Banking Business 

FUNCTION OF BANKING 

Primary  Function

ACCEPTING DEPOSITS

Current Deposits

Saving Deposits

Fixed Deposits

Recurring  Deposits

Granting  Advances 

Overdrafts

Cash Credit

Demand Loans

Term Loans

Bill Purchase /Discounting

 Secondary Function

AGENCY  FUNCTION

Transfer of funds

Periodic  Payments

Collection of cheques

Portfolio Management,

Wealth management

Periodic   Collection

Other agencies

Utility Function

Drafts

Lockers

Underwriting

Project Report

Social Welfare

Others

Sources of Funds

• Capital Funds
• Short Term Borrowings
• Long Term Borrowings
• Deposits

 Uses of Funds

• Cash & Bank Balance
• Investment
• Loans & Advances
• Fixed Assets

 Bank Balance sheet 

CONCEPT OF CREDIT

• Word ‘Credit’ is derived from Latin word ‘Credo’ which means                                                                         “I believe in you’ or ‘I have trust on you’.
•  Credit means a “trust or confidence” reposed in another person. 
• It is the ability of a customer to obtain goods or services before payment, based on the trust. 
• Banker’s view: "Credit is a contractual agreement in which a borrower receives something of value now”  & agrees to repay the  “Bank” at some future date along with interest & charges.
• In terms of Double entry Book keeping, “It is an entry on the Right-hand side of an account record i.e.(B/S).

 Decision Making Remember ..............  

• Appraisal of a proposal is a decision making exercise. 
• It is choosing one amongst the available possibilities. 
• It is a brainy activity as one has to separate Grain out of Chaff.
• Decision making is a function of Information, Intuition & Application thereof. D= f (I, I, A) 

Information is gathered from various sources: Financials, Rating Agencies, Market, FIs etc.

Intuition: It is the experience which our brain has recorded from the past Data, Circumstances,Situations we had faced. It is the perception one has derived out of past experiences. It is the Gut feeling that one develops after years of experience.

Application of these two aspects of Information & Intuition is decision making. Of course those are applied after weighing Pros and Cons of various situations.

Remember the past experiences of self  & others (seniors) are extremely useful.   

“Decision making is an ART & SCIENCE which one has to develop by applying the above tricks of the Trade”.

BANKERS EXTEND : LOANS/ ADVANCES/CREDIT FACILITIES/ FINANCE/ LINES OF CREDIT 

1. Carrying out Economic Activities (generate employment & income) such as: Business/Trade/ Manufacturing/ Services/ Transport/ Agri etc.  
2. For Personal Use or Consumption: HL/ Vehicle/Goods/Medical/ Celebrations/ Tours & Travels 

For carrying out these Economic Activities ‘4’ Types of Assets ARE NECESSARY:

• Fixed Assets.
• Current Assets.
• Non-Current &
• Intangible Assets.

Cardinal Principles of  Lending

• Take time to reach a decision. 
• Do not be too proud to ask for a second opinion. 
• Get full information from the customer and do not make unnecessary assumptions (i.e. Do not lend to a business you do not fully understand). 
• Do not take a customer’s statements and representations at face value and do ask for evidence to support the statements. 
• Distinguish between facts, estimates and opinions when forming a judgment. 
• Think again when your gut reaction suggests caution, even though the factual assessment looks satisfactory.
• In implementing the credit decision process, it is important to avoid unnecessary bureaucracy and delays.

Safety: Be in safe hands as we are trustees of depositors funds. (Willing & Committed to repay) 

Liquidity: Generate enough Cash to repay & a fare return to the Owners. 

Purpose: Generate Employment & Help in productive activities. Conform to Bank/RBI/ Govt. policies. To support society Bks. extend personal loans & loans for consumption needs. 

Profitability: It is the elixir of any business & hence generate sufficient returns to the owner after repayment of Loans.        

Security: It is an insurance to fall back upon / Insurance in case

National Goals / Social Responsibility: Priority sector norms, Generate income & employment; Lawful activities & Purposes & Not against the national interest or policies; not for prohibited activities. 

Spread/ Diversification of Risk: Different segments, types of loans, different activities, ST & LT, NFBs; different areas, to avoid concentration.  Post sanction Supervision & follow up.

Studying 5C’s is an indispensable part of “Basic principles of lending.”

5 C’S: STUDIED BY A BANKER TO JUDGE THE “CREDIT WORTHINESS”  

Character  - Business character

Credit Capacity – To generate income to repay, DSCR, DTI: Debt to Income.

Capital- The contribution/stake of borrower

Collateral- Additional security as a cushion to fall back upon

Comfort/ Confidence/ Condition with the business Plan:                                                                                                    

How accurate are the revenue and expense projections?                                                                      

Are they in tune with the economy?                                                                                                           

A banker needs to make a detailed study & judgment.

Credit Approval Procedure

• Loan authorities should be commensurate with the experience and knowledge of the lender/credit officer and take into consideration the type of credit, the amount of credit, and the level of risk involved.
• The simple rule is that the riskier the transaction, the higher the approval level must be. 
• Transactions with a high exposure or a low credit quality or a long tenor necessitate senior-management involvement

 Credit Policy & Procedure

• Defining Objectives/Mission of credit policy
• Organizational structure for credit administration 
• Credit risk appetite.
• Prudential limits, exposure norms ,etc.
• Credit approval procedures.
  • Origination of credit  proposals
  • Processing of credit proposal
  • Credit risk rating methodology
  • Risk acceptance standard/hurdle rate
  • Risk pricing linked  to risk  rating 
• Rehabilitation and restructuring
• Loan review mechanism.
• Capital allocation for credit risk.

 Credit Risk Mitigation

Credit risk mitigation measures aim at reducing the intensity of credit risk associated with a particular transaction or credit portfolio in general.

Credit Risk Mitigation  Measures

• Credit Policies and Procedures
• Proper pre-sanction due diligence
• Credit approval authorities
• Collateral management
• Risk pricing
• Prudential limits
• Use of credit derivative & hedging
• Loan review mechanism, Credit Audit

 Credit Risk Appetite

• Credit risk appetite is the extent to which the bank is able and willing to take risks in the normal course of business in respect to credit and credit-related exposures. 
• The capital level, the liquidity profile, the liability structure, the cost of funds, and the targeted return on funds largely influence the risk tolerance capacity of the bank

 Why Prudential Exposure Limit

• To limit the maximum loss of a Bank in the event of a sudden counterparty failure to a level that does not endanger Bank’s solvency
• To complement Basel Committee’s risk-based capital standard
• To prevent shock arising from a large counterparty failure which can destabilize the organization.