BANKING & WEALTH MANAGEMENT

Evolution of Banking The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Indian Banking Regulation Act 1949 was formulated to govern the financial sector. In 1921 the presidency Banks of Bengal, Bombay and Madras with their 70 branches were merged in 1921 to form the Imperial Bank of India. During the First 5 year plan in 1951, an act was passed in Parliament in May 1955 nationalizing the Imperial Bank and the State Bank of India was constituted on 1 July 1955 During the period 1906-1911, several Commercial banks such as BOI, Central Bank of India, BoB, Bank of Mysore etc were established which were all Joint Stock Banks

Definition of a Bank Indian Banking Regulation Act (1949) defines Banking as the Acceptance of money for the purpose of lending or investment, from deposits received from the public, repayable on demand or otherwise withdrawable by cheques, drafts or order to otherwise (Standing Instructions, ECS).

Nationalization of Banks First only State Bank of India (SBI) was nationalized in July 1955 under the SBI Act of 1955. Nationalization of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960. In 1969, Mrs. Indira Gandhi the then prime minister nationalized 14 banks then. These banks were mostly owned by businessmen and even managed by them.

Central Bank of India Bank of Maharashtra Dena Bank Punjab National Bank Syndicate Bank Canara Bank Indian Bank Indian Overseas Bank Bank of Baroda Union Bank Allahabad Bank United Bank of India UCO Bank Bank of India

1980 : Nationalisation of seven more banks with deposits over 200 crores.

Problems: Nationalized banks had job guarantee so employee efficiency very low, indiscipline and high absenteeism, trade union problems etc. Compare with present banks TYPE OF BANKS AND THEIR FUNCTIONS 1. 2. 3. 4. 5. 6. 7. 8. Central Bank State Bank of India Scheduled and Non Scheduled Banks Co operative Banking Retail Banking Private Banking Investment Banking Corporate Banking

1. CENTRAL BANK: RBI 1. A Central bank has the sole right of note issuance i.e. legal tender currency 2. It should be the channel, and the sole channel for the output and intake of legal tender currency. 3. It should be the holder of all the government balances, and the holder of all the reserves of the other banks and branches of banks in the country. 4. It should be the agent , so to speak, through which the financial operations, at home and abroad, of the government would be performed. 5. Based on its Monetary Policy It should further be the duty of the central bank to effect so far as it could , suitable contraction and suitable expansion on money supply based on inflationary or recessionary trends, aiming generally at stability, by using the following tools: OMO- Open Market Operation, Sterilization, CRR, SLR, Bank Rate etc- (Discussed in class, notes given) 6. When necessary, it should be the ultimate source from which emergency credit might be obtained in the form of rediscounting approved bills, or advances on approved short term securities or government papers. Lender of last resort/ Banker to Banks 7. It does not deal directly with the public. It indirectly helps agriculture, industry by augmenting resources of other banks, channeled through agencies such NABARD, SIDBI, NHB ie priority sector targets 8. Maintains the foreign exchange reserves and gold reserves for the country (Discussed in classnotes given) 9. Clearing House of Commercial Banks (Discussed in class-notes given) 10. Rediscounting bills for scheduled banks (Discussed in class-notes given) 11. Moral Suasion- Mild persuasion to banks and financial institutions to follow RBI requirements based on market situations 12. Monitoring and setting Priority Sector lending targets for banks COMPULSORY WEBSITES FOR RBI FUNCTIONS: CLEARING AND SETTLEMENT FUNCTIONS : http://www.rbi.org.in/SCRIPTs/PublicationsView.aspx?id=157 Also read: Cheque Truncated System PRIORITY SECTOR LENDING : http://www.rbi.org.in/SCRIPTS/FAQView.aspx?Id=8

2. STATE BANK OF INDIA

The State Bank of India acts as an agent of the Reserve Bank of India and performs the following functions: (1) Borrows money:- The Bank borrows money from the public by accepting deposits such as current account deposits, fixed deposits and demand deposits. (2) Lends money:- It lends money to merchants , industries and manufacturers. It also lends to farmers and co-operative institutions. It lends mostly on the security of easily realizable commodities like rice, wheat, cotton, oil-seeds, cloth, gold and government securities. The Bank can lend against agricultural bills upto a maximum period of fifteen months and incase of other bills upto a maximum period of six months. (3) Bankers Bank:-The State Bank of India acts as the bankers bank. In discharging this responsibility, the bank provides loans to commercial bank when required and also rediscount their bill. (4) It also acts as the clearing house of the commercial bank where RBI doesnot have its branches (CLEARING FUNCTIONS DISCUSSED IN CLASS). SBI and its Associate banks are responsible for clearing: SBBJ State Bank of Bikaner & Jaipur, SBH State Bank of Hyderabad, SBM State Bank of Mysore, SBIN State Bank of Indore, SBP State Bank of Patiala, SBT State Bank of Travancore. (4) Governments Bank:- The State Bank of India also acts as the agent of the Reserve Bank of India. As an agent, the State Bank of India maintains the treasuries of the State Government. The Bank also manages the debts (buying or selling of Bonds and Treasury Bills) floated by the State Governments. (5) Remittance:- The State Bank of India facilitates remittance of money from one place to another. It also helps in the transfer on the funds of the State and Central Government. (6) Functions as Central Bank:- The State Bank of India performs the functions of a Central Bank where RBI does not have its presence. (7) Subsidiary service functions:- The State Bank performs various subsidiary services also. It collects checks, drafts, bill of exchange, dividends interest, salaries and pensions on behalf of its customers.. It receives valuables and documents for safe custody and maintains safe deposit vaults 3. SCHEDULED AND NON SCHEDULED BANKS In the RBI ACT OF 1934, all banks listed in the second schedule is known as Scheduled banks All Scheduled bank operations are under strict surveillance of RBI. All nationalised banks, most private sector banks, foreign banks are scheduled. Most cooperative banks are non- scheduled (not subjected to strict financial discipline). Advantages of scheduled banks: 1. RBI can rediscount the bills already discounted by them 2.Their drafts, bank guarantee, letter of credit accepted in all government offices 3.RBI acts as lender of last resort 4. All government accounts and transaction get routed through them 5. More account holders and lesser interest payment towards deposits as compared to non scheduled banks 4. COOPERATIVE BANKING Definition by Paul Lambert: It is an enterprise formed and directed by an association of users, applying within itself the rules of democracy and directly intended to serve both its own members and the community as a whole. It is a voluntary concern with equitable participation and control among all concerned. 1. It is organized by those who themselves need credit

2. Runs as a democracy: Run by Board of Director elected on the basis of one vote per member Cosmos, Saraswat, Suvarna Sahakari etc 1. Rural Co-operative banks: predominantly agriculture credit banks-short, medium and long term to agriculture, handicraft, cottage industries. Issues: Recovery, problem of valuing land, livestock, perishable agricultural commodities, improper title of property as security, limited resources and fund shortage, high Non performing Assets, chances of financial mis-management by the management itself (corruption). 2. Urban Co-operative banks: Formed for meeting the credit requirement of the urban lower middle class which larger banks do not wish to lend due to high cost of advancing and recovery. Nor do these people have large incomes or large assets to offer as security. Membership open to traders, merchant, professionals etc who have to contribute to share capital. They have their own funds (paid up share capital) and borrowed funds (deposits from public and borrowing from other banks)

5. PRIVATE BANKING It is a part of Retail banking Catering to Super High Net worth customers- minimum account opening cheques: 4 crores (HSBC), 1 Crore (ICICI). Aim is to make fee based incomes by offering structured and specialized investment services from which bank earns commissions. Stress is mainly on customized investment products which are specifically designed for them using derivatives, Equity linked note, capital protection equity plans using Constant Proportionate portfolio investment (CPPI model) etc (Discussed in class-notes given). Lending functions are secondary and a part of the service functions. Customer service being rendered on a more personal basis, dedicated Relationship Managers with 8 to 10 years of investment experience. All products and services are offered at discounted or special rates. Deposit rates better, remittance charges waived, foreign exchange conversion rate few paises plus minus the interbank rate, loan rates discounted, documentation waived (fundamentally similar services given to HNIs in Retail banking except Investment products which are personally customized for these individual clients while in Retail HNI banking, products are customized for the entire group of customers)

6. RETAIL BANKING Basic Functions 1. Acceptance of Deposits: Classification of Deposits: Demand Deposits/Current Deposits-Repayable on demand-Savings accounts for individuals, Current Accounts for businesses (CASA) Fixed Deposits/Time Deposits/ Term Deposits The deposit is placed for a fix time period and fixed interest rate/ instructions needed for premature withdrawal. In exchange for the lack of liquidity, banks offer a higher yield on time deposits than they offer on regular savings accounts. Interest calculation for premature withdrawal of deposit and savings account interest calculation explained in class 2. Loans & Advances: Accepts funds so that they can lend out credit to customers for consumption towards cars, houses, consumer goods, construction etc

3. Use of Cheques: Since the deposits with banks are withdrawable by cheques it elevates bank deposits to the position of money 4. Banking as a part of the Financial Services industry a. Acting as an Intermediary: Collects Savings from those who have them and give to those who need them. b. Distribution of third party products such as mutual funds, insurance, RBI bonds etc c. General Utility services such as Bill payments, safety lockers, tax payments, issuing travellers cheques etc d. Non Traditional financial services in the recent times: Wealth Management and Relationship Management Services, selling gold coins Major Income Streams for Retail Banks BANKING SPREAD: The bank spread is the difference between the bank's cost of funds, in terms of interest paid to depositors, and the rate of interest the bank charges to debtors on bank loans. Interest income on term loans, home loans, personal loans , credit cards, overdrafts, cash credit. (Net Interest Income- Difference between the interest earned on Loans and Investments minus the interest paid on deposits and other borrowings) FEE BASED INCOMES: Third party incomes as Distributors of mutual funds, life insurance, general Insurance i.e. mediclaims & Property insurance, RBI Bonds, portfolio management schemes, merchant outlets: swipe machines, issuing bank guarantees, letter of credit etc FOREIGN EXCHANGE INCOMES: 1. Conversion charges on currency notes OTC 2. Conversion charges on Remittances 3. Converting foreign currency for exporters and importers 4. Foreign Currency loans to Exporters / Importers via Corporate Banking 5. Multi currency accounts (2007) for exporters with inter project fund transferability in any currency and country 6. Participating in currency futures market and holding Net Overnight Open Position limits (NOOPL) to make speculative profits from currency movements overnight INVESTMENT INCOME Income from investment in interbank call money market, Liquid & ultra short term mutual funds, government securities, Treasury bills, Certificate of Deposits, commercial papers. Negotiable Instruments Transactions related to NI are governed by the negotiable instruments act 1881. Section 13 defines a negotiable instrument means a promissory payable either to order or bearer Warehouse receipts/Bills of exchange/cheques/drafts/ certificate of deposits-unsecured borrowing by scheduled banks for a period ranging 3 months to 1 yr by issuing promissory notes/ Accommodation bill- it is a bill of exchange where a reputed third party is providing a guarantee towards repayment as a favor without any compensation for the same. This third party remains liable till the bill amount is repaid to the bank BANKS ASSETS: Loans and Banks Investments BANKS LIABILITIES: Savings account, current account, fixed deposits and bank borrowings from other sources

KYC-Know your Customer or Client/ AML- Placement, Layering and Integration/ Round Tripping of funds (Please refer to notes given in class)

Credit Creation of Banks: Loans Create Deposits Primary deposits: hard cash, cheque, drafts etc, total supply of money does not increase from that when people come and open the account with these. When banks loan out these primary deposits Derivative deposits are created which add to the money supply. Banks advance loans to Brokers, financial institutions, individuals etc and Discount Bill of exchange, promissory notes etc thereby increasing credit money supply. The loan amounts are credited to the respective borrowers accounts and they are authorised to draw cheques up to the sanctioned amounts. Therefore debt gets converted to money. Therefore the deposits of the respective borrowers bank increases. Incase the borrower is an account holder in the same bank that has advanced the loan; the deposits of the same bank will increase. Where the bank had lent out via the cheque route, the borrower will credit the cheque into his respective bank account, whether in a different bank or the same one. This will increase that banks deposit base by the equivalent amount. Thus money available for credit increases. Whenever any bank purchases an income earning asset, it credits that amount to the account of the seller, thereby indirectly creating a new deposit, which the respective borrower/seller can withdraw using cheques. Thus banks convert debt into money Balance Sheet approach: Let us assume a Deposit of INR 2000, of which the bank has to keep 20% as cash reserves and may lend the rest Step 1: Bank A Liability New Dep: Rs 2000 Total: Liab: 2000 Step 2: bank A Liability Deposit: 2000 Total: Liab: 2000

Asset New cash: 2000 Asset: 2000

Asset Cash: 400 Loan to X: 1600 Asset: 2000

Step 3 : Bank B (X is an Account holder) Liability Asset New Dep: 1600 Cash in hand: 1600 Total: Liab: 1600 Asset: 1600 Step 4: bank B Liability Deposit: 1600 Total Liability: 1600

Asset Cash in hand:320 Loan to Y: 1280 Total Asset: 1600

Step 5: Bank C (Y is an Account holder) Liability Asset

New Dep: 1280 Total: Liab: 1280

Cash in hand: 1280 Asset: 1280

Credit creation multiplier (K) K (Deposit multiplier)=1/ r , where r=percentage of deposit to be kept as liquid cash under the Fractional Reserve system with the central bank under the Cash Reserve Ratio requirement , which is currently at 5.50% Therefore K=1/5.50% which is around 18 times. Thus Credit creation can take place up to 18 times the initial deposit amount. RATES GOVERNING BANKS PLR-PRIME LENDING RATE: 5 top Commercial Banks charge between 11-15%- Prime Lending Rate (PLR) is that rate of interest at which a bank lends to its best customers with highest credit worthiness. This rate factors in operating costs, administration costs, cost of interest payment on deposits, risk premium as per creditworthiness of borrowers etc. The BASE rate of a bank factors in all these costs except for the risk premium factored in for borrowers. Thus its the minimum rate below which a bank cannot lend. CASH RESERVE RATIO: 5.5%- liquid cash that banks have to maintain with the Reserve Bank of India (RBI) or any designated Currency chest maintained at premises of approved banks deemed to be part of RBI, as a proportion of their deposits, which is 5.5% of their Net demand and time liabilities (NDTL). NDTL- Aggregate of liabilities to others (eg. Savings accounts, current accounts, fixed deposits) + net- interbank liabilities (liabilities of the bank with the banking system minus assets with the banking system) STATUTORY LIQUIDITY RATIO: 24% - SLR refers to the amount that all banks require to maintain in form of approved government securities, gold or cash, which is 24% of their net demand and Time liabilities BANK RATE: 6%- Longer term borrowing rate from RBI, it is also the Bill Re- discounting rate applicable for scheduled banks. REPO RATE: 8.5%- Short term Bank borrowing from RBI by pledging government bonds as security when banks have to meet temporary shortfalls. The banks then repay the loan by repurchasing the securities from RBI by paying the principle and the applicable rate REVERSE REPO RATE: 7.5%- Short term lending to RBI when banks have surplus liquidity. The banks park the funds with RBI, in turn RBI pledges government securities to the bank. In other words it is the borrowing rate for RBI when it borrows short term funds from banks by pledging government securities. CAR: 9%- Capital Adequacy Ratio- As per Basel 2 norms the minimum is 8% while RBI has fixed 9% as CAR -It is amount of a bank's own (Tier 1 and Tier 2 capital) expressed as a percentage of its risk weighted credit exposures i.e. (Capital/Risk weighted exposure of assets- loans & investments) determines the capacity of the bank in terms of honoring deposit withdrawals and managing other risk such as credit default risk, operational risk.

In case of Scheduled Commercial Banks CAR= 9 per cent For New Private Sector Banks CAR = 10 per cent For Banks undertaking Insurance Business CAR = 10 per cent For Local Area Banks CAR =15 per cent The government prefers banks to hold 12% CAR with 9% in Tier 1 Capital and 3% in Tier 2 capital LAF: Liquidity Adjustment facility- The RBI uses Repo and Reverse Repo to aid banks in adjusting their liquidity requirements and help in meeting Monetary policy measures.

MARGINAL STANDING FACILITY: 9.5%- The banks will use Marginal Standing Facility to borrow overnight money only when they have exhausted all other existing channels like collateralized borrowing and lending obligation (CBLO) and liquidity adjustment facility (LAF). The rate of interest on amount availed under this facility will be 100 basis points above the LAF repo rate, or as decided by the Reserve Bank from time to time. Banks can dip below 1% of their statutory liquidity ratio to avail cash from this window. Banks can avail overnight, up to one per cent of their respective Net Demand and Time Liabilities (NDTL)

ROLES AND FUNCTIONS OF DIFFERENT DEPARTMENTS 1. MIHU: May I help you: 1. Primary screening and addressing customers requirements when they enter the branch and then directing them to the respective departments as per their queries and demands. 2. Judge the potential of customers for cross sale of banking products based on their perceived net worth and thereby directing them to Branch Banking or Priority banking for either starting a new relationship or deepening existing relationship. 3. Divert customers to Alternate Delivery Channels (ADC) such as Phone Banking and Internet Banking to save the time of Service executives. 4. Assist in resolving very basic service queries 2. CUSTOMER SERVICE: Following services are performed by them 1. Operational aspect of physically opening customer Accounts post checking the accuracy of all documents and resolution of any discrepancy . Marking them according to the customer type as Special Category Client or high risk client in case hes a politician, police official etc who has enough influence to damage the banks reputation in case of any customer issue. 2. Ensuring that all KYC norms (Address proof, photo ID, photograph etc) are followed and collected during account opening 3. Follow AML guidelines diligently. Track accounts with heavy inflow/outflow and report to the relevant authorities to safeguard the interest of the bank. Also ensure that business transactions which should be through current accounts are not routed through savings accounts to get interest rate. Raise STRs i.e. Suspicious Transaction Report based on these heavy irregular fund flows 4. Keep a tab on clients whose cash flows highly exceed their mentioned profession or business.

5. Resolve queries pertaining to Credit cards, personal loans and home loans, assisting clients in their payments, change of EMI structure or part or full foreclosure and services related to accounts. 6. Responsible for service and resolution of queries pertaining to products such as interest calculation on deposits, placing fresh deposits and renewing the ones which have maturing selecting the optimum interest rates and time periods as per client specifications 7. Assist the customers in inward and outward remittances/ money transfers 8. Generating leads or Cross Sale of investments and other banking products by selling some of the products themselves like credit cards, deposits which are low involvement product or else directing the customer to the Relationship Manager for the respective product or department by generating warm leads. 9. All services pertaining to Locker opening, maintenance and collecting the charges are their responsibility 10. Maintaining Branch inventories of credit cards, debit cards, Sealed passwords for Accounts, internet banking, phone banking, account opening kits and cards. These are all held by them confidentially in fire proof lockers etc 11. Ensuring all transactions, documentation, accounts opening formalities, service standards are followed as per rules laid down by group compliance, country risk and reputation analysis before opening Non Resident accounts (CRRT-Country Risk and Reputational Table), which has a list of countries which are high risk for money laundering, terrorism financing etc. They are responsible for meeting branch audit requirements

3. TELLERS (CASHIERS) 1. Receipt and payment of cash over the counter and following certain security norms in case the amounts are very large i.e. letter from customer stating source of funds or its usage/Pan Card copy etc 2. Account to account fund transfers within the same bank/ branch. 3. Safeguard interest of customers from fraudulent practices by identifying signature mismatches and forgery on cheques, since they have a specimen signature on the records 4. Identify and destroy counterfeit currency 5. Encashment and also issuance of travellers cheques, gift cheques, and demand drafts. 6. Fund transfers via RTGS-real Time Gross Settlement-/ NEFT-National Electronic Fund transfer 7. Maintenance of Cash in ATMs 8. Exchanging foreign currency OTC (Over the Counter) 9. Acceptance and Clearing of cheques 10. Balancing the books of accounts end of day RTGS: The acronym 'RTGS' stands for Real Time Gross Settlement. RTGS system is a funds transfer mechanism where transfer of money takes place from one bank to another on a 'real time' and on 'gross' basis. Banks maintain a dedicated RTGS settlement account with RBI for outward and inward payments. This is an intra-day account. The account is funded at the start of the day from a current account held by RBI, Mumbai. The excess balance in this account at the end of the day is swept back to the current account and thereby zeroing the RTGS settlement account. This is the fastest possible money transfer system through the banking channel. Settlement in 'real time' means payment transaction is not subjected to any waiting period. The transactions are settled

as soon as they are processed. 'Gross settlement' means the transaction is settled on one to one basis without bunching with any other transaction. Minimum amount for transfer is 2 lakhs. NEFT settlement takes place 6 times a day during the week days (9.00 am, 11.00 am, 12.00 noon. 13.00 hours, 15.00 hours and 17.00 hours) and 3 times during Saturdays (9.00 am, 11.00 am and 12.00 noon). Any transaction initiated after a designated settlement time would have to wait till the next designated settlement time. Contrary to this, in RTGS, transactions are processed continuously throughout the RTGS business hours. The minimum amount to be remitted through RTGS is Rs.2 lakh. There is no upper ceiling for RTGS transactions. No minimum or maximum stipulation has been fixed for NEFT transactions. 4. BRANCH BANKING SEGMENT HSBC- Power Vantage/ Citibank-Citi Blue Mid market and Mass market Customers. The account opening cheques range from Rs.5000 for Mass market, while 1 Lac for Mid market, especially in multinationals Relationship Managers and Financial Consultants are assigned to customers to cross-sell banking products and offer wealth management services. Apart from the other products such as retail assets, credit cards etc, the focus is to primarily to sell Life Insurance with a secondary focus on mutual funds. Commissions on basic insurance products ranged from 15% to 40% on the first years premium as against 2.25% in mutual funds when Entry Load was prevalent i.e. ( 5 lac of Premium in insurance @ 40% commission gives a revenue of INR 200,000 , while approx INR 90,00,000 of MF sales gave the similar revenues) Even now with entry load ban on MFs upfront charges and reduced charges on insurance, even then insurance is much more profitable. Since Branch banking is a Volumes game and not a Value proposition the products aggressively sold are all very high revenue products, so that large percentage of income may be derived from the smaller amounts sold per customer

5. PRIORITY BANKING HSBC- Premier/ ABN Amro-Van Gogh Preferred Banking/ Citibank-Citigold/ Standard CharteredPriority Circle Value proposition with account opening amounts ranging from 25 30 lacs 1. Experienced Relationship Managers and Customer Service Managers assigned to fewer groups of customers for personalised and specialised services 2. Wealth Management Services to customers, consolidating previous, existing and fresh investments spanning equity, debt and sectoral mutual funds, stocks, bonds, gold, deposits, commodities, insurance, foreign investments, real estate etc. Thereby providing customised investment solutions which are extensively tracked, rebalanced and allocated according to customer risk profiling and cash flows 3. High focus on Structured investment products using derivatives etc are designed especially for these clients 4. Higher Deposit rates are offered, while fees are waived off in mostly all banking transactions and products 5. Very high limits offered on debit and credit cards with international service facilities included which are either free or heavily subsidised. All annual charges on cards are waived. 6. Extremely competitive rates are offered on currency conversion, while remittance charges are mostly waived or discounted

7.

Multiple account facilities in different countries offered to High Net worth clients with business interest across the globe. In one country the priority account minimum balance needs to be maintained, while in other countries it can be a zero balance account. 8. Interest Rates charged on Home loans and personal loans are at a significant discount to Branch banking customers, and also with much lesser documentation requirements 7. RELATIONSHIP MANAGEMENT 1. Wealth Management: Financial Planning, Investor risk profiling, Asset allocation & Product selection, Portfolio tracking & rebalancing (Explained in class) 2. Managing incremental cross sale of investments and other banking products 3. Retention of customers, deepen the relationship with constant interaction and ensure quality service and resolution of queries within given TAT (Turn around time) 4. Acquire new relationships and grow their balances through investments in various products. Maintain and grow CASA balances. 5. Sales of all categories of Life Insurance products i.e. market linked plans (ULIPs), term policies and Endowment Plans 6. Equity research, advisory, monitoring and stock trading through the Portfolio Management Services route 7. Constant reviewing and monitoring customers portfolios and detailed financial planning to address any need gaps using proprietary software. Thereby make changes in the portfolio based on current market levels and movements debt, equity and commodities side 8. Provide structured products to HNI clients. Most products are designed with inbuilt features to participate in the derivatives segment and involve aggressive option trading strategies and positions in Futures, to either enhance profitability or hedge risks 9. Track foreign currency markets to enable Non Resident customers profit from exchange rate fluctuations 10. Also focus on the corporate relationship segment (company accounts) as an avenue for high revenue from large company investments, by liaising with the corporate banking channel based on revenue sharing models. 11. Ensuring all audit and compliance norms are followed. Cross border investment and insurance norms have been followed. All investments have to be documented extensively capturing the minutest of investor/investment details. Anti Money Laundering measures have to be followed and country specific risk measures have to be taken as per CRRT (Country Risk Reputational Table) i.e. investments coming from Iraq, Nigeria, Zambia etc which are of risky nature

12. Conduct regular market research to review, assess, analyze, report on competitor activities of other banks and financial institutions ,and capturing changing consumer behavior and general industry trends

8. RETAIL ASSETS 1 Selling Home loans, car loans and Personal loans to existing and new customers 2. For home loans, liaison with designated lawyers and property valuers to ensure that the property to be kept as mortgage is secure with clear title, no encumbrances and with required market valuation for ensuring the security of the loan. 4. Credit managers verify customer income documents, calculate his repayment capacity and then Sanction loans. 5. The final Disbursal of loan ie. Cheque handed out to borrower, takes place post a clear legal report of the property papers from lawyers and based on the technical valuation report by property valuer of the current market value of property 6. Hold marketing events at the bank, companies, societies, clubs, malls, multiplexes etc sometimes offering concessional interest rates to promote loans. 7. Types of products: Home Loans, Loan against property, Loan against commercial property, Balance transfer, Top up . Also discuss the detailed process of Sanctioning and Disbursement of loans (Discussed in details class) 9. RETAIL LIABILITIES 1. Selling CASA: Current accounts and savings accounts 2. Selling Fixed deposits to increase the banks deposit base

10. CUSTOMER ACQUISITIONS TEAM (CAT) 1. Initiating and implementing Marketing efforts for acquiring new accounts by individual sales efforts, organizing customer meets, seminars & events 2. Procuring databases from various sources for cold calling and selling banking propositions 3. Taking customer references from existing and prospective clients for sourcing more accounts 4. Collecting and completing the required documentation for account opening 11. TRAINING & DEVELOPMENT 1. Ensure all mandatory certifications are completed by the sales and service staff and provide training for the same 2. Develop Learning & management modules covering a wide range of banking, finance and investment topics with online tests for getting a formal qualification 3. Extensive training provided on identifying money laundering trails and investments routed from high risk countries. 4. Provide training on new product launches, changes in bank policies, new technologies, rebranding and re launching existing products 5. Regular training on investments, insurance and financial planning for customers

6. Create talent pools by identifying and segregating employees based on various skill sets ranging from team management, selling skills, knowledge quotient, customer handling techniques etc by conducting regular workshops 7. Update staff on new legislations, competitor strategies and prevailing market opportunities 12. AUDIT & COMPLIANCE 1. Oversee that all branch operations are conducted based on Group compliance norms and legalities laid down by external entities such as the central bank, IRDA, AMFI etc 2. Ensure Sales Quality is maintained on all banking product sales. Checking that there is no wrong selling due to target pressure, forgery of documents while selling banking products, mismatch of signatures, investment product not matching the clients risk profile, investment tenure and age. 3. Conduct regular audit on all investment & insurance sales making sure that cross border investment norms are maintained (US, Canada Australia etc) Anti Money Laundering guidelines are followed, CRRT (Country Risk and Reputations Table) countries such as African countries etc are highlighted, documentation and records are all in order, the Sales person had all the mandatory licenses and customer interest has been met 13. RESEARCH TEAM 1. Daily updates, mails & messages on market trends and occurrences spread over all investment types 2. Compile extensive and detailed studies about markets, economics, new & existing funds, equity, global and local trends, sectors etc. 3. Track and research all mutual funds based over many parameters and compile a White list or Choice list which streamlines the best mutual funds in every sector and category based on their research which are recommended by the bank 4. Assist the sales team in closing large investment deals with their value added inputs based on views and market direction

14. BACK OFFICE OPERATIONS Back office functions. Issuance of cheque books, debit and credit cards and their respective passwords, placement and withdrawal of deposits, generating internet & phone banking passwords, generating account opening kits, bank statement etc 15. COLLECTIONS Recovery and settlement of bad loans, credit card defaults etc Customer background checks, field investigation reports and risk management measures such as verifying customers area of residence and whether he stays in a negative area , healthiness of his prior banking transactions, previous loan repayment records, credit history before the bank authorizes loans or credit cards, register name on CIBIL: Credit Information Bureau of India Limited) incase the customer defaults.

16. TREASURY FUNCTIONS

1. Cash Management & Risk management: Maintaining the cash reserves, capital and liquidity of the bank. Ensuring that the bank maintains the Cash reserve ratio and Statutory Liquidity Ratio requirements as laid down by the central bank. Participating in Repo, Interbank call money markets & CBLO in the case of shortfall and park excess money in Reverse Repo market or lend in the Call money markets in case of surplus Maintaining the Tier 1 & tier 2 capital of the bank as per the Capital Adequacy Ratio requirement laid down by RBI for the bank to adequately protect itself from any form of risk, broadly credit risk and investment risk: Tier I Capital = Ordinary Share Capital (Paid up share capital)+ Retained Earnings + Perpetual Non Cumulative Preferential shares+ Statutory Reserves*+ Capital Reserves (surplus arising out of sale proceeds of assets) + Perpetual Debt Instruments (Based on approval) *Statutory reserves Under Sec 17(1) of Banking regulation Act 1949, every banking company incorporated in India shall create a reserve fund out of the balance of profit each year as disclosed in P&L account. The transfer to the reserve fund will be before any dividends are declared, the amount being equivalent to not less than 20% of the profit Tier II Capital = Undisclosed Reserves + General Bad Debt Provision+ Revaluation Reserve + preferential share capital + Hybrid Debt instruments+ Investment Fluctuation Reserves* + Subordinate debt (Debt that is either unsecured or has a lower priority than that of another debt claim) *Investment Fluctuation Reserves- Banks are advised to build up this reserve to protect their investments against adverse developments in future. The IFR should be a minimum of 5% of the banks investment portfolio which should be built up within 5 years. This should be computed only for investments under the Held/ Available for Trading and Available for Sale categories. Banks may build this up up to 10% depending on the size and composition of their portfolio 2. Monitoring & Control of Interest Rate risk and price risks on securities Trading in money market securities (Treasury bills, Commercial papers, Certificate of Deposits etc) and government Bonds are done by banks. The Securities are maintained in 3 categories: HTM (Held to Maturity), AFS (Available for Sale) and AFT (Available for Trade) Banks have to compulsorily maintain 24% of their Net Demand and Time liabilities in Government securities and other approved Securities as per Statutory Liquidity Ratio requirement. For securities to be categorized as SLR bonds they have to have an implicit guarantee from the government both for interest and principle. Currently an average of 27-28% in these securities is being maintained by banks. The maximum HTM limit is 25% of the Net Demand and Time liabilities, and this does not have to be marked to Market (MTM) as per movement in yields/bond prices so no profits not losses need to be shown. However the additional 3% in AFS & AFT segment in banks attracts the MTM requirement, Thus losses or profits on the security holdings have to be reflected as per regulations in the Profit & Loss account. Individual securities have to be Marked to Market, Net depreciation if any has to be provisioned for by the bank. The Available for Trade category securities have to be Marked to Market every month while the Available for Sale securities need to be Marked to Market every quarter. Securities are held in AFT up to 90 days, post 90 days if they are not sold due to tight liquidity situations or extreme volatility then under extreme circumstance the bonds may be shifted to the

AFS category. This however is not an automatic route and board approval is compulsory for the same. Movement to and fro from the Held to Maturity segment happens usually once a year that too with the Board of Directors approval only. These 2 categories have to reflect the notional profits or losses arising from both Price risk and interest rate risk. (Discussed in details in class along with Futures hedging positions) Bank Treasury also participates in the derivative markets such as Interest rate futures to reduce risk from bond price fluctuations. For example go short on the underlying bond in the interest rate futures market if the Spot price of Government Securities is expected to fall, thus offsetting the loss in the Spot segment by gaining in the futures segment. (In Interest Rate futures market due to physical delivery requirement for the 10 year bond segment less participation by institutions causes illiquidity. The underlying is a notional ten year bond with 7% coupon, but delivery has to be settled with bonds maturing between 9-12 years if delivery is assigned. While even though the 90 day Treasury bill segment is cash settled but too short a maturity of the underlying prevents effective hedging discouraging high participation)

3. Maintaining the Foreign exchange reserves of the banka. Proprietary trading in foreign exchange for profitability by holding Net Overnight Open Position Limits (NOOPL) on foreign currencies and Day light trading (Intra Day trading) to make speculative gains from currency movements b. Meet foreign exchange needs of importers and exporters and giving loans and advances in foreign currency c. Make profits from foreign currency conversion both OTC and remittances making a Bid-Ask spread. Bid is the currency buying rate offered by banks which is lower than interbank rates and Ask is the selling rate quoted by the bank on the currency which is higher than interbank rates. d. Providing options for hedging of foreign currency fluctuation risks to corporates by providing OTC derivative instruments such as forward covers/ forward contracts/ Swaps. Banks make a spread on the currency as well as fee based income. e. Participate in the currency futures market (Currency derivatives). For banks to trade in currency futures they need permission from RBI, have a net worth of minimum 500 crores, a Capital Adequacy Ratio of 10%, profitable for last 3 years and have Net Non Performing Assets of less than 3% f. Banks buy foreign currency from exporters/ merchants and sell the same on the interbank forex market. They also sell foreign currency to importers by buying from the interbank forex market. Banks buy and sell in the interbank markets to square off their foreign currency balances at the end of each day making a spread income on the buying and selling rates. In case a bank maintains an open position (over bought or oversold) it exposes itself to foreign exchange fluctuation risks.

4. Capital Issuance: Implementing the raising of capital for the bank through the following methods a. Public offer through IPO or FPO, Divestment, issuance of ADRs, GDRs and Rights issue (Rights are issued whereby existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time)

b. Private placement of stocks or bonds (QIP-Qualified Institutional placements with QIB (Qualified Institutional Buyer), DII (Domestic Institutional Investor- MF/ Insurance Co), Foreign Institutional Investors, Private Equity funds , Venture Capitalist etc) c. Raising fund in the short term via the Repo window, interbank call money markets (overnight- Call money, 1 to 14 days-Notice money, 15 days up to 1 year-Term money), CBLO, COD-Certificate of deposits (7 days to 1 year unsecured promissory notes issued by scheduled banks to raise money) d. Raising long term funds through Bonds, FCCB (Foreign currency convertible bonds),CD (convertible debentures), NCD (Non convertible debentures) (Conversion premium concept explained in class)and Preferential shares (Preferential shares are not traded in the stock exchanges and share holders receive fixed percentage of dividend per share every year. The core right is that of preference in the payment of dividends. There is a negotiated fixed coupon payment with cumulative option or non cumulative. In case of bankruptcy or liquidation preferential share holders will get their part before common stock holders. Preferential share holders are not entitled to voting rights. There is cumulative and non-cumulative preference shares) d. Securitization: It is a process of aggregating a portion of existing debt of a bank where there is a cash flow receivable over a period of time into a common pool, and thereby issuing new securities backed by this pool to collect fresh funds from public or financial institutions etc. These securities are often known as MBS- Mortgage Backed Securities, CDO- Collateralized Debt Obligation and ABSAsset Backed Securities 5. Invest in short term money market instruments and government bonds to enhance profitability: a. Certificate of Deposits of other banks b. Govt Treasury bills: These are short term (up to one year) borrowing instruments of the Government of India. T-Bills for three different maturities are available: 91 days, 182 days and 364 days. Treasury Bills are available for a minimum amount of Rs.25,000 and issued at a discount to face value. On maturity the face value is paid to the holder c. Invest in Commercial papers of top companies. These are unsecured money market instruments issued in the form of promissory notes by high grade companies when they wish to borrow money for a short period (7 days to 1 year) and offering competitive interest rates d. Park excess funds in Short term Debt Mutual Fund schemes such as Cash funds/ Ultra short term bond funds/Liquid funds and Liquid plus funds where there barely any risk of capital erosion. Banks may invest up to maximum 10% of their net worth in Liquid funds e. Lend surplus in Call money markets or park excess in Reverse repo market with RBI f. Invest in government bonds g. Banks can have a direct capital market exposure of up to a maximum of 20% of their Net worth which may go towards convertible bonds, convertible debentures, equity, equity mutual fund units, and exposure to venture capitalist companies both registered or non registered. The banks investment in all these investments cumulatively cannot cross the 20% threshold of banks net worth

Type of Accounts Resident Accounts /NRE- Non Resident External/NRO- Non Resident Ordinary/FCNR/ RFC FCNR: Foreign Currency Non Resident Accounts:

In this type of accounts funds are held in foreign currencies but only in the form of foreign currency fixed deposits. The deposit rates vary according to the respective foreign currency. Foreign currency deposits such as USD, GB Pound, AUD- Australian dollar, AED (Dirham), CAD- Canadian dollar, EUR, HKD-Hongkong Dollar, JPY-Japanese Yen can be held. This foreign currency may be repatriated back abroad freely. RFC-Resident Foreign currency accounts: An Indian Resident who travels extensively abroad may open this account for depositing foreign exchange acquired from travelling abroad as payment for service or some business or the unspent amount of foreign exchange, or gift or honorarium received from abroad. These accounts may also be held by Non Resident Indians who have returned to India for permanent settlement after staying abroad for minimum 1 year. This account can be opened without any regulatory approval from RBI. These account s can hold erstwhile foreign currency held in FCNR account while they had NRI status. Income from overseas assets or income from sale of overseas assets, entire amount of pension received from abroad can be credited to these accounts. The balances from this account may be remitted abroad for bonafide purposes. In these accounts funds are held in foreign currencies. However no interest is paid on this account as it is maintained as a current account and also without any ceiling. Debits to this account has to be made as permissible under the Foreign Exchange Management Rules. Funds held in NRE and NRO savings account are in Indian Currency. Difference between NRE and NRO: 1. Funds can be freely repatriated from NRE accounts back to the foreign country, while from NRO accounts money can be transferred out only post CA certification that any taxes due to Indian government has been paid on the amount, so not very easily. The limit of repatriation on NRO is up to USD 1 million per year. 2. NRE SAVINGS account interest does not attract any tax, while NRO savings account interest attracts tax 3. In NRE accounts, the interest rates on deposits are not taxed, and are now decontrolled without any upper cap set by RBI, so banks are offering high competitive rates unlike earlier which are comparable domestic rates. NRO account deposit interest rates are taxed as per investors tax slab 4. One cannot deposit domestic currency (rupees) in the NRE account, only foreign currency. Which then gets converted into Indian rupees and then credited to the account. While in NRO accounts Indian currency and foreign currency both can be deposited. And then the foreign currency gets converted to rupees. 5. One can transfer funds from NRE to NRO but not vice versa

8. INVESTMENT BANKING 1. Investment banking is a field of banking that aids companies in acquiring funds, through the public or through Venture capitalists, Private equity funds and Mezzanine funds. Thus through investment banking, an institution generates funds in two different ways. a. They may draw on public funds through the capital market by selling stock in their company b. They may also seek out venture capital or private equity in exchange for a stake in their company. (ANGEL INVESTORS) Venture capital and Private equity Funds typically invest in early-stage, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO

or sale of stake in the company in the secondary markets. These investments are generally made as cash in exchange for shares in the invested company. Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms. Venture Capitalists look more towards new early ventures which are starved of funds with exponential growth potential while PE firms look more towards high growth existing companies in need of funds. Venture Capitalists mostly invest in unlisted companies and then make huge gains when the company is listed, post which they exit by selling their stake and making exponential profits Mezzanine funds are like a hybrid PE fund acquiring part equity and part debt to finance the expansion of existing companies. The debt holding provides for regular interest payment, while superior upside comes from the equity holding. The debt capital also gives the Fund the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. In India, the venture capital funds (VCFs) can be categorised into the following groups:Those promoted by the Central Government controlled development finance institutions such as IFCI Venture Capital Funds Limited (IVCF), SIDBI Venture Capital Limited (SVCL) Those promoted by State Government controlled development finance institutions: Gujarat Venture Finance Limited (GVFL),Kerala Venture Capital Fund Pvt Ltd, Punjab Infotech Venture Fund, Hyderabad Information Technology Venture Enterprises Limited (HITVEL).Those promoted by public banks: Canbank Venture Capital Fund, SBI Capital Markets Limited . Those promoted by private sector companies, for example:IL&FS Trust Company Limited, Infinity Venture India Fund

2. An investment banking firm also does a large amount of Fee based consulting on Mergers, Acquisitions and Take Overs. Mergers : They combine two or more previously separate firms into a single legal entity. The combined business, through structural and operational advantages secured by the merger, can cut costs and increase profits, boosting shareholder values for both groups of shareholders. The sum of its parts is worth more than the individual parts. In a merger of two corporations Acquisitions: It is characterized by the purchase of a smaller company by a much larger one Takeover: Hostile or otherwise involves buying the management rights through outright purchase of shares 3. Track the market in order to give advice on when to make public offerings and how best to manage the business assets, when to sell them and the pricing for the same. Also advice on debt restricting and company restructuring. 4. Fee based consultative activities such as buy-and-sell advice on equities, commodities, debt, derivatives, advisory on foreign exchange trading and calls based on foreign currency fluctuations and predictions.

5. Merchant banking services to companies for equity sale (IPO/FPO) such as price band calculation, price discovery, Lot size, timing for sale, pricing based on over and under subscription etc 6. Advisory on divestment/disinvestment. On the stake sale, the proportion of dilution, timing, pricing etc. 7. Underwriting services for IPO/FPO/Bond issues: This is a way of placing a newly issued security, such as stocks or bonds, with investors both retail & institutional. Investment Banks take on the risk of distributing the securities to investors. Should they not be able to find enough investors, then they have to purchase the securities themselves. Underwriters make their income from the price difference, or underwriting spread, between the price they pay the issuer and what they collect from investors or from broker-dealers who buy portions of the offering sometimes they earn fixed underwriting fees, commission on sales , but mostly underwriting spread

8. Bridge Financing: These are Short term temporary loans given to companies before they secure long term permanent ones. They also providing short term financing to companies before their IPO for the maintenance of operations. These funds are usually supplied by the investment bank while they are underwriting the new issue. As payment, the company acquiring the bridge financing usually gives a number of shares at a discount to the issue price to the investment bank that equally offsets the loan amount with interest. 9. Investment advisory in highly specialised or niche investment options where the risk and return probability is very high. The investment bank manufactures structured products which are derivatives based and customised to suit specific customer requirements and designed to optimise on current and future market trends.

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SARFAESI ACT 2002 The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court. The Act provides three alternative methods for recovery of non-performing assets, namely:

Securitization: It is the process of aggregating existing debt instruments, many times even illiquid debts, in a common pool, then issuing new securities backed by the pool to raise fresh funds. All assets can be securitized so long as they are associated with cash flows. Asset Reconstruction : Restructuring existing loans and selling the bad loans to Asset Reconstruction companies Enforcement of Security without the intervention of the Court

The provisions of this Act are applicable only for NPA loans with outstanding above Rs. 1.00 lac. NPA loan accounts where the amount is less than 20% of the principal and interest are not eligible to be dealt with under this Act. Non-performing assets should be backed by securities charged to the Bank by way of hypothecation or mortgage or assignment. The Act empowers the Bank:

To issue demand notice to the defaulting borrower and guarantor, calling upon them to discharge their dues in full within 60 days from the date of the notice. To give notice to any person who has acquired any of the secured assets from the borrower to surrender the same to the Bank.

To ask any debtor of the borrower to pay any sum due or becoming due to the borrower

Different categories of collateral kept with banks Mortgage: It is the transfer of interest to the lender in specific immovable property for the purpose of securing a loan, on the condition that this interest will be returned to the owner when the terms of the mortgage have been satisfied. It is a security for the loan that the borrower provides to the lender. The ownership remains with the borrower, but some rights are transferred to the bank such as recovering its dues by selling the property. Most prevalent is Equitable mortgage where all the original title deeds of the property and General Power of Attorney is given to the bank and taken back by the borrower once loan is repaid. Pledge: There should be bailment of goods. Bailment is derived from the French word bailer which means to deliver. The objective of the bailment should be to hold the goods as security for the payment of a debt or the performance of a promise. There is actual or constructive delivery of goods to the lender. The bank is the Plegee, who enters into an explicit contract with borrower (Pledgor) under which the securities are delivered to the bank. This then can get liquidated and sold by the bank in case of non payment. Hypothecation: Hypothecation is a charge against property for an amount of debt where neither ownership nor possession is passed to the creditor. Hypothecation is a charge against movable property. The goods will, unlike a pledge, be retained by the borrower and be in the borrowers possession. The borrower gives only a letter stating that the goods are hypothecated to the banker as security for the loan granted. Legally the borrower cannot sell these goods till the time the repayment is made. The document contains a clause that obligates the borrower to give possession of the goods to the bank on demand by the bank. Difference between the three: In a mortgage there is transfer of interest in the immovable property till the re-payment of the loan and borrower has to sign General power of attorney in favour of the bank which remain worthy until the full & final payment. Hypothecation involves movable property which is given as security for the loan however the possession of movable property remains with the debtor. In the case of pledge too, movable property is the security, but here, the creditor i.e. bank, is given physical possession of the movable property.

Assignment: The borrower assigns actionable claims to the bank. Actionable claims or receivables due to the borrower are money due from government departments or semi government

organizations or receipts from Life insurance policies. The bank gets absolute right over the funds assigned to it and other creditors of the borrower do not get priority over the bank in realizing their dues from the assigned debt. Bankers Lien: Lien is the right of the bank to retain the securities given by the borrower until the debt due is fully repaid. There is General Lien which confers the right to the bank to retain any goods bailed to them till payment is recovered. And there is Particular Lien where specific securities are earmarked for specific debt. The bank has the right to sell the goods and securities of the borrower defaults.

Wealth Management Wealth management is a service provided by financial institutions to help individuals and companies to protect and grow their wealth. This advanced investment advisory discipline involves providing a diverse range of services, such as financial planning, investment management, tax planning and cash flow and debt management, customized and based on client requirements and his risk appetite. and thereby investing his capital in a wide range of investment types and asset classes such as mutual funds, insurance, stocks, commodities, bonds, real estate, bullion etc There are two aspects to the wealth management process. One is protecting assets from market crashes or slowdowns, availing tax advantages and capitalizing or hedging against unexpected events. Secondly, growing the asset values through methods that actively manage risk and reward attempting to make financial gains for clients beating given benchmark returns. Wealth Management entails 2 distinct objectives for customers: 1. Asset management: which involves investing said amount in different asset classes, ensuring appreciation of capital, protection of portfolio, tracking, rebalancing portfolio and capital growth. 2. Liability Management: Studying customers existing liabilities such as business loans, home loans, personal loans etc and providing the required Life insurance cover to protect his family from heavy outflows towards loan repayment in case of his premature death. Also providing adequate cover to customer to ensure his family get a big lump sum or certain fixed income for atleast 5, 10, 15 years to maintain their existing living standards in the case of customers unexpected death. Thus understanding the customers risk appetite, short term & long term financial goals such as childrens education/ marriage, retirement planning, future asset purchases or business plans, his current financial assets- cash, mutual funds, bonds, deposits etc, fixed assets-land, property, gold, etc, no of dependants, tenure of investments, age and investment experience a suitable financial plan is made allocating funds spread over mutual funds- (equity, debt, gold, balanced etc), insurance, PMS, Structured products, fixed deposits etc Mutual Funds A mutual fund is a professionally managed and regulated investment trust, with a collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-

term money market instruments, and/or other securities based on the objective of the scheme, on behalf of the investors. A single Mutual fund house may have several different schemes investing in these specific asset types. Individual investors own a percentage of the value of the fund represented by the number of units they purchased and thus share in any gains or losses of the fund. The mutual fund has a fund manager that trades the pooled money on a regular basis with an aim to beat benchmark returns. Origination of Mutual Funds First MF was UTI established in1963 and set up by RBI . First scheme was Unit Scheme 1964, popularly known as US64. Entry of Public Sector Funds in 1987 ie SBI mutual Funds, Canbank, Punjab national Bank MF, BBOI, BOB 1993 was entry of private sector funds ICICI,Franklin MF AUM Sept 2009- 746000 crores .Business std Net Asset Value Explain the units issued at Rs.10 Face value. Please show how the NAV rises or falls based on the underlying stock movements. Discussed in class: (Market Value of investments-Debt/Equity + Cash holding + Dividends/Interest accrued- Expenses i.e. fund management charges etc)/Total number of outstanding units. Open Ended Fund An investor can invest in this fund perpetually at any point of time. The units are redeemable by the mutual fund on demand by the investor at any point of time and the value of the underlying assets of the fund decide the current price of units which he receives. New units are issued to investors against every additional investment that the fund house receives. Closed Ended Fund In this case the fund house issues a limited number of units and is closed to new capital once it starts operating. The Units cannot be redeemed until the fund liquidates post a given tenure, which is mentioned in the offer document, whether 3 years or 5 years etc. Post launch an investor may acquire or sell units in the secondary market through brokers, investors etc based on the fund being listed on the exchange and available liquidity but not from the mutual fund house directly like an open ended fund. Few schemes may allow early exit either partially or fully but at the cost of a very heavy exit load. All ELSS are closed ended funds, one may invest at anytime, but once invested the amount is locked in 3 or 5 years

SIP Vs Lump sum Investments in a volatile market: Rupee cost averaging Discussed in class DIVIDEND and GROWTH Options: Dividends always paid on Face Value i.e. Rs.10 and not Fund Value Calculation of Dividend Payout/ Reinvestment/ Growth and changes in NAV and also the Number of units held by an investor. Discussed in class Systematic Transfer Plan Systematic transfer plan. Using this facility the investor can transfer a fixed amount from one type of fund into another type of fund of the same mutual fund house. For example, an investor can transfer fixed amount periodically from a debt fund into an equity fund or equity fund to debt within the same fund house.

Systematic Withdrawal plan Long Term Capital Gains Tax (Tax on capital gains for investments> 1 year) and Short Term Capital Gains Tax (Tax on capital gains for investments< 1 year) and Dividend Distribution Tax (DDT) LTCG on Equity Schemes & Balanced Funds (35% debt & 65% equity) is zero while STCG is 15% STCG on Non Equity/Debt funds is the normal rate of tax slab applicable eg.30% to investor while LTCG is 10.3% or 20.6% with indexation Dividend Distribution tax on equity and balanced funds (35% debt & 65% equity) is zero As per this new budget: Dividend Distribution tax on debt funds for Retail investors is 12.5% but adds up to approximately 14% ({12.5%+(10% surcharge+3% cess on 12.5%)}. Dividend Distribution tax on Liquid funds for Retail investors is 25% For Corporates as per the new budget Dividend DistributionTax is 30% on Liquid funds and debt funds Dividend distribution tax is deducted by the fund house at the time it makes the dividend payment. The ex-dividend NAV of the fund is declared after factoring in the dividend distribution tax. Capital Gains Tax: This is not charged by the fund house. It is paid by the investor directly to the tax authorities while filing the income tax return

Top Down and Bottom Up investing In the top-down approach, the fund manager determines the growth potential of an economy, the sectors and industries he expects will do well in the future. Once these are identified, he picks out investible companies within that sector or industry. This approach involves the analysis of macroeconomic factors. The bottom-up approach focuses more on the individual company. The implicit assumption here is that companies can perform well even if the sector/industry they operate in are not. Very Micro level, studying individual company intrinsic valuations, security analysis etc

TYPES OF MUTUAL FUNDS (Discussed in details in class- ready reckoner) 1.Diversified Equity Schemes: Stocks of companies from large number of sectors to diversify risk and make healthy returns by investing in high growth companies. HSBC Equity, HDFC Equity, Birla Sun life Dividend yield plus plan 2. Bluechip/ Large Cap Schemes: ( Large Cap : Market capitalisation> 10 billion USD, approx 50,000 crores) Usually Stocks would be drawn from the companies in the BSE 200 Index as well as 200 largest capitalised companies in India (since BSE captures only free float and not

promoters holding) keeping the Benchmark as the Sensex or Nifty.Eg.HDFC top 200/ Frankling India bluechip Some Funds may also buy only from the BSE Top 100 Companies such as DSP BlackRock Top 100 equity fund 3. Mid Cap Funds: : ( Mid Cap stocks : Market capitalisation between 2- 10 billion USD) The funds are benchmarked to the BSE Midcap index. Eg HSBC Midcap Fund, Sundaram Select Midcap Fund 4.Small Cap Funds: (Small Cap stocks : Market capitalisation < 2 billion USD) Sundaram SMILE- Small and Medium Indian Leading Equities, Franklin Smaller companies funds. They invest in small Size companies benchmarked to BSE Small Cap index. Most of these small cap funds are closed ended for periods such as 3 years or 5 years 6. Hybrid Funds A category of mutual fund that is characterized by portfolio that is made up of a mix of stocks and bonds, which can vary proportionally over time or remain fixed based on market conditions, risk factors etc. They can be closed ended funds or open ended. These funds are predominantly debt oriented (e.g. 70% debt & 30% equity), with larger allocation to debt . Eg HDFC hybrid fund, 7. Balanced Funds A type of Hybrid fund combining Equity, Bonds and Money Market instruments but in a Fixed proportion. They are categorised under the Equity category since they are predominantly equity. They allocate minimum 65% Equity and 35% Debt, thereby getting the tax advantage of an equity fund HDFC Prudence, Pru ICICI Balanced Fund

8. Exchange Traded Funds: Benchmark Bank Bees/ Nifty Bees/ Nifty Junior Bees/ Benchmark Liquid ETF/ Benchmark Hangseng ETF/Reliance banking ETF: These funds are traded on the stock exchange like shares for which one needs a demat account. Investors can buy and sell at intraday prices unlike ordinary mutual funds which allot days closing prices for NAV calculation. The ETF funds in India are passive funds i.e they are aligned to an underlying index identical to Index funds. In the case of other mutual fund schemes the fund house buys back and sells units to investors, but in ETF it is different. In a way, an ETF resembles a close-end scheme, where the units are not sold back to the mutual fund and investors buy and sell the fund units on the secondary market. However, there is obviously no discount to NAV like closed end funds. Also, unlike a close-end funds, in ETFs supply of units can be altered by creating additional units or extinguished by withdrawing existing ones depending on investor demand. Authorized participants (typically, large institutional investors) actually buy or sell shares of an ETF directly from or to the fund manager, and then only large blocks called Creation units, large blocks of tens of thousands of ETF shares, which are usually exchanged in-kind with baskets of the underlying securities. Authorized participants may wish to invest in the ETF shares for the long-term, but usually act as market makers on the open market, using their ability to exchange creation units with their underlying securities to provide liquidity of the ETF shares and help ensure that their intraday

market price approximates to the net asset value of the underlying assets. Other investors, such as individuals using a retail broker, trade ETF shares on this secondary market.Trading of the units on secondary market ensures that underlying stocks do not have to be sold each time to meet redemption pressures or bought thereby investors entering and exiting do not also affect existing investors. As a result an ETF has a much lower tracking error than an index fund

9. Exchange Traded Fund: Gold A Gold ETF is an ETF that has gold as the underlying security. So, the value of the ETF is derived from the value of underlying gold. A gold ETF would be a passive fund; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value. The physical gold is held by a custodian bank, and each unit is issued against physical gold held.

The units of the Gold ETF post NFO period gets traded on the stock exchange just like shares and an investor has to have a demat account for holding a Gold fund. He gets the intraday prices on buying or selling his gold fund units based on the price of the underlying gold at that time of purchase or sale of units Each Unit will be valued at the price of 1 gram of gold or 0.5 gm of gold/ Min investment amount is mostly Rs.10000 Passive mutual fund with gold as the underlying asset: All gold bullion held by the fund will be 1kg bars of 0.995 purity sourced from LBMA (London Bullion Market Association) Gold ETF: SnapShot View Fund Name Gold Benchmark ETF Kotak Gold ETF Quantum Gold Reliance Gold ETF SBI Gold ETS UTI Gold ETF Launch Date Feb-2007 Jul-2007 Feb-2008 Nov-2007 Apr-2009 Mar-2007 Rating
0Unrated

Risk Grade Return Grade 1 Year Expense --Return Ratio ------------42.34 41.84 41.70 41.45 -41.89 1.00 1.00 1.00 1.00 1.63 1.00

Unrated Unrated Unrated Unrated Unrated Unrated

10. Index Funds: These funds replicate an underlying index such as Nifty, Sensex and the portfolio is readjusted according to changes in the index. Franklin Sensex plan, HDFC Nifty plan. These are passive funds and thus were much cheaper in terms of fund management charges. They suffer from the problems of Tracking error which measures the standard deviation of the difference between the mutual fund portfolio and underlying indexs actual returns. In simple terms, the tracking error is the difference between returns from the index fund to that of the index its tracking. Lower the tracking error, closer are the returns of the fund to that of the target index. A fund with a lower tracking error is superior to one which has high tracking error. Good index funds are those which have a low tracking error preferably below one per cent. Trackin error occurs due to expense ratios, cash holding by mutual funds, volatility and fluctuations of underlying stocks or them breaking circuit filter limits etc. (Discuss reasons for tracking errorimpact cost/cash holding and how index funds take hedging positions using Futures in class)

8.REIT/ REMF- Real estate mutual fund: A real estate investment trust (REIT) is a fund that holds real estate and property directly or mortgage using capital pooled from investors. REITs could be listed on stock markets or could be unlisted but still be under the eyes of a regulatory board. REITs can be classified as -equity REIT (investing directly in properties), mortgage REITs (investing indirectly through mortgages, bonds, debentures of real estate companies) and hybrid REITs as the combination of two. A real estate investment trust (REIT) is a fund that holds real estate or mortgage using capital pooled from investors. Equity REIT typically pools money from various investors (unit-holders) to directly acquire commercial real estate, properties, land, malls etc and manage it. The rent collected from these investments is the income generated by the REIT. They also sell these properties at profits when they appreciate in value and as decided by the fund manager based on suitable market rates. Mortgage REITs buy bonds, structured obligations (CDO, MBS, SBS), directly lend to real estate companies and generate interest income just like debt funds. They do not own the real estate property they own only the real estate loans. Aim is to generate interest income Hybrid REITs combine both the features of Equity and Mortgage REIT so that they make profits on selling property once they have appreciated in value as well as get regular interest income by investing in the estate company s debt products such as bonds, debentures, Structured obligation etc.

11. Contra Funds: They choose out of favour stocks and sectors, undervalued companies which are not in limelight at present to make superior returns once the markets favour these sectors. Eg. SBI Contra fund 12. Sectoral funds: Sector specific investment concentrating on one high growth sectors with the aim to deliver superior returns than the sensex/ nifty and the broader markets. Eg. Reliance Diversified Power sector fund, Reliance banking fund, franklin FMCG fund, Prudential ICICI nfrastructure, Franklin IT fund etc 13. Thematic funds: Funds which promote a particular theme. Schemes such as HSBC advantage India fund, whose theme was consumption, infrastructure and Outsourcing , Fidelity Value India Fund whose aim is to invest in undervalued companies whose stock price is less than the companys intrinsic value, Sundaram PSU Fund which will invest only in public sector companies already listed or to be listed as the government divests its stakes further, DSP Blackrock World Gold fund etc 14. ELSS: Equity Linked Saving Schemes which are tax savers. Funds are locked in minimum 3 years and investor gets 80C benefit, which allows every year investments up to Rs.100,000 in these funds to be deducted from one taxable income. HDFC tax saver, Fidelity tax saver. These are Closed ended funds where in one may invest at any point of time, post which the amount is locked in for 3 years. Incase an investor exits early all the tax benefits of 80C are reversed.

15. Asset Allocation Funds Open ended fund which first defines an asset allocation based on an investors risk profile i.e conservative, moderate or aggressive and then factors in his age and then identifies a basket of funds within the same fund house to allocate the investment such as Life Stage funds. Example: Franklin Templeton India Life stage Fund of Funds- for the 20s age group plan puts 80% in equity and 20% debt allocation. Thus 50% FT Bluechip/ 15% Franklin T Prima/15% Templeton India growth fund/10% Templeton India Income builder fund/ 10% Templetonindia income fund. Eg. Birla SLAsset Alloc, ICICI Pru Advisor-Aggressive plan or Moderate Plan or Cautious plan etc Tactical Asset Allocation funds constantly track economy, markets and changes the asset allocation based on his views of future market opportunities or threats. 16. Quant Funds An investment fund that selects securities based on quantitative analysis. In a quant fund, the managers build computer-based models to determine whether an investment is attractive. Quant funds use an investment methodology that involves sophisticated mathematical or quantitative analysis rather than investments based on a fund managers views. asset managers such as Reliance Mutual Fund, ING Asset Management (under its portfolio management service), Religare Mutual Fund (erstwhile Lotus MF) have been offering quant funds

DEBT FUNDS

1. Interval Funds: Interval Funds in India combine the characteristics of both closed and open
ended funds. Interval Funds in India allow limited flexibility to the investors for they can be repurchased and sold at a time period that is predetermined by the fund house. That is for example it allows an exit for investors each quarter or every 6 months. The fund may have three options -- 90 days, 180 days and 365 days. The 90-day interval fund would remain closed for 90 days, after which it will remain open for five days. In an interval fund, the fund manager has the advantage of managing the corpus without having to contend with fresh inflows or outflows at varied points in time, some of which may even prove to be detrimental to the fund performance. Some funds charge an exit load in case an investor redeems at any other period other than the one defined by the fund house. Interval Funds in India have been launched by many fund houses. Invest in Money Market and other debt securities with fixed incomes to reduce interest rate fluctuation based risks.

2. Cash Management Funds/ Liquid funds/Ultra Short term Bond Funds: Invest in the CBLO/
Reverse repo market/COD up to 3 months/ Treasury bills of 91 days/ CP of up to 3 months. They are not allowed to invest in papers exceeding maturities of 91 days. Investors park money for just a few days or few weeks, for a very short duration

Liquid Plus/ Treasury Advantage Funds/ Cash Management Savings plus Plan: Invest in money market instruments such as COD , CP , NCD, CBLO, reverse repo, Treasury Bills of 91 days/ 182 days and and 364 days T bills. Money is parked by the investor between few weeks to few months and a significant portion is invested by the fund house in money market instruments maturing between 6 months up to maximum 1 year.

3. Gilt Funds: Invest in Government of India Securities or any securities guaranteed by GOI 4. Bond funds/ Floating rate Funds (Long Term 3 years/Short term 1-2 years): Long term and
short term bonds of Companies, COD, CP,NCD, CD, Structured Obligation (CDO/ABS), GOI bonds 5. Income funds-Montly Income Plans: Aim is to generate regular income along with moderate capital appreciation. They have a combination of debt and small portion in equity for upside gains. The hold Government securities, COD, NCD, Structured Obligation (CDO/ABS). They have an Equity holding between 10% to 30% based on fund house and scheme. There is both long term and short term income funds The Short term MIP usually hold 10%-15% in equity while the long term MIP hold 25% to 30% in equity. 6. FMP: Fixed Maturity Plans: FMP. A closed-end fund that invests in debt and money market instruments of the same maturity as the stated maturity of the plan. These plans declare an indicative yield (return) and a fixed tenure of lock in of funds post which the plan matures. The fund house then invests in those debt instruments which have very similar yields as the one declared by the fund house and maturity dates very close to date of maturity of fund itself. This is the only type of scheme where an indicative return is declared right at the outset of the fund launch (which is not allowed to be declared nowadays). And since the debt instruments have the maturity dates and returns very close to the FMPs maturity date and returns the investor does not get affected by adverse affects of price and interest rate risks

7. Arbitrage Funds
IDFC/ HDFC Arbitrage Funds The investment objective is to generate income by investing predominantly in arbitrage opportunities between cash and derivative market and arbitrage opportunities within the derivative segment. Also deploy surplus cash in debt securities and money market instruments to enhance returns. These are predominantly a debt oriented scheme. There are also Equity Arbitrage funds eg. Kotak Equity Arbitrage fund, which for being categorised under the equity segment and getting the tax advantages of equities, minimum 65% of the corpus has to be in equities remaining in debt which then seek arbitrage opportunities. The scheme evaluates the difference between price of a stock in futures and spot market and enters into only those trades where there is a potential arbitrage available. The fund manager may square off or roll over the positions depending on the opportunities available. The scheme is suitable for investors who have an investment horizon of 3 months and above and who want to participate in equity arbitrage market for returns better than cash funds. In these funds there is an aim to make risk free profits without any capital erosion. Thus the returns are also quite low,