A Program on Introduction to International Banking

Facilitator : C Rajanikanth, Symbio Consulting rajni@symbio.in , +94442 92542

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Program Overview

Session 1: Introduction to Banking Session 2: Banking Products Session 3: Central Bank & Regulations Session 4: Payments - General Session 5: Payments UK practices

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Session 1: Introduction to Banking

Why Banks are needed? (Evolution) Different segments of Banking Product Overview Making sense of it all Banking terminologies

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Banking
Letter of Credit Loans & Deposits Cheque Clearing

Electronic fund transfer

Foreign Exchange Current /Savings ACs

Money Market

Shares / Bonds

Investment Banking
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Private Banking

Custodial Services

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Banking (Contd..)
Trade Finance SWIFT Capital Market

RTGS systems
Mortgages Underwriting Interest Rates Fixed / Floating Nostro Accounts

Derivatives

Collections
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Asset Management

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Different Banking segments

Retail Banking Commercial Banking Investment Banking Private Banking

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How Banks Came about?

Evolution

Problems with Bartering Need and Evolution of Money Gold Goldsmith Banking Fractional Reserve Banking Early Day functions of a Bank Deposit, Loan and Payment services Why Banks will remain a Regulated industry?

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Banks as Financial Intermediary

Trade in money
Lenders Borrowers

Issues Faced when Borrowers /Lenders come together

Credit Risk / Counterparty Risk Higher Transaction Cost Maturity Mismatch Liquidity Risk Issue of Aggregation

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Banks as Financial Intermediary

Banks as Financial Intermediary

Depositor (Lender) BANK as Financial Intermediary

Borrower

Lender and Borrower mitigated most of their risks discussed before Transfer of Risk to Bank

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Retail Products - Loans

Secured Loan
Start: Cash

BANK

Start: Collateral
End: Collateral End: Principal Plus Interest

CUSTOMER

Unsecured Loan
Start: Cash

BANK
End: Principal Plus Interest
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CUSTOMER

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Banks as Financial Intermediary

Basic Risks transferred to the Bank

Credit Risk Liquidity Risk Asset / Liability Mismatch Need for Asset Liability Management (ALM) Role of Money Market Introduction to Interest Rate risk faced by Banks

Looks like all are happy (Lenders, Borrowers, Bank)

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Alternate model to Bank as intermediary

Need for an alternate model

Interest rate for deposits given by Bank / Interest rate charged by Bank for borrowers But needs to overcome problems (Discussed before)
Need How it works?

Evolution of Credit rating agencies

How to overcome Liquidity Risk for Lenders and Borrowers

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Alternate model to Bank as intermediary Capital Market

Primary Market (e.g. IPO) Investor (Lender) Secondary Market (e,g. Trades in Stock Exchange) Investor (Lender) Issuer (Lender)

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Putting it all together Sources and Uses of Funds

Sources of Funds

Shareholders Capital Deposits Accounts (Savings / Current) Time deposits / Fixed Deposits Borrowings Money Market borrowings Borrowings through Capital Market (e.g. Bonds) Interest Earned from Loans Fees, Charges and commissions earned from services Fees for payment related services Advisory roles, Brokerage, Underwriting Commissions from issuing LC, Guarantees etc. Trading Profits Basic Banking

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Putting it all together Sources and Uses of Funds

Uses of Funds

Loans Retails Loans Housing Loan, Personal Loan, Vehicle Loan etc. Commercial Loans Term Loan, Working Capital etc. Trade finance related loans (Bill discounting, Negotiating, etc.) Money Market Placements Investment Shares, Bonds and other financial instruments Interest Paid on deposits Trading Loss Loan write-off (NPA)

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Session 2 Banking Products

Retail Products Corporate Lending Trade Finance Foreign Exchange Money Market Capital Market Cash Management

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Retail Products

Services provided by Banks primarily to individuals

Mass Market Via Branch Network

Current Account For people / entities with commercial or business interests Typically overdrafts are allowed

Different types of Accounts

Ability to withdraw more than the balance treated like a loan for the period of overdraft

No Restrictions on number of transactions Typically does not carry interest (Exceptions are there!!)

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Retail Products

Savings Account For individuals Pays interest on the balance Overdrafts are not allowed Restrictions on access, no of withdrawals etc. In some countries do not have Cheque books, ATM facility etc. Fixed deposits For a fixed maturity period Typically carries interest higher than savings account

Increases as the fixed period increases

Can be broken in between typically with penalty

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Retail Products - Loans

Collateral may have to be transferred physically to Banks

For e.g. Gold jewellery

For e.g. Vehicles

Collateral may have to be assigned / hypothecated

Unsecured loans are more risky and hence would typically carry higher interest than secured loans

Housing loans carry less interest than personal loans

Interest computation

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Retail Product - Loans

Interest Rates

Fixed Interest Interest rate is fixed for the term of the loan Floating rate Varies during the term of the loan

Benchmark rate (+ or - )Spread Reset Frequency For e.g. LIBOR 3M + 0.75 reset every 3 months.

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Retail Product Account services

Funds Transfer Demand Drafts / Bankers cheque Standing instructions Cheque issuance / Stop cheque services Bill payments Locker services Account statements

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Retail Products - Payments

Covered in details under Payments which is a later topic

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Corporate Lending

Basic principals of Lending common for Retail as well as corporate lending

Secured / Unsecured Fixed interest rate / Floating interest rate

Term Loan / Working Capital / Overdraft

Depends on the basis of requirement Credit worthiness Collateral provided

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Corporate Lending Credit appraisal workflow

Loan Workflow

Borrower seeking loan applies for Bank assistance Details regarding Borrower, purpose, amount etc. are furnished in the application Bank scrutinises and assesses the following Purpose of loan and its cost Promoters contribution Loan requirement

Term Loan Working Capital

Viability Profitability Collateral for assistance Cash Flow Credit Report.

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Corporate Lending Credit appraisal workflow

On satisfactory assessment, Bank sanctions limits (Facilities) for Long Term loan and / or Working Capital assistance. Revolving / Non-Revolving facility Loan Agreement is executed between Bank and borrower. It sets the terms and conditions of assistance. While financing projects, Bank will disburse the loan amount in one or more tranches depending on the need and progress of project. Bank monitors end use of funds, periodically reviews operations in the loan account, visits borrower premises, inspects production and plant maintenance, ensures availability of insurance cover and checks sufficiency of collateral. Repayments could be Bullet or Scheduled In retail loans typically amortized - EMI

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Syndicated Loan

Syndicated Loan

Loan granted to a client by a group of Banks Primarily because of the size of the loan e.g. $500 Million
Bank A Bank D Bank B Bank E Bank C

Agreed Loan Amount

USD500,000,000.00

Client

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Trade Finance

Involved in case of international trade

Need for international trade Different resources Impossible and unproductive to be Self-sufficient Concept of specialization Benefits Importer Buyer of Goods Is worried whether goods will be delivered according to specification By agreed time at agreed location Exporter Seller of Goods Is worried whether the importer would pay-up upon delivery

Clients needs

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Trade finance

Banks Roles in Trade finance

Issue LC to importer If importer is a Client Advises exporter on receipt of LC If exporter is a Client Arranges to fund the imported , if needed Arranges to fund the exporter Bill discounting Manage the foreign exchange component involved

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Trade finance Import LC process

Letters of Credit Import LC workflow Import

1
contract

Seller/Exporter

Buyer/Importer
7
shipment

14

Collect goods

2
LC application Documents Documents Advise LC

8
Payment

15 4
LC issuance Documents Payment

13

Usual ABN role

Buyers Bank
3
LC creation

Sellers Bank
5
record LC

9 12

10 Doc Checking 11 Debit client

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Trade finance Export collections

Export In some cases LC may not be involved

Collections Bank acts just as a collecting agent on behalf of the exporter

1
contract

Seller/Exporter

shipment

Buyer/Importer

Documents

3
Payment

8
Payment

Usual ABN role

10

Documents

7 5
Documents

Sellers Bank
4
Receive Documents

Sellers Banks Overseas Branch

6
Receive Documents

Payment

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Participants in Trade finance workflow

Participants

Importer / Exporter Transportation companies e.g. shipping company Insurance companies Governments Import export controls /licenses Customs and excise Duties Professional goods inspection companies Sellers and buyers Banks Sellers and Buyers agents

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Trade finance Other aspects

Documentation involved

Import relies a lot on documents Bill of Lading Inspection certificates Insurance documents Key terms with respect to shipping e.g. FOB Free on Board EXW - Ex-works

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