Contents – Management of Banking and Financial Services, 2nd Edition



Preface to the Second Edition



About the Authors

01 Managing Banking and Financial Services—Current Issues and Future Challenges

Section I The Setting

Section II The Global Financial system—Current Issues

The Causes of the Crisis

Macro Economic and Financial Stability—Understanding the Linkages

The Role of ‘Trust’ in Financial Stability

The Role of Regulation in Ensuring Financial Stability

The Objectives of Financial Regulation

Financial Stability—The Overarching Agenda for the Future

Section III The Indian Financial System—an Overview

Financial Stability in India

Section IV The Indian Banking System—an Overview

The Bank Market Structure in India

Who Owns the Commercial Banks in India?

Evolution of Indian Banking

Annexure I: Banking Sector Reforms

Annexure II: Committee on Financial Sector Reforms—2009: Main Proposals of the Raghuram Rajan Committee

Annexure III: Select Major Policy and Legal Reforms Since 1991–9221

02 Monetary Policy—Implications for Bank Management

Section I Basic Concepts

A Macroeconomic View

Central Bank Tools to Regulate Money Supply

The Impact of OMOs on Other Tools of Monetary Policy

Central Bank Signaling Through the ‘Policy Rate’

Popularity of the ‘Repo’ Rate as the Policy Rate

The Monetary Ratios

Other Factors that Impact Monetary Base and Bank Reserves

Section II Application Of The Monetary Policy Tools in India

The Monetary Base in India

Measuring Money Supply in India

Operation of Reserve Requirements in India

Net Demand and Time Liabilities

Open Market Operations in India

Repo Market Instruments Outside the LAF

Section III Monetary Policy Tools in Select Countries

The United States of America


The Eurosystem

Other Developed and Developing Countries

Annexure I: Computation of the NDTL for the Banking System in India

03 Banks’ Financial Statements

Section I Basic Concepts

Bank Liabilities

Bank Assets

Contingent Liabilities

The Income Statement

Section II Financial Statements Of banks Operating in India

Bank Liabilities

Bank Assets

Income Statement of Indian Banks

Other Disclosures to be Made by Banks in India

Section III Analyzing Banks’ Financial Statements

Annexure I: Camels Ratings

Annexure II: Key Performance Indicators (KPI)for Banks

Annexure III: Some Alternative Models for Bank Financial Statement Analysis

Annexure IV: Growth of Non-Interest Income in India

Annexure V: Changes in International Accounting Standards and Code of Good Practices on Transparency in Monetary and Financial Policies—The International Monetary Fund

04 Sources of Bank Funds

Section I Basic Concepts

Section II Bank Liabilities—Deposits

Protecting the Depositor—Deposit Insurance

Deposit Insurance in India

Section III Pricing Deposit Services

The Need to Price with Precision

Some Commonly Used Approaches to Deposit Pricing

Marginal Cost of Funds Approach

New Cost of Funds Analysis

Deposits and Interest Rate Risk

Section IV Bank Liabilities—Non-Deposit Sources

The Funding Gap

The Indian Scenario

Section V Bank Deposits in India—Some Important Legal Aspects

Banking’ Defined

Who is a Customer?

Who is Eligible to be a Customer?

General Guidelines for Opening Deposit Accounts

Termination of Banker–Customer Relationship

Types of Deposit Accounts

Section VI Design of Deposit Schemes—Some Illustrations

Recurring Deposit Scheme (RD)

Reinvestment Deposit Scheme

Fixed Deposit Scheme

Cash Certificates

Annexure I: Some Important Non-Deposit Funding Sources for Banks in India and the USA

Annexure II: Some Important Legal Provisions Relevant for Bankers

Annexure III: A Summary of Important Legal Aspects of Bank Deposits in India

Annexure IV: Anti-Money Laundering and Know Your Customer Guidelines—International

Best Practices and Guidelines for Indian Banks

05 Uses of Bank Funds—The Lending Function

Section I Basic Concepts


Banks’ Role as Financial Intermediaries

Gains from Lending

Who Needs Credit?

Features of Bank Credit

Types of Lending

Section II the Credit Process

Constituents of the Credit Process

Section III Financial Appraisal for the Credit Decision

Financial Ratio Analysis

Common Size Ratio Comparisons

Cash Flow Analysis

Section IV Different Types of Loans and Their Features

Loans for Working Capital

Loans for Capital Expenditure and Industrial Credit

Loan Syndication

Loans for Agriculture

Loans for Infrastructure—Project Finance

Loans to Consumers or Retail Lending

Non-Fund Based Credit

Section V Loan Pricing and Customer Profitability Analysis

Step 1: Arrive at Cost of Funds

Step 2: Determine Servicing Costs for the Customer

Step 3: Assess Default Risk and Enforceability of Securities

Step 4: Fixing the Profit Margin

Some More Models of Loan Pricing

Annexure I: Risk Classification Criteria and the Role of Credit Rating

Annexure II: Credit Appraisal—Some Commonly Used Financial Ratios

Annexure III: Income Statement-Based Cash Flow Analysis

06 Banks in India—Credit Delivery and Legal Aspects of Lending

Section I Modes of Credit Delivery

Cash Credit

Loan System for Delivery of Bank Credit—The Working Capital Demand Loan


Bills Finance

Pricing of Loans

Section II Legal Aspects of Lending

What are Unsecured Loans?

What are Secured Loans?

What is a ‘Security’?

Annexure I: Types of Borrowers and Modes of Lending

Annexure II: Reclassification of Borrowers' Financial Statements for Credit Appraisal

Annexure III: Some Common Securities for Bank Loans

07 Credit Monitoring, Sickness and Rehabilitation

Section I Basic Concepts

The Need for Credit Review and Monitoring

Triggers of Financial Distress

Financial Distress Models—The Altman's Z Score

Some Alternate Models Predicting

Financial Distress

The Workout Function

Section II Banks in India—Credit Monitoring and Rehabilitation Process

Debt Restructuring and Rehabilitation of Sick Firms in India—Past and Present

Monitoring by the States—State Level Inter-Institutional Committees

Debt-Restructuring Mechanism for SMEs

Annexure I: Warning Signs that Banks Should Look out for—An Illustrative Checklist

Annexure II: Small/Medium Enterprise and Corporate Debt Restructuring in India

Annexure III: Case Studies: Debt Restructured Under CDR

08 Managing Credit Risk—An Overview

Section I Basic Concepts

Expected Versus Unexpected Loss

Defining Credit Risk

The Basel Committee's Principles of Credit Risk Management

Loan Workouts and Going to Court for Recovery

Credit Risk Models

Section II Measuring Credit Risk—Introduction to Some Popular Credit Risk Models

A Basic Model

Modeling Credit Risk

Section III Credit Risk Transfers—Loan Sales and Credit Derivatives

Credit Derivatives

Some Basic Credit Derivative Structures

Section IV Treatment of Credit Risk in India—Some Important Exposure Norms, Prudential Norms for Asset Classification, Income Recognition and Provisioning

Some Important Exposure Norms

Prudential Norms for Asset Classification, Income Recognition and Provisioning

Income Recognition

Asset Classification

Provisioning Norms

Section V Treatment of Credit Risk in India—Securitization and Credit Derivatives

Securitization—The Act

Securitization—The Indian Experience

The Securitization Market in India—2008–2009

Credit Derivatives

Annexure I: Basel Committee—Principles for the Assessment of Banks’ Management of Credit Risk

Annexure II: Salient Features of Securitization

09 Managing Credit Risk—Advanced Topics

Section I Basic Concepts

Estimating PD, EAD and LGD—The Issues

Why Do We Need Credit Risk Models?

Credit Risk Models—Best Practice Industry Models

Section II Select Approaches and Models—the Credit Migration Approach

The Credit Migration Approach (Used by Credit Metrics)

Calculation of Portfolio Risk

The Credit Migration Approach (Used by Credit Portfolio View)

Section III Select Approaches and Models—the Option Pricing Approach

The KMV Model

Section IV Select Approaches and Models—the Actuarial Approach

Credit Risk+™ Model

Section V Select Approaches and Models—the Reduced Form Approach

Kamakura Risk Manager Version 7.0 and Kamakura Public Firm Models Version 4.1

Which Model is Better—Structured or Reduced-Form?

Section VI Pricing Credit Derivatives

Pricing Credit Default Swaps—Understanding the Cash Flows

Pricing Credit Default Swaps—Grasping the Basics

Pricing Collateralized Debt Obligations—The Basics

Section VII Credit Risk Measurement After the Financial Crisis

The Financial Crisis—An Overview and Analysis

Current Developments and Regulatory Changes

Annexure I: The Global Credit Crisis—A Brief Chronology of Events in 2007–08

10 Uses of Bank Funds—Investments

SECTION I Basic Concepts

The Treasury Functions

Risks and Returns of Investment Securities

Section II Measuring Market Risk With Var

Approaches to VaR Computation

Section III Banks’ Investment Portfolio in India—Valuation and Prudential Norms'

Classification of the Investment Portfolio

Valuation of Investments

Investment Reserve

Determination of ‘Market Value’ While Marking to Market (HFT and AFS Categories)

‘Non-Performing’ Investments

Income Recognition

Annexure I: Case Study—LTCM Collapse and Link with VaR

Annexure II: Summary of Regulatory Responses to Market Risk Measurement Practices by Banks After the Global Financial Crisis

11 Capital—Risk, Regulation and Adequacy

Section I Basic Concepts

Why Regulate Bank Capital?

To What Should Capital be Linked to Ensure Bank Safety?

The Concept of Economic Capital

The Concept of Regulatory Capital

Section II Risk-Based Capital Standards—Regulatory Capital

Basel Accord I

Basel Accord II

Determination of Capital Requirements Under the New Basel Plan

Capital Requirement for Interest Rate (Market) Risk

Capital Requirement for Operational Risk

Constitution of Banks’ Capital Funds

Calculation of the Capital Ratio

Stress Testing and Its Applicability to Regulatory Capital

Section III Application of Capital Adequacy to Banks in India

Capital Funds of Banks Operating in India

Tier 1 Capital

Tier 2 Capital

Total Capital Funds

Calculating Capital Charges and Risk-Weighted Assets

Section IV Illustrative Problems on Calculating Capital Adequacy

Steps for Computing Risk-Weighted Assets

Annexure I: Guidelines for Operational Risk Management

Annexure II: The Financial Crisis of 2007—Basel II and the Blame Game

Annexure III: Pillars II and III of Basel II Accord and Their Application to Indian Banks

Annexure IV: Capital Adequacy Ratios of Indian Banks—Some Comparative Tables

12 Risk Management in Banks

Section I The Changing Face Of Banking Risks

Section II Asset Liability Management

Section III Interest Rate Risk Management

Managing Interest Rate Risk

Measuring Interest Rate Risk

Managing Interest Rate Risk—A Strategic Approach

Interest Rate Risk or Model Risk?

Alternative Methods to Reduce Interest Rate Risk

Section IV Managing Interest Rate Risk—Interest Rate Derivatives


Interest Rate Futures

Forward Rate Agreements (FRAs)

Interest Rate Options

Interest Rate Guarantees



Derivatives Market Growth—The Issues

Section V Liquidity Risk Management

Sources of Liquidity Risk

How to Measure Liquidity?

Modern Approaches to Liquidity Risk Management

Approach to Managing Liquidity for Long-Term Survival and Growth

Approach to Managing Liquidity in the Short Term—Some Tools for Risk Measurement

Liquidity Risk—Stress Testing Process

Rating the Bank's Liquidity by the Regulator

Section VI Applicability to Banks in India

Interest Rate Derivatives in India

ALM Framework for Indian Banks

Liquidity Risk Management in Indian Banks

Annexure I: Theories of Interest Rates

Annexure II: Concept of Duration and Convexity

Annexure III: Features of a Sound Liquidity and Funds Management Policy and Symptoms of Potential Liquidity Risk

Annexure IV: Management of Liquidity Risk in Financial Groups—Key Findings

Annexure V: ALM in India—Classification of Bank Liabilities and Assets According to Rate Sensitivity and Maturity Profile

13 Banking Functions, Retail Banking and Laws in Everyday Banking

Section I Basic Concepts

Negotiable Instruments

Types of Deposits

Non-Resident Indian (NRI) Accounts

Mandates and Power of Attorney

Section II Retail Banking—Nature and Scope

Why Banks Focus on Retail Business

Emerging Issues in Handling Retail Banking

SWOT Analysis of Retail Banking

Strategies for Success in Retail Banking

Section III Customer Relationship Management (CRM)

CRM Strategies/Steps

Three Tip Questions for Managers

Image-Building Exercises

Blending Tradition with Technology

Section IV Laws in Everyday Banking

Key Acts That Govern the Functioning of the Banking Sector

Different Customers—Different Laws

Bank–Customer Relationship

Rights of a Banker

Obligations of a Banker

14 Banking System—Services and Innovations

Section I Commercial Banking System and Structure

Globalization and Innovations

Section II Case Studies of Banks

The ICICI Bank


The State Bank of India (SBI)

Section III Case in Detail—HSBC Bank


Credit Cards

Standard Privileges for HSBC Card Holders


Wealth Management


Special Offers

15 International Banking—Foreign Exchange and Trade Finance


Section I Basic Concepts

Exchange Rates

FOREX Market

Transfer Systems

Direct and Indirect Quotations

Functioning of Foreign Exchange Market

Section II Inter-Bank Market and Forex Dealing

Forex Dealing Room Operations

Spot, Forward, Cash, Tom Rates in an Inter-Bank Market

Bid and Offer Rates

Foreign Exchange Market

Section III Trade Finance—Letters of Credit

Financing International Trade Through Letters of Credit

Flowchart Depicting a Typical Import Transaction with Letter of Credit

Types of LC

Section IV Trade Finance—Financing Exporters

The Export Credit Scheme

Features of Packing Credit in Local Currency

Features of Pre-Shipment Credit in Foreign Currency (PCFC)

Post-Shipment Finance

Section V Foreign Currency Loan (FCL)

Features of Foreign Currency Loans

16 High-Tech Banking—E-Payment Systems and Electronic Banking


Why Do We Need Technology in Banking?

Benefits of Electronic Banking

Section II E-Payments

The Importance of Payments and Settlement Systems

International Standards and Codes for Payment and Settlement Systems

Payment and Settlement Systems in India

Section III Retail Payment Systems

Paper-Based Instruments in Retail Payment Systems—An Overview

Electronic Retail Payment Systems—An


Section IV Plastic Money And E-Money

Credit Cards

Debit Cards

Credit and Debit Cards in India

Other Payment Channels/Products

Section V Security Issues in E-Banking

17 Insurance Services

Section I Basic Concepts

Basic Features of Insurance Contracts

Benefits of Insurance

Types of Insurance Products

Section II India's Insurance Sector—an Overview

The Insurance Sector

Changing Scenario of the Life Insurance Sector

Insurance Regulatory Development Authority (IRDA)

IRDA Regulations

Life Insurance Corporation of India

Export Credit Guarantee Corporation of India (ECGC)

Section III Banks and Insurance Services—Bancassurance in India

How Does Bancassurance Help Banks?

How Does Bancassurance Help Insurance Companies?

How Does Bancassurance Help Customers?

Section IV Global Insurance Industry, Opportunities and Challenges

The Industry After the Financial Crisis




The Growth of Insurance Demand

18 Mutual Funds, Securities Trading, Universal Banking and Credit Rating

Section I Mutual Funds

Advantages of Mutual Funds

Types of Mutual Funds

Important Terms

Section II Trading in Securities/Shares

Factors Behind Growth of Online Trading

Impact on Securities Market

Section III Universal Banking

Size and Market Power

Diversification: Insurance and Securities

Core of Universal Banking

Impartial Investment Advice

Benefits to Banks

Benefits to Customers


Section IV Credit Rating Services

Credit Rating—An Overview

Information to Investors

Benefits to Issuers

Benefit to the Regulators

Differences of Opinion in the Credit Rating Industry

19 Cash Management and Demand Forecasting in ATMs

Section I Introduction

Section II The Case of Bharath Bank

Outsourced Agents for ATMs

Section III The Case of Global Bank

Information Flow in the Supply Chain—Role of IT Infrastructure

Section IV Cash Demand Forecasting

Time Series Analysis of Cash Withdrawals from ATMs

Sales Trends and Other Factors

Annexure I: ATM—Post- and Pre-Installation Activities

20 Mergers and Acquisitions in the Banking Sector

Section I Mergers and Acquisitions

Section II Case of Bank of Madura Merger With ICICI Bank

Profiles of Banks

Swap Ratio and Stock Price Fluctuations

Suitability Analysis

Synergies of the Merger

Annexure I: Share Price Volume Data

Annexure II: The Merger of Bank of Tokyo

Mitsubishi and UFJ Bank

21 Innovations in Products and Services—Cases of Three Banks

Case Study I Barclays Bank

Uk Banking

Barclay Card

Barclays Capital

Barclays Global Investors

Barclays Wealth Management

Performance and Governance

Products and Services

Other Services

Savings and Investments

Recent Initiatives

Barclays Strategy

Case Study II ING Vysya Bank

Milestones of the Bank over the Long Years of Its Services

The Origin of ING Group

The New Identity: ING Vysya Bank

Customer Relationship Management

IT Implementation for Quick Customer Response

Retail Banking

ING Vysya Bank's Retail Banking Strategy

Case Study III State Bank of India

Features of the State Bank of India

Primary Activities

Secondary Activities

Products and Services

22 Innovations in Products and Services in Banking—Cases of Public and Private Sector Banks

Case Study I Corporation Bank

Personal Banking

Loan Schemes


High-Tech Banking Products and Services

Products and Services for Non-Residents

Important Services

Case Study II South Indian Bank


SIB Deposit Schemes

Loans and Advances

NRI Schemes

Other Service Features Offered by SIB

Appendix: Objective-Type Questions on Commercial Banking