Banking Domain

INTRODUCTION TO BFSI

-Yogeshwar N. tompe1

An Investment in Knowledge always Pays the best Interest- benjamin Franklin2

FEW OF THE GIANTS IN BANKINGInternational and Commercial Bank of China

Assets of this Chinese bank are more than the entire banking sector of India!Assets = 3616 (US$ billion)INR= 239789435200000

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SBI- Largest in IndiaAssets- US$ billion 3504

WHAT IS A DOMAIN?Sector of economy for which AUT is being developed.

InsuranceBankingLife sciencesTelecommunicationE-CommerceGame Applicationetc.

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ADVANTAGES OF DOMAIN KNOWLEDGEReduces the training time

Knowledge of functional flow chart (work flow, business process & rules)

Good Idea on UI features

Helps in writing precise and accurate test cases

Those hoping for the position of Business Analyst at the earliest must need a strong command on domain knowledge

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OBJECTIVEProvide an overview of Banking Domain

Enable Technology people understand Financial Terms

Explain Operations in specific lines of banking

Cover Global Banking Practices

Introduce some of the recent developments in banking7

KEYWORDSConcept of moneyFinancial InstrumentsFinancial StatementsIntroduction to BankingRetail BankingConsumer LendingCards and PaymentsCommercial and Wholesale BankingInvestment banking Investment ManagementSettlement Corporate ServicesInsurance8

MONEYStandard unit of Exchange- advancement over barter systemCurrencies-based upon development level of countriesExchange Rates- Who decides, Pegged currenciesFace value of currencyStandard Value currency

Interest charged on loan amount- Simple and CompoundSimple- On Rs.100 by 10 per cent, amount paid every year is Rs. 10Compound- On Rs.100 by 10 per cent, amount paid every year varies

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INFLATIONRise in cost of goods and services over a periodReal rate of interest = Nominal rate of Interest-Inflation Rate

Nominal rate of interest = 10%Inflation rate 4%

Real rate of interest = 6%Increase in Prices reduces the value of currency

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COST OF CAPITALLand, Labor, CAPITAL, Enterprise(Idea)

Depends upon- Borrower, type of financing, market timing, collateral, tenure for debtCost of capital include followingInterest for debtDividend, expected earning for equity

WACC- Weighted Average Cost of Capital- If more than one source of finance is used.WACC= Cost of each*Weight11

FINANCIAL INSTRUMENTSCapital- Business needs capital for operations, fixed assets.

Methods by which capital can be raisedDebtBank LoansBond/Debentures: Fixed, Floating-rating, Corporate, Govt.

EquityOwners equityVenture CapitalIPOs

Mutual Funds

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CONTINUEDDerivativesForwardsFutureOptions

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DEBTMoney owed by one entity to otherCost is interestDebt is considered senior to equity i.e. the interest on debt is paid before the dividends on stock in case of liquidation of assetsExamples- Bonds, Loan, Commercial papersInvestors chose between debt and equity based on their investment objectives14

BONDSAn investor loans money to an entity at a specific interest rate.Small deposits from multiple peopleInvestment ceilingInterest is generally paid semiannuallyFactors influencing coupon ratePrevailing economic conditionsIssuers Credit rating (risk)In return investor gets the bond/certificate which contains:Interest rate (Coupon rate)Maturity date (Repayment date)Face amount

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CONTINUED Corporate bondSecured bonds- backed by specific assetsUnsecured bonds (Debentures)

Treasury Securities (Government agencies)Treasury bills-Short termTreasury bonds-Long termMost secure bonds16

EQUITYEquity (Stock)- represents ownership interestCommon StockVoting RightsMajority shareholders manage organizationPopularCorporations sells it through IPOCan be traded in secondary markets-BSE, NYSE etc.

Preferred StockNo voting rightsFixed rate of return

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MUTUAL FUNDSInvestment companiesPool resources from individual investorsMF companies invest into diverse sector of economyInvestors are equally responsible for loss or gainDividends earned are distributed according to the investment

Hedge FundA group of investors who take financial risks together in order to try to earn a lot of money 18

DERIVATIVESIt is a contract between two or more partiesObligation on buyer and seller

Forward Agreement to buy/sell an asset in future at a specified priceEx. MCX

Future Agreement to buy/sell an asset in future at a future price19

FINANCIAL MARKETSPlace where financial instruments are traded

Primary Financial MarketsNew financial instruments are issuedInitial Public Offering

Secondary Financial MarketsPrimary instruments (Shares) are tradedInvestors can monetize their sharesEx. BSE, NYSE

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BANKING21

BANKINGAny financial institution licensed to accept deposits and issue credit through loans

FunctionsChannelize savingsCredit facilities to borrowerInvestment avenues o investorsFacilitate the trade and commerce dealingsFinancial InclusionMinimize cash transactionsProvide financial servicesCreation of money in the economyRestricts expansion of black money22

STRUCTURE OF BANKING SECTOR IN INDIA23

Industrial- IDBIAgriculture and Rural development-NABARD23

CENTRAL BANKBankers bankRegulator to other banksGovernments bankProvide stable monetary and financial policyDecides policy rates-Impacts money in the marketProtects rights of the consumer by supervising banking institutionMonitors inflow and outflow of foreign currenciesClearing house facilityBanker of last resortEx. RBI

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HOW DO BANK EARN PROFITS?Difference in the rate of interest between depositors and lendersNumber of productsThrough investment of its resourcesFee based servicesNet bankingMobile bankingDemand Draft

Universal BankingCommercial as well as investment banking services under one roof25

BASEL FRAMEWORKBIS- Bank of International Settlement Located in Basel, SwitzerlandFosters co-operation among central banks and other agencies in pursuit of monetary and financial stability.A forum to promote discussion and policy analysis among central banks and within the international financial communityIt sets standards for best practices in banking which are ensured by all banks

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SERVICES OFFERED BY BANKCorporate bankingTrade FinanceCash Management

Retail BankingDepositsBranch & Electronic BankingCredit card servicesRetail Lending- Home, Personal, CarPrivate banking & wealth ManagementBusiness banking for SMEs

Investment Banking

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RETAIL BANKINGServes financial needs of individuals (Consumers) and SMEsLarge volume low value transactionsProducts and servicesDepositsLoansCredit cardsDebit cardsInvestment productsLocal branches, ATMsNet BankingMobile Banking28

ASSETS AND LIABILITIES IN BANKINGLiabilities- Money received by bank from depositorsAsset- Loans extended by bankRevenue- Money that is maid by an organization in yearLiquidate- To sell a business/property especially to pay off debt

Asset-Reconstruction-Here, the right or interest of any bank or financial institution in any financial asset is acquired by the asset re-construction company for the purpose of realization of dues.

NPA-Non-Performing Asset (bad loans)An asset of a bank (such as a loan given by the bank) turns into NPA when it ceases to generate regular income such as interest etc for the bankBiggest challenge faced by Indian Public sector banksEx. Kingfisher owes 7000 crore to PSBs

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DEPOSIT PRODUCTSDemand DepositsDeposited and withdrawn on demandSaving and Current

Term DepositMoney kept with the bank for a specified periodFixed DepositAttractive returnsEnsure capital availability for banks

D-MAT AccountFor trading and of shares

No-Frill AccountsLimited services at a low costZero balance accountsJan-Dhan accounts

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RETAIL CHANNELS

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BRANCH BANKINGTeller OperationsTeller- Deals directly with consumersServes as front line in banking

Relationship ManagerBanks POC to the customerDevelops tailored banking solutions for each client

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CORE BANKING/MULTI-BRANCH BANKINGNetwork of bank which allows customer of a bank to perform transaction at any branch of the same bank

Geographical constraints are removed

Branch customer becomes banks customer

This is achieved through a set of software called banking applications

Ex. Finacle(Infosys)

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ATMComputerized Telecommunication Device

Typical ATM Services

Cash withdrawal Limit per day restricted by respective bank guidelinesMoney Transfer between accounts Cash/ Check Deposits Utility Bill Payments Balance enquiry /Account Statements Mobile Top Ups VISA & Master networks are large global networks that service ATMs.Interbank operations are settled in clearing house

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TELEPHONE BANKINGTransactions over phone

Automated phone answering systems(IVR/VRU) with keypad response

Voice recognition capability

VRU- Voice Response Unit-A Programmed computer responds to caller

IVR- Interactive Voice Response-Computer phone application which accepts keypad selection and responds

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ONLINE BANKINGFinancial transactions on a secure website operated by respective bankBatch transactions operations are carried out with least human interventionBill Pay and Recurring payments E-TaxStatements : Monthly or quarterly bank statementsTransaction historyFund transferNEFTRTGSIMPS

IFSC- Indian Financial System Code is an alpha-numeric code that uniquely identifies a bank-branch participating in the NEFT system.

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FUND TRANSFERNEFTRTGSNational Electronic Fund Transfer

No transaction limit

Not a immediate mode of transfer during banks working hours only.

Real Time Gross Settlement

There is minimum amount limit

Immediate mode of transfer though during working hours of bank

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IMPSImmediate Payment ServiceInstant money transfer through mobile phone or onlineMobile number of remitter and beneficiary should be linked to their respective bank accountsBest way for transferring remittancesMMID- Mobile money identifier is generatedThere is a limit on amount of transaction

SWIFT- Society for Worldwide Interbank Financial TelecommunicationsSWIFT transports messages between two financial institutions. This activity involves the secure exchange of proprietary data while ensuring its confidentiality and integrityBIC- Uses Bank Identifier Code

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INTERNATIONAL BANKINGFacilitate imports and exports of their clients trade financingArrange for foreign exchange cross-border transactions and foreign investmentsParticipate in international loan syndicate lending to MNCs- project financing and to sovereign governments economic developmentTrade foreign exchange products for their own accountGateway for the transfer of remittances by expatriates

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INVESTMENT BANKINGFunctionsPrivate EquityBuying/SellingCorporate AdvisoryManaging company assetsCapital RaisingUnderwriterSecurity middlemenLong term financingEmerging MarketsMerger & AcquisitionsEx. TechMahindra-Satyam, IGate-Patni, Facebook-Whatsapp40

CARDS AND PAYMENTSCards- Fastest growing means of non-cash paymentsNon-cash payment instrumentsChequeDebit cardCredit cardC0-Branded cards- like credit cards associated with a particular firmAffinity card-Tie-up between a bank and an organizationCorporate/ Commercial cardPrepaid card- gift card, mall cards

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EMERGING PAYMENTSInternet Currencies/Digital cash/E-walletsPreload account with moneyTransfer money or make paymentsNo time barrierNo need to enter card credentialsEx. Paytm wallet

Contactless PaymentsRadio Frequency IDNear Field Communication(NFC)Eliminate swiping card, signing slip at the POSTargeted at eliminating cash transactions at retail counters42

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MORTGAGEA customers personal guarantee with the lenderCommonly used to refer to loan for the purpose of purchasing property.

Commercial MortgageCommercial building as a collateralLoan taken by businesses

Residential MortgageResidential property as a collateral to secure repayment.Loan taken by individual borrowers

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MORTGAGE FLOW

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ROLE OF INFORMATION TECHNOLOGY (IT) IN THE BANKINGCompetitiveness compel to adapt to latest technologiesInstrument of cost reductionEffective communication with people and institutions associated with the banking business.Better market infrastructurehelps the financial intermediaries to reach geographically distant and diversified markets in a cost effective manner47

Insurance48

Definition: Insurance is defined as the equitable transfer of the risk of a loss from one entity to another in exchange for payment

Terminologies:

Insurer: Insurance company selling the policy

Insured: Policy holder or the entity availing the policy

Re-Insurance: Insurance by another insurer of all or a part of a risk previously assumed by a insurance company

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CONTINUEDPremium: An amount charged by insurer in order to cover insured against a risk

Factors determining premium amount:The Frequency of Claims (how many)The Severity (Cost of each Claim)Condition of insurer, kind of policy, probability of risk, etc.

Underwriter: Person who approves the policy and determines the premium to be charged against a coverage.

Claim: Request by insured in order to seek policy benefits from insurer

Adjudicator: One who processes or settles the claims.50

TYPES OF INSURANCELife Insurance (Long Term)Non-Life Insurance (Short Term)

By the Law of Insurance in USA Unemployment InsuranceSocial SecurityWorkers Compensation

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CATEGORY OF INSURANCEDental HealthLifeBusinessResidentialTransport/CommunicationOther

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INSURANCE PROCESSESBranches of Insurance company

Policy Administration SystemsClaim Management SystemInvestment Management SystemThird Party Administration SystemsRisk Management SolutionsRegulatory & ComplianceActuarial System (Valuation & Pricing)

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Thank You59Plant trees & save water for the sustainability of earth AND save baby girl for the sustainability of human race.