MBA 3 SEM

MA 0038 BANK MANAGEMENT

ASSIGNMENT

Q1. Write about the financial services provided by banks.

Ans1. Commercial banks differ from investment banks. Most financial consumers think of “the bank” as a place to keep liquid financial resources, such as checking accounts and savings accounts. A consumer may have personal accounts at a commercial bank. The commercial bank’s primary business involves taking in financial assets as deposits then lending these assets to other customers at a rate of interest. The interest rate the bank charges on loans and revolving lines of credit or other credit facilities will depend on the current interest rate environment. A consumer bank, such as a credit union or savings bank, may focus on the personal banking needs of a specific group or industry.

An investment bank raises capital for businesses. The investment bank works with businesses to sell loans offered by the company called bonds. Bonds are debts owed by the company to investors. The investment bank distributes the bond issue to customers. The investment bank may choose to distribute publicly traded bonds to clients, or arrange a private placement of the client company’s debt directly with another company. The investment bank prices the debt according to the current yield curve and the company’s credit rating. A company's credit rating, like a consumer's FICA credit score, helps the company pay less to sell bonds in the public or private markets. Investment banks also raise capital for client companies by arranging equity issues, called stock. Investment banks receive fees from clients to raise capital. Many investment banks employ professional sales and marketing teams to distribute clients’ debt and equity issues.

Banking services

The primary operations of banks include:

Keeping money safe while also allowing withdrawals when needed

Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post

Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business)

Issuance of credit cards and processing of credit card transactions and billing Issuance of debit cards for use as a substitute for checks Allow financial transactions at branches or by using Automatic Teller Machines (ATMs) Provide wire transfers of funds and Electronic fund transfers between banks Facilitation of standing orders and direct debits, so payments for bills can be made

automatically

Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account.

Provide internet banking system to facilitate the customers to view and operate their respective accounts through internet.

Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.

Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check.

Notary service for financial and other documents Accepting the deposits from customer and provide the credit facilities to them.

Q2. What are the basic objectives which the banks persue while pricing their business loans?

Ans2. The basic objectives pursued by banks in pricing their business loans are :

PROFIT-One of the major objectives of banks in granting business loans is profit maximization. Without making a decent profit in every banking operation ,banks cannot just survive .Profitability is an area of concern for bankers these days.With intense competition ,banks are finding their net interest margins and operating profits under pressure.

SURVIVAL-Banks facing intense competition find that they need to adjust prices for increasing the volume of business that will help recover the costs and avoid losses.Banks which have been facing declining volumes of business are faced with the greatest challenge of regaining their viability .Survival in the market is the major concern for such banks and it becomes a critical objective of pricing for them.For banks saddled with higher levels of non- performing assests,severely eroding their capacity to extend fresh loaning and also having a severe impact on their capital adequacy .the situation is grave and calls for survival strategies .Pricing of loan products along with liability products gain all the more significance for generating adequate business ,keeping their costs at the minimum possible level and getting revenue.

MARKET SHARE- Business these days are merely pursuing an increase in business in the absolute terms, but are keen in their relative positions as reflected by the criteria like market share.In the competitive era, marketing is more of warfare and banks aim to occupy as large a territory as they can. Maintaining or increasing market share is an important objective, especially for the major players .Market leaders will have normally this as their principal objective as retaining their position in the market is critical for them.The banking industry is witnessing the market forces at play vigorously.

CASH FLOW- Price results in revenue and hence cash flows . Any adjustment to cash flow is possible through a suitable modification in price and it is an important objective for bankswhen cash flow assumes particularly greater significance either for meeting some larger cash outlays or when faced with cash crunch.Price can effect cash flow in two ways: one by advancing the cash inflow through shorter credit terms and two , by increase in business thereby accelerating conversion of operation into profits.

STATUS QUO- Firms may seek to stabilize demand and sales of their products by setting suitable price levels.This could be the objective for the market leaders in respect to the products in the maturity stage of the life cycle.Some of the products like bank guarantee and letters of credit which could be considered at the maturity stage of the life cycle ,are to some extent priced by banks with an objective to have a stable demand for such products and for earning the desired level.

Q3. Relationship marketing is an effective medium for marketing in a service industry like banking. Explain.

Ans3.Relationship marketing was first defined as a form of marketing developed from direct response marketing campaigns which emphasizes customer retention and satisfaction, rather than a dominant focus on sales transactions. As a practice, relationship marketing differs from other forms of marketing in that it recognizes the long term value of customer relationships and extends communication beyond intrusive advertising and sales promotional messages.

With the growth of the internet and mobile platforms, relationship marketing has continued to evolve and move forward as technology opens more collaborative and social communication channels. This includes tools for managing relationships with customers that goes beyond simple demographic and customer service data. Relationship marketing extends to include inbound marketing efforts, (a combination of search optimization and strategic content), PR, social media and application development. Relationship marketing is a broadly recognized, widely-implemented strategy for managing and nurturing a company’s interactions with clients and sales prospects. It also involves using technology to organize, synchronize business processes, (principally sales and marketing activities), and most importantly, automate those marketing and communication activities on concrete marketing sequences that could run in autopilot, (also known as marketing sequences). The overall goals are to find, attract and win new clients, nurture and retain those the company already has, entice former clients back into the fold, and reduce the costs of marketing and client service. Once simply a label for a category of software tools, today, it generally denotes a company-wide business strategy embracing all client-facing departments and even beyond. When an implementation is effective, people, processes, and technology work in synergy to increase profitability, and reduce operational costs.

Relationship marketing refers to a short-term arrangement where both the buyer and seller have an interest in providing a more satisfying exchange. This approach tries to disambiguiously transcend the simple post purchase-exchange process with a customer to make more truthful and richer contact by providing a more holistic, personalized purchase, and uses the experience to create stronger ties.

According to Liam Alvey, relationship marketing can be applied when there are competitive product alternatives for customers to choose from; and when there is an ongoing and periodic desire for the product or service.

Fornicatell and Wernerfelt used the term defensive marketing for attempts to reduce customer turnover and increase customer disloyalty. This customer-retention approach was contrasted with "offensive marketing" which involved obtaining new customers and increasing customers' purchase frequency. Defensive marketing focused on reducing or managing the dissatisfaction of your customers, while offensive marketing focused on "liberating" dissatisfied customers from your new customers. There are two components to defensive marketing: increasing customer satisfaction and increasing switching barriers.

Modern consumer marketing originated in the 1960s and 1970s as companies found it more profitable to sell relatively low-value products to masses of customers. Over the decades, attempts have been made to broaden the scope of marketing, relationship marketing being one of these attempts. Arguably, customer value has been greatly enriched by these contributions.

Q4. Explain the credit process.

Ans4. Central bank is the first source of money supply in the form of currency in circulation. The Reserve Bank of Indian is the note issuing authority of the country. The RBI ensures availability of currency to meet the transaction needs of the economy. The Total Volume of money in the economy should be adequate to facilitate the various types of economic activities such as production, distribution and consumption. 

The commercial banks are the second most important sources of money supply. The money that commercial banks supply is called credit money. 

The process of 'Credit Creation' begins with banks lending money out of primary deposits. Primary deposits are those deposits which are deposited in banks. In fact banks cannot lend the entire primary deposits as they are required to maintain a certain proportion of primary deposits in the form of reserves with the RBI under RBI & Banking Regulation Act. After maintaining the required reserves, the bank can lend the remaining portion of primary deposits. Here bank's lend the money and the process of credit creation starts

Credit creation is one of the important functions of a commercial bank.It constitutes the major component of money supply in the economy commercial banks differs from other financial institutions in this aspect. Other financial institutions transfer money from the lenders to the borrowers. Commercial banks while performing the same function, they create credit or bank money also. Professor Sayers says, "Banks are not merely purveyors of money, but in an important sense, they are the manufacturers of money".

The process of credit creation occurs when banks accepts deposits and provide loans and advances. When the customer deposit money with the bank, they are called primary deposits. This money will not be withdrawn immediately by them. Hence banks keeps a certain amount of deposits as reserves which is known as cash reserve ratio and provide the balance amount as loans and advances. Thus, every deposit creates a loan. Commercial banks give loans and advances against some security to the public. But the bank does not give the loan amount directly. It open an account in the name of the borrower and deposits the amount in that account. Thus, every loan creates a deposit. The loan amount can be withdrawn by means of checks. They create a deposits while lending money also. These deposits created by banks with the help of

primary deposits are called derivative deposits.

Customers use these loans to make payments. While paying they issue a checks against these deposits. The person who receives the checks, deposit it in another bank. For that bank, this will be the primary deposit. A part of the deposit will be kept as a reserve and the balance will be used for giving loans and advances. This process is repeated by other banks. When all the banks involve in this process, it is called Multiple Credit Creation.

Q5. Explain the intermediation process of banks.

Ans5. Intermediation: A situation in which a financial institution stands between counterparties in a transaction. For example, in the sale of a house, a bank usually serves as a financial intermediary by providing a mortgage to the buyer to pay the seller. In some non-traditional transactions, a bank may buy a product (e.g. corn) and immediately re-sell it for a profit to a third party. Most transactions requiring a loan to one of the parties include intermediation

Financial intermediation is an essential part of the economy of the countries of the world. Though many people may not understand economics or the way businesses and markets operate, the reality is that these processes are vitally important to the success, prosperity, and continuance of any country. Money, as people have long understood, really is a driving force and affects many different aspects of people's lives. Capitalism is centered on money because it is the ultimate goal business people seek and what is also required to reach that goal. In this complex environment of spending, earning, and negotiation, financial intermediation has an important role

Most people probably know that financial intermediation exists and takes place without recognizing it by name. To put it simply, financial intermediation is the process by which the financial intermediaries--usually banks or other similar firms--borrow money from one source to give it to another company that needs funding, investment or resources. Basically, when people put their money in a bank or other savings fund, these financial intermediaries can then use, or "borrow," this money, allowing other companies to use to create or expand their own businesses. Since the money is not being used sitting in the bank, it seems clear that it would be put to better use by allowing it to serve as investments for others.

Anyone who has any basic idea of how the economy and financial world operates understands that borrowing money is an integral part of life. Nearly everyone has borrowed money at some point, whether it is to make a large purchase, like buying a house or car, or simply to acquire goods now that they will pay for later (credit). Any big endeavor requires an initial outlay of money that most people do not have at their disposal. Therefore, any time anyone wants to create a new business, borrowing money for investment and funding is critical to the success of the fledgling company. Clearly, this money that is to be borrowed has to come from some source, and in many cases this source is financial intermediaries. Financial intermediation is so important because banks are responsible for most of the financing that occurs in economies. Although it seems risky to give one person's money to someone else while it is not being used, the reality is that this operation actually benefits people a great deal because new businesses stimulate the economy and the money the banks can make from this lending procedure helps keep them in operation, as well.

Q6. What are the strategies to manage non- interest expenses?

Ans6. Non -interest expenses represent expenditure other than interest paid on deposit and salaries and wages paid to staff. There are two components under non -interest expenses; they are

occupancy expenses and other operating expenses.

STRATEGIES TO MANAGE NON- INTEREST EXPENSESThe commercial banks operate in a competitive environment .The basic concept of banking is mobilizing the deposits from the public and investing in the forms of loans. The interest on loans is comparatively low when compared to the interest paid on deposits. The net interest margin is low.The income recognition on asset deprives the bank the benefit of considering the entire interest on loan as income.We shall analyze the strategies to control the non-interest expenses. This process primarily cut costs and increases the profitability of the bank. The bank management provides targets under non- interest expense to all branches within which they are required to spend during the year. This is cost management strategy. The cost management strategies are allocating resources to the most profitable lines of business to achieve improved performance. There are few methods of expense management strategies:

EXPENSE REDUCTION- An important way to save money is to reduce expenses. There are a lot of ways you can stretch your dollars and help avoid that "too much month at the end of the money" feeling. Some of these steps will take a bit of planning and investigation but they will be well worth the effort. Others you will be able to implement immediately. Some will require a small up-front investment but have a substantial long-term payoff. Your ability to implement those will depend on available cash and your budget.What you’ll need first, is a clear idea of where your money is going; then you can look at ways to cut fluff and lower the cost of your required living expense. Always keep in mind that it’s not just about cheaper; it’s about efficiency. Analyze your needs and do the math. Most importantly, however, is to understand that reducing expenses is a lifestyle change and a change in your thinking patterns. Never let yourself believe that pennies don't count.

OPERATING EFFICIENCIES- In a business context, operational efficiency can be defined as the ratio between the input to run a business operation and the output gained from the business. When improving operational efficiency, the output to input ratio improves.

Inputs would typically be money (cost), people (headcount) or time/effort. Outputs would typically be money (revenue, margin, cash), new customers, customer loyalty, market differentiation, headcount productivity, innovation, quality, speed & agility, complexity or opportunities.

The terms "operational efficiency", "efficiency" and "productivity" are often used interchangeably. An explanation to the difference between efficiency and (total factor) productivity is found in "An Introduction to Efficiency and Productivity Analysis".To complicate, "operational excellence" which is about continuous improvement - not limited to efficiency - is occasionally used when meaning operational efficiency. From time to time "operating efficiency" is also used with the same meaning as "operational efficiency".

REVENUE ENHANCEMENT- The top line is rapidly becoming “top of mind” as companies try to seize the growth opportunities of a rebounding economy. It’s no surprise that an analysis of Fortune 500 companies over the last decade confirms that growth is the key to shareholder value. At our organization, Revenue Enhancement is about making money— this quarter. Our approach

focuses on increasing cash flow while holding down associated Selling, General & Administrative (SG&A) costs, streamlining processes and improving performance across all of your marketing, sales and service activities.