Monday, May 4, 2009

INTRODUCTION OF BANKING INDUSTRIES

The Indian banking industries has been an important driving force behind the nation‘s economy development. It is predominantly a public sector entity with 80% of banking business carried out by public sector bank. Indian banking has undergone many transformations. The current transformation process, which began in 1991, is every important because of its profound effect on banking. Because of these effects on Indian banking, his history can be divided into two major eras, such as pre-reform era and post-reform era. All establish condition of the earlier era have undergone radical change, the detail of which are provide in table 1.

Table 1

Pre-reform Era

Post Reform Era

Confined marketplace

Unlimited marketplace

Monopoly of public sector bank

Competition from many player

Regulated regime

Deregulated regime

Manual process

Technology driven process

Limited & one-size-fits all products one channel service

Extensive products with customization & innovation Multi-channel service

Generalist orientation

Specialist orientation

Bankers were labourers

Bankers are to be knowledge workers

Banking was a clerical activity

Banking is highly skilled business and a specialized activity

Brawn power

Brain power

Labour Management

Knowledge Management

With the introduction of various reforms measures, banks are required to comply with a new set of prudential accounting norms of capital adequacy, asset classification, provisioning and valuation; the guidelines of the asset-liability management and risk management techniques. Moreover, globalization and information technology are rapidly changing the contours of Indian banking. The merging environment poses both opportunities and threats to the banks and to survive; they are required to manage a lot of things such as:

§ Capital Management.

§ Asset and Liability Management.

§ Risk Management.

§ NPA Management.

§ Technology Management.

§ Total Quality Management.

§ Change Management.

§ People Management.

§ Knowledge Management.

§ Corporate Governance.

SERVICE INDUSTRY

In numerous countries, increased productivity and automation in agriculture and industry, combined with growing demand for both new and traditional services, have jointly resulted in a continuing increase over time in the percentage of the labor force that is employed in services. There’s a hidden service sector within many large corporations that are classified by governments statisticians as being in manufacturing, agricultural, or natural resources industries. These so-called internal services cover a wide range of activities, including recruitment, legal and accounting services, payroll administration, office cleaning, landscape maintenance, supply-chain management, advertising, and many other kinds of services. Organizations are increasingly choosing to outsource the internal services that can be performed more efficiently by a specialist subcontractor.

PLANNING PROCESS

Project planning is one of the most significant activities of project management because it includes activities that were not included earlier. There are two kinds of planning processes:

§ Core Processes and

§ Facilitating Processes.

SOURCES OF FUNDS - BANK’S LIABILITIES

The sources of funds for the lending and investment activities constitute the liabilities side of the bank’s balance sheet. The various sources through which the bank raises funds for its business are broadly classified into the following:

§ Capital

§ Reserves and Surplus

§ Deposits

§ Borrowings

§ Other Liabilities and Provisions.

Capital:

The RBI has provided guidelines for the capital requirement of the banks. The capital of the nationalized banks, which is fully contributed by the government, will also include the contributions made by the government for participating in the World Bank projects. For banks that are incorporated outside India, and have branches in India, the capital will be the amount they bring in by way of start-up capital as prescribed by the RBI. Also shown under this head is the amount of deposit kept with the RBI under Section 11(2) of the Banking Regulation Act, 1949. According to this section, if the bank is not incorporated in India, it will have to maintain a deposit with the RBI either in cash or in the form of unencumbered approved securities or partly in cash and partly in such securities. New bank will have to be incorporated under the Indian Companies Act and have a minimum capital requirement of Rs. 100 crore. The old private sector banks which are also incorporated under Indian Companies Act are, however, exempted from the minimum capital account the authorized, issued, be represented by the paid-up capital which will be arrived at after deducting the calls-in-arrears and adding up the paid-up value of forfeited shares to the called-up capital.

Reserve and Surplus:

The components under this item of the bank’s liability will includes statutory reserves, capital reserves, share premium, revenue and other reserves and balance in profit and loss account. These items are discussed below:

i. Statutory Reserves:

Section 17 of the Banking Regulation Act, 1949, which deals with the reserve fund account of the bank, provides that every banking company incorporated in India shall create a reserve fund out of the balance of profit of each year as disclosed in the profit and loss account. This transfer of funds will be before any dividend is declared and the amount will be equivalent to not less than 20 percent of the profit.




BANK EXPENSES

The expenses of the bank can be broadly classified into interest expenses and other operating expenses. The detailed break up of these expenses is provided below:

INTEREST EXPENSES

Since a bank will have to mobilize funds regularly to meet the credit demands, its major expenses arise from the interest expended on deposits and borrowings.

a. Interest on deposits:

Interest paid on all types of deposits raised by the bank from other banks, institutions and others will appear under this head.

b. Interest on RBI/interbank borrowings:

This includes the discount/interest on all borrowings/refinance from RBI and other banks.

c. Others:

Discount/interest on all borrowings/refinance from FIs and other payments like interest on participation certificates, penal interest, etc. are included here.

OPERATION EXPENSES

The operating expenses will generally include the costs of running the bank; Components of the operating expenses are listed below:

a. Payments to and Provision for Employees:

A major part of the operating expenses of the bank will be in the form of the staff salaries/wages, allowances, bonus, other staff benefits like provident fund, pension fund, gratuity, liveries to staff leave fare concessions, staff welfare, medical and house rent allowance to staff, etc.

b. Rent, Taxes and Lighting:

This expense item includes rent paid by the banks on building and vehicles, municipal taxes and other taxes (including income taxes and interest tax) and other charges on electricity, etc.

c. Printing and Stationery:

Books and forms and stationery used by the bank and other printing charges, which are not incurred by way of publicity expenditure are included here.

d. Advertisement and Publicity:

All expenditures included by a bank for advertisement and publicity and the related printing charges will be included in this type of expenditure.

e. Depreciation on bank’s Property:

Included here is the amount of depreciation on bank’s own property, motor cars and other vehicles, furniture, electric fittings, vaults, lifts, leasehold properties, non-banking assets, etc.

f. Director’s Fees, Allowances and Expenses:

Expenses included here are the sitting fees and all other expenditures incurred on behalf of directors, the daily allowance, hotel charges, conveyance charges, included those which are to reimbursed and similar expenses of local committee members.

g. Auditor’s Fees and Expenses:

Fees paid to the statutory/branch auditors for their professional services and all expenses incurred for performing their duties including those which are in the nature of reimbursement will be entered under this expenses account. This item includes the branch auditor’s fees and expenses also.

h. Law Charges:

All legal expenses and reimbursement of related expenses are considered under this head.

i. Postage, etc:

Postal charges like stamps, telegrams, telephones, etc. will be appearing under this head.

j. Repairs and Maintenance:

Repairs to bank’s property, their maintenance charges, etc. are included here.

k. Insurance:

This includes insurance charges on bank’s property, insurance premium paid to Deposit Insurance and Credit Guarantee Corporation (DICGC), etc. to the extent they are not recovered from other concerned parties.

l. Other Expenditure:

Other expenses that are not covered under any of the above heads like, fees and expenses incurred on the external auditors appointed by banks themselves for internal inspection and audits and other services, license fees, donations, subscriptions to papers, periodicals, entertainment expenses, travel expenses, etc. are all included here. If the amount of expense for any of the items in this category exceeds one percent, particulars of the same will have to be given in the notes.

Electronic Payments

Despite so much talk about electronic payments and e-commerce, the fact is that 90% of world’s payments are done in cash. The other way of looking at its is that so much of scope lies ahead for electronic for electronic payments. In fact, we see a worldwide trend their money electronically, through use of various kinds of innovative instruments.

“It is our motto to offer all high-tech services on 24*7 basis to common man at an affordable price.”

Our bank is the fast transforming into tech-savvy bank. The new tech-savvy features and products.

Modern Bank of India has been adopting latest technology to transform it as a tech-savvy bank. In the 2006, we started to implement total branch automation with our own in-house Gayathri software.

Starting from 2007, within a period of 24 months, we have planed to implement core banking solution – Flex-cube software, in all our branches including rural. With the help of this we have planed to achieve cent percent implementation of core banking solution in all our operations.

Simultaneously, we have introduced a number of delivery channels for the convenience of our customers. We have our own 167 ATMs. In addition to that, we have planned to enter into tie-up with National Finance Switch, MITR consortium and UTI Bank. Because of these tie-ups, roughly 13000 ATMs are available to the customers of our banks. We have also planed to launch Debit card by doing tie-up arrangement with VISA international. For that we have signed an agreement with VISA International to got acquiring business of VISA cardholders.

International banking is launched for non-financial transactions to the saving bank customers. In core banking solution environment, all the SB customers can withdraw amount from any of our branches at free of cost. Similarly, collection and remittance facilities are provided at par for SB customers. We have lunched a Multicity cheque facility for the convenience of corporate and current account holders, because of which, the transit time is completely eliminated in funds remittance/cheques collection facilities. Efforts are on to introduce mobile banking and internet banking for financial transactions. We have implemented RTGS facility in all our branches which is appreciated by Reserve bank of India.

Our bank’s main strength would be relationship banking.

Having implemented core banking solution, number of Back-office functions have been taken care by data center. We have opened 12 central clearing service offices where centralized debit of cheques is also implemented. The frontline staff in branch is having time to promote relationship banking with customers. In addition to that, we have been giving training to marketing through outside consultants.

It is our vision to have strong in – house marketing department to improve the customer base and maintain a meaningful CRM. The current financial 2006-07 is christened as “year of aggressive marketing”.

As per the our growth plan we accept to reach the magic figure of 1000crore in net owned funds by 31st march 2007 our bank seems to heading toward 1000crore capital base very soon. This must commendable performance for a private bank

Traditionally, the bank has been extending credit support to trade and retail segment. We continue to maintain the same thrust in extension of retail credit. Even trough our housing loan portfolio appear to be very sleek, we do extend housing loan to the needy customer of our bank

As on date, on technology front we are equal to any generation private sector bank. It our motto to offer all high tech services on 24 * 7 basis to common man at an affordable price. “Technology services at an affordable price” is our signature tune.


E-banking application

Products of e- banking

The emergence of e-commerce facilities the growth an expansion of internet and information, technology, banking sector and financial activity remarkably.

The e-banking consists of following products:

§ Automatic teller machine (ATM)

§ Electronic funds transfer( EFT)

§ Personal computer banking (PCB)

§ Shared payment network system(SPNS)

§ Point of sales terminal

§ Electronic data interchange(EDI)

§ Structure message transfer system using swift

§ Corporate banking terminal

§ Tele banking

The bank consists of following main products & services:

§ Saving bank account

§ Fixed deposits.

§ Recurring deposits.

§ Draft receivable.

§ Loans.

§ Mass banking.

Benefits of e-banking:

With the help of e-banking, one can overcome the drawbacks of manual system, as computers are capable of storing, analyzing, consolidating, searching, presenting the data as per the users requirements with great speed and accuracy. A large increase in volume of work in banks can be handled by the computerization. Almost every thing that can be attended via tradition method can be transacted electronically for which different techniques are available at present for conducting e-banking.

Communication Infrastructure




Categorization of retail bank services

Core services

Facilitating services

Supporting services

Payment services

§ Cash

§ Foreign currency requirements

§ Travelers cheques

§ DD/Bankers cheque

§ TT

§ EFT

§ Making payments at door step

§ Internet banking

§ Telephone banking

Current account and savings account

§ ATM card

§ Standing instructions from customers for making payments

§ Inter branch/inter bank transfer of funds

§ Safety vault

§ Credit cards

§ Debit cards

§ Services to senior citizens

§ Telephone banking

§ Internet banking

§ Conversion of excess balance to time deposit

Loan products:

Consumer loans,

Personal loans,

Housing loans,

Educational loans

§ Current account

§ Savings account

§ Time deposit account

§ Delivery of loan at promised time period

§ Interest rate option: fixed/floating

§ Flexibility in pre-payment of loan

§ Counseling on real estate markets

§ Legal services for documentation

§ ECS for payment of loan installments

Insurance products:

life insurance,

Pension schemes

§ Current account

§ Savings account

§ Time deposit

§ Safety vault

§ Additional insurance facility for family members

§ Counseling on post retirement savings.

Machineries

§ ATM machines

§ Computers

§ Telephones

§ Fax machines

§ Teller machines

§ Air conditioner

§ Server room

§ Security system: Hidden cameras, voice response unit.

§ Printers

§ Cheque clearing machine

§ Vehicle for transporting money

Utilities

§ ATM outlets

§ Security personnel

§ Intranet

§ Intercom facility

§ Internet interface

§ Web portal

§ Software for accessing the database of customers and efficiently enabling the smooth functioning of the system

§ Locker rooms-locker boxes

§ Waiting area for customers

Components of Network Systems

All systems consist of three components:

§ software and Hardware

§ people and

§ producers

The same is true of computer and network system. Security of the software and hardware, trustworthiness of the people who use and manage it and reliability of the products for using and managing the system are the means of securing a computer system.

Due to customer demands, the banks and financial institution are under intense competition. They are trying to provide customers with innovative products at lower costs and better services. Thus the quality of information that is contained in the communication networks and their application that contained in the communication networks and their application to the evolving business and customer need measure the productivity of a bank. However, the risk associated in use of IT and deficiencies in security and controls within the banking procedures may pose a significant threat to the banking operations. Due to severe increase of dependence on the computers and IT related tools. The risks have not only extended beyond the traditional areas but have also become a vital reason of concern.

Threats



The risk discuss so far are not specific to the banking sector but are encountered in all type of business. The common effects of the risk are:

1) privacy violation

2) setback of business due to improper decision making

3) financial loss due to computer

4) Interruption in activities due to loss of data, hardware, software, people.

Cost reduction exercise:

Cost reduction exercise in the bank comprise in the following activities:

1) Minimum flow( by proper layout decision),

2) Automation

3) Facilities Optimization

4) Procedural formalities improvement for time delays

5) Levels of dealing in an ultimate transaction.

6) Speed and accuracy of information ( manage by good database and well trained personal)

7) Well coordinated functioning

Disciplines like timeliness in operation, availability of personal at required time, consistenancy and appropriateness of activities of reduces time and cost elements. Automation and networking are long term gain of cost effectiveness in addition to value generation.


Electronic Clearing System (ECS)

A. ECS Credit:

In this method of transaction a series of electronic payment instructions are generated to replace paper instrument. This system works on the basis of one single debit transaction triggering a large number of credit entries. These credits of electronic payment instructions which possess details of the beneficiaries account number, amount and the bank branch are then communicated to the bank branches through their respective service branches for crediting the accounts of the beneficiaries either through magnetic media duly encrypted or through hand copy.

B. ECS debit

This scheme facilitates payment of charges to utility services such as electricity, telephone companies, payment of insurance premia and loan installments etc by customers. This scheme facilitates for faster collection of bills by the companies better cash flow management and eliminates the need to go to collection centers/designated banks by the customers.

Cheque truncation:-

Cheque truncations a method of payment processing where under movement of the paper instrument is truncated by substituting with electronic transmission of the cheque details or data. In India the technology with regard to MICR processing would need to be up graded to a full image capture solution. Electronic presentation of images of cheque substitute physical delivery of cheques. This combined with the centralized signature storage and retrieval system will eliminate multiplicity of destination points and reduce clearing time very substantially.

Electronic Fund Transfer [EFT]

The Electronic fund transfers the ongoing inconvenience of accepting, processing and handling monthly payments by cheque, cash or other paper instruments. EFT is designed to dramatically improve customer services and reduce the inherent cost of processing paper transactions. EFT is the means by which pre authorized debits and credits are electronically transmitted from a customer’s account to the business accounts. The software enables one to utilize electronic fund transfers for one’s financial needs without having to become involved in the detailed regulatory or technical aspects of automated clearing house (ACH) item processing.

A wide range of payment instrument like EFT, ECS, E money, smart card and credit card cater to the needs of different types of economic transaction. At the level of Inter-bank payments and settlements, real-time and online funds transfer plays a major role both in local as well as inter-city transaction. The spread and the reach of the modern system enable equal and convenient access from both small and big centers alike.

The information Technology Act in a nut shell caters the following requirements;

  • Authentication of Instruments.
  • Countermanding of Instructions
  • Operational security of system.
  • Check against fraud Technical failure and errors.
  • Evidence Data Protection and Record preservation.

Evolution

The Rangarajan Committee report in early 1980s was the first step towards computerization of banks. Banks started exploring the idea of 'Total Bank Automation (TBA)'. Although titled 'Total Bank Automation,' TBA was in most cases confined to branch automation.

It was only in the early 1990s that banks started thinking about tying-up disparate branches together to facilitate information sharing.

At the same time, private banks entered the banking arena with radically different strategies. Given the huge IT budgets at their disposal and with almost no legacy IT equipment to worry about; private banks hastened the adoption of technology. The philosophy for private banks was very clear: to provide a whole new range of financial products and services at minimal costs. And technology made this possible.

The improved connectivity and falling costs offered by leased lines and VSATs provided a booster to inter-branch automation.

With centralized infrastructure and numerous connectivity options, banks started exploring multiple delivery channels like ATM, Net-banking, mobile banking, and Tele-banking thus driving down cost per transaction.

Core matters

After the turn of consolidated databases and networks come core banking applications. Core banking applications help provide complete front and backend automation of banks.

These applications also help banks achieve centralized processing and provide 24-hour customer service. "Core banking applications provide anywhere, anytime 24 by 7 non-stop services, which is not possible with traditional localized branch automation systems that are available only between 10 am to 2 pm," says V. Chandrasekhar.

Core banking applications help integrate the enterprise to existing in-house applications to offer a single customer view. These applications provide automation across multiple delivery channels.

Mining for intelligence

Another important issue banks face is in proper analysis of financial data to identify business potential. This helps a bank identify cross- sell and up-sell potentials. Technologies such as data warehousing/mining come into play here.

A data warehouse can help the bank get a single view of its data across disparate systems. This comes in handy since most banks have data spread over several disparate, sometimes legacy systems. If the data is spread across different systems, a transaction done on one system will not be reflected in the other. This is not a very desirable situation when it comes to multi-channel banking.

Data warehousing solves these by integrating all the data into a common warehouse (usually an RDBMS). The multiple data coming in from different systems is converted into a common format using the ETL (Extraction, Transformation, and Loading) process. This provides a single repository from which you can view or use information when required.

Data mining can help you recognize patterns in the data you have.

For example, how many of your customers have a two wheeler and earn more than Rs 15,000 a month? The answer to this question will give you a list of prospective customers to whom you can offer a car loan. Just give the query you have to the data mining tool and you will have the answer in a jiffy. "Data mining and data warehousing can help banks identify the right customer for a particular promotion. They also help in cross sell and up sell of services to customers," says George Varghese, Head - Marketing, SAS India.

Pre Server Consolidation Era


Post Server Consolidation Era

Store it

Storage is an ever-increasing proposition. Consider this: The very nature of financial data involves large amount of information generated by the minute. Add to this the RBI regulations for banks and financial institutions to store over the past seven years of financial transactions and you have one big mess up your sleeve.

This brings us to two main issues about storage: storing all the information and managing it. Banks, especially the private and the MNCs, are increasingly going in for SANs.

Outsourced Security

Given the very nature of financial transactions, information security plays a critical role in banking. Most banks have a clearly defined security policy with access rights determined by the role an employee plays in an organization. Banking is one sector where CIOs are focused on the core security processes and operations than just implementing security products.

In addition to investing in the usual security tools and solutions like anti-virus, firewalls, intrusion detection systems (IDS), and PKI, many banks are now outsourcing their security requirements. This way they can focus on their core business competencies than managing their backend security.

BUDGET

Serial No.

Item No.

Units

Cost per Unit

Total

1

Office Area\Rent

3,000 Sq.Ft

36,000 per month

2

Furniture & Fixture

5,00,000

3

Electric Fittings

1,00,000

4

Personal Computer

11

24,000

2,64,000

5

ATM Machines

1

3,00,000

3,00,000

6

Telephones

12

600

7,200

7

Teller Machines

3

14,000

42,000

8

Cheque Clearing Machine

1

7,000

7,000

9

Staff

Peon

Casher

Front Desk Mngr

Main Mngr

Help Desk Mngr

Pass Book/DD

2

3

1

1

1

2

2,000

8,000

12,500

18,000

6,000

7,500

4,000

24,000

12,500

18,000

6,000

15,000

10

Stationary

5,000

11

Security System

10,000

12

Printer

2

3,500

7,000

13

Fax

2

8,000

16,000

14

AC

6

30,000

1,80,000

TOTAL

15,53,700