• Forward Contract
• Foreign Exchange SWAP
• Currency Future
• Foreign Exchange Option

Basic Concepts in Core Banking

Core Banking system provides a comprehensive suite of functionality to support Bank’s business, irrespective of its customer base, types of customers number of branches & volumes of accounts.
Core banking system has the following sub systems / modules:-

• Deposit Module
  • Range of processes and services required by the various deposit products including the management and maintenance of current and savings accounts, deposits & withdrawal management.

• Lending Module
  • Management & Transactional activity of all the lending products falling under revolving / non revolving loans; funded services / non funded services.
• Service Module (Payments Module)
  • Establishing integrated payment transactions with other core banking internal application modules as well as the external Centralized Payment Systems.
• Customer Administration System
  • An integrated and centralized customer administration subsystem, provides functions for customer maintenance