Tag: Banking

  • 7 Advantages and Disadvantages of Electronic Banking

    7 Advantages and Disadvantages of Electronic Banking

    Discover the advantages and disadvantages of electronic banking. Explore the convenience and risks of managing your finances online.

    Advantages and Disadvantages of Electronic Banking: Meaning and Definitions

    Electronic banking, also known as e-banking or internet banking, refers to the use of electronic means to conduct banking transactions and access banking services. It allows customers to manage their finances efficiently through a range of online platforms and devices, including computers, smartphones, and tablets.

    Definitions:

    1. General Definition:

      Electronic banking is a form of banking in which funds are transferred through an exchange of electronic signals rather than the exchange of cash, checks, or other types of paper documents. This can include a variety of different methods and platforms.
    2. Internet Banking:

      Internet banking is a type of electronic banking that enables customers to conduct financial transactions on a secure website operated by their bank. Users can perform tasks such as checking account balances, transferring money, paying bills, and applying for loans without visiting a branch.
    3. Mobile Banking:

      Mobile banking is a service provided by a bank or other financial institution that allows its customers to conduct a range of financial transactions remotely using a mobile device such as a smartphone or tablet. Mobile banking typically operates through specially developed apps provided by the financial institutions.
    4. Telebanking:

      Telebanking, another form of electronic banking, allows customers to perform banking transactions by telephone. It provides access to account information and allows transactions like fund transfers and bill payments via an automated service or through a live customer service representative.
    5. ATM (Automated Teller Machine) Banking:

      ATM banking is a basic form of electronic banking where customers can perform activities like withdrawing cash, checking account balances, transferring funds between accounts, and even depositing checks or cash through ATMs.

    Learn about the advantages and disadvantages of electronic banking. Find out how it can simplify your financial management while considering the potential drawbacks.

    Advantages of Electronic Banking

    Electronic banking offers numerous benefits to both customers and financial institutions, streamlining financial processes and enhancing user convenience. Here are some of the key advantages:

    1. Convenience:
      • Customers can access their accounts and perform transactions 24/7 from anywhere, without the need to visit a bank branch.
      • This level of accessibility is particularly useful for people with busy schedules or those living in remote areas.
    2. Speed and Efficiency:
      • Transactions such as fund transfers, bill payments, and account inquiries are processed quickly, often in real-time.
      • Automated processes reduce the time and effort required for routine banking tasks.
    3. Cost Savings:
      • Electronic banking can be more cost-effective for both banks and customers. Banks save on operational costs, which can translate to lower fees and charges for customers.
      • Customers save on travel costs and time associated with branch visits.
    4. Enhanced Security:
    5. Better Account Management:
      • Customers have instant access to account information, enabling them to monitor transactions and manage their finances more effectively.
      • Features like alerts and notifications help users stay informed about account activities and potential issues.
    6. Range of Services:
    7. Environmental Benefits:
      • Reduced reliance on paper statements and forms helps decrease the environmental impact associated with traditional banking.
      • Electronic banking supports sustainability initiatives by minimizing the use of physical resources.

    By leveraging these advantages, electronic banking continues to evolve, providing a more seamless and efficient banking experience for both consumers and financial institutions.

    Disadvantages of Electronic Banking

    While electronic banking offers numerous advantages, it is not without its drawbacks. Here are some of the key disadvantages:

    1. Security Concerns:
      • Despite advanced security measures, electronic banking is still vulnerable to cyberattacks such as phishing, hacking, and malware.
      • Customers may fall victim to fraud or identity theft if they do not follow proper security precautions.
    2. Technology Dependence:
    3. Limited Customer Service:
      • While electronic banking offers the convenience of self-service, complex issues or disputes may require personal interaction with bank staff, which can be challenging to address online.
      • Automated systems may not provide the same level of personalized service as human representatives.
    4. Accessibility Issues:
    5. Errors and Transaction Issues:
      • Technical glitches can lead to errors in transactions, which may result in delays or financial loss.
      • Resolving such issues can sometimes be time-consuming and stressful for customers.
    6. Privacy Concerns:
      • Personal and financial information shared online is susceptible to breaches, posing risks to user privacy.
      • There is a fear among some users about the safety of their data when using electronic banking services.
    7. Lack of Physical Presence:
      • Some banking needs, like notarizing documents or handling significant changes to an account, still require a visit to a physical branch.
      • Customers who prefer face-to-face interactions may find electronic banking impersonal and less satisfying.
    8. Dependence on Power Sources:
      • Electronic devices used for e-banking need power, and any power outage can render these services inaccessible.

    In summary, while electronic banking provides significant convenience and efficiency, it is crucial to be aware of these disadvantages and take appropriate measures to mitigate potential risks.

  • 30 Difference between Public vs Private vs Investment Banking

    30 Difference between Public vs Private vs Investment Banking

    What is the Difference between Public vs Private vs Investment Banking? Public banking refers to government-owned banks serving the general public with basic financial services. Private banking offers tailored financial solutions for high-net-worth individuals, including wealth management and personalized advice. Investment banking provides financial advisory, capital raising, and strategic services for corporations and institutional clients. It facilitates mergers and acquisitions, underwrites securities, and offers trading and brokerage services.

    Difference between Public vs Private vs Investment Banking – Definition, Comparison Chart, Examples, and Key Points.

    Public vs Private vs Investment Banking in Short:

    • Public banking refers to financial institutions that are government-owned and provide banking services to the general public.
    • Private banking is tailored towards high-net-worth individuals and offers personalized financial services, including wealth management and investment advice.
    • Investment banking primarily focuses on providing financial advisory and capital-raising services to corporations, governments, and other institutional clients.

    These are the basic differences between public, private, and investment banking in a nutshell.

    30 Difference between Public vs Private vs Investment Banking Image
    Photo by Tirachard Kumtanom from Pexels

    Definition of Public Banking

    Public banking refers to the operation and management of financial institutions that are owned and controlled by the government or public entities. These banks offer a range of financial services to the general public, including deposit accounts, loans, mortgages, and other banking facilities. The primary objective of public banking is to promote economic stability, and financial inclusion, and support the overall development of the community.

    Definition of Private Banking

    Private banking is a specialized banking service primarily offered to high-net-worth individuals, affluent families, and select institutions. It provides personalized and exclusive financial solutions tailored to the specific needs of clients. Private banks typically offer services such as wealth management, investment advisory, estate planning, tax optimization, and personalized banking facilities. Client confidentiality and personalized attention are key features of private banking.

    Definition of Investment Banking

    Investment banking refers to the financial activities and services provided by specialized banks or divisions within larger financial institutions. These banks primarily focus on offering financial advisory services, facilitating mergers and acquisitions, underwriting securities offerings, and providing capital-raising solutions to corporations, governments, and institutional clients. Investment banks play a crucial role in facilitating complex financial transactions, managing risks, and providing strategic guidance on various financial matters. They often deal with underwriting securities, trading, research, and sales.

    10 Comparison Chart for the Difference between Public vs Private and Investment Banking

    Sure! Here is an expanded comparison chart highlighting the difference between Public vs Private and Investment Banking in ten different aspects:

    AspectPublic BankingPrivate BankingInvestment Banking
    OwnershipGovernment-owned or controlledPrivately owned and operatedPrivately owned and operated
    Target AudienceGeneral publicHigh-net-worth individuals, affluent familiesCorporations, governments, institutional clients
    Services OfferedBasic financial servicesTailored financial solutions, wealth managementFinancial advisory, capital-raising, strategic services
    Customer RelationsMore transactional, less personalizedPersonalized attention, client confidentialityTransactional, relationship-based
    FocusEconomic stability, financial inclusionClient needs and wealth managementThe generally lower risk profile
    RegulationGoverned by banking regulations and policiesRegulated by financial authoritiesSubject to financial regulations and compliance
    Risk ExposureAdvisory fees, underwriting fees, trading, and brokerage incomeDepends on individual client investment strategiesExposure to market volatility, regulatory risks
    Income SourcesInterest income, fees, government supportFees, investment returns, commission-basedFacilitates economic growth, capital formation, and business expansion
    Job RolesBank tellers, customer service agentsRelationship managers, investment advisorsInvestment bankers, traders, analysts, corporate finance professionals
    Social ImpactPromotes financial inclusion and stabilitySupports the wealth management of affluent individualsFacilitates economic growth, capital formation, and business expansion

    This comparison chart summarizes the key differences between public, private, and investment banking across various aspects. Each type of banking serves distinct purposes and targets different audiences, offering unique services and benefits.

    10 Examples of Differences Between Public vs Private vs Investment Banking

    Certainly! Here are 10 examples that illustrate the differences between Public, Private, and Investment Banking:

    • Ownership: Public banking is government-owned or controlled, while private banking is privately owned and operated. Investment banking is also privately owned and operated.
    • Target Audience: Public banking serves the general public, private banking caters to high-net-worth individuals and affluent families, and investment banking focuses on corporations, governments, and institutional clients.
    • Services Offered: Public banking provides basic financial services to the public, private banking offers tailored financial solutions and wealth management services, and investment banking provides financial advisory, capital-raising, and strategic services.
    • Customer Relations: Public banking tends to have more transactional relationships with customers, while private banking provides personalized attention and client confidentiality. Investment banking relationships are transactional and relationship-based.
    • Focus: Public banking aims to promote economic stability and financial inclusion, private banking focuses on client needs and wealth management, and investment banking specializes in corporate transactions such as mergers and acquisitions.
    • Regulation: Public banks are governed by banking regulations and policies, while private banks are regulated by financial authorities. Investment banks are subject to financial regulations and compliance.
    • Risk Exposure: Public banking generally has a lower risk profile, while risk exposure in private banking depends on individual client investment strategies. Investment banking is exposed to market volatility and regulatory risks.

    Additionally examples

    • Income Sources: Public banks generate income from interest, fees, and government support. Private banks generate income from fees, investment returns, and commission-based services. Investment banks earn income from advisory fees, underwriting fees, and trading and brokerage activities.
    • Job Roles: Public banking employs bank tellers and customer service agents, private banking has relationship managers and investment advisors, and investment banking includes job roles such as investment bankers, traders, analysts, and corporate finance professionals.
    • Social Impact: Public banking promotes financial inclusion and stability. Private banking supports the wealth management of affluent individuals. Investment banking facilitates economic growth, capital formation, and business expansion.

    These examples highlight the distinctions between public, private, and investment banking in terms of ownership, target audience, services offered, customer relations, focus, regulation, risk exposure, income sources, job roles, and social impact.

    10 Main key points Differences between Public vs Private vs Investment Banking

    Here are the key differences between Public vs Private vs Investment Banking:

    Certainly! Here are the 10 main key points differentiating Public, Private, and Investment Banking:

    • Ownership:
      • Public Banking: Owned and operated by the government or state authorities.
      • Private Banking: Owned and operated by individuals, partnerships, or privately-held companies.
      • Investment Banking: Owned and operated by financial institutions, offering specialized financial services.
    • Clientele:
      • Public Banking: Serves the general public, including individuals and small businesses.
      • Private Banking: Caters to high-net-worth individuals, providing customized financial services.
      • Investment Banking: Primarily works with corporations, institutions, and high-profile clients.
    • Services Offered:
      • Public Banking: Focuses on core banking services such as savings accounts, loans, and mortgages.
      • Private Banking: Provides personalized wealth management, investment advisory, and estate planning services.
      • Investment Banking: Offers services like underwriting, mergers and acquisitions, capital raising, and financial advisory.
    • Investment Activities:
      • Public Banking: Generally limited to traditional banking activities, with a conservative investment approach.
      • Private Banking: Offers a wide range of investment opportunities, including alternative investments and hedge funds.
      • Investment Banking: Engages in sophisticated investment strategies, such as trading stocks, bonds, derivatives, and commodities.
    • Client Relationships:
      • Public Banking: Often transactional, with limited personalized attention.
      • Private Banking: Focuses on building strong, long-term relationships with clients, providing dedicated relationship managers.
      • Investment Banking: Combination of transactional and relationship-based interactions, depending on the nature of the engagement.
    • Regulatory Framework:
      • Public Banking: Subject to government regulations and oversight.
      • Private Banking: Regulated by financial authorities and regulatory bodies.
      • Investment Banking: Highly regulated, complying with various financial laws and regulations.
    • Risk Exposure:
      • Public Banking: Generally has a conservative risk appetite with fewer risks involved.
      • Private Banking: Risk profiles differ depending on clients’ investment preferences and risk tolerance.
      • Investment Banking: Involves higher risks due to complex financial transactions, market volatility, and regulatory compliance.

    Besides keys

    • Focus and Expertise:
      • Public Banking: Primarily focused on retail banking services and promoting financial inclusion.
      • Private Banking: Concentrates on individualized wealth management and tailored financial solutions.
      • Investment Banking: Specializes in corporate finance, capital markets, and advisory services for large-scale transactions.
    • Income Sources:
      • Public Banking: Generates income through interest on loans, fees, and government support.
      • Private Banking: Earns income from fees, commissions, and returns on investments made on behalf of clients.
      • Investment Banking: Main sources of revenue include advisory fees, underwriting fees, and trading activities.
    • Social Impact:
      • Public Banking: Aims to provide accessible banking services to the general public, promoting financial stability and inclusion.
      • Private Banking: Generally benefits high-net-worth individuals, contributing to wealth management and preservation.
      • Investment Banking: Plays a crucial role in facilitating capital raising, fostering economic growth, and supporting corporate transactions.

    These key points outline the core differences between Public, Private, and Investment Banking, covering ownership, clientele, services offered, investment activities, client relationships, regulatory framework, risk exposure, focus and expertise, income sources, and social impact.

    Bottom line

    Public banking refers to government-owned banks that serve the general public with basic financial services. Private banking offers tailored financial solutions for high-net-worth individuals, including wealth management and personalized advice. Investment banking provides financial advisory, capital raising, and strategic services for corporations and institutional clients. Public banking promotes economic stability and financial inclusion, while private banking focuses on client needs and wealth management. Investment banking facilitates corporate transactions such as mergers and acquisitions.

    Public banking is owned by the government, private banking is privately owned, and investment banking is owned by financial institutions. Also, Public banking serves the general public, private banking caters to high-net-worth individuals, and investment banking targets corporations, governments, and institutional clients. Public banking offers basic financial services, private banking provides personalized financial solutions, and investment banking offers financial advisory and capital-raising services.

  • Difference between Wealth management vs Private banking

    Difference between Wealth management vs Private banking

    What is the Difference between Wealth management vs Private banking? Wealth management and private banking are two distinct financial services that cater to the needs of high-net-worth individuals and families. While they share similarities, there are fundamental differences between the two.

    Understanding the Difference between Wealth Management vs Private Banking – Its Definition, Comparison Chart, Examples, and Key Points.

    Wealth management involves the comprehensive management of an individual’s wealth, including investment management, financial planning, tax planning, estate planning, and risk management. Wealth managers take a holistic approach and provide personalized solutions to help clients achieve their financial goals.

    While Private banking primarily focuses on personalized banking and investment services for affluent individuals and families. Private banks offer exclusive services like asset management, estate planning, specialized lending solutions, and personalized attention. Private bankers work closely with clients to tailor financial strategies to their specific needs.

    10 Difference between Wealth management vs Private banking Image

    Photo by Ketut Subiyanto

    Definition of Wealth management:

    Wealth management refers to a comprehensive approach to managing an individual’s wealth and investment portfolio. It involves various financial services such as investment advice, portfolio management, tax planning, estate planning, and risk management. Wealth managers focus on long-term financial goals, providing holistic solutions tailored to the client’s unique circumstances.

    Definition of Private banking:

    Private banking, on the other hand, primarily focuses on personalized banking and investment services for affluent individuals and families. They typically offer a range of exclusive services, including wealth planning, asset management, estate planning, and even specialized lending solutions. Private bankers work closely with their clients, offering personalized attention and tailored financial strategies.

    10 Comparison Chart for the Difference between wealth management vs Private banking

    Sure! Here is an expanded comparison chart highlighting the difference between wealth management and private banking in ten different aspects:

    AspectWealth ManagementPrivate Banking
    FocusComprehensive management of wealthPersonalized banking and investment services
    Services OfferedInvestment management, financial planning, tax planning, estate planning, risk managementAsset management, estate planning, specialized lending solutions
    Client BaseHigh-net-worth individuals and familiesAffluent individuals and families
    Service DeliveryHolistic approach, long-term strategiesPersonalized attention, tailored financial solutions
    ExpertiseWide range of financial servicesFocus on banking and investments
    AccessibilityMore accessible to a broader range of clientsLimited to a select group of individuals
    RegulationRegulated by financial authoritiesOften has more stringent requirements
    RelationshipBuilds long-term relationships with clientsEmphasizes personalized client-banker relationship
    Fee StructureFees based on assets under managementHigher minimum investments, fees, or commissions based on services provided
    Exclusive BenefitsComprehensive financial planning services, specialized solutionsExclusive banking services, access to unique investment opportunities

    These are the main differences between wealth management and private banking. Each service has its unique focus and caters to the different needs of affluent individuals and families.

    Examples of Differences between wealth management vs private banking

    Certainly! Here are some examples that illustrate the differences between wealth management and private banking:

    • Scope of Services: Wealth management includes a wide range of financial services such as investment management, financial planning, tax planning, estate planning, and risk management. Private banking, on the other hand, focuses more on personalized banking and investment services.
    • Client Criteria: Wealth management caters to high-net-worth individuals and families who meet certain wealth thresholds. Private banking serves affluent individuals and families who may have even higher wealth criteria.
    • Service Delivery: Wealth management takes a holistic approach, providing comprehensive solutions tailored to clients’ financial goals. Private banking offers more personalized attention, taking into account clients’ preferences and providing customized financial strategies.
    • Investment Options: Wealth management firms typically offer a wide range of investment options, including stocks, bonds, mutual funds, and alternative investments. Private banks may offer exclusive investment opportunities, such as private equity or hedge funds.
    • Relationship Management: Wealth management focuses on building long-term relationships with clients, often involving multiple generations. Private banking emphasizes a personalized client-banker relationship, providing dedicated relationship managers to address clients’ financial needs.
    • Access to Services: Wealth management services are generally more accessible to a broader range of clients. Private banking services, on the other hand, are often limited to a select group of individuals who meet specific criteria.
    • Fee Structure: Wealth management firms typically charge fees based on a percentage of assets under management. Private banks may have higher minimum investment requirements and charge fees or commissions based on the services provided.

    Additionally examples

    • Regulatory Oversight: Both wealth management and private banking are regulated by financial authorities to ensure compliance with applicable laws and regulations. However, private banking may have additional regulatory requirements due to its exclusive nature.
    • Value-added Services: Wealth management firms often offer comprehensive financial planning services, including tax planning, estate planning, and philanthropic strategies. Private banks may provide additional benefits such as concierge services, exclusive events, and access to luxury services.
    • Risk Management Approach: Wealth Management takes a comprehensive approach to risk management, evaluating clients’ risk tolerance and developing strategies to mitigate risks across their financial portfolio. Private banking also considers risk management but may place more emphasis on mitigating risks within specific banking and investment activities.

    These examples highlight some of the key differences between wealth management and private banking. They showcase the distinct nature of these services, catering to the unique needs of high-net-worth individuals and families.

    Main key point Differences between wealth management vs private banking

    To summarize, the key differences between wealth management and private banking are as follows:

    • Focus: Wealth Management takes a comprehensive approach to managing an individual’s wealth. While private banking primarily focuses on personalized banking and investment services.
    • Services offered: Wealth management encompasses various financial services, including investment advice and estate planning. While private banking offers specialized banking services alongside investment management.
    • Client base: Wealth management caters to high-net-worth individuals and families. While private banking serves affluent individuals and families.
    • Service delivery: Wealth management emphasizes a holistic approach and long-term strategies. While private banking provides personalized attention and tailored financial solutions.
    • Expertise: Wealth management covers a wide range of financial services. While private banking concentrates more on banking and investments.
    • Accessibility: Wealth management is relatively more accessible to a broader range of clients. Whereas private banking is limited to a select group of individuals.
    • Regulation: Both wealth management and private banking are regulated by financial authorities. But private banking often has more stringent requirements.
    • Relationship: Wealth management focuses on building long-term relationships with clients. While private banking emphasizes a personalized client-banker relationship.
    • Fee structure: Wealth management firms often charge fees based on assets under management. While private banks may require higher minimum investments and charge fees or commissions accordingly.
    • Exclusive benefits: Wealth management firms provide comprehensive financial planning services and specialized solutions. While private banking offers exclusive banking services and access to unique investment opportunities.

    Bottom line

    Wealth management and private banking are two distinct financial services catering to high-net-worth individuals and families. Wealth management involves comprehensive management of wealth, including investment management, financial planning, tax planning, estate planning, and risk management.

    Private banking focuses on personalized banking and investment services, offering services like asset management, estate planning, specialized lending solutions, and personalized attention. There are differences in focus, services offered, client base, service delivery, expertise, accessibility, regulation, relationship, fee structure, and exclusive benefits between wealth management and private banking. Wealth management is more comprehensive, accessible, and relationship-driven, while private banking offers more personalized attention and exclusive benefits.

  • Marketing Risk Management in Banks Framework Types

    Marketing Risk Management in Banks Framework Types

    Marketing Risk Management in Banks with their Meaning, Framework, Types, and also Importance; Credit risk management has traditionally been a major challenge for banks. As deregulation progresses, the market risk becomes relatively more important due to adverse changes in market variables; such as interest rates, exchange rates, stock prices, and commodity prices. Even small changes in market variables result in significant changes in the income and economic value of banks.

    Here is the article to explain, Market Risk Management in Banks Meaning and Definition with Marketing Framework, their Types, and also Importance.

    Market risk can define as the possibility of a bank losing money due to changes in market variables. There is a risk that the value of off-balance sheet positions will affect by movements in the stock market and interest rates, exchange rates, and commodity prices.

    Market risk is the risk to bank profits and capital due to changes in market rates of interest rates or prices of securities, currencies, and stocks as well as the volatility of these prices. Market risk management offers a comprehensive and dynamic framework for measuring, monitoring, and controlling a bank’s liquidity, interest rate, currency, and equity, as well as commodity price risk, which should tightly integrate into the bank’s business strategy.

    Scenario analysis and stress tests are other tools for assessing potential problem areas in a portfolio. Identify future changes in economic conditions such as;

    • Economic/industrial turnover.
    • Market risk events.
    • Liquidity conditions.

    What can affect a bank’s portfolio is a precedent for stress testing. As the underlying assumptions change over time, test results should review periodically. Market risk arises from dynamics of market forces, which for the banking sector can include interest rate fluctuations, maturity discrepancies, exchange rate fluctuations, market competition for services and products, changes in customer preferences and requirements leading to product aging, together with changing scenarios. national and international politics and economy. These risks are like maritime hazards that can arise from any change occurring anywhere at the national and international levels.

    What is the meaning and definition of marketing risk management?

    Market risk includes the risk of financial loss due to market price movements. Market risk assessed based on, but not limited to, the following valuation factors:

    The sensitivity of a financial institution’s earnings or the economic value of its capital to adverse changes in interest rates, exchange rates, commodity, or stock prices. Management’s ability to identify, measure, monitor, and control marketing risk exposure by considering the size, complexity, and risk profile, and loss of the institution.

    The nature and complexity of interest rate risk in banking arising from non-trading positions. Where applicable, the type and complexity of market risk positions from international trade and transactions. This topic also contains specific guidelines on interest rate risk, i. H exposure of the bank’s current and future profits and capital to adverse interest rate movements, and capital market rules, regulatory capital requirements for bank holding companies, and members of government-owned banks that are significantly exposed to certain market risks.

    Marketing Risk Management Framework;

    Successful marketing initiatives require a disciplined approach that aligns objectives with management practices and tools for developing expectations, budgeting costs, and monitoring key activities. Following the traditional marketing process of strategy development, marketing planning, implementation, and evaluation, a multi-level platform of business goals, performance indicators, risk factors, and control factors should develop. These development stages should consist of the following factors:

    • Business Goals: Leadership goals for companies that drive marketing Key Performance Indicators (KPIs)
    • KPIs: Marketing metrics that track how marketing meets its needs for business objectives. They are usually market-oriented/focused and results-oriented. This KPI provides a Key Risk Indicator (KRI)
    • KRIs: They focus on the company’s business and are usually based on information (changes in customer preferences, behavior, and demands), strategic (poor strategy validation and prioritization), and operations (inefficient people, processes, and technology). KRIs are obstacles to getting good results in KPI marketing. They anticipate hazards and allow organizations to decide what needs to reduce them. KRIs usually flow into the development of Key Control Indicators (KCI).
    • KCI: They relate to management and help manage processes to achieve goals. They serve to ensure that the company does not reach the risk indicators; KCI are the resources, controls, and mitigation factors for managing risk.

    This platform combines marketing strategy with multifunctional implementation in the company. Level indicators reflect cascading top management goals with the day-to-day management of marketing programs and support for operational activities.

    Changes in marketing costs;

    For example, a credit card company looking to align its product message with the small business owner’s business needs requires a scalable marketing cost approach to managing the risks of this major change. They developed a system of indicators for key performance indicators (with a strong focus on business operations) and complemented them with risk and control indicators at the departmental level to enable rapid evaluation and adjustment of important additional procedures.

    Marketing costs control very carefully against these key figures, as distribution only increases when the measures show increased efficiency. The company was able to redistribute 100 percent of its costs to on-demand programs within 15 months and increase its average return on marketing costs by 30 percent.

    We repeat the process;

    This framework is a continuous cycle in which control, risk, and effectiveness indicators dynamically reassess, and information, strategy, and operations then adjust and improve. It designs to address the unique challenge of allocating marketing resources in a multifunctional environment where marketing has significant responsibility but the limited authority to achieve increased revenue and profitability.

    The dynamics of marketing risk management require methodologies and a set of tools that can facilitate rapid decision making and corrective action to produce successful results. However, marketing management must meet the requirements of this approach through timely decisions and adjustments in the allocation of marketing resources.

    Types of marketing risk;

    Today’s marketing environment is changing dramatically. To stay ahead of the game, you need to implement marketing techniques and strategies that take into account the risks of today’s business. Here are some of them:

    Product Brand risk;

    Any company can lose its brand value. This can be due to strong competition or poor marketing. If you overestimate the power of your brand, you may be using the wrong marketing techniques. It may be too late by the time you realize that you need to increase your efforts or expend more resources on promoting your brand.

    Incorrect calculation of your target market;

    Failure to do extensive market research, collect data in the wrong places, and misuse data can jeopardize your marketing plans. If you don’t understand your market, you can create strategies that will target the wrong people or get the wrong picture of your selling product. To create a marketing message that your target audience will love, make sure you do thorough research first.

    In today’s digital world, marketing trends change every day. When your marketing strategy is out of date, your business is at risk. Always keep an eye on the latest promotional messages in your niche, price changes, automation technology, and keep a check on what your competitors are doing.

    Promotional or advertising risk;

    The way you promote your product will have a strong impact on the success of your marketing plan. If you use a poorly calculated approach, your efforts will fail. Fake, misleading, and exaggerating news can also harm your marketing efforts. You ensure that your advertising techniques are attractive, powerful, and effective and ensure that your advertising practices are ethical.

    The Importance of a Marketing Risk Management for Business Plan;

    Risk is the main reason for uncertainty in marketing. You may wonder whether your message is reaching its intended destination; whether potential customers are responding positively, or whether your brand is recognizable. A marketing risk management plan can help you limit this risk. That’s why such a plan is important:

    Risky tasks;

    The most important role of a marketing risk management plan is for you to identify and identify any bottlenecks that your marketing team may face. Knowing what you’re dealing with can help you make the right decisions to avoid threats or minimize negative impacts. With this knowledge, you will feel more confident in developing and implementing marketing strategies.

    Risk analysis;

    The risk management plan provides you with important information about the risks you intend to take during the planning phase and after the implementation of your marketing measures. By analyzing each potential risk; you can find out how likely it is, how big, and how often it can happen. You can then change your marketing strategy to meet any challenges that stand in your way. Therefore, analyzing all the risks before starting your marketing efforts will prepare you for success.

    Planning risk response and action;

    Most threats are unique and every challenge needs to mitigate differently. With a risk management plan, you can overcome any challenge by taking precautions beforehand. You can choose to address the underlying risk, remove the driver, reduce its severity, or avoid it altogether. Once you’ve established and realized that your desired marketing message isn’t generating potential customers; you can respond with more effective strategies.

    Product Risk monitoring;

    If you keep track of all threats, you are less likely to fall victim to them. You can predict when a threat will become a serious problem and take action to counter it. In today’s marketing landscape, we constantly face challenges. Your competitors may innovate better, your customer preferences may change, or sales may decline. A risk management plan helps you monitor new and existing challenges and prepare for most of them.

    Risk management is an important process that every company should incorporate into its business operations. Implementing a risk management plan into your marketing strategy can help you anticipate all challenges, prepare for them, and avoid them altogether.

    How can I influence the bank to manage marketing risk?

    Marketing risk affects banks in two ways:

    Marketing risk is the potential error or loss that can result from a marketing plan. To limit your risk when trying to sell a product, you must have a marketing risk management plan in place. A comprehensive risk mitigation system will help you anticipate, prepare for, avoid or overcome the challenges you will face.

    • Customer requirements change due to changing economic scenarios. Therefore, banks need to improve/modify their products to make them more comfortable for customers; otherwise, the aging of the products will shift customers to other banks thereby reducing the bank’s business and profits.
    • Macroeconomic changes in national and international political and economic scenarios have different effects on the elements of risk in different business activities. This aspect has become important in modern times due to the increasing integration of world markets.
    • Since both aspects are dynamic and change is the only constant; market risks must continuously monitor and appropriate strategies developed to keep these risks within manageable limits. Because you can only manage what you can measure, risk measurement always requires immediate attention.

    Market risk can define as the risk of loss on off-balance-sheet and off-balance sheet positions due to unfavorable developments in market variables.

    Marketing Risk Management in Indian Banks;

    Market risk management should be the main concern of top management in banks. The board should clearly articulate policies, market risk management procedures, supervisory risk limits, review mechanisms, and reporting and auditing systems. The guidelines should discuss bank risk in a consolidated manner and formulate a clear risk measurement system that covers all material sources of market risk and assesses their impact on the bank. Operational regulatory constraints and line management accountability should also clearly define. The Asset Liability Management Committee (ALCO) shall act as the highest operating unit for balance sheet management within the performance/risk parameters set by the board.

    Banks also need to establish an independent middle office to monitor the level of market risk in real-time. The middle office should consist of market risk management experts, economists, statisticians; and, general bankers and be functionally able to report directly to ALCO. The middle office must also be separate from the Ministry of Finance and not take part in the Ministry of Finance’s ongoing management (ALCO) regarding compliance with supervisory/risk parameters and summarize all assumptions of market risk position in banking.

    Marketing Risk Management in Banks Meaning Definition Framework Types Importance Image
    Marketing Risk Management in Banks Meaning Definition Framework Types Importance; Image by Credit Commerce from Pixabay.
  • Interest Rate Risk in Banking Principles Management

    Interest Rate Risk in Banking Principles Management

    Interest Rate Risk in Banking, the banks define their meaning, definition, principles, example, types with Management and Business Finance; The management should be an important part of market risk management in banks. In the past, regulatory restrictions have significantly reduced many risks in the banking system. However, deregulation of interest rates has exposed them to the negative effects of interest rate risk.

    Here is the article to explain, Interest Rate Risk Management in Banking Principles Business Finance

    Interest rate risk management in banking is a potential negative impact on net interest income and is related to the vulnerability of an institution’s financial position to changes in interest rates. Changes in interest rates affect income, assets, liabilities, off-balance sheet items, and cash flows. Therefore, the objectives of interest rate risk management are to maintain profitability; the ability to increase the capacity to bear losses and ensure adequate risk compensation received, and reach a compromise between return and risk.

    The significance or meaning of interest rate risk;

    What does mean interest rate risk? Interest rate risk is the potential investment loss caused by changes in interest rates. For example, if interest rates rise, the value of bonds or other fixed-income investments falls. The change in bond prices when interest rates change knows as duration. Interest rate risk can be reduced by holding bonds with different maturities; and, investors can also reduce interest rate risk by hedging fixed-income investments with interest rate swaps, options, or other interest rate derivatives.

    Interest rate risk management aims to record the risk of non-adherence to maturity and revaluation and is measured in terms of both profit and economic value. The bank’s net interest income (NII) or net interest margin (NIM) depends on the development of interest rates. Any difference in cash flows (fixed assets or liabilities) or revaluation dates (moving assets or liabilities) will make the NII or NIM of the bank fluctuate. Returns on assets and prices of liabilities are now closely related to the volatility of market interest rates.

    The profit perspective includes an analysis of the effect of changes in interest rates on fees or reported earnings shortly. This measure by measuring changes in Net Interest Income (NII); which is the difference between total interest income and total interest expense. The economic outlook includes an analysis of the expected cash flows from assets minus the expected cash flows from liabilities plus net cash flows or balance sheet items. The economic outlook determines the risk value of the difference in long-term interest rates.

    Determination or Definition of interest rate risk in banking;

    Interest rate risk defines as the risk of changes in asset value due to interest rate volatility. It makes the security in question uncompetitive or increases its value. Although risk should arise from an unexpected move, investors are generally concerned about reducing risk. This risk directly affects holders of fixed-income securities. If the interest rate rises, the price of fixed-income security falls and vice versa.

    It banking book describes the risk to bank capital, management; and, gains from adverse interest rate developments that affect positions in the banking book. Any changes in interest rates will affect the present value of the bank’s future cash flows. This affects the basic value of the bank’s assets, liabilities, and off-balance sheet. This causes a change in its economic value. When interest rates change, it affects the bank’s bottom line, as net interest income (NII) changes; which depends on interest-sensitive income and expenses.

    Interest rate risk is the potential that changes in overall interest rates will reduce the value of bonds or other fixed-income investments:

    • If interest rates rise, bond prices fall and vice versa. This means that the market price of existing bonds will fall to offset the prices of new, more attractive bonds.
    • Interest rate risk measure by the duration of fixed-income securities, with long-term bonds being more sensitive to price changes.
    • Interest rate risk can reduce by diversifying the terms of the bonds or hedging with interest rate derivatives.

    Understanding risk opportunities;

    The feedback between interest rates and bond prices can explain by the possibility of risk. By buying bonds, investors accept that if interest rates rise; they will relinquish the option to buy bonds with more attractive yields. When interest rates rise, the demand for existing bonds with lower yields decreases as new investment opportunities arise (for example, new bonds with higher yields issue). Although fluctuations in interest rates affect the prices of all bonds, the rate of change varies between bonds.

    Different bonds show different price sensitivity to interest rate fluctuations. It is therefore important to assess the duration of a bond when assessing interest rate risk. Bonds with shorter maturities usually involve lower interest rate risk than bonds with longer maturities. With longer-term bonds, interest rates are more likely to change. Therefore, they bear the risk of higher interest rate changes.

    The principle of interest rate risk in banking;

    The Basel Committee has established the following principles for measuring and managing interest rate risk. Part one below are;

    • Risks critical to all banks must specifically identified, measured, monitored, and controlled. In addition, banks must monitor and assess CSRBB (Credit Spread Risk in the banking book).
    • The governance body of each bank is responsible for overseeing the IT governance framework and the bank’s risk appetite for IRRB. Their monitoring and management may delegate by senior management, experts, or an asset-liability management committee. Banks must have an adequate IT governance framework, including periodic independent reviews and assessments of system effectiveness.
    • Bank’s risk appetite must formulate in terms of risk, both economic value, and profit. Banks should apply policy limits to keep their exposure in line with their risk appetite.
    • Your measurements should be based on the results of economic values ​​and income-based metrics derived from abroad and a precise set of interest rate shock and pressure scenarios.
    • When measuring IRRB, the most important behavioral and model assumptions should fully understand, conceptually justified and documented. These assumptions must rigorously examine and consistent with the bank’s business strategy.
    • The measurement systems and models used should be based on accurate data and subject to appropriate documentation, tests, and controls to ensure the accuracy of calculations. The model used to measure it must be comprehensive and covered by the management process to control the risk model, including a validation function that is independent of the development process.
    Part two below are;
    • The results of your hedging assessments and strategies should report regularly to the management body or its agents at the appropriate aggregation level (by consolidation level and currency).
    • Information on exposure levels and measurement and control practices should regularly disclose to the public.
    • Capital adequacy should specifically consider as part of the Authority’s Approved Capital Adequacy Assessment Process (ICAAP) in line with the bank’s risk appetite for IRRB.
    • Supervisors should regularly obtain sufficient information from banks to monitor trends in bank credit exposure, assess the soundness of bank governance, and identify additional banks that require review and/or additional regulatory capital.
    • Supervisors should regularly evaluate this and the effectiveness of the approach banks use to identify, measure, monitor, and control IRRB. Regulators should use dedicated resources to support such assessments. The supervisory authorities should cooperate and exchange information with the competent supervisory authorities in other jurisdictions regarding the supervision of banking exposures.
    • Supervisors should publish their criteria to further identify banks. Banks identified as having extraordinary value should consider as potential illegal IRRB holders. If a bank’s exposure review reveals inadequate management or excessive risk to capital, earnings, or overall risk profile, regulators should require measures to reduce risk and/or capital gain.

    How high is the detailed interest rate risk in banking?

    In detail Interest rate risk in banks the risk due to changes in market interest rates which can harm the bank’s financial position, management. Changes in interest rates have a direct impact on bank profits through a decrease in net interest income (NII). Ultimately, the potential long-term effects of changes in interest rates will have an impact on the underlying economic value of bank assets, liabilities, and off-balance sheet items. Interest rate risk seen from these two perspectives refers to as “Profit Outlook” or “Economic Value Outlook”.

    Simply put, a high percentage of fixed-income assets means that raising interest rates will not increase interest income (because interest rates fix), and lowering interest rates will not reduce interest income either. The low proportion of fixed assets has the opposite effect.

    For the classification of securities in the trading book, the bank has set guidelines for volume, minimum period, holding period, duration, stop loss, rating standards, etc. The interest rate sensitivity declaration makes by the bank. Regulatory restrictions have been imposed on gaps in total assets, income, or equity.

    Interest rates explain using examples;

    For example, a bank accepts 13% long-term deposits and uses a 17% down payment. If the market interest rate falls by 1%; it must decrease the down payment rate by 1%, because advances revalue every three months. However, it will not be able to reduce the fixed time deposit interest. This will reduce the bank’s net interest income by 1%.

    Or let’s say the bank has a 90-day deposit of 9% in a 12% annual bond. If the market interest rate rises by 1%, the bank must renew the deposit after 90 days at a higher interest rate. However, it still receives interest from the old bond interest rates. And in this case, net interest income fell by 1%.

    Examples of interest rate risk;

    Let’s understand interest rate risk using an example.

    If the investor has invested a certain amount in a fixed rate of interest, the bond will be at its current price; which offers a 5% coupon; and, if the interest rate then rises to 6%, the bond price will fall. This is because bonds offer a 5% interest rate while the market offers a 6% yield. If the investor wants to sell these bonds in the market, then the buyer will offer a lower amount for the bonds; because these bonds have low yields compared to the market. New investors will try to achieve a return similar to the market because the amount invested is lower.

    In other words, the opportunity cost of earning better returns elsewhere increases as interest rates increase. Therefore, this leads to a decrease in the price of the binding. There are several ways to counter interest rate risk. One can buy interest rate swaps, buy calls or place options on securities, or invest in negatively correlated securities to hedge risk.

    The effect of changes in interest rates on bonds;

    Changes in interest rates have different effects on bonds with different maturities. The correlation between interest rate movements and price movements increases with increasing maturity. Because if interest rates rise, bonds with longer maturities will suffer longer from lower interest rates than bonds with shorter maturities. For this reason, investing in bonds with different maturities use as a hedging technique to combat interest rate risk.

    Changes in interest rates affect coupon bonds and no-coupon bonds differently. If we look at two types of bonds with the same maturities; they will see a sharper decline in the price of a no-coupon bond compared to a coupon bond due to rising interest rates. This is because, with zero-coupon bonds, the full amount must receive at the end of the specified term and thus increases the effective duration; whereas with coupon bonds, returns generate periodically and thus the effective payment reduces the duration.

    Interest rate risk also affects by interest rates. Bonds with lower interest rates carry a higher interest rate risk than bonds with higher interest rates. This is because small changes in the market rate can easily overwhelm the lower rate and lower the bond’s market price.

    Types of interest rate risk in banking;

    The various following types of interest rate risk in banking identified below are:

    Price Risk:

    Price risk arises when an asset sale before a specified maturity. In financial markets, bond prices and yields are inversely related. Price risk closely ties to the trading book, which should benefit from short-term interest rate movements. Therefore, banks that have active trading portfolios should formulate guidelines for limiting portfolio size, holding period, duration, offset period, stop loss limit, market marking, etc. This is the risk of changes in the price of a security that could result in an unexpected gain or loss on the sale of the security.

    Reinvestment or Investment Risk:

    Uncertainty about the rate at which future cash flows can reinvest knows as reinvestment risk. Any difference in cash flow will expose the bank to fluctuations in NII because market interest rates move in different directions. This refers to the risk of changes in interest rates that could lead to a lack of ability to reinvest at current interest rates. Also, It divides into 2 parts.

    • Duration of risk; This refers to the risk that arises from the possibility that you will not want to repay or extend an investment early after a predetermined period of time.
    • Main or Basis risks; This refers to the risk of not experiencing a reversal of changes in the interest rates of securities with an inverse characteristic.
    Interest Rate Risk in Banking Principles Management Finance Image
    Interest Rate Risk in Banking Principles Management Finance; Image by Gerd Altmann from Pixabay.
  • Corporate Banking: Meaning Characteristics Importance Advantages

    Corporate Banking: Meaning Characteristics Importance Advantages

    What is Corporate Banking? Corporate banking is a significant division of commercial banks. This is a relatively new concept that has been adopted by many banks. This article explains Corporate Banking with its topic of Meaning, Definition, Characteristics, Bank list, Difference, Importance, and Advantages. Corporate banking is a subset of business banking that involves a range of banking services that offer only to corporates. The services include the provision of credit, cash management facilities, etc. Many business owners may go as far as using a different bank for their corporate account to ensure funds are not being muddled up. Furthermore, most companies require that you open a corporate account for the value proposition of your business to become valid.

    Here are explain Corporate Banking: Meaning, Definition, Characteristics, Bank list, Difference, Importance, and Advantages.

    Corporate banking also refers to business banking that identifies with the items and services that include loaning or credits between the bank and the bank’s client. The corporate banking segment of banks typically serves a diverse clientele, ranging from small-to-mid-sized local businesses with a few million in revenues to large conglomerates with billions in sales and offices across the country.

    Definition of Corporate Banking:

    By ICICI Bank, “They offer corporates a wide range of products and services, the technologies to leverage them anytime, anywhere and the expertise to customize them to client-specific requirements. From cash management to corporate finance, from forex to acquisition financing; they provide you with end-to-end services for all your banking needs.”

    According to my accounting course as;

    “Corporate banking is the tailor-made financial services that financial institutions offer to corporations in the context of corporate financing and raise capital.”

    What is the definition of corporate banking? Typically, corporate banking is a specialized division of a commercial bank that offers various banking solutions; such as credit management, asset management, cash management, and underwriting to large corporations as well as to small and medium-sized enterprises (SMEs). Corporate banks might be offering similar services to retail banks; however, the major distinction is the clientele and the amount of money and profit involved.

    Characteristics of Corporate Banking:

    The following characteristics of corporate banking below are;

    1. Clientele or Customer: A bank’s business banking unit usually serves small to middle-sized businesses and large conglomerates.
    2. Authority: A company’s corporate banking accounts can only be opened after obtaining consensus from the board of directors of the company. It means that they must authorize by an official vote or a corporate resolution. As well as, the company’s treasurer usually opens corporate accounts.
    3. Liability: Since companies are recognized as separate legal entities under the law, all contents of corporate accounts are the property of the company and not of the individual board members. It means that there is a certain degree of independence in corporate accounts. It also indicates that the personal creditors of the board of directors are not entitled to the contents of the corporate account of a company.
    4. Credit rating: The conduct or functioning of the corporate account forms part of the credit history of the company. It affects the valuation and share prices of the company, the interest rates applicable to loans extended to the company, etc.
    5. Bankers: Corporate banking requires a degree of expertise in the industry. Thus, corporate bankers are extremely well paid. JP Morgan Chase, Bank of America Merrill Lynch, and Goldman Sachs are some of the largest commercial banks in the world.

    Bank list for Commercial and Corporate Banking in India:

    The following bank list by NSDL below are;

    Bank Name (A-Z): Allahabad Bank, Andhra Bank, Axis Bank, Bank of Bahrain and Kuwait, Bank of Baroda – Corporate Banking, Bank of Baroda – Retail Banking, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, City Union Bank, Corporation Bank, Deutsche Bank, Development Credit Bank, Dhanlaxmi Bank, Federal Bank, ICICI Bank, IDBI Bank, Indian Bank, Indian Overseas Bank, IndusInd Bank, ING Vysya Bank, Jammu & Kashmir Bank, Karnataka Bank Ltd, Karur Vysya Bank, Kotak Bank, Laxmi Vilas Bank, Oriental Bank of Commerce, Punjab National Bank – Corporate Banking, Punjab National Bank – Retail Banking, Punjab & Sind Bank, Shamrao Vitthal Co-operative Bank, South Indian Bank, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of India, State Bank of Mysore, State Bank of Patiala, State Bank of Travancore, Syndicate Bank, Tamilnad Mercantile Bank Ltd., UCO Bank, Union Bank of India, United Bank of India, Vijaya Bank, and Yes Bank Ltd…

    The Difference Between Retail Banking And Corporate Banking:

    Retail Banking and Corporate Banking make up the two very essential components of the field of finance. While retail banking mainly deals with individual customers, corporate banking focuses more on the corporate world. Apart from these, there are quite a few other differences between the two that will highlight in this article. The following difference between Retail and Corporate Banking provided and referenced by medium.com below are;

    Very popularly known as consumer banking or personal banking, retail banking consider the more visible face of banking to the general public. The most vibrant character of this branch is the presence of numerous bank branches all over the major cities. Usually, there is no, one specific bank which only focuses on catering to the needs of the general public, usually, banks have branches that specialize in this field. Whereas on the other hand, corporate banking stands very popularly known as, business banking. It is meant to highlight that aspect of banking, which solely deals with corporate customers. This type of banking is popularly known to be the key profit center, for most banks in the USA as well as other nations.

    In terms of products and services, both branches differ widely. While on one hand, retail banking offers several services like checking and savings accounts, certificates of deposit and Guaranteed Investment Certificates, Mortgages on residential as well as investment properties, automobile financing, credit cards, lines of credit, foreign currency, and remittance services. Apart from these services, there are a few more targeted services, that stand generally offered through another division; or, an affiliate of the bank, stock brokerage, Insurance, Wealth Management, Private Banking, and so on.

    Continually;

    On the other hand, the corporate banking segment of the banking sector usually says to deal with clients on a varied scale. Here the clients usually range from small to mid-sized local business firms, to huge conglomerates with billions in sales. It is the commercial banks, which usually offer a range of corporate banking products and services like loans and other credit products, which is by far the biggest area of business for corporate banks. Other services include treasury and cash management services, equipment lending, treasury and cash management, commercial real estate, trade finance, employer services, and so on.

    While these two branches may have their differences, they are equally important for the economy, both on a domestic as well as a global level. Retail Banking usually is responsible for bringing in, large customer deposits, that enable banks to make loans to their retail and business customers. Whereas on the other hand, it is the commercial banks, which help in making the loans to enable businesses to grow as well as hire more people, thus in a way contributing to the economy of any particular country. Despite their differences, both of these fields stand highly preferred as career options, by several finance aspirants. To get their dream career and jobs, a lot of candidates go a step ahead and seek to get industry-relevant education, by opting for several certification programs, offered by Imarticus Learning.

    Need and Importance of Corporate Banking:

    The following need and importance of corporate banking below are;

    Safe Accounting:

    As a start-up, it is vital to account for every naira to effectively help you track your business activities and analyze what expenses to cut down on, what areas need more investing; what revenue stream yields the highest income, and so on. It is also important to keep all invoices and receipts, to account for every business transaction carried out using the corporate account.

    Professionalism:

    How your business funds manage, directly impacts the corporate image of your company. If you are writing a check to a supplier or receiving money from a customer, checks or deposits need to address to your business name. What is the IT Professionalism in Information Technology Essay? Additionally, it will be a hassle managing the inflow or outflow of cash; if your business and personal finances do not keep separate.

    Managing Expansion:

    With a business account, you may choose to allocate money to pay employees as your staff increases in size. You can also use your corporate account to partner with other businesses, or use it for mass payments. Whatever the case is, it is convenient to transact transparently to monitor growth in your venture.

    Loan Accessibility:

    As a start-up, potential investors must perceive that your venture is running smoothly and effectively. Whether it is a bank loan or a private equity investment you are aiming for; opening a corporate account will increase your chances of accessing loans. This is because your investors can better track how the business has been running to date; before making any long-term commitments.

    Tax Audit:

    When your start-up becomes operational; there is a need to open a corporate account to keep your accounting transparent for external auditing. It will determine whether or not you should be paying taxes to the government. It will also help auditors to determine the precise amount of taxes your business should be paying; based on the net profit being generated by your company.

    Bills of Exchange:

    Companies often use bills of exchange for accounts receivables and account payables purposes. For instance, if company A agrees to pay company B at a later date, they could sign a bill of exchange for the same. Company A can then take this bill of exchange to the bank to get the bill discounted.

    Corporate Banking Meaning Characteristics Importance and Advantages Image
    Corporate Banking: Meaning, Characteristics, Importance, and Advantages, Image from Pixabay.

    Advantages of Corporate Banking:

    The following advantages of corporate banking below are;

    It is a segment of financial services necessary for corporations, like funding, capital structure, allocation of finances, and more. It is largely related to financial planning and how finances must be implemented at various stages of the business. The basic function of a bank is giving credit to its customers. It doesn’t just end there. It is the process that covers various stages from granting credit to its recovery.

    Credit management also includes setting up the terms and conditions; the policy of agreement, analysis of risk factors, and other related functions. In simple words, this segment takes care of the money owned by corporations or individuals. This segment of corporate banking directs and decides where to invest the money. Management of the cash flow of the corporates is one of the key functions of corporate banks.

    This segment ensures efficient collection, distribution, and investment of cash in an organization. It ensures efficient implementation of resources and various other financial operations. Also, Corporate banking involves a specialized loan department that oversees the process of granting loans to the corporation; compliance with the credit regulation policies, and other management-related functions. The loan department of corporate banks must ensure that they must maintain the bank’s profit.

    Reference:

    • www.myaccountingcourse.com/accounting-dictionary/corporate-banking
    • corporatefinanceinstitute.com/resources/knowledge/finance/corporate-banking/
    • tin.tin.nsdl.com/tan/Bank.html
    • medium.com/@imarticus/whats-the-difference-between-retail-banking-and-corporate-banking-5bb1e4da9e06
    • www.234finance.com/the-importance-of-a-corporate-bank-account/
    • www.enterpriseedges.com/corporate-banking-development-of-economy
  • Investment Banking: Introduction, Concept, and Types

    Investment Banking: Introduction, Concept, and Types

    What does Investment Banking mean? Investment banks are essentially financial intermediaries, who primarily help businesses and governments with raising capital, corporate mergers and acquisitions, and securities trade. Investment Banking: Introduction, Concept, and Types; It is a much wider term than merchant banking as it implies significant fund-based exposure to the capital market.

    Does Investment Banking explain their concept of what they are?

    Internationally, investment banking has progressed both in the fund based & fee-based segments of the industry. In India, the dependence is heavily on merchant banking, more particularly with issue management & underwriting. In the USA, such banks are the most important participants in the direct market by bringing financial claims for sale. They help interested parties in raising capital, whether debt or equity in the primary market to finance capital expenditure.

    Once the securities sell, investment bankers make secondary markets for the securities as brokers and dealers. In 1990, there were 2500 investment banking firms in the USA doing underwriting business. About 100 firms are so large that they dominate the industry. In recent years some investment banking firms have diversified or merged with other financial institutions to become full-service financial firms.

    Introduction to Investment Banking:

    Banking and financial institution on the one hand and the capital market on the other are the two broad platforms of institutional that investment for capital flows in the economy. Therefore, it could be inferred that investment banks are those institutions that are counterparts of banks in the capital markets in the function of intermediation in the resource allocation.

    Investment bankers have always enjoyed celebrity status, but at times, they have paid the price for excessive flamboyance as well. Investment banks help companies, governments, and their agencies to raise money by issuing and selling securities in the primary market. They assist public and private corporations in raising funds in the capital markets, as well as in providing strategic advisory services for mergers acquisitions and other types of financial transactions.

    However downturn in the primary market has forced merchant banks to diversify & become full-fledged investment banks. Over the decades, backed by evolution & also fuelled by recent technological developments, investment banking has transformed repeatedly to suit the needs of the finance community & thus become one of the vibrant & exciting segments of financial services.

    The future for investment banks is bright with scope for merchant banks to convert themselves into investment banks. Much of the investment banking in its present form, thus owes its origins to the financial market in U.S.A due to which, American investment banks have been the leader in the American & Euro market as well.

    Therefore, the term “Investment banking” can say to be of American origin. Their counterparts in the U.K. were termed as “Merchant banks” since they had confined themselves to capital market intermediation until the U.K & European markets & extended the scope of such businesses.

    Investment Banking in India:

    For more than three decades, investment banking activity was mainly confined to merchant banking services. The foreign banks were the forerunners of merchant banking in India. The erstwhile Grindlays Bank began its merchant banking operations in 1967 after obtaining the required license from RBI. Soon after Citibank followed through. Both the banks focused on syndication of loans and raising of equity apart from other advisory services.

    In 1972, the Banking Commission report asserted the need for merchant banking activities in India and recommended a separate structure for merchant banks different from commercial bank’s structure. The merchant banks were meant to manage investments and provide advisory services. The SBI set up its merchant banking division in 1972 and the other banks followed suit. ICICI was the first financial institution to set up its merchant banking division in 1973.

    More Things;

    The advent of SEBI in 1992 was a major boost to the merchant banking activities in India and the activities were further propelled by the subsequent introduction of free pricing of primary market equity issues in 1992. Post-1992, there were a lot of fluctuations in the issue market affecting the merchant banking industry. SEBI started regulating merchant banking activities in 1992 and a majority of the merchant banker registers with it. The number of merchant banker registers with SEBI began to dwindle after the mid-nineties due to the inactivity in the primary market.

    Many of the merchant bankers into issue management or associate activity such as underwriting or advisory. Many merchant bankers succumbed to the downturn in the primary market because of the over-dependence on issue management activity in the initial years. Also, not all the merchant bankers were able to transform themselves into full-fledged investment banks. Currently, bigger industry players who are in investment banking are dominating the industry.

    The Scenario for Investment Banking in India?

    In India commercial banks restricted from buying and selling securities beyond five percent of their net incremental deposits of the previous year. They can subscribe to securities in the primary market and trade in shares and debentures in the secondary market.

    Further, acceptance of deposits limits to commercial banks. Non-bank financial intermediaries accept deposits for a fixed term restricted to financing leasing/hire purchase, investment and loan activities and housing finance.

    They cannot act as issue managers or merchant banks. Only merchant bankers registered with the Securities and Exchange Board of India (SEBI) can undertake issue management and underwriting, arrange mergers and offer portfolio services. Merchant banking in India is non-fund based except underwriting.

    Structure of Investment Banking in India:

    The Indian investment banking industry has a heterogeneous structure for the following reasons:

    • The regulations do not permit all investment banking functions to perform by a single entity for two reasons: 1) To prevent excessive exposure to business risk, and. 2) To prescribe and monitor capital adequacy and risk mitigation mechanisms.
    • Commercial banks prohibited from getting exposed to stock market investments and lending against stocks beyond certain specified limits under the provisions of the RBI and Banking Regulation Act.
    • Merchant banking activities can carry out only after obtaining a merchant-banking license from SEBI.
    • Merchant bankers are other than banks and financial institutions not authorized to carry out any business other than merchant banking.
    • The Equity research activity has to carry out independent of the merchant banking activity to avoid conflict of interest, and.
    • Stockbroking business has to be separated into a different company.

    Regulatory Framework for Investment Banking in India:

    An overview of the regulatory framework furnish below:

    • All investment banks incorporated under the Companies Act, 1956 governed by the provisions of that Act.
    • Those investment banks that incorporate under a separate statute regulate by their respective statute. Ex: SBI, IDBI.
    • Universal banks that function as investment banks regulate by RBI under the RBI Act, 1934.
    • All Non-banking Finance Companies that function as investment banks regulate by RBI under RBI Act, 1934.
    • SEBI governs the functional aspects of Investment banking under the Securities and Exchange Board of India Act, 1992.
    • Those investment banks that carry foreign direct investment either through joint ventures or as fully owned subsidiaries govern by the Foreign Exchange Management Act, 1999 concerning foreign investment.

    Investment Banking Introduction Concept and Types
    Investment Banking: Introduction, Concept, and Types. #Pixabay.

    Types of Players in Investment Banking:

    The following Types of Players below are:

    Full-Service Firms:

    These are the type of investment banks that have a significant presence in all areas like underwriting, distribution, M&A, brokerage, structured instruments, asset management, etc. They are all rounder 0f the game.

    Commercial Banks:

    Commercial Banks operating through “Section 20” subsidiaries referring to the subsidiaries formed under section 20 of the Glass- Steagall Act which were allowed to carry on limited investment banking services.

    Boutique Firms:

    These are the type of players who specialize in particular areas of investment banking.

    Brokerage Firms:

    These firms offer only trading services to retail & institutional clients. They have a huge investor base which also use by underwriters to place issues.

    Asset Management Firms:

    These firms offer investment services. This includes activities like fund management, wealth management, cash management, portfolio management depending on the type of investors, Tenure of the corpus, purpose of investments, type of instrument invested in, etc.

  • Merchant Banking: Functions, Origin, and Evolution

    Merchant Banking: Functions, Origin, and Evolution

    Meaning of Merchant Banking: Dictionary meaning of Banking points at merchant bank as an organization that underwrites securities for corporations advises such clients on mergers and involves in the ownership of commercial ventures. The term “Merchant Banking” has been used differently in different parts of the world.

    Learn, Explain each topic of Merchant Banking: Functions, Origin, and Evolution!

    While in the UK, merchant banking refers to the “Accepting and issuing houses”, in the USA it knows as “Investment banking“. The word merchant banking has been so widely used that sometimes; it applies to banks who are not merchants, sometimes to merchants who are not banks, and sometimes to those intermediaries who are neither merchants nor banks. Explain the Organizational setup of Merchant Bankers in India!

    Functions of Merchant Banking:

    The basic function of a merchant banker is marketing corporate and other securities. Now they require to take up some allied functions also.

    A merchant bank now takes up the following functions:

    1. Promotional Activities:

    A merchant bank functions as a promoter of industrial enterprises in India He helps the entrepreneur in conceiving an idea, identification of projects, preparing feasibility reports, obtaining governmental approvals and incentives, etc. Some of the merchant banks also assist technical and financial collaborations and joint ventures

    2. Issue Management:

    In the past, the function of a merchant banker had mainly been confined to the management of new public issues of corporate securities by the newly formed companies, existing companies (further issues); and the foreign companies in dilution of equity as required under FERA In this capacity the merchant banks usually act as sponsor of issues.

    They obtain the consent of the Controller of Capital Issues (now, the Securities and Exchange Board of India) and provide several other services to ensure success in the marketing of securities. The service provided by them includes the preparation of the prospectus, underwriting arrangements, appointment of registrars, brokers, and bankers to the issue, advertising and arranging publicity and compliance of listing requirements of the stock exchanges, etc.

    They act as experts of the type, timing, and terms of issues of corporate securities and make them acceptable for the investors on the one hand and also provide flexibility and freedom to the issuing companies.

    3. Credit Syndication:

    Merchant banks provide specialized services in preparation of the project, loan applications for raising short-term as well as long-term credit from the various bank and financial institutions, etc. They also manage Euro-issues and help in raising funds abroad.

    4. Portfolio Management:

    Merchant banks offer services not only to the companies issuing the securities but also to the investors. They advise their clients, mostly institutional investors, regarding investment decisions. Merchant bankers even undertake the function of purchase and sale of securities for their clients to provide portfolio management services. Some merchant bankers are operating mutual funds and offshore funds also.

    5. Leasing and Finance:

    Many merchant bankers provide leasing and finance facilities to their customers. Some of them even maintain venture capital funds to assist entrepreneurs. They also help companies in raising finance by way of public deposits.

    6. Servicing of Issues:

    Merchant banks have also started to act as paying agents for the service of debt- securities and to act as registrars and transfer agents. Thus, they maintain even the registers of shareholders and debenture holders and arrange to pay dividends or interest due to them

    7. Other Specialized Services:

    In addition to the basic activities involving the marketing of securities, merchant banks also provide corporate advisory services on issues like mergers and amalgamations, tax matters, recruitment of executives and cost and management audits, etc. Many merchant bankers have also started making bought-out deals of shares and debentures. The activities of the merchant bankers are increasing with the change in the money market.

    Origin of Merchant Banking:

    The origin of merchant banking can trace back to the 13th century when a few families-owned and managed firms engaged in the sale and purchase of commodities were also found to engage in banking activity. These firms not only acted as bankers to the kings of European States, financed coastal trade but also borne exchange risk.

    To earn profits, they invested their funds where they expected higher returns despite the high degree of risk involved. They charged very high rates of interest for financing highly risky projects. In turn, they suffered heavy losses and had to close down. Some of them restarted the same activity after gaining financial strength. Thus merchant Banking survived and continued during the 13th century.

    Later,

    Merchant Bankers were known as “Commission agents” who handled the coastal trade on a commission basis and provided finance to the owners or supplier of goods. They made investments in goods manufactured by sellers and made huge profits. They also financed continental wars. The sole objective of these merchant bankers was profit maximization by making investments in risky projects.

    Then came the industrial revolution in England. The scope of international trade widened to include North America and other continents. Many people were attracted to take up merchant banking activities to transfer the machine-made goods from European nations to other nations and colonies and bring raw material from other nations and colonies to Europe and to finance such trade.

    During the early nineteenth century, merchants indulged in overseas trade and earned a good reputation. They accepted the bills of the lesser reputed traders by guaranteeing the holder to receive full payment on the due date. This practice of accepting bills has grown over the years with expansion in trade and has become part of merchant banking activity.

    Merchant Banking Functions Origin and Evolution
    Merchant Banking: Functions, Origin, and Evolution! Image credit from #Pixabay.

    Evolution of Merchant Banking:

    “Hundi” was the main instrument of credit used by indigenous bankers before the coming of western merchants in India. It was in 1813 when merchants came from European countries to trade with India. Agency houses were set up by merchant bankers based in London.

    These agency houses raised deposits at cheaper rates of interest viz. 4% to 5% from their home and made advances to native merchants at 10% to 12%; and also, they charged high commissions on every kind of service provided to the clients.

    Easy availability of money at the spot from the agency houses had eliminated the role of acceptance house or merchant banking in India. It was only with the entrance of East India Company that restrictions were put on the operation of agency houses.

    During the 19th century,

    Foreign merchant bankers operated in India through “East India House”. East India House members moved into real estate business viz. tea and rubber plantation, cotton mills, etc. They faced tough competition from Persian finance houses who were willing to grant credit to the trade with India.

    It was in 1860 when the merchant’s interest in joint-stock banking started growing and with their investments, they floated joint-stock banks. Some new banks were founded which included Orient Bank in 1845, Chartered Bank of India and Asia in 1853, Chartered Mercantile Bank of India, London & China in 1857, and so on.

    These banks financed trade transactions. The control and management of these banks lied with managing agents. Also, the managing agency system enabled a single firm to look after several firms in complementary industries.

    With the result,

    The banking industry flourished in India with the support of London-based merchant bankers; and, the merchants who had full control of the Board. Telegraphic transfers improved banking links and the business.

    The managing agents acted as merchants banks and performed functions of promoting financing and marketing of securities. They developed strong roots in depth of India’s economic, commercial and industrial structure. Also, they served the industry, trade, and commerce as the merchant bankers were doing in the UK; and, European countries or the investment bankers were doing in the USA.

    Managing agents acquire a large share of investible capital initially; and, later on, dispose of the shares once the company gets established. In other words, Managing Agency Houses acted as an issue house for securities. It founds that 600 industrial establishments did manage under the managing agency system in 1951.

    Few Indian managing agency houses did also established in pre-World War II who started as the family business, later on, converted into partnership and public limited companies.

    Examples of prominent managing agency houses included:
    • Tatas,
    • Birlas,
    • Dalmia’s,
    • Singhanias,
    • Thapar’s,
    • Narang’s etc.

    These managing houses had the necessary skills and expertise which helped in the development of projects.

    Functions performed include:
    • Investing funds like venture capital in promoting the enterprise.
    • Assist the enterprises in procuring finance by guaranteeing bank loans and advances.
    • Raising public deposits.
    • Enter into negotiation with foreign capitalists.

    Thus, they acted as intermediaries of investment by holding the shares of new companies; motivating people to invest, and keeping deposits for investment.

    In Post-World War II, Amendments in the Companies Act, 1956 led to the streamlining of the procedure for capital issues and facilitated the growth of the capital market in India.

    To speed up the pace of economic development, efforts did make to channelize household savings into investment in industry and trade. Significant amendments did make in the Companies Act, Capital Issues (Control) Act, Banking Companies Act to regulate the growth of business enterprises.

    In 1948,

    Industrial Finance Corporation of India (IFCI) did set up to provide long and medium-term finance to industrial enterprises and underwrite new securities. At the state level, State Financial Corporations did also established in 1951 to provide financial assistance to the industry.

    In 1955,

    The Industrial Credit and Investment Corporation of India (ICICI) did set up to provide developmental finance to industrial concerns. Also, ICICI invests in equity by way of direct subscription and also underwrites shares and debentures.

    Many more financial and investment institutions emerged at national and state levels e.g. LIC, RCI (Refinance Corporation for Industry), Industrial Development Bank of India (IDBI), Unit Trust of India (UTI), State Industrial Development Corporation (SIDC), etc. over the years.

    The basic objectives of setting up all these institutions were to boost the industrial sector, improve the capital market; make finance easily available and support the investment climate in the country. These institutions also underwrite the capital issues besides the lending support of broking houses.

    The need for merchant banking services did widely felt. It was during this period that National & Grindlays Bank (now Grindlays Bank) took a lead by taking up merchant banking activities; and announced the inauguration of its “Merchant Banking Division” in January 1969.

  • The Objectives and Functions of RBI (Reserve Bank of India)!

    The Objectives and Functions of RBI (Reserve Bank of India)!

    Learn about the objectives and functions of RBI and how it influences the management of commercial banks in India. RBI (Reserve Bank of India) is the apex financial institution of the country’s financial system entrusted with the task of control, supervision, promotion, development, and planning. RBI is the queen bee of the Indian financial system which influences the commercial banks’ management in more than one way. The RBI influences the management of commercial banks through its various policies, directions, and regulations. Its role in bank management is unique. The RBI performs the four basic functions of management, viz., planning, organizing, directing and controlling in laying a strong foundation for the functioning of commercial banks.

    Learn and explain the Objectives and Functions of RBI (Reserve Bank of India)!

    History of RBI (Reserve Bank of India)!

    In 1921, the Imperial Bank of India was established to act as the central bank of India by the British Government. Unfortunately, Imperial Bank failed to show its performance up to the mark and didn’t achieve any success as the Central Bank. Then the Government asked the Hilton Young Commission in 1925 to view on this subject.

    The commission submitted their reports saying that one single organization can’t be able to act as two separate agencies (both credit and currency control). So, it’s required to set up a brand new central bank. On 1st April 1935, the Reserve Bank of India was set up. In January 1949, RBI was nationalized.

    Objectives of the RBI (Reserve Bank of India)!

    The Preamble to the Reserve Bank of India Act, 1934 spells out the objectives of the Reserve Bank as:

    “To regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.”

    Before the establishment of the Reserve Bank, the Indian financial system was inadequate on account of the inherent weakness of the dual control of currency by the Central Government and of credit by the Imperial Bank of India.

    The Hilton-Young Commission, therefore, recommended that the dichotomy of functions and division of responsibility for control of currency and credit and the divergent policies in this respect must ended by setting of a central bank – called the Reserve Bank of India – which would regulate the financial policy and develop banking facilities throughout the country.

    Hence, the Bank was established with this primary object in view. Another objective of the Reserve Bank has been to remain free from political influence and be in successful operation for maintaining financial stability and credit.

    The fundamental object of the Reserve Bank of India is to discharge purely central banking functions in the Indian money market, i.e., to act as the note-issuing authority, bankers’ bank, and banker to the government, and to promote the growth of the economy within the framework of the general economic policy of the Government, consistent with the need of maintenance of price stability.

    A significant object of the Reserve -Bank of India has also been to assist the planned process of development of the Indian economy. Besides the traditional central banking functions, with the launching of the five-year plans in the country. The Reserve Bank of India has been moving ahead in performing a host of developmental and promotional functions. Which are normally beyond the purview of a traditional Central Bank.

    Functions of the RBI (Reserve Bank of India)!

    As per the RBI Act 1934, it performs 3 types of functions as that of any other central bank.

    They are:

    1. Banking Functions
    2. Supervisory Functions and
    3. Promotional Functions.

    The main function of the RBI is to regulate the money supply in the country. Moreover, it has been directed to take care of agriculture, industry, export promotion, etc. The RBI is also responsible for the maintenance of the external value of the rupee.

    #Banking Functions:

    Now, explain the functions;

    1. Bank of Issue:

    Under section 22 of the Reserve Bank of India Act, the bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country undertaken by the Reserve Bank as the agent of the Government.

    The Reserve Bank has a separate Issue Department which entrusted with the issue of currency notes. The assets and liabilities of the Issue Department kept separate from those of other Banking Departments.

    Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin. Gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might held in rupee coins. Government of India rupee securities, eligible bills of exchange, and promissory notes payable in India.

    Due to the exigencies of the Second World War and the post-war period, these provisions were considerably modified. Since 1957, the Reserve Bank of India required to maintain gold and foreign exchange reserves of Rs. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today known,-as the minimum reserve system.

    2. Banker to Government:

    The second important function of the Reserve Bank of India is to act as a Government banker, agent, and adviser. The Reserve Bank is the agent of the Central Government and of all State Governments in India except that of Jammu and Kashmir.

    The Reserve Bank must transact Government business, via to keep the cash balances as deposits free of interest. To receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations.

    The Reserve Bank of India helps the Government—both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as the adviser to the Government on all monetary and banking matters.

    3. Banker’s Bank and Lender of the Last Resort:

    The Reserve Bank of India acts as the banker’s bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 percent of its time liabilities in India.

    By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 percent of their aggregate deposit liabilities. The minimum cash requirements can changed by the Reserve Bank of India.

    The scheduled banks can borrow from the Reserve Bank of India based on eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker’s bank but also the lender of the last resort.

    4. The controller of Credit:

    The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume of credit created by banks in India. It can do so by changing the Bank rate or through open market operations.

    According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons based on certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank.

    The Reserve Bank of India armed with many more powers to control the Indian money market. Every bank has to get a license from the Reserve Bank of India to do banking business within India. The license can canceled by the Reserve Bank if certain stipulated conditions not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can open a new branch.

    Each scheduled bank must send a weekly return to the Reserve Bank showing in detail, its assets and liabilities. This power of the Reserve Bank to call for information also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank.

    As the supreme banking authority in the country, the Reserve Bank of India, therefore, has the following powers:

    1. It holds the cash reserves of all the scheduled banks.
    2. It controls the credit operations of banks through quantitative and qualitative control.
    3. It controls the banking system through the system of licensing, inspection, and calling for information.
    4. It acts as the lender of the last resort by providing re-discount facilities to scheduled banks.

    5. Custodian of Foreign Reserve:

    It is the responsibility of the Reserve Bank to stabilize the external value of the national currency. The Reserve Bank keeps gold and foreign currencies as reserves against note issues and also meets the adverse balance of payments with other countries. It also manages foreign currency by the controls imposed by the government.

    As far as the external sector is concerned, the task of the RBI has the following dimensions:

    • To administer the Foreign Exchange Control;
    • To choose, the exchange rate system and fix or manage the exchange rate between the rupee and other currencies;
    • To manage exchange reserves;
    • To interact or negotiate with the monetary authorities of the Sterling Area, Asian Clearing Union, and other countries. With International financial institutions such as the IMF, World Bank, and Asian Development Bank.

    The RBI is the custodian of the country’s foreign exchange reserves, id it vested with the responsibility of managing the investment and utilization of the reserves in the most advantageous manner. The RBI achieves this through buying and selling of foreign exchange markets, from and to scheduled banks. Which, are the authorized dealers in the Indian foreign exchange market? The Bank manages the investment of reserves in gold counts abroad and the shares and securities issued by foreign governments and international banks or financial institutions.

    #Supervisory Functions:

    In addition to its traditional central banking functions, the Reserve Bank has certain non-monetary functions of the nature of supervision of banks and the promotion of sound banking in India.

    The Reserve Bank Act, of 1934, and the Banking Regulation Act, of 1949 have given the RBI wide powers of supervision and control over commercial and cooperative banks, relating to licensing and establishments, branch expansion, the liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation.

    The RBI authorized to carry out the periodical inspection of the banks and to call for returns and necessary information from them. The nationalization of 14 major Indian scheduled banks in July 1969 imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards the more rapid development of the economy and realization of certain desired social objectives.

    The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop sound lines and improve the methods of their operation.

    #Promotional Functions!

    With economic growth assuming a new urgency since independence, the range of the Reserve Bank’s functions has steadily widened. The Bank now performs a variety of developmental and promotional functions. Which, at one time, were regarded as outside the normal scope of central banking.

    The Reserve Bank was asked to promote banking habits, extend banking facilities to rural and semi-urban areas, and establish and promote new specialized financing agencies. Accordingly, the Reserve Bank has helped in the setting up of the Industrial Finance Corporation of India and the State Financial Corporations. It set up the Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in 1963, and the Industrial Reconstruction Corporation of India in 1972.

    These institutions were set up directly or indirectly by the Reserve Bank to promote saving habits to mobilize savings, and to provide industrial finance as well as agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural Credit Department to provide agricultural credit. But only since 1951, the Bank’s role in this field has become extremely important.

    The Bank has developed the co-operative credit movement to encourage saving, to eliminate moneylenders from the villages, and to route its short-term credit to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to provide long-term finance to farmers.