· What is Open Market operations(OMO)?
The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system by RBI. Open market operations are the principal tools of monetary policy.
· What is Micro Credit?
It is a term used to extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families.
· What is Liquidity Adjustment Facility(LAF)?
A tool used in monetary policy that allows banks to borrow money through repurchase agreements. This arrangement allows banks to respond to liquidity pressures and is used by governments to assure basic stability in the financial markets.
· What is RTGS System?
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. 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 as soon as they are processed. 'Gross settlement' means the transaction is settled on one to one basis without bunching with any other transaction.
· What is Bancassurance?
It is the term used to describe the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products.
· What is Wholesale Price Index(WPI)?
The Wholesale Price Index (WPI) is the index used to measure the changes in the average price level of goods traded in wholesale market. A total of 435 commodity prices make up the index. It is available on a weekly basis. It is generally taken as an indicator of the inflation rate in the Indian economy. The Indian Wholesale Price Index (WPI) was first published in 1902, and was used by policy makers until it was replaced by the Producer Price Index (PPI) in 1978.
· What is Consumer price Index(CPI)?
It is a measure estimating the average price of consumer goods and services purchased by households.
· What is Venture Capital?
Venture capital is money provided by an outside investor to finance a new, growing, or troubled business. The venture capitalist provides the funding knowing that there’s a significant risk associated with the company’s future profits and cash flow. Capital is invested in exchange for an equity stake in the business rather than given as a loan, and the investor hopes the investment will yield a better-than-average return.
· What is a Treasury Bills?
Treasury Bills (T-Bills) are short term, Rupee denominated obligations issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They are thus useful in managing short-term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments.
· What is Banking Ombudsmen Scheme?
The Banking Ombudsman Scheme enables an expeditious and inexpensive forum to bank customers for resolution of complaints relating to certain services rendered by banks.
The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services.
The Banking Ombudsman Scheme was first introduced in India in 1995, and was revised in 2002. The current scheme became operative from the 1 January 2006, and replaced and superseded the banking Ombudsman Scheme 2002.
· What is Subsidy?
A subsidy is a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an industry to prevent the decline of that industry or an increase in the prices of its products or to encourage it to hire more labor.
· What is a Debenture? How many types of debentures are there? What are they?
A debenture is basically an unsecured loan to a corporation. A type of debt instrument that is not secured by physical asset. Debentures are backed only by the general creditworthiness and reputation of the issuer.
i)Convertible Debentures: Any type of debenture that can be converted into some other security or it can be converted into stock..
ii)Non-Convertibility Debentures(NCB): Non Convertible Debentures are those that cannot be converted into equity shares of the issuing company, as opposed to Convertible debentures. Non-convertible debentures normally earn a higher interest rate than convertible debentures do.
· What is a hedge fund?
‘Hedge’ means to reduce financial risk.
A hedge fund is an investment fund open to a limited range of investors and requires a very large initial minimum investment. It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment.
· What is FCCB?
A Foreign Currency Convertible Bond (FCCB) is a type of convertible bond issued in a currency different than the issuer’s domestic currency. In other words, the money being raised by the issuing company is in the form of a foreign currency. A company may issue an FCCB if it intends to make a large investment in a country using that foreign currency.
· What is Capital Account Convertibility(CAC)?
It is the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. This means that capital account convertibility allows anyone to freely move from local currency into foreign currency and back.
The Reserve Bank of India has appointed a committee to set out the framework for fuller Capital Account Convertibility.
Capital account convertibility is considered to be one of the major features of a developed economy. It helps attract foreign investment. capital account convertibility makes it easier for domestic companies to tap foreign markets.
· What is Current Account Convertibility?
It defines at one can import and export goods or receive or make payments for services rendered. However, investments and borrowings are restricted.
· What is Arbitrage?
The opportunity to buy an asset at a low price then immediately selling it on a different market for a higher price.
· What is Capitalism?
Capitalism as an economy is based on a democratic political ideology and produces a free market economy, where businesses are privately owned and operated for profit; in capitalism, all of the capital investments and decisions about production, distribution, and the prices of goods, services, and labor, are determined in the free market and affected by the forces of supply and demand.
· What is Socialism?
Socialism as an economy is based on a collectivist type of political ideology and involves the running of businesses to benefit the common good of a vast majority of people rather than of a small upper class segment of society.
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SOME MORE BANKING TERMS
CERTIFICATE OF DEPOSITS
This scheme was introduced in July 1989, to enable the banking system to mobilise bulk
deposits from the market, which they can have at competitive rates of interest.
The major features are:
Who can issue Scheduled commercial banks (except RRBs) and All India Financial Institutions
within their `Umbrella limit’.
CRR/SLR Applicable on the issue price in case of banks
Investors Individuals (other than minors), corporations, companies, trusts, funds, associations
etc
Maturity Min: 7 days Max : 12 Months (in case of FIs minimum 1 year and maximum 3 years).
Amount Min: Rs.1 lac, beyond which in multiple of Rs.1 lac
Intt. rate Market related. Fixed or floating
Loan Against collateral of CD not permitted
Pre-mature cancellation Not allowed
Transfer Endorsement & delivery. Any time
Nature Usance Promissory note. Can be issued in Dematerialisation form only only wef June
30, 2002
Other conditions
• If payment day is holiday, to be paid on next preceding business day
• Issued at a discount to face value
• Duplicate can be issued after giving a public notice & obtaining indemnity
CORE BANKING SOLUTIONS
Core Banking Solutions (CBS) or Centralised Banking Solutions is the process which is
completed in a centralized environment i.e. under which the information relating to the
customer’s account (i.e. financial dealings, profession, income, family members etc.) is stored in
the Central Server of the bank (that is available to all the networked branches) instead of the
branch server. Depending upon the size and needs of a bank, it could be for the all the
operations or for limited operations. This task is carried through an advance software by making
use of the services provided by specialized agencies.
Due to its benefits, a no. of banks in India in recent years have taken steps to implement the
CBS with a view to build relationship with the customer based on the information captured and
offering to the customer, the customised financial products according to their need.
Advantages: The CBS process is advantageous both to the customers and the banks in the
following manner:
Customer:
• Transaction of business from any branch, ATM that offers him anytime anywhere banking
facility.
• Lower incidence of errors. Hence accuracy in transactions.
• Better funds management due to immediate availability of funds.
Banks:
• Standardisation of process within the bank.
• Better customer service leading to retention of customer and increased customer traffic.
• Availability of accurate data & Better use of available infrastructure
• Better MIS and reporting to external agencies such as Govt., RBI etc.
• Increased business volume with better asset liability management and risk management.
DERIVATIVES
A derivative is a financial contract that derives its value from another financial
product/commodity (say spot rate) called underlying (that may be a stock, stock index, a foreign
currency, a commodity). Forward contract in foreign exchange transaction, is a simple form of a
derivative.
Objectives and instruments of derivates: The major purpose that is served by derivatives is to
hedge the risk. Futures, forwards, options, swaps etc. are the common instruments of
derivatives. The derivatives do not have any independent existent and are based on the
underlying assets that could be a stock index, a foreign currency, a commodity or an individual
stocks.
Operators in the derivative market : There are various kinds of operators in the derivative
market such as hedgers (which manage the risk), the speculators (who undertake risk for
realization of profit) and the arbitrageurs (who make purchase and sales simultaneously but in
different market to take benefit of price differentials). The players in option market include
development finance institutions, mutual funds, institutional investors, brokers, retail investors.
Components: The derivatives have components such as Options, Futures-forwards and Swaps.
Option It is contract that provides a right but does not impose any obligation to buy or sell a
financial instrument, say a share or security. It can be exercised by the owner. Options offer the
buyers, profits from favourable movement of prices say of shares or foreign exchange.
Variants of option: There are two variants of options i.e. European (where the holder can
exercise his right on the expiry date) and American (where the holder can exercise the right,
anytime between purchase date and the expiry date). It is important to note that option can be
exercised by the owner (the buyer, who has the right to buy or sell), who has limited liability but
possibility of realization of profits from favourable movement in the rates. Option writers on the
other hand have high risk and they cover their risk through counter buying.
Components of options: Options have two components i.e. call option and put option. The
owner’s liability is restricted to the premium he is to pay.
Call option : The owner i.e. the buyer, has the right to purchase and the seller has to obligation
to sell, a specified no. of instruments say shares at a specified price during the time prior to
expiry date.
Put option : Owner or the buyer has the right to sell and the seller has the obligation to buy
during a particular period.
Futures and forwards
The futures are the contracts between sellers and buyers under which the sellers (termed ‘short’)
have to deliver, a pre-fixed quantity, at a pre-fixed time in future, at a pre-fixed price, to the
buyers (known as ‘long’). It is a legally binding obligation between two parties to give/take
delivery at a certain point of time in future. The main features of a futures contract are that these
are traded in organised exchanges, regulated by institutions such as SEBI, they need only
margin payment on a daily basis. The future positions can be closed easily. Futures contract are
made primarily for hedging, speculation, price determination and allocation of resources.
The forward on the other hand is a contract that is traded off-the-stock exchange, is self
regulatory and has certain flexibility unlike future which are traded at stock exchange only, do not
have flexibility of quantity and quality of commodity to be delivered and these are regulated by
SEBI, RBI or other agencies.
Futures and options.
Futures can also be distinguished from options because in futures, both the parties have to
perform the contract and no premium is required to be paid by either party, where as in case of
option, only the writer has to perform while the buyers makes payment of the premium to the
seller in consideration for his performance. In addition, in futures the contract is to be performed
on the settlement date and not before that whereas in case of option the buyer can exercise the
option any time prior to the expiry date.
Credit derivatives.
Credit derivatives are over the counter financial contracts (i.e. off-balance sheet) through which
the transferor can transfer the credit risk to another party without actually selling the asset. It can
be defined as a contract on the basis of which one party has to make payment to another party on the basis of performance of a specified underlying credit assets. In a credit derivative there
are two parties i.e. protection seller and protection buyer.
Protection seller assumes the credit risk in consideration of premium that the protection buyer
pays. Protection buyer on the other hand transfer the risk to the protection seller for a premium.
Under the arrangement, the protection seller makes the payment to the protection buyer on
credit event (such as failure to pay, insolvency, bankruptcy, repudiation, price decline etc. of the
underlying asset) taking place.
CUSTOMER RELATIONSHIP MANAGEMENT
Customer satisfaction is the degree of happiness a customer realises with a product or service
and is the most important driving force for retention of an existing customer which in turn results
in growth of any business organisation including banks, since it determines the size of cash flows
into the business. The satisfied customers always help in improving the toplines (i.e. business
turnover) through referrals and positive publicity which lead to improvement in bottomlines. In
order to maintain their position, while the business organisations have to retain their existing
customers, but for better growth in future, fresh customers are also required to be added.
New vis-à-vis old customer
It needs to be borne in mind that to attract new customers involves huge cost in terms of set up
costs, promotion costs, advertising cost, follow up cost etc. Due to these costs the operating cost
for new customer is generally higher for new customers. As a result, the longer relationship of a
customer brings better returns to the business. The defection by customers is a major factor for
loss of revenue to the business and it should be appreciated that higher the rate of defection
causing lower average length of relationship, higher would be the rate of reduction in profits.
Emergence of CRM
Hence, every deregulated market has to veer around to retaining existing customers besides
identifying and attracting new customers. In US decreasing interest in traditional marketing was
witnessed as early as 1980s when returns dipped to 3%, companies had to look for an alternative
to mass marketing through ads and promos. This led to a finer segmentation of the market. The
technological innovation like data warehouses and call centres allowed a micro approach i.e. a
segment called customer relationship management or CRM and eCRM. With the size, location
or past history not being that relevant which it used to be in the past and the market forces being
in favour of the customer, the organisations caring for customers are likely to be the winners.
The availability of information technology tools are arousing additional expectations of the
customer which these organisation can think of ignoring.
Customer Relationship Management (CRM) refers to the ability to understand, anticipate and
manage the needs of the customer, interaction and relationship resulting in increased profitability
through revenue and margin growth and operational efficiencies. eCRM can address other
factors like personalisation, customization, one to many and many to many transactions. It
permit business speed, agility and real time response to customers or markets through the new
tools such as eMail, internet telephony, chat facility etc. It reduces the cost of customer contract.
BANKING VISION 2010
An IBA’s Committee prepared a vision report in the backdrop of globalisation of Indian economy,
developments taking place in and around the globe and those that are expected as per the
projections made in the Planning Commission’s India Vision Document 2020 & 10th Five Year
Plan, the on-going reforms measures, expected Basel II needs and the expected pace of
expansion in the balance sheets of banks.
Focus of banking: The focus of banking has to move in favour of cost control as that would be
the key factor to higher profits in future. The cost will have to be determined as revenue minus
profit which would necessitate efficient use of resources including manpower resources with
proper reconfiguration of human minds, as the increase in productivity would determine the
winners and laggards. Financial services system could see the emergence of highly varied
financial products, tailored to meet specific needs of the customers in the retail as well as
corporate segments. The advent of new technologies could see the emergence of new financial
players doing financial intermediation (such as utility service providers offering bill payment
services or supermarkets or retailers doing basic lending operations).
Specialisation : Some players might emerge as specialists in mortgage products, credit cards
etc. whereas some could choose to concentrate on particular segments of business system,
while outsourcing all other functions. Some other banks may concentrate on SME segments or
high net worth individuals by providing specially tailored services beyond traditional banking
offerings to satisfy the needs of customers they understand better than a more generalist
competitor.
Growth with quality : The future growth of banking business has to focus on the qualitative
aspects rather than quantitative only. Total assets of the Scheduled Commercial Banks by March
2010 would be at Rs.40,90,000 cr. Bank assets are expected to increase at annual compounded
rate of 13.4% till March 2010 compared with 16.7% increase during 1995-2003 period. Deposits
are expected to grow from Rs.1356000 cr to Rs.3500000 cr i.e. 14.5% CAGR and investments
with a CAGR of 23.6%.
Need for consolidation: Consolidation of banking institutions is expected through mergers and
acquisitions, globalisation of their operations, development of new technology and
universalisation of banking.
There would be greater presence of international players in the Indian financial system. Some of
the leading Indian banks, may emerge as global players since there are opportunities available
to Indian banks abroad to expand their business. The market led mergers between private banks
and also between public sector banks, are not ruled out This could see the emergence of 4-5
world class Indian Banks.
Risk and reward : For success of banking transactions, the ability of the banking institutions to
perceive risk and take suitable steps to manage the risk, will have to be ensured. The risk
managers could prosper and the risk takers are likely to survive. The risk management has to be
given substantial attention and this has to be initiated at the branch level instead of corporate
offices.
Information technology: Faster decision making and faster appraisal are likely to be in place
with faster information and data flow. This could help banks to improve their credit management
effectively in addition to reduction in transaction cost and improved revenues.
Continued from Banking vision 2010:
Credit delivery : The most significant challenge before banks is the maintenance of rigorous
credit standards, especially in an environment of increased competition for new and existing
clients. Large-scale efforts are needed to upgrade skills in credit risk measuring, controlling and
monitoring as also revamp operating procedures. Credit evaluation may have to shift from cash
flow based analysis to “borrower account behaviour”, so that the state of readiness of Indian
banks for Basle II regime improves.
Retail lending and Social banking: Retail banking is expected to receive greater attention. The
concept of social lending would undergo a change and instead of being seen as directed lending,
the priority sector lending would be business driven. With rural market comprising big size of the
population and disposable surplus, there is likely to be greater emphasis on rural and semi-urban
areas for business growth.
Regulatory framework: The expected integration of various intermediaries in the financial system would require a strong regulatory frame work. There have to be various legislative
changes to enable the banking system to remain contemporary/competitive. However, the
emphasis would be on self regulation instead of regulatory prescriptions based on putting in
practice the best practices. Banks are likely to migrate to the global accounting standards which
would require greater transparency, more disclosures and tighter norms for enlisting the
confidence of global investors and international market players.
Hi Varun,
Thank you verymuch for such a wonderful article.i also request you to post regarding the marketting terms also in this blog to be familiar with them as marketting has become a section in SBI po exams
Very useful information.
Thank u guys :)
Thank u guys :)
thanks dear
i m gona to face interview i tnk it s very good tng to find all tng under a umbrela
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