Symbi Banking Lecture Notes 2012(1)

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BANKING & WEALTH MANAGEMENT 

Evolution of Banking

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the

Reserve Bank of India Act, 1934. The Indian Banking Regulation Act 1949 was formulated to govern

the financial sector.

In 1921 the presidency Banks of Bengal, Bombay and Madras with their 70 branches were merged in

1921 to form the Imperial Bank of India. During the First 5 year plan in 1951, an act was passed in

Parliament in May 1955 nationalizing the Imperial Bank and the State Bank of India was constituted

on 1 July 1955

During the period 1906-1911, several Commercial banks such as BOI, Central Bank of India, BoB,

Bank of Mysore etc were established which were all Joint Stock Banks

Definition of a Bank

Indian Banking Regulation Act (1949) defines Banking as the Acceptance of money for the purpose of 

lending or investment, from deposits received from the public, repayable on demand or otherwise

withdrawable by cheques, drafts or order to otherwise (Standing Instructions, ECS).

Nationalization of Banks

First only State Bank of India (SBI) was nationalized in July 1955 under the SBI Act of 1955.Nationalization of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960. 

In 1969, Mrs. Indira Gandhi the then prime minister nationalized 14 banks then. These banks were

mostly owned by businessmen and even managed by them.

  Central Bank of India

  Bank of Maharashtra

  Dena Bank

  Punjab National Bank

  Syndicate Bank

  Canara Bank  Indian Bank

  Indian Overseas Bank

  Bank of Baroda

  Union Bank

  Allahabad Bank

  United Bank of India

  UCO Bank

  Bank of India

1980 : Nationalisation of seven more banks with deposits over 200 crores.

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Problems: Nationalized banks had job guarantee so employee efficiency very low, indiscipline and 

high absenteeism, trade union problems etc. Compare with present banks

TYPE OF BANKS AND THEIR FUNCTIONS

1.  Central Bank2.  State Bank of India

3.  Scheduled and Non Scheduled Banks

4.  Co operative Banking

5.  Retail Banking

6.  Private Banking

7.  Investment Banking

8.  Corporate Banking

1. CENTRAL BANK: RBI1. A Central bank has the sole right of note issuance i.e. legal tender currency

2. It should be the channel, and the sole channel for the output and intake of legal tender currency.

3. It should be the holder of all the government balances, and the holder of all the reserves of the

other banks and branches of banks in the country.

4. It should be the agent , so to speak, through which the financial operations, at home and abroad,

of the government would be performed.

5. Based on its Monetary Policy It should further be the duty of the central bank to effect so far as it

could , suitable contraction and suitable expansion on money supply based on inflationary or

recessionary trends, aiming generally at stability, by using the following tools: OMO- Open Market

Operation, Sterilization, CRR, SLR, Bank Rate etc- (Discussed in class, notes given)

6. When necessary, it should be the ultimate source from which emergency credit might be obtainedin the form of rediscounting approved bills, or advances on approved short term securities or

government papers. Lender of last resort/ Banker to Banks

7. It does not deal directly with the public. It indirectly helps agriculture, industry by augmenting

resources of other banks, channeled through agencies such NABARD, SIDBI, NHB ie priority sector

targets

8. Maintains the foreign exchange reserves and gold reserves for the country (Discussed in class-

notes given) 

9. Clearing House of Commercial Banks (Discussed in class-notes given)

10. Rediscounting bills for scheduled banks (Discussed in class-notes given) 

11. Moral Suasion- Mild persuasion to banks and financial institutions to follow RBI requirements

based on market situations

12. Monitoring and setting Priority Sector lending targets for banks

COMPULSORY WEBSITES FOR RBI FUNCTIONS:

CLEARING AND SETTLEMENT FUNCTIONS :

http://www.rbi.org.in/SCRIPTs/PublicationsView.aspx?id=157 

Also read: Cheque Truncated System

PRIORITY SECTOR LENDING :

http://www.rbi.org.in/SCRIPTS/FAQView.aspx?Id=8 

2. STATE BANK OF INDIA

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The State Bank of India acts as an agent of the Reserve Bank of India and performs the following

functions:

(1) Borrows money:- The Bank borrows money from the public by accepting deposits such as current

account deposits, fixed deposits and demand deposits.

(2) Lends money:- It lends money to merchants , industries and manufacturers. It also lends to

farmers and co-operative institutions. It lends mostly on the security of easily realizable commoditieslike rice, wheat, cotton, oil-seeds, cloth, gold and government securities. The Bank can lend against

agricultural bills upto a maximum period of fifteen months and incase of other bills upto a maximum

period of six months.

(3) Banker’s Bank:-The State Bank of India acts as the banker’s bank. In discharging this

responsibility, the bank provides loans to commercial bank when required and also rediscount their

bill.

(4) It also acts as the clearing house of the commercial bank where RBI doesnot have its branches

(CLEARING FUNCTIONS DISCUSSED IN CLASS). SBI and its Associate banks are responsible for

clearing: SBBJ – State Bank of Bikaner & Jaipur, SBH – State Bank of Hyderabad, SBM – State Bank of 

Mysore, SBIN – State Bank of Indore, SBP – State Bank of Patiala, SBT – State Bank of Travancore.

(4) Government’s Bank:- The State Bank of India also acts as the agent of the Reserve Bank of India.

As an agent, the State Bank of India maintains the treasuries of the State Government. The Bank also

manages the debts (buying or selling of Bonds and Treasury Bills) floated by the State Governments.

(5) Remittance:- The State Bank of India facilitates remittance of money from one place to another.

It also helps in the transfer on the funds of the State and Central Government.

(6) Functions as Central Bank:- The State Bank of India performs the functions of a Central Bank

where RBI does not have its presence.

(7) Subsidiary service functions:- The State Bank performs various subsidiary services also. It collects

checks, drafts, bill of exchange, dividends interest, salaries and pensions on behalf of its customers..It receives valuables and documents for safe custody and maintains safe deposit vaults

3. SCHEDULED AND NON SCHEDULED BANKS

In the RBI ACT OF 1934, all banks listed in the second schedule is known as Scheduled banks 

All Scheduled bank operations are under strict surveillance of RBI. All nationalised banks, most

private sector banks, foreign banks are scheduled. Most cooperative banks are non- scheduled (not

subjected to strict financial discipline).

Advantages of scheduled banks:

1. RBI can rediscount the bills already discounted by them

2.Their drafts, bank guarantee, letter of credit accepted in all government offices3.RBI acts as lender of last resort

4. All government accounts and transaction get routed through them

5. More account holders and lesser interest payment towards deposits as compared to non

scheduled banks

4. COOPERATIVE BANKING

Definition by Paul Lambert: It is an enterprise formed and directed by an association of users,

applying within itself the rules of democracy and directly intended to serve both its own members

and the community as a whole. It is a voluntary concern with equitable participation and control

among all concerned.

1. It is organized by those who themselves need credit

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2. Runs as a democracy: Run by Board of Director elected on the basis of one vote per member

Cosmos, Saraswat, Suvarna Sahakari etc

1. Rural Co-operative banks: predominantly agriculture credit banks-short, medium and long term

to agriculture, handicraft, cottage industries. Issues: Recovery, problem of valuing land, livestock,

perishable agricultural commodities, improper title of property as security, limited resources andfund shortage, high Non performing Assets, chances of financial mis-management by the

management itself (corruption).

2. Urban Co-operative banks: Formed for meeting the credit requirement of the urban lower middle

class which larger banks do not wish to lend due to high cost of advancing and recovery. Nor do

these people have large incomes or large assets to offer as security. Membership open to traders,

merchant, professionals etc who have to contribute to share capital. They have their own funds

(paid up share capital) and borrowed funds (deposits from public and borrowing from other banks)

5. PRIVATE BANKING

It is a part of Retail banking Catering to Super High Net worth customers- minimum account opening

cheques: 4 crores (HSBC), 1 Crore (ICICI). Aim is to make fee based incomes by offering structured

and specialized investment services from which bank earns commissions. Stress is mainly on

customized investment products which are specifically designed for them using derivatives, Equity

linked note, capital protection equity plans using Constant Proportionate portfolio investment (CPPI

model) etc (Discussed in class-notes given). Lending functions are secondary and a part of the

service functions. Customer service being rendered on a more personal basis, dedicated Relationship

Managers with 8 to 10 years of investment experience. All products and services are offered at

discounted or special rates. Deposit rates better, remittance charges waived, foreign exchange

conversion rate few paises plus minus the interbank rate, loan rates discounted, documentationwaived (fundamentally similar services given to HNIs in Retail banking except Investment products

which are personally customized for these individual clients while in Retail HNI banking, products are

customized for the entire group of customers)

6. RETAIL BANKING

Basic Functions

1. Acceptance of Deposits:

Classification of Deposits:

Demand Deposits/Current Deposits-Repayable on demand-Savings accounts for individuals, Current

Accounts for businesses (CASA)

Fixed Deposits/Time Deposits/ Term Deposits

The deposit is placed for a fix time period and fixed interest rate/ instructions needed for premature

withdrawal. In exchange for the lack of liquidity, banks offer a higher yield on time deposits than

they offer on regular savings accounts.

Interest calculation for premature withdrawal of deposit and savings account interest calculation

explained in class

2. Loans & Advances: Accepts funds so that they can lend out credit to customers for consumption

towards cars, houses, consumer goods, construction etc

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3. Use of Cheques: Since the deposits with banks are withdrawable by cheques it elevates bank

deposits to the position of money

4. Banking as a part of the Financial Services industry

a. Acting as an Intermediary: Collects Savings from those who have them and give to those who needthem.

b. Distribution of third party products such as mutual funds, insurance, RBI bonds etc

c. General Utility services such as Bill payments, safety lockers, tax payments, issuing travellers’

cheques etc

d. Non Traditional financial services in the recent times: Wealth Management and Relationship

Management Services, selling gold coins

Major Income Streams for Retail Banks

BANKING SPREAD: The bank spread is the difference between the bank's cost of funds, in terms of 

interest paid to depositors, and the rate of interest the bank charges to debtors on bank loans.Interest income on term loans, home loans, personal loans , credit cards, overdrafts, cash credit.

(Net Interest Income- Difference between the interest earned on Loans and Investments minus the

interest paid on deposits and other borrowings)

FEE BASED INCOMES: Third party incomes as Distributors of mutual funds, life insurance, general

Insurance i.e. mediclaims & Property insurance, RBI Bonds, portfolio management schemes,

merchant outlets: swipe machines, issuing bank guarantees, letter of credit etc

FOREIGN EXCHANGE INCOMES:

1.  Conversion charges on currency notes OTC

2.  Conversion charges on Remittances3.  Converting foreign currency for exporters and importers

4.  Foreign Currency loans to Exporters / Importers via Corporate Banking

5.  Multi currency accounts (2007) for exporters with inter project fund transferability in any

currency and country

6.  Participating in currency futures market and holding Net Overnight Open Position limits (NOOPL)

to make speculative profits from currency movements overnight

INVESTMENT INCOME

Income from investment in interbank call money market, Liquid & ultra short term mutual funds,

government securities, Treasury bills, Certificate of Deposits, commercial papers.

Negotiable Instruments

Transactions related to NI are governed by the negotiable instruments act 1881. Section 13 defines “

a negotiable instrument means a promissory payable either to order or bearer” 

Warehouse receipts/Bills of exchange/cheques/drafts/ certificate of deposits-unsecured borrowing

by scheduled banks for a period ranging 3 months to 1 yr by issuing promissory notes/

Accommodation bill- it is a bill of exchange where a reputed third party is providing a guarantee

towards repayment as a favor without any compensation for the same. This third party remains

liable till the bill amount is repaid to the bank

BANK’S ASSETS: Loans and Bank’s Investments BANK’S LIABILITIES: Savings account, current

account, fixed deposits and bank borrowings from other sources

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KYC-Know your Customer or Client/ AML- Placement, Layering and Integration/ Round Tripping of 

funds (Please refer to notes given in class)

Credit Creation of Banks: Loans Create DepositsPrimary deposits: hard cash, cheque, drafts etc, total supply of money does not increase from that

when people come and open the account with these.

When banks loan out these primary deposits Derivative deposits are created which add to the

money supply. Banks advance loans to Brokers, financial institutions, individuals etc and Discount Bill

of exchange, promissory notes etc thereby increasing credit money supply.

The loan amounts are credited to the respective borrower’s accounts and they are authorised to

draw cheques up to the sanctioned amounts. Therefore debt gets converted to money. Therefore

the deposits of the respective borrowers bank increases. Incase the borrower is an account holder in

the same bank that has advanced the loan; the deposits of the same bank will increase.

Where the bank had lent out via the cheque route, the borrower will credit the cheque into his

respective bank account, whether in a different bank or the same one. This will increase that banksdeposit base by the equivalent amount. Thus money available for credit increases.

Whenever any bank purchases an income earning asset, it credits that amount to the account of the

seller, thereby indirectly creating a new deposit, which the respective borrower/seller can withdraw

using cheques. Thus banks convert debt into money

Balance Sheet approach:

Let us assume a Deposit of INR 2000, of which the bank has to keep 20% as cash reserves and may

lend the rest

Step 1: Bank A

Liability AssetNew Dep: Rs 2000 New cash: 2000

Total: Liab: 2000 Asset: 2000

Step 2: bank A

Liability Asset

Deposit: 2000 Cash: 400

Loan to X: 1600

Total: Liab: 2000 Asset: 2000

Step 3 : Bank B (X is an Account holder)

Liability Asset

New Dep: 1600 Cash in hand: 1600

Total: Liab: 1600 Asset: 1600

Step 4: bank B

Liability Asset

Deposit:

1600 Cash in hand:320

Loan to Y: 1280

Total Liability: 1600 Total Asset: 1600

Step 5: Bank C (Y is an Account holder)

Liability Asset

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New Dep: 1280 Cash in hand: 1280

Total: Liab: 1280 Asset: 1280

Credit creation multiplier (K)K (Deposit multiplier)=1/ r , where r=percentage of deposit to be kept as liquid cash under the

Fractional Reserve system with the central bank under the Cash Reserve Ratio requirement , which is

currently at 5.50%

Therefore K=1/5.50% which is around 18 times. Thus Credit creation can take place up to 18 times

the initial deposit amount.

RATES GOVERNING BANKS

PLR-PRIME LENDING RATE: 5 top Commercial Banks charge between 11-15%- Prime Lending Rate

(PLR) is that rate of interest at which a bank lends to its best customers with highest creditworthiness. This rate factors in operating costs, administration costs, cost of interest payment on

deposits, risk premium as per creditworthiness of borrowers etc.

The BASE rate of a bank factors in all these costs except for the risk premium factored in for

borrowers. Thus it’s the minimum rate below which a bank cannot lend.

CASH RESERVE RATIO: 5.5%- liquid cash that banks have to maintain with the Reserve Bank of India

(RBI) or any designated Currency chest maintained at premises of approved banks deemed to be

part of RBI, as a proportion of their deposits, which is 5.5% of their Net demand and time liabilities

(NDTL).

NDTL- Aggregate of liabilities to others (eg. Savings accounts, current accounts, fixed deposits)

+ net- interbank liabilities (liabilities of the bank with the banking system minus assets with thebanking system)

STATUTORY LIQUIDITY RATIO: 24% - SLR refers to the amount that all banks require to maintain in

form of approved government securities, gold or cash, which is 24% of their net demand and Time

liabilities

BANK RATE: 6%- Longer term borrowing rate from RBI, it is also the Bill Re- discounting rate

applicable for scheduled banks.

REPO RATE: 8.5%- Short term Bank borrowing from RBI by pledging government bonds as security

when banks have to meet temporary shortfalls. The banks then repay the loan by repurchasing the

securities from RBI by paying the principle and the applicable rate

REVERSE REPO RATE: 7.5%- Short term lending to RBI when banks have surplus liquidity. The banks

park the funds with RBI, in turn RBI pledges government securities to the bank. In other words it is

the borrowing rate for RBI when it borrows short term funds from banks by pledging government

securities.

CAR: 9%- Capital Adequacy Ratio- As per Basel 2 norms the minimum is 8% while RBI has fixed 9% as

CAR -It is amount of a bank's own (Tier 1 and Tier 2 capital) expressed as a percentage of its risk

weighted credit exposures i.e. (Capital/Risk weighted exposure of assets- loans & investments)

determines the capacity of the bank in terms of honoring deposit withdrawals and managing other

risk such as credit default risk, operational risk.

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In case of Scheduled Commercial Banks CAR= 9 per cent

For New Private Sector Banks CAR = 10 per cent

For Banks undertaking Insurance Business CAR = 10 per cent

For Local Area Banks CAR =15 per cent

The government prefers banks to hold 12% CAR with 9% in Tier 1 Capital and 3% in Tier 2 capital

LAF: Liquidity Adjustment facility- The RBI uses Repo and Reverse Repo to aid banks in adjusting

their liquidity requirements and help in meeting Monetary policy measures.

MARGINAL STANDING FACILITY: 9.5%- The banks will use Marginal Standing Facility to borrow

overnight money only when they have exhausted all other existing channels like collateralized

borrowing and lending obligation (CBLO) and liquidity adjustment facility (LAF). The rate of interest

on amount availed under this facility will be 100 basis points above the LAF repo rate, or as decided

by the Reserve Bank from time to time. Banks can dip below 1% of their statutory liquidity ratio to

avail cash from this window. Banks can avail overnight, up to one per cent of their respective Net

Demand and Time Liabilities (NDTL)

ROLES AND FUNCTIONS OF DIFFERENT DEPARTMENTS

1. MIHU: May I help you:

1. Primary screening and addressing customers’ requirements when they enter the branch and then

directing them to the respective departments as per their queries and demands.

2. Judge the potential of customers for cross sale of banking products based on their perceived net

worth and thereby directing them to Branch Banking or Priority banking for either starting a newrelationship or deepening existing relationship.

3. Divert customers to Alternate Delivery Channels (ADC) such as Phone Banking and Internet

Banking to save the time of Service executives.

4. Assist in resolving very basic service queries

2. CUSTOMER SERVICE: Following services are performed by them

1.  Operational aspect of physically opening customer Accounts post checking the accuracy of 

all documents and resolution of any discrepancy . Marking them according to the customer

type as Special Category Client or high risk client in case he’s a politician, police official etc

who has enough influence to damage the bank’s reputation in case of any customer issue.

2.  Ensuring that all KYC norms (Address proof, photo ID, photograph etc) are followed and

collected during account opening

3.  Follow AML guidelines diligently. Track accounts with heavy inflow/outflow and report to

the relevant authorities to safeguard the interest of the bank. Also ensure that business

transactions which should be through current accounts are not routed through savings

accounts to get interest rate. Raise STRs i.e. Suspicious Transaction Report based on these

heavy irregular fund flows

4.  Keep a tab on clients whose cash flows highly exceed their mentioned profession or

business.

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5.  Resolve queries pertaining to Credit cards, personal loans and home loans, assisting clients

in their payments, change of EMI structure or part or full foreclosure and services related to

accounts.

6.  Responsible for service and resolution of queries pertaining to products such as interest

calculation on deposits, placing fresh deposits and renewing the ones which have maturing

selecting the optimum interest rates and time periods as per client specifications

7.  Assist the customers in inward and outward remittances/ money transfers

8.  Generating leads or Cross Sale of investments and other banking products by selling some of 

the products themselves like credit cards, deposits which are low involvement product or

else directing the customer to the Relationship Manager for the respective product or

department by generating ‘warm leads’.

9.  All services pertaining to Locker opening, maintenance and collecting the charges are their

responsibility

10. Maintaining Branch inventories of credit cards, debit cards, Sealed passwords for Accounts,

internet banking, phone banking, account opening kits and cards. These are all held by themconfidentially in fire proof lockers etc

11. Ensuring all transactions, documentation, accounts opening formalities, service standards

are followed as per rules laid down by group compliance, country risk and reputation

analysis before opening Non Resident accounts (CRRT-Country Risk and Reputational Table),

which has a list of countries which are high risk for money laundering, terrorism financing

etc. They are responsible for meeting branch audit requirements

3. TELLERS (CASHIERS)

1.  Receipt and payment of cash over the counter and following certain security norms in case the

amounts are very large i.e. letter from customer stating source of funds or its usage/Pan Card

copy etc

2.  Account to account fund transfers within the same bank/ branch.

3.  Safeguard interest of customers from fraudulent practices by identifying signature mismatches

and forgery on cheques, since they have a specimen signature on the records

4.  Identify and destroy counterfeit currency

5.  Encashment and also issuance of traveller’s cheques, gift cheques, and demand drafts.

6.  Fund transfers via RTGS-real Time Gross Settlement-/ NEFT-National Electronic Fund transfer

7.  Maintenance of Cash in ATMs

8.  Exchanging foreign currency OTC (Over the Counter)9.  Acceptance and Clearing of cheques

10. Balancing the books of accounts end of day

RTGS: The acronym 'RTGS' stands for Real Time Gross Settlement. RTGS system is a funds transfer 

mechanism where transfer of money takes place from one bank to another on a 'real time' and 

on 'gross' basis. Bank’s maintain a dedicated RTGS settlement account with RBI for outward and 

inward payments. This is an intra-day account. The account is funded at the start of the day from

a current account held by RBI, Mumbai. The excess balance in this account at the end of the day 

is swept back to the current account and thereby zeroing the RTGS settlement account. This is

the fastest possible money transfer system through the banking channel. Settlement in 'real time' 

means payment transaction is not subjected to any waiting period. The transactions are settled 

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as soon as they are processed. 'Gross settlement' means the transaction is settled on one to one

basis without bunching with any other transaction. Minimum amount for transfer is 2 lakhs.

NEFT settlement takes place 6 times a day during the week days (9.00 am, 11.00 am, 12.00 noon.

13.00 hours, 15.00 hours and 17.00 hours) and 3 times during Saturdays (9.00 am, 11.00 am and 

12.00 noon). Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time. Contrary to this, in RTGS, transactions are processed 

continuously throughout the RTGS business hours. The minimum amount to be remitted through

RTGS is Rs.2 lakh. There is no upper ceiling for RTGS transactions. No minimum or maximum

stipulation has been fixed for NEFT transactions.

4. BRANCH BANKING SEGMENT

HSBC- Power Vantage/ Citibank-Citi Blue

Mid market and Mass market Customers. The account opening cheques range from Rs.5000 for

Mass market, while 1 Lac for Mid market, especially in multinationals

Relationship Managers and Financial Consultants are assigned to customers to cross-sell banking

products and offer wealth management services. Apart from the other products such as retail assets,credit cards etc, the focus is to primarily to sell Life Insurance with a secondary focus on mutual

funds. Commissions on basic insurance products ranged from 15% to 40% on the first years premium

as against 2.25% in mutual funds when Entry Load was prevalent i.e. ( 5 lac of Premium in insurance

 @ 40% commission gives a revenue of INR 200,000 , while approx INR 90,00,000 of MF sales gave

the similar revenues)

Even now with entry load ban on MFs upfront charges and reduced charges on insurance, even then

insurance is much more profitable. Since Branch banking is a Volumes game and not a Value

proposition the products aggressively sold are all very high revenue products, so that large

percentage of income may be derived from the smaller amounts sold per customer

5.  PRIORITY BANKING

HSBC- Premier/ ABN Amro-Van Gogh Preferred Banking/ Citibank-Citigold/ Standard Chartered-

Priority Circle

Value proposition with account opening amounts ranging from 25 – 30 lacs

1.  Experienced Relationship Managers and Customer Service Managers assigned to fewer groups of 

customers for personalised and specialised services

2.  Wealth Management Services to customers, consolidating previous, existing and fresh

investments spanning equity, debt and sectoral mutual funds, stocks, bonds, gold, deposits,

commodities, insurance, foreign investments, real estate etc. Thereby providing customisedinvestment solutions which are extensively tracked, rebalanced and allocated according to

customer risk profiling and cash flows

3.  High focus on Structured investment products using derivatives etc are designed especially for

these clients

4.  Higher Deposit rates are offered, while fees are waived off in mostly all banking transactions and

products

5.  Very high limits offered on debit and credit cards with international service facilities included

which are either free or heavily subsidised. All annual charges on cards are waived.

6.  Extremely competitive rates are offered on currency conversion, while remittance charges are

mostly waived or discounted

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7.  Multiple account facilities in different countries offered to High Net worth clients with business

interest across the globe. In one country the priority account minimum balance needs to be

maintained, while in other countries it can be a zero balance account.

8.  Interest Rates charged on Home loans and personal loans are at a significant discount to Branch

banking customers, and also with much lesser documentation requirements

7.  RELATIONSHIP MANAGEMENT

1.  Wealth Management: Financial Planning, Investor risk profiling, Asset allocation & Product

selection, Portfolio tracking & rebalancing (Explained in class) 

2.  Managing incremental cross sale of investments and other banking products

3.  Retention of customers, deepen the relationship with constant interaction and ensure

quality service and resolution of queries within given TAT (Turn around time)

4.  Acquire new relationships and grow their balances through investments in various products.

Maintain and grow CASA balances.

5.  Sales of all categories of Life Insurance products i.e. market linked plans (ULIPs), term

policies and Endowment Plans

6.  Equity research, advisory, monitoring and stock trading through the Portfolio Management

Services route

7.  Constant reviewing and monitoring customer’s portfolios and detailed financial planning to

address any need gaps using proprietary software. Thereby make changes in the portfolio

based on current market levels and movements debt, equity and commodities side

8.  Provide structured products to HNI clients. Most products are designed with inbuilt features

to participate in the derivatives segment and involve aggressive option trading strategies

and positions in Futures, to either enhance profitability or hedge risks

9.  Track foreign currency markets to enable Non Resident customers profit from exchange rate

fluctuations

10. Also focus on the corporate relationship segment (company accounts) as an avenue for high

revenue from large company investments, by liaising with the corporate banking channel

based on revenue sharing models.

11. Ensuring all audit and compliance norms are followed. Cross border investment and

insurance norms have been followed. All investments have to be documented extensively

capturing the minutest of investor/investment details. Anti Money Laundering measures

have to be followed and country specific risk measures have to be taken as per CRRT

(Country Risk Reputational Table) i.e. investments coming from Iraq, Nigeria, Zambia etc

which are of risky nature

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12. Conduct regular market research to review, assess, analyze, report on competitor activities

of other banks and financial institutions ,and capturing changing consumer behavior and

general industry trends

8.  RETAIL ASSETS

1 Selling Home loans, car loans and Personal loans to existing and new customers

2. For home loans, liaison with designated lawyers and property valuers to ensure that the

property to be kept as mortgage is secure with clear title, no encumbrances and with

required market valuation for ensuring the security of the loan.

4. Credit managers verify customer income documents, calculate his repayment capacity

and then Sanction loans.

5. The final Disbursal of loan ie. Cheque handed out to borrower, takes place post a clear

legal report of the property papers from lawyers and based on the technical valuation report

by property valuer of the current market value of property

6. Hold marketing events at the bank, companies, societies, clubs, malls, multiplexes etc

sometimes offering concessional interest rates to promote loans.

7. Types of products: Home Loans, Loan against property, Loan against commercial

property, Balance transfer, Top up . Also discuss the detailed process of Sanctioning and

Disbursement of loans (Discussed in details class)

9.  RETAIL LIABILITIES

1.  Selling CASA: Current accounts and savings accounts

2.  Selling Fixed deposits to increase the banks deposit base

10. CUSTOMER ACQUISITIONS TEAM (CAT)

1.  Initiating and implementing Marketing efforts for acquiring new accounts by individual sales

efforts, organizing customer meets, seminars & events 

2.  Procuring databases from various sources for cold calling and selling banking propositions

3.  Taking customer references from existing and prospective clients for sourcing more accounts

4.  Collecting and completing the required documentation for account opening

11. TRAINING & DEVELOPMENT

1.  Ensure all mandatory certifications are completed by the sales and service staff and provide

training for the same

2.  Develop Learning & management modules covering a wide range of banking, finance and

investment topics with online tests for getting a formal qualification

3.  Extensive training provided on identifying money laundering trails and investments routed from

high risk countries.

4.  Provide training on new product launches, changes in bank policies, new technologies,

rebranding and re launching existing products

5.  Regular training on investments, insurance and financial planning for customers

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6.  Create talent pools by identifying and segregating employees based on various skill sets ranging

from team management, selling skills, knowledge quotient, customer handling techniques etc by

conducting regular workshops

7.  Update staff on new legislations, competitor strategies and prevailing market opportunities

12. AUDIT & COMPLIANCE

1.  Oversee that all branch operations are conducted based on Group compliance norms and

legalities laid down by external entities such as the central bank, IRDA, AMFI etc

2.  Ensure Sales Quality is maintained on all banking product sales. Checking that there is no

wrong selling due to target pressure, forgery of documents while selling banking products,

mismatch of signatures, investment product not matching the clients risk profile,

investment tenure and age.

3.  Conduct regular audit on all investment & insurance sales making sure that cross border

investment norms are maintained (US, Canada Australia etc) Anti Money Laundering

guidelines are followed, CRRT (Country Risk and Reputations Table) countries such asAfrican countries etc are highlighted, documentation and records are all in order, the Sales

person had all the mandatory licenses and customer interest has been met

13. RESEARCH TEAM

1.  Daily updates, mails & messages on market trends and occurrences spread over all investment

types

2.  Compile extensive and detailed studies about markets, economics, new & existing funds, equity,

global and local trends, sectors etc.

3.  Track and research all mutual funds based over many parameters and compile a ‘White list’ or

‘Choice list’ which streamlines the best mutual funds in every sector and category based on their

research which are recommended by the bank

4.  Assist the sales team in closing large investment deals with their value added inputs based on

views and market direction

14. BACK OFFICE OPERATIONS

Back office functions. Issuance of cheque books, debit and credit cards and their respective

passwords, placement and withdrawal of deposits, generating internet & phone banking passwords,

generating account opening kits, bank statement etc

15. COLLECTIONS

Recovery and settlement of bad loans, credit card defaults etc

Customer background checks, field investigation reports and risk management measures such as

verifying customer’s area of residence and whether he stays in a negative area , healthiness of his

prior banking transactions, previous loan repayment records, credit history before the bank

authorizes loans or credit cards, register name on CIBIL: Credit Information Bureau of India Limited)

incase the customer defaults.

16. TREASURY FUNCTIONS

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1. Cash Management & Risk management:

Maintaining the cash reserves, capital and liquidity of the bank. Ensuring that the bank maintains

the Cash reserve ratio and Statutory Liquidity Ratio requirements as laid down by the central bank.

Participating in Repo, Interbank call money markets & CBLO in the case of shortfall and park excess

money in Reverse Repo market or lend in the Call money markets in case of surplus

Maintaining the Tier 1 & tier 2 capital of the bank as per the Capital Adequacy Ratio requirement laid

down by RBI for the bank to adequately protect itself from any form of risk, broadly credit risk and

investment risk:

Tier I Capital = Ordinary Share Capital (Paid up share capital)+ Retained Earnings + Perpetual Non

Cumulative Preferential shares+ Statutory Reserves*+ Capital Reserves (surplus arising out of sale

proceeds of assets) + Perpetual Debt Instruments (Based on approval)

*Statutory reserves – Under Sec 17(1) of Banking regulation Act 1949, every banking company 

incorporated in India shall create a reserve fund out of the balance of profit each year as disclosed in

P&L account. The transfer to the reserve fund will be before any dividends are declared, the amount 

being equivalent to not less than 20% of the profit 

Tier II Capital = Undisclosed Reserves + General Bad Debt Provision+ Revaluation Reserve +

preferential share capital + Hybrid Debt instruments+ Investment Fluctuation Reserves* +

Subordinate debt (Debt that is either unsecured or has a lower priority than that of another debt

claim)

*Investment Fluctuation Reserves- Banks are advised to build up this reserve to protect their 

investments against adverse developments in future. The IFR should be a minimum of 5% of the

banks’ investment portfolio which should be built up within 5 years. This should be computed only for 

investments under the’ Held  / Available for Trading’ and  ‘Available for Sale’ categories. Bank’s may 

build this up up to 10% depending on the size and composition of their portfolio

2. Monitoring & Control of Interest Rate risk and price risks on securities

Trading in money market securities (Treasury bills, Commercial papers, Certificate of Deposits etc)

and government Bonds are done by banks. The Securities are maintained in 3 categories: HTM (Held

to Maturity), AFS (Available for Sale) and AFT (Available for Trade)

Banks have to compulsorily maintain 24% of their Net Demand and Time liabilities in Government

securities and other approved Securities as per Statutory Liquidity Ratio requirement. For securities

to be categorized as SLR bonds they have to have an implicit guarantee from the government both

for interest and principle.

Currently an average of 27-28% in these securities is being maintained by banks.

The maximum HTM limit is 25% of the Net Demand and Time liabilities, and this does not have to be

marked to Market (MTM) as per movement in yields/bond prices so no profits not losses need to be

shown. However the additional 3% in AFS & AFT segment in banks attracts the MTM requirement,

Thus losses or profits on the security holdings have to be reflected as per regulations in the Profit &

Loss account. Individual securities have to be Marked to Market, Net depreciation if any has to be

provisioned for by the bank.

The ‘Available for Trade’ category securities have to be Marked to Market every month while the

‘Available for Sale’ securities need to be Marked to Market every quarter.

Securities are held in AFT up to 90 days, post 90 days if they are not sold due to tight liquidity

situations or extreme volatility then under extreme circumstance the bonds may be shifted to the

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AFS category. This however is not an automatic route and board approval is compulsory for the

same.

Movement to and fro from the Held to Maturity segment happens usually once a year that too with

the Board of Director’s approval only. These 2 categories have to reflect the notional profits or losses

arising from both Price risk and interest rate risk. (Discussed in details in class along with Futures

hedging positions)

Bank Treasury also participates in the derivative markets such as Interest rate futures to reduce risk

from bond price fluctuations. For example go short on the underlying bond in the interest rate

futures market if the Spot price of Government Securities is expected to fall, thus offsetting the loss

in the Spot segment by gaining in the futures segment. (In Interest Rate futures market due to

physical delivery requirement for the 10 year bond segment less participation by institutions causes

illiquidity. The underlying is a notional ten year bond with 7% coupon, but delivery has to be settled

with bonds maturing between 9-12 years if delivery is assigned. While even though the 90 day

Treasury bill segment is cash settled but too short a maturity of the underlying prevents effective

hedging discouraging high participation)

3. Maintaining the Foreign exchange reserves of the bank-

a. Proprietary trading in foreign exchange for profitability by holding Net Overnight Open Position

Limits (NOOPL) on foreign currencies and Day light trading (Intra Day trading) to make speculative

gains from currency movements

b. Meet foreign exchange needs of importers and exporters and giving loans and advances in foreign

currency

c. Make profits from foreign currency conversion both OTC and remittances making a Bid-Ask

spread. Bid is the currency buying rate offered by banks which is lower than interbank rates and Askis the selling rate quoted by the bank on the currency which is higher than interbank rates.

d. Providing options for hedging of foreign currency fluctuation risks to corporates by providing OTC

derivative instruments such as forward covers/ forward contracts/ Swaps. Banks make a spread on

the currency as well as fee based income.

e. Participate in the currency futures market (Currency derivatives). For banks to trade in currency

futures they need permission from RBI, have a net worth of minimum 500 crores, a Capital Adequacy

Ratio of 10%, profitable for last 3 years and have Net Non Performing Assets of less than 3%

f. Bank’s buy foreign currency from exporters/ merchants and sell the same on the interbank forex

market. They also sell foreign currency to importers by buying from the interbank forex market.

Banks buy and sell in the interbank markets to square off their foreign currency balances at the end

of each day making a spread income on the buying and selling rates. In case a bank maintains an

open position (over bought or oversold) it exposes itself to foreign exchange fluctuation risks.

4. Capital Issuance: Implementing the raising of capital for the bank through the following methods

a. Public offer through IPO or FPO, Divestment, issuance of ADRs, GDRs and Rights issue (Rights are

issued whereby existing shareholders have the privilege to buy a specified number of new shares

from the firm at a specified price within a specified time)

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b. Private placement of stocks or bonds (QIP-Qualified Institutional placements with QIB (Qualified

Institutional Buyer), DII (Domestic Institutional Investor- MF/ Insurance Co), Foreign Institutional

Investors, Private Equity funds , Venture Capitalist etc)

c. Raising fund in the short term via the Repo window, interbank call money markets (overnight- Call

money, 1 to 14 days-Notice money, 15 days up to 1 year-Term money), CBLO, COD-Certificate of deposits (7 days to 1 year unsecured promissory notes issued by scheduled banks to raise money)

d. Raising long term funds through Bonds, FCCB (Foreign currency convertible bonds),CD

(convertible debentures), NCD (Non convertible debentures) (Conversion premium concept

explained in class)and Preferential shares (Preferential shares are not traded in the stock exchanges

and share holders receive fixed percentage of dividend per share every year. The core right is that of 

preference in the payment of dividends. There is a negotiated fixed coupon payment with

cumulative option or non cumulative. In case of bankruptcy or liquidation preferential share holders

will get their part before common stock holders. Preferential share holders are not entitled to voting

rights. There is cumulative and non-cumulative preference shares)

d. Securitization: It is a process of aggregating a portion of existing debt of a bank where there is a

cash flow receivable over a period of time into a common pool, and thereby issuing new securities

backed by this pool to collect fresh funds from public or financial institutions etc. These securities

are often known as MBS- Mortgage Backed Securities, CDO- Collateralized Debt Obligation and ABS-

Asset Backed Securities

5.  Invest in short term money market instruments and government bonds to enhance profitability:

a.  Certificate of Deposits of other banks

b.  Govt Treasury bills: These are short term (up to one year) borrowing instruments of the

Government of India. T-Bills for three different maturities are available: 91 days, 182 days

and 364 days. Treasury Bills are available for a minimum amount of Rs.25,000 and issued at

a discount to face value. On maturity the face value is paid to the holder

c.  Invest in Commercial papers of top companies. These are unsecured money market

instruments issued in the form of promissory notes by high grade companies when they wish

to borrow money for a short period (7 days to 1 year) and offering competitive interest rates

d.  Park excess funds in Short term Debt Mutual Fund schemes such as Cash funds/ Ultra short

term bond funds/Liquid funds and Liquid plus funds where there barely any risk of capital

erosion. Banks may invest up to maximum 10% of their net worth in Liquid funds

e.  Lend surplus in Call money markets or park excess in Reverse repo market with RBI

f.  Invest in government bonds

g.  Banks can have a direct capital market exposure of up to a maximum of 20% of their Net

worth which may go towards convertible bonds, convertible debentures, equity, equity

mutual fund units, and exposure to venture capitalist companies both registered or non

registered. The banks investment in all these investments cumulatively cannot cross the

20% threshold of banks net worth

Type of Accounts

Resident Accounts /NRE- Non Resident External/NRO- Non Resident Ordinary/FCNR/ RFC

FCNR: Foreign Currency Non Resident Accounts:

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In this type of accounts funds are held in foreign currencies but only in the form of foreign currency

fixed deposits. The deposit rates vary according to the respective foreign currency. Foreign currency

deposits such as USD, GB Pound, AUD- Australian dollar, AED (Dirham), CAD- Canadian dollar, EUR,

HKD-Hongkong Dollar, JPY-Japanese Yen can be held. This foreign currency may be repatriated back

abroad freely.

RFC-Resident Foreign currency accounts:

An Indian Resident who travels extensively abroad may open this account for depositing foreign

exchange acquired from travelling abroad as payment for service or some business or the unspent

amount of foreign exchange, or gift or honorarium received from abroad. These accounts may also

be held by Non Resident Indians who have returned to India for permanent settlement after staying

abroad for minimum 1 year. This account can be opened without any regulatory approval from RBI.

These account s can hold erstwhile foreign currency held in FCNR account while they had NRI status.

Income from overseas assets or income from sale of overseas assets, entire amount of pension

received from abroad can be credited to these accounts. The balances from this account may be

remitted abroad for bonafide purposes. In these accounts funds are held in foreign currencies.

However no interest is paid on this account as it is maintained as a current account and also withoutany ceiling. Debits to this account has to be made as permissible under the Foreign Exchange

Management Rules.

Funds held in NRE and NRO savings account are in Indian Currency.

Difference between NRE and NRO:

1. Funds can be freely repatriated from NRE accounts back to the foreign country, while from NRO

accounts money can be transferred out only post CA certification that any taxes due to Indian

government has been paid on the amount, so not very easily. The limit of repatriation on NRO is up

to USD 1 million per year.

2. NRE SAVINGS account interest does not attract any tax, while NRO savings account interest

attracts tax3. In NRE accounts, the interest rates on deposits are not taxed, and are now decontrolled without

any upper cap set by RBI, so banks are offering high competitive rates unlike earlier which are

comparable domestic rates. NRO account deposit interest rates are taxed as per investors tax slab

4. One cannot deposit domestic currency (rupees) in the NRE account, only foreign currency. Which

then gets converted into Indian rupees and then credited to the account. While in NRO accounts

Indian currency and foreign currency both can be deposited. And then the foreign currency gets

converted to rupees.

5. One can transfer funds from NRE to NRO but not vice versa

8.  INVESTMENT BANKING

1.  Investment banking is a field of banking that aids companies in acquiring funds, through the

public or through Venture capitalists, Private equity funds and Mezzanine funds.

Thus through investment banking, an institution generates funds in two different ways.

a. They may draw on public funds through the capital market by selling stock in their

company

b. They may also seek out venture capital or private equity in exchange for a stake in their

company. (ANGEL INVESTORS)

Venture capital and Private equity Funds typically invest in early-stage, high-potential, growthcompanies in the interest of generating a return through an eventual realization event such as an IPO

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or sale of stake in the company in the secondary markets. These investments are generally made as

cash in exchange for shares in the invested company. Venture capital typically comes from

institutional investors and high net worth individuals and is pooled together by dedicated investment 

 firms. Venture Capitalists look more towards new early ventures which are starved of funds with

exponential growth potential while PE firms look more towards high growth existing companies in

need of funds. Venture Capitalists mostly invest in unlisted companies and then make huge gainswhen the company is listed, post which they exit by selling their stake and making exponential profits

Mezzanine funds are like a hybrid PE fund acquiring part equity and part debt to finance the

expansion of existing companies. The debt holding provides for regular interest payment, while

superior upside comes from the equity holding. The debt capital also gives the Fund the rights to

convert to an ownership or equity interest in the company if the loan is not paid back in time and in

 full.

In India, the venture capital funds (VCFs) can be categorised into the following groups:-

Those promoted by the Central Government controlled development financeinstitutions such as IFCI Venture Capital Funds Limited (IVCF), SIDBI Venture Capital 

Limited (SVCL) T hose promoted by State Government controlled development finance

institutions: Gujarat Venture Finance Limited (GVFL),Kerala Venture Capital Fund Pvt 

Ltd, Punjab Infotech Venture Fund, Hyderabad Information Technology Venture

Enterprises Limited (HITVEL).Those promoted by public banks: Canbank Venture

Capital Fund, SBI Capital Markets Limited . Those promoted by private sector 

companies, for example:IL&FS Trust Company Limited, Infinity Venture India Fund 

2.  An investment banking firm also does a large amount of Fee based consulting on Mergers,

Acquisitions and Take Overs.

Mergers : T hey combine two or more previously separate firms into a single legal entity. The

combined business, through structural and operational advantages secured by the merger,

can cut costs and increase profits, boosting shareholder values for both groups of 

shareholders. The sum of its parts is worth more than the individual parts. In a merger of two

corporations

 Acquisitions: It  is characterized by the purchase of a smaller company by a much larger one

Takeover: Hostile or otherwise involves buying the management rights through outright 

 purchase of shares

3.  Track the market in order to give advice on when to make public offerings and how best to

manage the business assets, when to sell them and the pricing for the same. Also advice on

debt restricting and company restructuring.

4.  Fee based consultative activities such as buy-and-sell advice on equities, commodities, debt,

derivatives, advisory on foreign exchange trading and calls based on foreign currency

fluctuations and predictions.

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5.  Merchant banking services to companies for equity sale (IPO/FPO) such as price band

calculation, price discovery, Lot size, timing for sale, pricing based on over and under

subscription etc

6.  Advisory on divestment/disinvestment. On the stake sale, the proportion of dilution, timing,

pricing etc.

7.  Underwriting services for IPO/FPO/Bond issues: This is a way of placing a newly issued

security, such as stocks or bonds, with investors both retail & institutional. Investment Banks

take on the risk of distributing the securities to investors. Should they not be able to find

enough investors, then they have to purchase the securities themselves. Underwriters make

their income from the price difference, or underwriting spread, between the price they pay

the issuer and what they collect from investors or from broker-dealers who buy portions of 

the offering – sometimes they earn fixed underwriting fees, commission on sales , but

mostly underwriting spread 

8.  Bridge Financing: These are Short term temporary loans given to companies before they

secure long term permanent ones. They also providing short term financing to companies

before their IPO for the maintenance of operations. These funds are usually supplied by the

investment bank while they are underwriting the new issue. As payment, the company

acquiring the bridge financing usually gives a number of shares at a discount to the issue

price to the investment bank that equally offsets the loan amount with interest.

9.  Investment advisory in highly specialised or niche investment options where the risk and

return probability is very high. The investment bank manufactures structured products

which are derivatives based and customised to suit specific customer requirements and

designed to optimise on current and future market trends.

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SARFAESI ACT 2002

The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,

2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets

without the intervention of the Court. The Act provides three alternative methods for recovery of 

non-performing assets, namely: -

  Securitization: It is the process of aggregating existing debt instruments, many times even

illiquid debts, in a common pool, then issuing new securities backed by the pool to raise

fresh funds. All assets can be securitized so long as they are associated with cash flows.

  Asset Reconstruction : Restructuring existing loans and selling the bad loans to Asset

Reconstruction companies

  Enforcement of Security without the intervention of the Court

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The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac. NPA

loan accounts where the amount is less than 20% of the principal and interest are not eligible to be

dealt with under this Act. Non-performing assets should be backed by securities charged to the Bank

by way of hypothecation or mortgage or assignment.

The Act empowers the Bank:

  To issue demand notice to the defaulting borrower and guarantor, calling upon them to

discharge their dues in full within 60 days from the date of the notice.

  To give notice to any person who has acquired any of the secured assets from the borrower

to surrender the same to the Bank.

To ask any debtor of the borrower to pay any sum due or becoming due to the borrower

Different categories of collateral kept with banks

Mortgage: It is the transfer of interest to the lender in specific immovable property for the purpose

of securing a loan, on the condition that this interest will be returned to the owner when the terms

of the mortgage have been satisfied. It is a security for the loan that the borrower provides to the

lender. The ownership remains with the borrower, but some rights are transferred to the bank such

as recovering its dues by selling the property. Most prevalent is Equitable mortgage where all the

original title deeds of the property and General Power of Attorney is given to the bank and taken

back by the borrower once loan is repaid.

Pledge: There should be bailment of goods. Bailment is derived from the French word bailer which

means to deliver. The objective of the bailment should be to hold the goods as security for the

payment of a debt or the performance of a promise. There is actual or constructive delivery of goodsto the lender. The bank is the Plegee, who enters into an explicit contract with borrower (Pledgor)

under which the securities are delivered to the bank. This then can get liquidated and sold by the

bank in case of non payment. 

Hypothecation: Hypothecation is a charge against property for an amount of debt where neither

ownership nor possession is passed to the creditor. Hypothecation is a charge against movable

property. The goods will, unlike a pledge, be retained by the borrower and be in the borrower’s

possession. The borrower gives only a letter stating that the goods are hypothecated to the banker

as security for the loan granted. Legally the borrower cannot sell these goods till the time the

repayment is made. The document contains a clause that obligates the borrower to give possession

of the goods to the bank on demand by the bank.

Difference between the three:

In a mortgage there is transfer of interest in the immovable property till the re-payment of the loan

and borrower has to sign General power of attorney in favour of the bank which remain worthy

until the full & final payment. Hypothecation involves movable property which is given as security

for the loan however the possession of movable property remains with the debtor. In the case of 

pledge too, movable property is the security, but here, the creditor i.e. bank, is given physical

possession of the movable property.

Assignment: The borrower assigns actionable claims to the bank. Actionable claims or receivablesdue to the borrower are money due from government departments or semi government

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organizations or receipts from Life insurance policies. The bank gets absolute right over the funds

assigned to it and other creditors of the borrower do not get priority over the bank in realizing their

dues from the assigned debt.

Banker’s Lien: ‘Lien’ is the right of the bank to retain the securities given by the borrower until the

debt due is fully repaid.There is General Lien which confers the right to the bank to retain any goods bailed to them till

payment is recovered. And there is

Particular Lien where specific securities are earmarked for specific debt. The bank has the right to

sell the goods and securities of the borrower defaults.

Wealth Management

Wealth management is a service provided by financial institutions to help individuals and companies

to protect and grow their wealth. This advanced investment advisory discipline involves providing a

diverse range of services, such as financial planning, investment management, tax planning and cash

flow and debt management, customized and based on client requirements and his risk appetite. and

thereby investing his capital in a wide range of investment types and asset classes such as mutual

funds, insurance, stocks, commodities, bonds, real estate, bullion etc

There are two aspects to the wealth management process. One is protecting assets from market

crashes or slowdowns, availing tax advantages and capitalizing or hedging against unexpectedevents. Secondly, growing the asset values through methods that actively manage risk and reward

attempting to make financial gains for clients beating given benchmark returns.

Wealth Management entails 2 distinct objectives for customers: 1. Asset management: which

involves investing said amount in different asset classes, ensuring appreciation of capital, protection

of portfolio, tracking, rebalancing portfolio and capital growth. 2. Liability Management: Studying

customer’s existing liabilities such as business loans, home loans, personal loans etc and providing

the required Life insurance cover to protect his family from heavy outflows towards loan repayment

in case of his premature death. Also providing adequate cover to customer to ensure his family get a

big lump sum or certain fixed income for atleast 5, 10, 15 years to maintain their existing living

standards in the case of customer’s unexpected death.

Thus understanding the customer’s risk appetite, short term & long term financial goals such as

children’s education/ marriage, retirement planning, future asset purchases or business plans, his

current financial assets- cash, mutual funds, bonds, deposits etc, fixed assets-land, property, gold,

etc, no of dependants, tenure of investments, age and investment experience a suitable financial

plan is made allocating funds spread over mutual funds- (equity, debt, gold, balanced etc),

insurance, PMS, Structured products, fixed deposits etc

Mutual Funds

A mutual fund is a professionally managed and regulated investment trust, with a collectiveinvestment scheme that pools money from many investors and invests it in stocks, bonds, short-

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term money market instruments, and/or other securities based on the objective of the scheme, on

behalf of the investors. 

A single Mutual fund house may have several different schemes investing in

these specific asset types. Individual investors own a percentage of the value of the fund

represented by the number of units they purchased and thus share in any gains or losses of the fund.

The mutual fund has a fund manager that trades the pooled money on a regular basis with an aim to

beat benchmark returns.

Origination of Mutual Funds

First MF was UTI established in1963 and set up by RBI . First scheme was Unit Scheme 1964,

popularly known as US64.

Entry of Public Sector Funds in 1987 ie SBI mutual Funds, Canbank, Punjab national Bank MF, BBOI,

BOB

1993 was entry of private sector funds ICICI,Franklin

MF AUM Sept 2009- 746000 crores .Business std

Net Asset Value

Explain the units issued at Rs.10 Face value. Please show how the NAV rises or falls based on the

underlying stock movements. Discussed in class:(Market Value of investments-Debt/Equity + Cash holding + Dividends/Interest accrued- Expenses

i.e. fund management charges etc)/Total number of outstanding units.

Open Ended Fund

An investor can invest in this fund perpetually at any point of time. The units are redeemable by the

mutual fund on demand by the investor at any point of time and the value of the underlying assets

of the fund decide the current price of units which he receives. New units are issued to investors

against every additional investment that the fund house receives.

Closed Ended Fund

In this case the fund house issues a limited number of units and is closed to new capital once it startsoperating. The Units cannot be redeemed until the fund liquidates post a given tenure, which is

mentioned in the offer document, whether 3 years or 5 years etc. Post launch an investor may

acquire or sell units in the secondary market through brokers, investors etc based on the fund being

listed on the exchange and available liquidity but not from the mutual fund house directly like an

open ended fund. Few schemes may allow early exit either partially or fully but at the cost of a very

heavy exit load. All ELSS are closed ended funds, one may invest at anytime, but once invested the

amount is locked in 3 or 5 years

SIP Vs Lump sum Investments in a volatile market: Rupee cost averaging

Discussed in class

DIVIDEND and GROWTH Options: Dividends always paid on Face Value i.e. Rs.10 and not Fund

Value

Calculation of Dividend Payout/ Reinvestment/ Growth and changes in NAV and also the Number of 

units held by an investor. Discussed in class

Systematic Transfer Plan

Systematic transfer plan. Using this facility the investor can transfer a fixed amount from one type

of fund into another type of fund of the same mutual fund house. For example, an investor can

transfer fixed amount periodically from a debt fund into an equity fund or equity fund to debt within

the same fund house.

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Systematic Withdrawal plan

Long Term Capital Gains Tax (Tax on capital gains for investments> 1 year) and Short Term Capital

Gains Tax (Tax on capital gains for investments< 1 year) and Dividend Distribution Tax (DDT)

LTCG on Equity Schemes & Balanced Funds (35% debt & 65% equity) is zero while STCG is 15%

STCG on Non Equity/Debt funds is the normal rate of tax slab applicable eg.30% to investor while

LTCG is 10.3% or 20.6% with indexation

Dividend Distribution tax on equity and balanced funds (35% debt & 65% equity) is zero

As per this new budget:

Dividend Distribution tax on debt funds for Retail investors is 12.5% but adds up to approximately

14% ({12.5%+(10% surcharge+3% cess on 12.5%)}.

Dividend Distribution tax on Liquid funds for Retail investors is 25%

For Corporates as per the new budget Dividend DistributionTax is 30% on Liquid funds and debt

funds

Dividend distribution tax is deducted by the fund house at the time it makes the dividend payment.

The ex-dividend NAV of the fund is declared after factoring in the dividend distribution tax.

Capital Gains Tax: This is not charged by the fund house. It is paid by the investor directly to the tax

authorities while filing the income tax return

Top Down and Bottom Up investing

In the top-down approach, the fund manager determines the growth potential of an economy, the

sectors and industries he expects will do well in the future. Once these are identified, he picks out

investible companies within that sector or industry. This approach involves the analysis of macro-

economic factors.

The bottom-up approach focuses more on the individual company. The implicit assumption here is

that companies can perform well even if the sector/industry they operate in are not. Very Micro

level, studying individual company intrinsic valuations, security analysis etc

TYPES OF MUTUAL FUNDS (Discussed in details in class- ready reckoner)

1.Diversified Equity Schemes:

Stocks of companies from large number of sectors to diversify risk and make healthy returns by

investing in high growth companies. HSBC Equity, HDFC Equity, Birla Sun life Dividend yield plus plan

2.  Bluechip/ Large Cap Schemes: ( Large Cap : Market capitalisation> 10 billion USD, approx

50,000 crores) Usually Stocks would be drawn from the companies in the BSE 200 Index aswell as 200 largest capitalised companies in India (since BSE captures only free float and not

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promoters holding) keeping the Benchmark as the Sensex or Nifty.Eg.HDFC top 200/

Frankling India bluechip

Some Funds may also buy only from the BSE Top 100 Companies such as DSP BlackRock Top 100

equity fund

3.  Mid Cap Funds: : ( Mid Cap stocks : Market capitalisation between 2- 10 billion USD)

The funds are benchmarked to the BSE Midcap index. Eg HSBC Midcap Fund, Sundaram

Select Midcap Fund

4.Small Cap Funds: (Small Cap stocks : Market capitalisation < 2 billion USD) 

Sundaram SMILE- Small and Medium Indian Leading Equities, Franklin Smaller companies funds.

They invest in small Size companies benchmarked to BSE Small Cap index. Most of these small cap

funds are closed ended for periods such as 3 years or 5 years

6.  Hybrid Funds

A category of mutual fund that is characterized by portfolio that is made up of a mix of stocks and

bonds, which can vary proportionally over time or remain fixed based on market conditions, risk

factors etc. They can be closed ended funds or open ended. These funds are predominantly debt

oriented (e.g. 70% debt & 30% equity), with larger allocation to debt . Eg HDFC hybrid fund,

7.  Balanced Funds

A type of Hybrid fund combining Equity, Bonds and Money Market instruments but in a Fixed

proportion. They are categorised under the Equity category since they are predominantly

equity. They allocate minimum 65% Equity and 35% Debt, thereby getting the tax advantage of 

an equity fund

HDFC Prudence, Pru ICICI Balanced Fund

8.  Exchange Traded Funds: Benchmark Bank Bees/ Nifty Bees/ Nifty Junior Bees/ Benchmark Liquid

ETF/ Benchmark Hangseng ETF/Reliance banking ETF: These funds are traded on the stock

exchange like shares for which one needs a demat account. Investors can buy and sell at intra-

day prices unlike ordinary mutual funds which allot day’s closing prices for NAV calculation. The

ETF funds in India are passive funds i.e they are aligned to an underlying index identical to Index

funds.

In the case of other mutual fund schemes the fund house buys back and sells units to investors,

but in ETF it is different. In a way, an ETF resembles a close-end scheme, where the units are not

sold back to the mutual fund and investors buy and sell the fund units on the secondary market.

However, there is obviously no discount to NAV like closed end funds. Also, unlike a close-end

funds, in ETFs supply of units can be altered by creating additional units or extinguished by

withdrawing existing ones depending on investor demand. Authorized participants (typically,

large institutional investors) actually buy or sell shares of an ETF directly from or to the fund

manager, and then only large blocks called ‘Creation units’, large blocks of tens of thousands of 

ETF shares, which are usually exchanged in-kind with baskets of the underlying securities.

Authorized participants may wish to invest in the ETF shares for the long-term, but usually act as

market makers on the open market, using their ability to exchange creation units with theirunderlying securities to provide liquidity of the ETF shares and help ensure that their intraday

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market price approximates to the net asset value of the underlying assets. Other investors, such

as individuals using a retail broker, trade ETF shares on this secondary market.Trading of the

units on secondary market ensures that underlying stocks do not have to be sold each time to

meet redemption pressures or bought thereby investors entering and exiting do not also affect

existing investors. As a result an ETF has a much lower tracking error than an index fund

9.  Exchange Traded Fund: Gold

A Gold ETF is an ETF that has gold as the underlying security. So, the value of the ETF is derived from

the value of underlying gold. A gold ETF would be a passive fund; so, when gold prices move up, the

ETF appreciates and when gold prices move down, the ETF loses value. The physical gold is held by a

custodian bank, and each unit is issued against physical gold held.

The units of the Gold ETF post NFO period gets traded on the stock exchange just like shares and an

investor has to have a demat account for holding a Gold fund. He gets the intraday prices on buying

or selling his gold fund units based on the price of the underlying gold at that time of purchase or

sale of units

Each Unit will be valued at the price of 1 gram of gold or 0.5 gm of gold/ Min investment amount is

mostly Rs.10000

Passive mutual fund with gold as the underlying asset: All gold bullion held by the fund will be 1kg

bars of 0.995 purity sourced from LBMA (London Bullion Market Association)

Gold ETF: SnapShot View 

Fund Name  Launch Date 

Rating

0Unrated 

Risk Grade

-- 

Return Grade

-- 

1 Year

Return 

Expense

Ratio 

Gold Benchmark ETF Feb-2007  Unrated  --  --  42.34  1.00 

Kotak Gold ETF Jul-2007  Unrated  --  --  41.84  1.00 

Quantum Gold Feb-2008  Unrated  --  --  41.70  1.00 

Reliance Gold ETF Nov-2007  Unrated  --  --  41.45  1.00 

SBI Gold ETS Apr-2009  Unrated  --  --  --  1.63 

UTI Gold ETF Mar-2007  Unrated  --  --  41.89  1.00 

10.  Index Funds: These funds replicate an underlying index such as Nifty, Sensex and the portfolio isreadjusted according to changes in the index. Franklin Sensex plan, HDFC Nifty plan. These are

passive funds and thus were much cheaper in terms of fund management charges. They suffer

from the problems of Tracking error which measures the standard deviation of the difference

between the mutual fund portfolio and underlying index’s actual returns. In simple terms, the

tracking error is the difference between returns from the index fund to that of the index its

tracking. Lower the tracking error, closer are the returns of the fund to that of the target index.

A fund with a lower tracking error is superior to one which has high tracking error. Good index

funds are those which have a low tracking error preferably below one per cent. Trackin error

occurs due to expense ratios, cash holding by mutual funds, volatility and fluctuations of 

underlying stocks or them breaking circuit filter limits etc. (Discuss reasons for tracking error-

impact cost/cash holding and how index funds take hedging positions using Futures in class)

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8.REIT/ REMF- Real estate mutual fund:

A real estate investment trust (REIT) is a fund that holds real estate and property directly or

mortgage using capital pooled from investors. REITs could be listed on stock markets or could be

unlisted but still be under the eyes of a regulatory board. REITs can be classified as -equity REIT (investing directly in properties), mortgage REITs (investing indirectly through mortgages, bonds,

debentures of real estate companies) and hybrid REITs as the combination of two. A real estate

investment trust (REIT) is a fund that holds real estate or mortgage using capital pooled from

investors.

Equity REIT typically pools money from various investors (unit-holders) to directly acquire

commercial real estate, properties, land, malls etc and manage it. The rent collected from these

investments is the income generated by the REIT. They also sell these properties at profits when

they appreciate in value and as decided by the fund manager based on suitable market rates.

Mortgage REITs buy bonds, structured obligations (CDO, MBS, SBS), directly lend to real estate

companies and generate interest income just like debt funds. They do not own the real estate

property they own only the real estate loans. Aim is to generate interest incomeHybrid REITs combine both the features of Equity and Mortgage REIT so that they make profits on

selling property once they have appreciated in value as well as get regular interest income by

investing in the estate company ‘s debt products such as bonds, debentures, Structured obligation

etc.

11. Contra Funds:

They choose out of favour stocks and sectors, undervalued companies which are not in

limelight at present to make superior returns once the markets favour these sectors. Eg. SBI

Contra fund

12. Sectoral funds:

Sector specific investment concentrating on one high growth sectors with the aim to deliver

superior returns than the sensex/ nifty and the broader markets. Eg. Reliance Diversified Power

sector fund, Reliance banking fund, franklin FMCG fund, Prudential ICICI nfrastructure, Franklin

IT fund etc

13. Thematic funds: Funds which promote a particular theme. Schemes such as HSBC advantage

India fund, whose theme was consumption, infrastructure and Outsourcing , Fidelity Value

India Fund whose aim is to invest in undervalued companies whose stock price is less than

the company’s intrinsic value, Sundaram PSU Fund which will invest only in public sector

companies already listed or to be listed as the government divests its stakes further, DSP

Blackrock World Gold fund etc

14. ELSS: Equity Linked Saving Schemes which are tax savers. Funds are locked in minimum 3

years and investor gets 80C benefit, which allows every year investments up to Rs.100,000 in

these funds to be deducted from one taxable income. HDFC tax saver, Fidelity tax saver.

These are Closed ended funds where in one may invest at any point of time, post which the

amount is locked in for 3 years. Incase an investor exits early all the tax benefits of 80C arereversed.

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15. Asset Allocation Funds

Open ended fund which first defines an asset allocation based on an investor’s risk profile i.e 

conservative, moderate or aggressive and then factors in his age and then identifies a basket of 

funds within the same fund house to allocate the investment such as Life Stage funds.

Example: Franklin Templeton India Life stage Fund of Funds- for the 20s age group plan puts 80% in

equity and 20% debt allocation. Thus 50% FT Bluechip/ 15% Franklin T Prima/15% Templeton India

growth fund/10% Templeton India Income builder fund/ 10% Templetonindia income fund. Eg. Birla

SLAsset Alloc, ICICI Pru Advisor-Aggressive plan or Moderate Plan or Cautious plan etc

Tactical Asset Allocation funds constantly track economy, markets and changes the asset allocation

based on his views of future market opportunities or threats.

16. Quant Funds

An investment fund that selects securities based on quantitative analysis. In a quant fund, the

managers build computer-based models to determine whether an investment is attractive. Quant

funds use an investment methodology that involves sophisticated mathematical or quantitative

analysis rather than investments based on a fund manager’s views. asset managers such as Reliance

Mutual Fund, ING Asset Management (under its portfolio management service), Religare Mutual

Fund (erstwhile Lotus MF) have been offering quant funds

DEBT FUNDS

1.  Interval Funds: Interval Funds in India combine the characteristics of both closed and open

ended funds. Interval Funds in India allow limited flexibility to the investors for they can be

repurchased and sold at a time period that is predetermined by the fund house. That is for

example it allows an exit for investors each quarter or every 6 months. The fund may have three

options -- 90 days, 180 days and 365 days. The 90-day interval fund would remain closed for 90

days, after which it will remain open for five days. In an interval fund, the fund manager has the

advantage of managing the corpus without having to contend with fresh inflows or outflows at

varied points in time, some of which may even prove to be detrimental to the fund performance.

Some funds charge an exit load in case an investor redeems at any other period other than theone defined by the fund house. Interval Funds in India have been launched by many fund

houses. Invest in Money Market and other debt securities with fixed incomes to reduce interest

rate fluctuation based risks.

2.  Cash Management Funds/ Liquid funds/Ultra Short term Bond Funds: Invest in the CBLO/

Reverse repo market/COD up to 3 months/ Treasury bills of 91 days/ CP of up to 3 months.

They are not allowed to invest in papers exceeding maturities of 91 days. Investors park

money for just a few days or few weeks, for a very short duration

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3  Liquid Plus/ Treasury Advantage Funds/ Cash Management Savings plus Plan: Invest in

money market instruments such as COD , CP , NCD, CBLO, reverse repo, Treasury Bills of 91

days/ 182 days and and 364 days T bills. Money is parked by the investor between few

weeks to few months and a significant portion is invested by the fund house in money

market instruments maturing between 6 months up to maximum 1 year.

3.  Gilt Funds: Invest in Government of India Securities or any securities guaranteed by GOI

4.  Bond funds/ Floating rate Funds (Long Term 3 years/Short term 1-2 years): Long term and

short term bonds of Companies, COD, CP,NCD, CD, Structured Obligation (CDO/ABS), GOI

bonds

5.  Income funds-Montly Income Plans: Aim is to generate regular income along with moderate

capital appreciation. They have a combination of debt and small portion in equity for upside

gains. The hold Government securities, COD, NCD, Structured Obligation (CDO/ABS). They

have an Equity holding between 10% to 30% based on fund house and scheme. There is both

long term and short term income funds The Short term MIP usually hold 10%-15% in equitywhile the long term MIP hold 25% to 30% in equity.

6.  FMP: Fixed Maturity Plans: FMP. A closed-end fund that invests in debt and money market

instruments of the same maturity as the stated maturity of the plan. These plans declare an

indicative yield (return) and a fixed tenure of lock in of funds post which the plan matures.

The fund house then invests in those debt instruments which have very similar yields as the

one declared by the fund house and maturity dates very close to date of maturity of fund

itself. This is the only type of scheme where an indicative return is declared right at the

outset of the fund launch (which is not allowed to be declared nowadays). And since the

debt instruments have the maturity dates and returns very close to the FMPs maturity date

and returns the investor does not get affected by adverse affects of price and interest rate

risks

7.  Arbitrage Funds

IDFC/ HDFC Arbitrage Funds

The investment objective is to generate income by investing predominantly in arbitrage

opportunities between cash and derivative market and arbitrage opportunities within the

derivative segment. Also deploy surplus cash in debt securities and money market instruments to

enhance returns. These are predominantly a debt oriented scheme.

There are also Equity Arbitrage funds eg. Kotak Equity Arbitrage fund, which for being

categorised under the equity segment and getting the tax advantages of equities, minimum 65%

of the corpus has to be in equities remaining in debt which then seek arbitrage opportunities. The

scheme evaluates the difference between price of a stock in futures and spot market and enters

into only those trades where there is a potential arbitrage available. The fund manager may

square off or roll over the positions depending on the opportunities available. The scheme is

suitable for investors who have an investment horizon of 3 months and above and who want to

participate in equity arbitrage market for returns better than cash funds.

In these funds there is an aim to make risk free profits without any capital erosion.

Thus the returns are also quite low,

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