Vous êtes sur la page 1sur 8

National Institute of Business Management

Chennai - 020
Elective: Banking Management (Part -2)
Attend any 4 questions. Each question carries 25 marks
(Each answer should be of minimum 2 pages / of 300 words)

1. Identify the recent policy measures launched by the government in the financial
sector and analyze how the banking companies have used them for their advantage.
2. Explain the changes in the nature and scope of Bank activities and operations for
performing the new role in the recent liberalized economic environment where
they are expected to perform social obligations and at the same time ensure a high
degree of operational efficiency comparable to global standards.
3. Explain the issues in transfer price mechanism in Banks.
4. Explain Credit Planning and Control System.
5. Write an essay on asset and liability management in Banks.
6. What are the Principles for the Assessment of Internal Control Systems in Banks?
Explain management oversight and the control culture.

25 x 4=100 marks

4. Explain Credit Planning and Control System

'Credit control' is the system used by a business to make certain that it gives credit only to
customers who are able to pay, and that customers pay on time. Credit control is part of the
Financial controls that are employed by businesses particularly in manufacturing to ensure that
once sales are made they are realized as cash or liquid resources.
Credit Control is a critical system of control that prevents the business from becoming illiquid
due to improper and un-coordinated issuance of credit to customers or even lending in a Financial
institution. Credit control has a number of sections that include - credit approval, credit limit
approval, dispatch approvals and well as collection process.
In a large business a credit process will be run by a senior manager and will include processes as
such as Know Your Customer(KYC), Account Opening, Approval of credit and credit limits (both
in terms of the amounts and the terms e.g 30 Days, 30 Days net), Extension of Credit and
effecting collection action.
Credit Control will normally report to the Finance Director or Risk Management Committee!
Credit Control will normally report to the Finance Director or Risk Management Committee!
Procedures for Issuing Credit
During the selling process a potential customer or even a current customer who pays cash may
request for credit lines to be extended. At this point the following process may be followed:1. Formal letter of application for credit to be extended to a customer entity 2. Head of Finance
evaluates the credit requested 3. Risk managers evaluate if the credit fits in with the current risk
portfolio 4. Credit Collection period (usually in Days) is considered both as a stand alone and as a
component of the working capital cycle in particular ensuring that it does not exceed the Payables
Period ( usually in Days too). 5. External rating agencies may be invoked to assess the risk
attached to extending credit to the customer. Usually credit worthiness of a firm may be assessed
independently by firms such as Dan & Braadstreet, Bloomburge, AC Nielsen or other reputable
firms. 6. Fillers are also made into the market to assess the creditworthiness of a firm 7. An
internal evaluation is made considering the risk of Bad or Doubtful Debts against the profit or
returns. 8. After Risk Manager & Finance Director is satisfied that the extension of credit will not
result in loss of principal. Credit is extended! 9. An account is opened with the credit setting set
for the agreed terms - Cap of Credit the Customer will enjoy and the terms or duration which they
will enjoy that credit. In other words the time-limit as well as the value of the credit are sides of
the same coin.
Managing Credit Extended
Once extended credit terms have to be rigorously applied and followed up on a regular basis- 1.
Dispatch ( in manufacturing ) cease to collect cash on delivery 2. A statement of account is
generated on a regular basis showing all the customer details including credit limit and the status

of each invoice - past due, due or not due. Typically the statement of account will be split in
credit buckets that will follow the terms: Current, 30 Days, 60 Days, 90 Days & 180 Days. 3.
Invoices must be kept to support the statement of account should a dispute arise. 4. A
Reconciliation is typically done on a regular basis to ensure that both the supplier and customers
have booked the same items and reconcile any booking differences. 5. Checks are collected on a
regular basis against the statements with a remittance advice that shows exactly what invoices
have been paid for. 6. One booking entries the paid invoices are matched so that they cease to
appear on the Statement of account. 7. If the customer does not pay on time a call is made to
follow up the credit.
Uncollectibilty of Extended Credit
Extended credit could despite all efforts made become uncollectible. In this case a professional
Debt collection agency may be hired along with attendant legal, court and other fees. This event
is normally dreaded and most Chartered Accountants are reluctant to consider that credit
extended, managed has now become uncollectible necessitating a Debt write off if the Receivable
has gone bust or a provision if only a lower amount can ultimately be collected.
Why is Credit Issued at All
Credit may be issued to spur growth in a business. Internally generated growth, customer loyalty
programs may ensure that the business increases sales revenues. Credit may also be used as part
of a business strategy to enter markets where the competition is stronger than other areas.
However credit issuance on its own accord is not a business strategy!
Risk of Credit
Unwarranted Debt may be a serious strain on the company and could lead to company failure.
Many SMEs have failed due to unsatisfactory Debt Collection process's or procedures. During
the credit crunch many businesses experienced a serious credit risk and severely curtailed
extension of credit to partner firms and business's. Even though the current situation is much less
severe credit extension remains key, pivotal role in business management.

1. Write an essay on asset and liability management in Banks.

A dramatic expression of international banking in recent years has led banks to re-examine the
traditional decision-making process. Many banks had found that their international operations
had grown in size and complexity, particularly regarding funding and lending. Additional effort
was thus required to monitor and coordinate these activities, especially with domestic money
However, the guidelines set by management for sound operations are therefore, critical for
maintaining the attractiveness of the bank. A checklist of management concerns would include
the following.
(1) Adequate capital, as the ratio of assets to capital increases, the risk to shareholders and
uninsured depositors increases but, as the ratio declines, the rate of return on capital falls off. The
happy medium is hard to find. When achieved, it is a blend of what competitors are doing , what
supervisory authorities view as appropriate, and what the banks own management think is
(2) Liquidity; it is the nature of banking to make commitments to receive and to pay out funds.
Some commitments may be fixed in advance. The bank may be required to make payment to the
holder of a certificate of despite or a Eurodollar account, to receive payment on a maturing
Treasury bill or to hold funds in its reserve account.
(3) Interest rate risk : The risk of losses resulting from movements in interest rates and their
impact on future cash-flows. Generally because a bank may have a disproportionate amount of
fixed or variable rates instruments on either side of the balance-sheet. One of the primary causes
are mismatches in terms of a bank deposits and loans.
(4) Currency risk management: The risk of losses resulting from movements in exchanges rates.
To the extent that cash-flows assets and liabilities are denominated in different currencies.
(5) Funding and capital management: As all the mechanism to ensure the maintenance of
adequate capital on a continuous basis. It is a dynamic and ongoing process considering both
short-and longer term capital needs and is coordinated with a bank's overall strategy and planning
cycles (usually a prospective time-horizon of 2 years)
(6) Profit planning and growth In addition, ALM is dealing with aspects related to credit risk as
this function is also to manage the impact of the entire credit portfolio (including cash,
investments and loans) on the balance sheet. The credit risk, specifically in the loan portfolio, is
handled by a separate risk management function and represents one of the main data contributors
to the ALM team.
In conclusion, to ensure adequate liquidity while managing the bank's spread between the
interest income and interest expense, to approve a contingency plan, to review and approve the
liquidity and funds management policy at least annually. To link the funding policy with needs
and sources via mix of liabilities or sale of assets (fixed vs floating rate funds, wholesale vs retail
deposit, money market vs capital market funding, domestic vs foreign currency funding...)

3. Explain the issues in transfer price mechanism in Banks.

Transfer pricing is a profit allocation method (the other being formulary apportionment) used to
attribute a multinational corporation's net profit (or loss) before tax to countries where it does
business. Transfer pricing results in the setting of prices among divisions within an enterprise.
Transfer prices are charges for goods and services between controlled (or related) legal entities
within an enterprise. Legal entities considered under the control of a single corporation include
branches and companies that are wholly or majority owned ultimately by the parent corporation.
Certain jurisdictions consider entities to be under common control if they share family members
on their boards of directors.
Issues in transfer price
Over 60 governments have adopted transfer pricing rules.[4] Transfer pricing rules in most
countries are based on the arms length principle that is to establish transfer prices based on
analysis of pricing in comparable transactions between two or more unrelated parties dealing at
arms length. The OECD has published guidelines based on the arm's length principle, which are
followed, in whole or in part, by many of its member countries in adopting rules. The United
States and Canadian rules are similar in many respects to the OECD guidelines, with certain
points of material difference. A few countries, such as Brazil and Kazakhstan, follow rules that
are materially different overall. Since Tax Havens do not attempt to collect taxes, they can ignore
the issue.
Tax Treaties
Double taxation can occur if one country does not accept the taxation imposed by another
country, perhaps because it considers the country a Tax haven, where unrealistically low taxes are
collected. Most tax treaties and many tax systems provide mechanisms for resolving disputes
among taxpayers and governments to reduce the potential for double taxation. Many systems also
permit advance agreement between taxpayers and one or more governments regarding
mechanisms for setting related party prices.
Jurisdictional issues
Which government should tax the MNEs income and what if both claim the same right? If we c
onsider the case where the tax base arises in more than one country, should one of the governmen
ts give tax relief to prevent double taxation of the MNEs income, and if so, which one?
These are some of the jurisdictional issues which arise with crossborder transactions.
An added dimension to the jurisdictional issue is the spectra of transfer pricing
manipulation as some MNEs engage in practices that seek to reduce their overall tax bills. This m
ay involve profit shifting through transfer pricing in order to reduce the aggregate tax burden of a
multinational group. It must be noted that the aim of reducing taxation may be a key
motive influencing an international enterprise in the setting of transfer prices for intragroup trans

actions, but it is not the only factor contributing to the transfer pricing policies
and practices of an international enterprise.
Allocation issues
MNEs are global entities which share common resources and overheads. From the perspective of
the MNE, these resources need to be allocated with maximum efficiency in the most optimal man
ner. From the governments perspective, the allocation of costs and income from the MNE resour
ces needs to be addressed to calculate the tax. There sometimes tends to be a tugofwar betwe
en countries in the allocation of costs and resources aimed towards maximising the tax base in the
ir respective nation states.
Valuation issues
Mere allocation of income and expenses to one or more members of the MNE group is not suffici
ent; the income and expenses must also be valued. This directly leads us to a key issue of transfer
pricing, the valuation of intrafirm transfers. With the MNE being
an integrated entity with the ability to exploit international differentials and utilise economies of i
ntegration not available to domestic firms, transfer prices within the group are unlikely to be the s
ame prices unrelated parties would negotiate.
In conclusion,
Transfer prices serve to determine the income of both parties involved in the crossborder transac
tion. The transfer price therefore tends to shape the tax base of the countries
involved in crossborder transaction. In any crossborder tax scenario, the three parties involved a
re the multinational group, taken as a whole, along with the tax authorities of the two
countries involved in the transaction.

1. What are the Principles for the Assessment of Internal Control Systems in Banks?
Explain management oversight and the control culture.
As part of its on-going efforts to address bank supervisory issues and enhance supervision
through guidance that encourages sound risk management practices, the Basle Committee on
Banking Supervision1 is issuing this framework for the evaluation of internal control systems. A
system of effective internal controls is a critical component of bank management and a
foundation for the safe and sound operation of banking organizations.
Principles for the Assessment of Internal Control Systems
Management oversight and the control culture
Principle 1:
The board of directors should have responsibility for approving and periodically reviewing the
overall business strategies and significant policies of the bank; understanding the major risks run
by the bank, setting acceptable levels for these risks and ensuring that senior management takes
the steps necessary to identify, measure, monitor and control these risks; approving the =
organizational structure; and ensuring that senior management is monitoring the effectiveness of
the internal control system. The board of directors is ultimately responsible for ensuring that an
adequate and effective system of internal controls is established and maintained.
Principle 2:
Senior management should have responsibility for implementing strategies and policies approved
by the board; developing processes that identify, measure, monitor and control risks incurred by
the bank; maintaining an organizational structure that clearly assigns responsibility, authority and
reporting relationships; ensuring that delegated responsibilities are effectively carried out; setting
appropriate internal control policies; and monitoring the adequacy and effectiveness of the
internal control system.
Risk Recognition and Assessment
Principle 4:
An effective internal control system requires that the material risks that could adversely affect the
achievement of the banks goals are being recognized and continually assessed. This assessment
should cover all risks facing the bank and the consolidated banking organization (that is, credit
risk, country and transfer risk, market risk, interest rate risk, liquidity risk, operational risk, legal
risk and reputational risk). Internal controls may need to be revised to appropriately address any
new or previously uncontrolled risks.

Lack of adequate management oversight and accountability, and failure to develop a strong
control culture within the bank. Without exception, cases of major loss reflect management
inattention to, and laxity in, the control culture of the bank, insufficient guidance and oversight
by boards of directors and senior management, and a lack of clear management accountability
through the assignment of roles and responsibilities. Cases also reflect a lack of appropriate
incentives for management to carry out strong line supervision and maintain a high level of
control consciousness within business areas. The absence or failure of key control structures and
activities, such as segregation of duties, approvals, verifications, reconciliations, and reviews of
operating performance.
Lack of segregation of duties in particular has played a major role in the significant losses
that have occurred at banks. Inadequate communication of information between levels of
management within the bank, especially in the upward communication of problems. To be
effective, policies and procedures need to be effectively communicated to all personnel involved
in an activity. Some losses in banks occurred because relevant personnel were not aware of or did
not understand the banks policies. In several instances, information about inappropriate activities
that should have been reported upward through organizational levels was not communicated to
the board of directors or senior management until the- 7 -problems became severe. In other
instances, information in management reports was not complete or accurate, creating a falsely
favourable impression of a business situation.
In conclusion, the internal control framework underlying this guidance is based on practices
Currently in place at many major banks, securities firms, and non-financial companies, and their
auditors. Moreover, this evaluation framework is consistent with the increased emphasis of
banking supervisors on the review of a banking organisations risk management and
Internal control processes. It is important to emphasise that it is the responsibility of a banks
board of directors and senior management to ensure that adequate internal controls are in place at
the bank and to foster an environment where individuals understand and meet their
responsibilities in this area.