FMI-Banks & Financial System-F

7/29/2019 FMI-Banks & Financial System-F

1/16

IF ECONOMY IS THE ARTERIALSYSTEM

FINANCE IS THE BLOOD THATFLOWS THROUGH IT

BANKS ARE THE PURVEYORS OF

FINANCEHENCE BANKS ARE THE CRITICAL

COMPONENT OF ECONOMY


2/16

Banks & Financial System

Liberalisation, privatisation and Globalisationreforms.

Financial sector reforms- 1990-1998-2007

Demand for credit and new products.

Growth in Technology-e.g. ICICI bank

Changing role of BanksInterest rates- stock prices- exchange rates.


3/16

Banks & Financial System-

emerging issues

Know your customer( KYC)

Technology- robustness

Product innovation- margins

Pricing of products

Human resources.-

- transaction provider/solution provider/CRM.

ALM-low cost deposits

Risk Management.


4/16

Banks

A Balance Sheet with a difference!

Liabilities Amt. Assets Amt

Deposits (100) Cash 3

SB/CD-Demand 25

Loans &advances (55)

Term 60

Short term 30

Borrowings 5

Medium/long term 25

Capital &surplus

10

Investments 40

Fixed assets 2

Total 100

Total 100


5/16


Sources of funds- short term by natureand practice.

Financial Leverage is very high-equity

base is very low. May lead to earningsvolatility. (CAR)

Fixed assets are quite low.

A high proportion of bank funds are inloans & advances and investments- allinterest sensitive.


6/16


Off Balance Sheet items:-

Bank Guarantees

Performance

Financial

Letters of Credit

Derivatives


7/16


Income Statement. Bulk of revenue from Interest on advances and

Investments. Net Interest Income( NII) after deducting All

Interest payments to Deposits & Borrowings.

NII should be substantial to cover operatingcosts Non Interest Income-Other income-fee-based,

commission etc.( Non Int. Income- Overheadexps.= Burden)

Provision for loans, losses and market risks. Taxes. NII- Burden-provision-tax= NET INCOME


8/16

Banks & Financial System-

Balance Sheet

Liabilities-

Schedule1 Capital

Schedule2 Reserves & Surplus Scheduel3 Deposits

Schedule4 Borrowings

Schedule5 Other liabilities & provisions


9/16


Assets

Schedule 6 Cash & bank balance withRBI

Schedule 7 Balance with Banks and

money at call Schedule 8 Investments

Schedule 9 Advances

Schedule10 Fixed assets

Schedule11 Other assets______________________________________

Schedule 12 Contingent liabilities


10/16


Income Statement-

Schedule13 Interest earned.

Schedule14 Other income

Schedule15 Interest expended

Schedule16 Operating expenses

=====Schedule 17 & 18- notes to accounts, provisionsand contingencies and significant accounting

polices.


11/16


Statutory Reserves-20% of the profitunder Sec. 17(1) of Bkg. Reg. Act,1949

IFR- min 5% of the investment portfolio inHFT and AFS category.

Capital adequacy ratio of 9% on RWA CRR and SLR prescriptions on NDTL


12/16

Banks-Key Performance Indicators

Efficiency & Expenses control ratios:-

Operating Efficiency-Total operating exps./totalassets

Cost of funds- Total Interest exps/ total deposits& borrowings.

Non-interest income/ net total income.

Burden Ratio- Non-Interest income/ non-interest

expenses Employee productivity- Net income/ no. of full

time equivalent employees.


13/16


LIQUIDITY RATIOS

Demand to Time deposits ratio

Borrowings/ total assets Total credit/ total assets

Cash/ total assets


14/16


RISK RATIOS

Total assets/ equity- effects ROE

Equity/total assets Capital adequacy- Total capital/RWA

Net NPA/Total assets

Incremental RWA/Incremental totalassets- propensity to take risk


15/16


PROFITABILITY RATIOS ROE = Net Profit/ equity ROA = Net Profit/ Total assets

Profit margin = Net Profit/ Total income Asset utilisation= Total income/ total

assets Yield on Assets=interest income/total

earning assets Cost of funds- NIM= net interest income/total assets


16/16

BANKS-RATING-

CAMELSBoth objective & subjective parameters. CAPITAL ADEQUACY- ASSET QUALITY-

MANAGEMENT QUALITY EARNINGS LIQUIDITY SENSITIVITY TO MARKET RISKS

Rated on a scale of 1 to 51.0- 1.4- strong 1.5-2.4-Satisfctory 2.5-3.4-fair3.5-4.4-Marginal over 4.4 Unsatisfactory

Documents

FMI-Banks & Financial System-F