Index
A
anomalous mortgage, 208
anti-money laundering (AML) and combating the financing of terrorism (CFT) measures, 138–139
arbiloans, 506
Asset Backed Securitizations (ABS), 290
for infrastructure, 162
asset class, 303
asset finance companies (AFC), 22
asset finance company (AFC), 623, 625
asset liability management, 625
assignment, 281
automated teller machines (ATM), 614, 717
automatic transfer from savings (ATS) ac-counts, 109
average yield, 172
B
balance sheet of banks, 470
bank assets
fixed assets, 78
investments, 79
loans and advances, 79
residual assets, 80
bank capital regulation, 408, 450
Basel Accords I, II and III, 409
for capital raising, 441
asset–based lending, 148
categories of borrowers, 152
common securities for, 217
credit analysis, steps, 152, 179
credit process, 149
fund-based lending, 177
gains from lending, 147
long-term loans, 149
non-fund-based lending, 148
principal representations and warranties, 155
revolving credits, 149
warning signals and, 229
banker
bankers’ acceptances (BA), 376
bankers’ lien, 205
obligations of a, 566
rights of a, 565
Bank for International Settlements (BIS), 6, 141, 464
banking. See also bank assets; banking reforms;
bank’s financial statements; banks liabilities Indian banking system
bailout of banks, 6
banks’ role as financial intermediaries, 146–147
defined, 146
globalization and innovations, 574
banking reforms
Basel Accords I, II and III, 409
committee on the financial system (CFS), 28, 31
Banking Regulation Act, 26, 38, 106, 563–564
Banking Regulation (BR) Act, 1949, 85, 563
Banking Stability Map and Indicator (BSI), 97
bank liabilities
balance of profit after appropriations, 64
borrowings, 67
capital, 67
capital reserves, 67
contingent liabilities, 67
demand deposits, 78
interest accrued, 78
inter-office adjustments, 78
payment deposits, 108
and provisions, 78
RBI guidelines for capital, 63
share premium, 78
statutory reserves, 78
term deposits, 78
in India, 54
bank reserves
bank’s financial statements
alternative models for analysis, 96
analysis of, 97
assets, 74
borrowings, 74
contingent liabilities, 61
deposits, 60
fixed assets, 61
income statement, 81
interest expended, 81
investments, 81
liabilities, 80
loans and advances, 81
net worth, 80
operating in India, 81
banks’ investment portfolio in India, 387–388
banks liabilities
external, 42
internal, 42
Barclays’ UK retail and business banking, 699
Basel Accords I, II and III, 409
financial crisis and, 59
and liquidity risk management, 194, 511
supervisory review process, 411, 414
Basel Committee on Banking Supervision (BCBS), 92, 307
borrowers, categories of, 216
reclassification of financial statements, 216
Boy Lost in the Back Row (BLITBR), 584–585
C
capital adequacy of banks in India, 89, 273, 312
calculating, 130
capital charge
for credit risk, 438
for market risk, 439
for operational risk, 441
capital funds of banks operating in India, 431
capital requirement
for interest rate (market) risk, 440, 448
for operational risk, 441
caplets, 502
cash credit system, 196
cash demand forecasting, 672
cash management service (CMS), 668
cash reserve ratio (CRR), 18, 68, 71
composition of, 68
maintenance period, 68
penal provisions, 68
central bank’s float, 38
certificates of deposits (CDs), 78
clean bills, 198
collateralized borrowing and lending obligations (CBLO), 55
collateralized debt obligations (CDO), 258, 347–348
collateralized debt obligations (CDOs), 347–348
Committee on Payment and Settlement Systems (CPSS), 408, 603
committee on the financial system (CFS), 28, 31
Companies Act, 1956, 564
consumer rights and protection applicable, 623, 642
contingent liabilities, 75, 80, 102
cooperative banking sector, 36
co-operative credit institutions, 24–25
Co-operative Societies Act, 213, 571
Corporate Debt Restructuring (CDR), 229, 239
corporate debt restructuring (CDR), 239, 247
case studies, 241
Corporation Bank, 288, 719, 721
Corrective Action Plan (CAP), 235
costs of funds and spread, 200
credit analysis
cash flow analysis, 158
common size ratio comparisons, 157–158
financial ratio analysis, 157
risk classification criteria, 165, 177
risk management system, 165–166
steps, 152
credit cards, 43, 162, 580, 610, 613
credit collateral, 304
credit default swap (CDS), 355
credit delivery modes, 195–196
in India, 256
credit indices, 349
Credit Information Bureau (India) Limited (CIBIL), 228
and loan approval, 228
Credit Information Companies (CIC), 37, 228
Credit Information Companies (Regulation)
Act, 2005, 228
credit intermediation swap, 268
credit linked deposits (CLDs), 270
credit linked notes (CLN), 269, 530
credit monitoring system, 115, 224
credit rating
analytics behind, 184
debt-equity ratio, 246
income statement–based cash flow analysis, 184
in India, 166
operating or activity ratios, 189
profitability ratios, 157, 189
valuation ratios, 191
credit rating agencies, 166–167
limitations, 172
non-credit rating services, 172
rating framework, 170
rating symbols and their interpretation by investors, 167–169
users, 169
credit rating services, 663, 666
credit review process, 2223
Basel Committee’s principles for management of, 254, 458
defined, 186
estimating PD, EAD and LGD, 310–311
interplay between market and, 351–352
measurement after the financial crisis, 352
modeling, 255
prudential norms for asset classification, 272
income recognition and provisioning, 272, 296
risk-weighted assets, calculating, 94, 420, 438, 444, 446
credit risk models, 254–255, 307, 310, 314
actuarial model, 334
Black–Scholes–Merton framework for determining default probability, 294
Credit Portfolio View (CPV), 322–323, 359
Credit Risk+™ Model, 334
expected default frequency (EDF), 326, 329–330, 333, 370
Jarrow Merton Hybrid Model, 340
Kamakura Risk Information Services (KRIS), 339
Kamakura’s Public Firm Models, 339
KMV model of determining default probability, 338
Merton Structural Model, 339, 340
Moody’s KMV (MKMV) model, 328, 331
reduced-form models, 338–339, 359
Vasicek–Kealhofer (VK) model, 328
credit risk options, 268
credit spread derivatives, 269, 296
CRISIL Ltd, 179
currency ratio, 49
Current Account Savings Account (CASA), 102, 119
customer-centric performance measures, 96
customer profitability analysis, 163, 171
customer relationship management (CRM), 561
bank–customer relationship, 565
blending tradition with technology, 563, 727
customers, category of, 283
image-building exercises, 562
rights of a banker, 565
strategies/steps, 562
D
debit cards, 576, 610, 613–614, 709
debt-equity ratio, 246
Debtor Creditor Agreement (DCA), 236, 240
debt restructuring and rehabilitation of sick firms, in India, 239
default correlation, 347, 350, 362
defensive open-market operations, 49
deferred purchase consideration (DPC), 304
deposit insurance agency (DIA), 112
Deposit Insurance Corporation (DIC) of India, 112, 507, 553, 712
deposits
accounts in select countries, 109
certificates of (CDs), 70, 376
fixed deposit scheme, 130
legal provisions, 136
payment, 173
pricing, 169
protecting the depositor, 109
recurring deposit scheme (RD), 129, 724
reinvestment deposit scheme, 129–130
schemes for non–resident Indians (NRIs), 128
derivative market, issues, 531
direct assignment, 281, 284, 292
documentary demand bills or documents against payment (D/P), 198
drawee bills, 199
Du Pont analysis of banks, 84, 97–98
‘duration’ in the context of bonds, 542
dynamic credit swap, 268
dynamic open-market operation, 49
E
economic capital, concept of, 404, 406
electronic banking (e-banking), 602, 609, 621
security issues in, 616
English mortgage, 208
e-payments and settlement systems, 603–604
Equifax Credit Information Services Pvt. Ltd., 228
equitable mortgage, 208
equity multiplier (EM), 94, 369
Excess Interest Spread (EIS), 304
quoting, 589
spot, forward, cash, tom rates, 590-591
exit load, 660
expected losses (EL), 96, 296, 455
Experian Credit Information company of India Pvt. Ltd., 228
Export Credit Guarantee Corporation of India (ECGC), 653–654
export credit refinance facility, 55
export credit scheme, 596
Export Import Bank of India (EXIM Bank), 294
exposure at default (EAD), 310, 412
External Commercial Borrowings (ECBs), 124
F
Financial Action Task Force (FATF) on money, 126
financial crisis, overview and analysis, 5, 352
insurance industry after, 645, 656
financial distress
Altman’s Z-score model, 225–226
triggers of, 224-225
workout function, 226-227
financial institutions (FIs), 2, 12, 15, 69, 123
financial receivables, 200
financial regulation
role in financial stability, 24
tools of, 10
financial repression, 27
financial stability
macroeconomic developments and, 8
Financial Stability Board (FSB), 5, 11, 39, 141, 300
financing capital, 215
fixed deposit scheme, 130, 718
foreign banks, 19, 34, 58, 98, 100
Foreign Currency Convertible Bonds (FCCBs), 244
foreign currency loan (FC L), 597–598
Foreign Currency Non Resident Repatriable (Banks) Scheme (FCNR(B)), 51
foreign exchange market (FOREX), 15, 28, 32, 587–588
bid price and offer price, 591
FOREX dealing room of a bank, 587, 590
functioning of, 589
spot, forward, cash, tom rates, 590–591
foreign exchange transactions, 49, 63, 251
forward exchange contract, 103
forward rate agreements (FRAs), 439, 494
for capital expenditure and industrial credit, 159
to consumers or retail lending, 162
loan syndication, 196
for working capital, 183, 192, 196, 213–214
funds for banks, 108, 124, 132, 365
funds management policies, 545
funds transfer pricing (FTP), 96
future payouts, 303
G
global credit crisis, 2007–08, 309, 362
global financial crisis, 2 2007–08, 5, 32, 252, 397, 547
causes of, 4
loss of trust and, 5
sovereign debt tensions and, 5
global financial system, 5, 308, 408
guaranteed investment certificates (GICs), Canada, 109
H
High Mark Credit Information Services Pvt. Ltd., 228
housing finance, 23, 141, 630–631, 642
housing finance companies (HFC), 15, 23, 36, 228, 632
I
ICICI Bank, 244, 295, 575–576, 682–683
income statement-based cash flow analysis, 158–159
income statement of banks, 85
contingent liabilities, 75, 77, 80
disclosures made by banks, 85
interest earned, 81
provisions and contingencies, 77, 82
incoterms, 594
banker–customer relationship, 126–127
termination of, 126
bank market structure, 11, 283, 590
commercial banking system, 573
customer, defined, 655
eligibility of a customer, 636
evolution of, 265
guidelines for opening a deposit account, 126
legal provisions, 136
micro, small and medium enterprises (MSME) sector, 229, 291
NDTL, computation of, 54–55, 66
non-banking financial institutions (NBFIs), 11, 20
ODTL, computation of, 66
private sector banks, 17
public financial institutions, 105
state financial corporations (SFCs), 21, 288
state industrial and development corporations (SIDCs), 21
Indian financial market
characteristics of, 9
financial instruments in, 106, 355
regulatory structure of, 14
Indian financial network (INFINEN), 55, 622
Indian Trusts Act, 1882, 138, 213
infrastructure finance companies (IFC), 22, 625
initial public offering (IPO), 32, 632, 665
insurance
contracts, features of, 605
sector in Insurance, 658
Insurance Regulatory Development Act (IRDA), 649, 652
Insurance Regulatory Development Authority (IRDA), 652–653
Inter Creditor Agreement (ICA), 236
interest rate caps and floors, 504
interest rate ‘collars,’ 504–505
interest rate derivatives in India, 494, 533–534
exchange traded, 533
OTC derivative contracts, 529
TR, 531
interest rate futures, 497–499
interest rate guarantees (IRGs), 506
interest rate options, 13, 502, 530, 537
interest rate risk management, 471–472, 534
with interest rate derivatives, 494–495
measuring interest rate risk, 142, 480, 484
interest rates, theories of, 540–541
International Accounting Standards Committee (IASC), 508
International Association of Deposit Insurers (IADI), 110
International Association of Insurance Supervisors (IAIS), 126
international financial reporting standards and the international accounting standards, 508
International Monetary fund (IMF), 12, 28, 39, 438
International Organization of Securities Commissioners (IOSCO), 126, 140
International Organization of Securities Commissions (IOSCO), 40, 143, 185
investment company (IC), 623, 625
IOSCO(International Organization of Securities Commissions), 40, 143, 167
J
Joint Lenders’ Forum (JLF), 235, 237
K
key performance indicators (KPI) for banks, 92–93
efficiency and expense control ratios, 93
risk, 81
Know Your Customer (KYC) guidelines of the RBI, 138–139
L
lending. See bank credit letter of credit (LC), 102, 199, 558, 592
LIBOR (London Inter Bank Offered Rate), 266, 494
Life Insurance Corporation of India (LIC), 649, 653–654
Liquidity Adjustment Facility (LAF), 36, 54–55
repo market instruments outside, 54
liquidity adjustment facility (LAF), 54
liquidity ratios, 157, 186, 462, 519
liquidity risk
in financial groups, 546
Northern Rock liquidity crisis, 552
sources of, 552
liquidity risk management, 511–512, 518, 534
Basel Accord and, 410, 413, 450
liquidity theory, 541
loan companies (LC), 22
loan policy document, 150
loan portfolio swap, 315, 358, 516
loan pricing, 163, 171, 220, 310
assessing default risk, 165
base rate calculation, 200, 231, 485
cost benefit loan model, 171
cost of funds, 93, 95, 102, 108
customer profitability analysis, 163, 172
fixed vs floating rates, 170, 494
fixing profit margin, 156
hedging and matched funding, 170
price leadership model, 170
RBI guidelines, 198, 257, 308, 458
service costs for customers, 154
loss given default (LGD), 251, 368, 412
LTCM colapse, case study, 384, 396
M
macroeconomic developments and financial stability, 8
managed CDO, 349
market repo, 55
market risk measurement practices after financial crisis, 397
market segmentation theory, 541
market stabilization scheme (MSS-2004), 55
market value of equity (MVE), 329, 360, 429
mergers and acquisitions, 679–680
Bank of Tokyo Mitsubishi–UFJ Bank, 562, 690
MIBOR (Mumbai Interbank Offered Rate), 169, 501
micro, small and medium enterprises (MSME) sector, 21, 229
micro finance institutions (MFIs), 17, 22
Mitakshara school of Hindu Law, 564
monetary base
and bank reserves, factors impacting, 49
in India, 39
monetary policies in Canada, 47
Eurosystem, 59
money supply, tools for regualting, 43, 46
open-market operations (OMOs), role of, 45, 49
Policy rate, 46
in select developed and developing countries, 46, 61
in USA, 8
USA and sub-prime crisis, 48
money market products, 376
Monopolies and Restrictive Trade Practices Act (MRTP Act), 679
Mortgage Backed Securities (MBS) transactions, 37, 304
mutual funds
types of, 660
Mutual Funds (MFs), 12, 64, 179
N
Narasimham Committee, banking reforms, 28, 31, 33, 53, 451
National Bank for Agriculture and Rural Development (NABARD), 21, 40
National Housing Bank (NHB), 38, 263
Negotiable Instrument Act, 1881, 556, 563
negotiable instruments, 136, 198
cheque, 556
negotiable order of withdrawal (NOW), 109
net asset value, 660
net demand and time liabilities (NDTL), 53–54
computation of, 53
Net Interest Margin (NIM), 84, 95
net worth of a bank, 74
Non-Banking Finance Companies (NBFCs), 12
non-banking financial companies (NBFCs), 32, 55
structure based on activity, 22
non-banking financial company (NBFC), 624
classification, 624
functions of, 625
major products offered by, 626
non-banking financial institutions (NBFIs), 11, 20
non-deposit funding sources, 107, 135
call/notice money, 55, 122, 142
Indian scenario, 122
share of, 364
in USA, 8
non-fund-based lending, 148, 177
non-operating expenditure, 215
non-performing assets (NPAs), 274, 438
‘non-performing’ investments, 390
Non-Resident Indians (NRIs) accounts, 78, 128
O
open market operations (OMO), 59–60
operating or activity ratios, 189
operational risk management, guidelines for, 456, 458
other financial intermediaries (OFI), 11, 40
overdue composition, 303
P
Payment and Settlement Act, 2007, 459, 604–605
pool cash flows, 303
pool duration, 303
portfolio risk, calculation of, 269
preferred habitat theory, 541
prepaid payment instruments, 615
conditional, 113
cost plus margin approach, 115
explicit costs, 114
implicit costs, 114
marginal cost of funds approach, 117–118
need for, 223
new cost of funds analysis, 118–119
upscale target, 116
primary agricultural credit societies (PACS), 24
primary dealer credit facility (PDCF), 368
primary dealers (PDs), 15, 20, 40, 122
private sector banks, 17–18, 105, 169
probability of default (PD), 94, 185, 317, 326
Prof. Bond (short for Bondop), 584–585
profitability ratios, 178, 189 Provisioning Coverage Ratio (PCR), 280
public sector banks, 16–17, 105, 442
purchasing/discounting bills, 198
pure expectations theory, 541
Q
quality spread, 542
R
RAROC/RORAC analysis, 96
RBI’s ‘Asset Liability Management (ALM), 548
Real Time Gross Settlement System (RTGS), 103
recurring deposit scheme (RD), 129, 724
redemption price, 660
export, 596
regional rural banks, 19–20, 123, 574
regulatory capital, concept of, 263, 407
reinvestment deposit scheme, 129–130
repurchase agreements (repo), 46, 62, 135
reservable liabilities (RL), 68
Reserve Bank of India Act, 1934, 563
reserve requirements in India, 67, 176, 433, 622
residential mortgage-backed securities (RMBS), 290
restructuring
defined, 209
RBI guidelines, 229
relief measures under, 230
valuation of restructured advances, 230–231
Resurgent India Bonds (RIB), 51
retail banking
emerging issues in handling, 560
nature and scope, 557
need for, 532
strategies for success in, 561, 572
retail payment systems, 606–607
paper-based instruments in, 606
return on equity (ROE), 105, 155, 404
risk index–based approach, 69–97
S
sales load, 660
securities
bank investments in security, reason for, 337–338
risks and returns of, 378
securities market products, 377
securitization, 49, 148, 257, 280, 308
companies in India, 266
securitization of assets, 49
Short-term Cooperative Credit Structure (STCCS), 25
Small Industries Development Bank of India (SIDBI), 21, 294
Societies Registration Act, 1860, 564, 571
sole proprietor, 565
South Indian Bank (SIB), 723, 726
sovereign and banking stress, 6
special investment vehicles (SIVs), 11
Special Mention Accounts (SMA), 235
signs for categorising as, 218
special purpose entities (SPEs), 270
spot rate curve, 542
State Bank of India (SBI), 16, 21, 33, 207, 305
state financial corporations (SFCs), 21, 288
state industrial and development corpora-tions (SIDCs), 21
statutory liquidity ratio (SLR), 18, 68, 123
stock market-based performance measures, 96
sub-prime mortgages, 11
swaptions, 506
Systemically Important Financial Institution (SIFI), 419–420
T
Taxpayer Relief Act of 1997, 135
term auction facility (TAF), 367
Term Deposit Facility (TDF), 127
term securities lending facility (TSLF), 368
trade finance
export credit scheme, 596
packing credit, 596
post-shipment credit, 597
trading in securities/shares, 660–661
Transfer of Property Act, 1882, 137, 204, 207
transfer systems, 588
treasury
profit, 339
treasury bills (T bills), 62, 70
U
unbiased expectations theory, 541
unexpected losses (UL), 74, 249, 296, 455
universal banking, 7, 561, 659, 661
unsecured exposure, 277
unsecured loans, 149, 202, 216, 582
urban co-operative banks (UCBs), 15, 24, 30, 55
US generally accepted accounting Principles (US GAAP), 82
usufructuary mortgage, 208
V
value at risk (VaR), 312, 380, 397, 399
venture capital market, 626
Vysya Bank (ING Vysya Bank), 685, 705, 707, 709
W
Weighted Average Loan to Value ( WAL), 303
Weighted Average Residual Maturity (WAM), 303
Weighted Average Seasoning (WAS), 303
Weighted Average Yield (WAY), 303
working capital financing, 149, 194, 213
framework for arriving at amount, 214
working capital gap (WCG), 159, 214
World Council for Credit Unions (WOCCU), 24