Download - FMI-Banks & Financial System-F
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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
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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.
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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.
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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
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Banks & Financial System
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.
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Banks & Financial System
Off Balance Sheet items:-
Bank Guarantees
Performance
Financial
Letters of Credit
Derivatives
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Banks & Financial System
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
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Banks & Financial System-
Balance Sheet
Liabilities-
Schedule1 Capital
Schedule2 Reserves & Surplus Scheduel3 Deposits
Schedule4 Borrowings
Schedule5 Other liabilities & provisions
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Banks & Financial System
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
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Banks & Financial System
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.
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Banks & Financial System
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
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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.
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Banks-Key Performance Indicators
LIQUIDITY RATIOS
Demand to Time deposits ratio
Borrowings/ total assets Total credit/ total assets
Cash/ total assets
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Banks-Key Performance Indicators
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
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Banks-Key Performance Indicators
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
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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