205 fmbo unit4e

Unit 4 : Banks and NBFCs
Banks and NBFCs: Types of Banks & NBFCs:
Central Bank, Nationalized & Co Operative Banks,
Regional Rural Banks, Scheduled Banks, Private
Banks & Foreign Banks, Mudra Bank, Small Finance
Banks, Specialized Banks, NBFCs.
Types of Banking: Wholesale and Retail Banking,
Investment Banking, Corporate Banking, Private
Banking, Development Banking.

• Types of Banking: Wholesale and Retail
Banking, Investment Banking,
Corporate Banking, Private Banking,
Development Banking

Wholesale banking refers to the banking
services offered by banks to larger
customers.
The customers are various entities and the
list is given below.
– Mortgage banks
– Commercial Banks
– Large Corporations
– Mid-sized Companies
– Real Estate Developers and Investors
– Institutional Customers
– Government agencies

Wholesale Banking includes currency
conversions and large scale transactions.
Wholesale banking is also called corporate
banking or commercial banking, as opposed
to retail banking which involves small
customers like individuals.
– Specialised Finance.
– Loan Syndications.
– Structured Transactions.
– Securitisation.
– Credit Structuring.
– Public Sector Infrastructure financing.

Advantages of Wholesale Banking
―There is additional safety for depositors.
―Lending to Government to carry out long term
projects with heavy investments.
―Better Cash management.
―Massive working capital requirement of large
businesses can be fulfilled.
―Customers of wholesale banking have the
advantage of having lower transaction fees.
―It will help companies have transactions on a
large scale.

Disadvantages of Wholesale Banking
– Interest Rates are very high.
– Processing Fees are also very high.
– Have to pay for services even if they are not
availed.
– It is expensive to maintain accounts and
records.
– Risk of large scale loss if the bank closes
down.

Retail banking is a major form of
commercial banking but mainly targeted to
consumers rather than corporate clients.
It is the method of banks’ approach to the
customers for sale of their products. The
products are consumer-oriented like offering a
car loan, home loan facility, financial
assistance for purchase of consumer
durables, etc.
Retail banking therefore has large customer-
base and hence, large number of transactions
with small values. It may therefore be cost
ineffective in a highly competitive
environment.

Most of the Rural and semi-urban branches
of banks, in fact, do retail banking.
In the present day situation when lending to
corporate clients lead to credit risk and
market risk, retail banking may eliminate
market risk.
It is one of the reasons why many a
wholesale bankers like foreign banks also
prefer to go for consumer financing albeit
for marginally higher net worth individual.

Advantages of Retail Banking
1. Retail deposits are stable and constitute core
deposits.
2. They are interest insensitive and less
bargaining for additional interest.
3. They constitute low cost funds for the banks.
4. Effective customer relationship management
with the retail customers built a strong base.
5. Retail banking increases the subsidiary
business of the banks.
6. Retail banking results in better yield and
improved bottom line for a bank.

Advantages of Retail Banking
7. Retail segment is a good avenue for funds
development.
8. Consumer loans are presumed to be of lower
risk and NPA perception.
9.Retail banking helps economic revival of the
nation through increased production activity.
10. Retail banking improves lifestyle and fulfils
aspirations of the people through affordable
credit.
11. Innovative product development credit.
12. Retail banking involves minimum marketing
efforts in a demand-driven economy.

Disadvantages of Retail Banking
1. Designing own and new financial products
is very costly and time consuming for the
bank.
2. Customers now-a-days prefer net banking
to branch banking. The banks that are slow
in introducing technology-based products,
are finding it difficult to retain the customers
who wish to opt for net banking.
3. Customers are attracted towards other
financial products like mutual funds etc.

Disadvantages of Retail Banking
4. Though banks are investing heavily in
technology, they are not able to exploit the
same to the full extent.
5. A major disadvantage is monitoring and
follow up of huge volume of loan accounts
inducing banks to spend heavily in human
resource department
6. Long term loans like housing loan due to
its long repayment term in the absence of
proper follow-up, can become NPAs.

INVESTMENT BANKING
Investment banking is the division of a bank
or financial institution that serves
governments, corporations, and institutions
by providing underwriting (capital raising)
and mergers and acquisitions (M&A)
advisory services.
Investment banks act as intermediaries
between investors (who have money to
invest) and corporations (who require
capital to grow and run their businesses).

There can sometimes be confusion between
an investment bank and the investment
banking division (IBD) of a bank.
Full-service investment banks offer a wide
range of services that include underwriting,
M&A, sales and trading, equity research,
asset management, commercial banking,
and retail banking.
The investment banking division of a bank
provides only the underwriting and M&A
advisory services.

Full-service banks offer the following services:
• Underwriting – Capital raising and underwriting
groups work between investors and companies
that want to raise money or go public via the IPO
process. This function serves the primary market
or “new capital”.

• Mergers & Acquisitions (M&A) – Advisory roles
for both buyers and sellers of businesses,
managing the M&A process start to finish.
• Sales & Trading – Matching up buyers and sellers
of securities in the secondary market. Sales and
trading groups in investment banking act as agents
for clients and also can trade the firm’s own capital.
• Equity Research – The equity research group
research, or “coverage”, of securities helps
investors make investment decisions and supports
trading of stocks.
• Asset Management – Managing investments for a
wide range of investors including institutions and
individuals, across a wide range of investment
styles.

Underwriting Services in Investment Banking
Underwriting is the process of raising capital
through selling stocks or bonds to investors
(e.g., an initial public offering IPO) on behalf of
corporations or other entities. Businesses
need money to operate and grow their
businesses, and the bankers help them get
that money by marketing the company to
investors.
There are generally three types of underwriting:
Firm Commitment – The underwriter agrees to
buy the entire issue and assume full financial
responsibility for any unsold shares.

Best Efforts – Underwriter commits to selling
as much of the issue as possible at the
agreed-upon offering price but can return
any unsold shares to the issuer without
financial responsibility.
All-or-None – If the entire issue cannot be
sold at the offering price, the deal is called
off and the issuing company receives
nothing.

• Once the bank has started marketing the
offering, the following book-building steps
are taken to price and complete the deal.

M&A Advisory Services
Mergers and acquisitions (M&A) advisory is
the process of helping corporations and
institutions find, evaluate, and complete
acquisitions of businesses.
This is a key function in i-banking. Banks use
their extensive networks and relationships
to find opportunities and help negotiate on
their client’s behalf.
Bankers advise on both sides of M&A
transactions, representing either the “buy-
side” or the “sell-side” of the deal.

Below is an overview of the 10-step mergers and
acquisitions process.

Banking Clients
Investment banks’ clients include:
Governments – Investment banks work with
governments to raise money, trade securities, and buy
or sell crown corporations.
Corporations – Bankers work with both private and
public companies to help them go public (IPO), raise
additional capital, grow their businesses, make
acquisitions, sell business units, and provide research
for them and general corporate finance advice.
Institutions – Banks work with institutional investors who
manage other people’s money to help them trade
securities and provide research. They also work with
private equity firms to help them acquire portfolio
companies and exit those positions by either selling to a
strategic buyer or via an IPO.

CORPORATE BANKING
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.

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.

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.”

Characteristics of Corporate Banking:
Clientele or Customer: A bank’s business
banking unit usually serves small to middle-
sized businesses and large conglomerates.
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.

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 to 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.
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.

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.

Advantages of Corporate Banking:
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 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.

Private Banking
Private banking is a service often used by high-net-
worth individuals allowing them to receive
personalized care from a retail bank or financial
institution.
Private banking services cater to the needs of wealthy
and high-net-worth persons.
Clients may work with a single representative or a
team of financial advisors to receive expert
information on a matter of financial subjects.
Private banking offers clients a range of services
allowing them to manage their wealth.
It is a one-stop shop for high-net-worth individuals
seeking to have everything they need under one
roof when it comes to their finances.

Private Banking
Some of the wealth management services
available include investing in stocks,
management of investment portfolios, tax
services, insurance, and trust and estate
planning.
Retail banks and financial institutions of all
sizes provide customers of all financial
levels the chance to use private banking.
Oftentimes, it is only high-net-worth
individuals who take advantage of private
banking to manage their wealth.

Private banking offers the usual services that
most financial institutions provide.
The difference between regular banking and
private banking is that the checking and
savings accounts services are much more
personalized to the individual’s needs.
A client will be assigned a “private banker” or
“relationship manager” to handle all of their
needs.
Some of the tasks the private banker will
handle include paying bills or arranging
mortgages.

Advantages of private banking
Clients receive a number of advantages when they
use private banking. As banking as become more
automated and digitalized, private banking allows
clients to speak with a person that has expertise
on financial matters. Having a private banker to
speak with is not the only reason clients work
with these financial institutions.
Other advantages to private banking include:
Privacy – A clients’ services and dealings can
remain anonymous when working with a private
bank. Services and products are kept confidential
as private banking institutes want to keep
competitors from discovering their financial
offerings.

Preferential pricing – Clients may receive
discounted prices on financial services and
products. They may also receive special terms
or interest rates on products.
Alternative investments – Clients will receive
an extensive range of opportunities to make
investments through private bankers. There
are also a wide range of resources provided to
clients to use allowing them to manage their
money smarter.
Assets and Fees for Banks – Private banks
compete to get high-net-worth individuals
under their umbrella. A client’s financial might
is added to the private bank’s assets under
management.

One-stop shop – One of the most significant
reason high-net-worth individuals use private
banking services is due to them being a one-
stop shop of financial products and services.
Clients can find everything they need under
one roof. A client will receive enhanced
services from their expert handler who works
as a liaison with other departments within the
same financial institution.
Personal attention – Clients love the personal
attention they receive. The more wealth that
an individual possesses, the more white-glove
approach they receive.

Disadvantages to private banking may include:
• Bank employee changes – Banks regardless of
their size often have employee turnover and
changes. Loyalty can also be called into question of
private bankers as they are compensated by the
financial institution rather than the client. Therefore,
the products offered and sold could be in the
financial institution’s best interests and not the
client’s.
• Low number of investment options – Private
bank groups may only offer a client their proprietary
services rather than a range of investment services.
Some smaller financial institutions may not offer the
same expert knowledge as larger organizations.

Disadvantages to private banking may
include:
Bank regulations – Since 2008 when the
financial crisis gripped the world, private
banks have been under increased
regulations. Licensing requirements are
now higher and there is more transparency
and accountability in the private banking
sector. In many ways, this is also an
advantage now.

Types of private banking
There are two ways to structure the service
provided by private banking.
American Style – Focuses more on the
wholesale banking business or corporate
customer.
The Swiss-Spanish style: focused on
clients with high wealth. They help them to
control them correctly and at the same time
improve their quality of life.

DEVELOPMENT BANK
A development bank may, thus, be defined as
a financial institution concerned with
providing all types of financial assistance
(medium as well as long-term) to business
units, in the form of loans, underwriting,
investment and guarantee operations, and
promotional activities-economic
development in general, and industrial
development, in particular.
In short, a development bank is a
development-oriented bank;

Features of development banks:
It is a specialized financial institution, provides
medium and long-term finance to business
units.
Unlike commercial banks, it does not accept
deposits from the public, It is not just a term-
lending institution. It’s a multi-purpose
financial institution.
It is essentially a development-oriented bank. Its
primary objective is to promote economic
development by promoting investment and
entrepreneurial activity in a developing
economy. It encourages new and small
entrepreneurs and seeks balanced regional
growth.

Features of development banks:
They provide financial assistance not only to the
private sector but also to the public sector
undertakings, It aims at promoting the saving and
investment habit in the community.
It does not compete with the normal channels of
finance, i.e., finance already made available by the
banks and other conventional financial institutions.
Its major role is of a gap-filler, i. e., to fill up the
deficiencies of the existing financial facilities.
Its motive is to serve the public interest rather than to
make profits. It works in the general interest of the
nation.

Functions of Development Banks:
Development banks have been started with the motive of
increasing the pace of industrialization. The traditional financial
institutions could not take up this challenge because of their
limitations. To help all round industrialization development
banks were made multipurpose institutions. Besides financing,
they were assigned promotional work also.
Some important functions of these institutions discuss as
follows:
Financial Gap Fillers: Development banks do not provide
medium-term and long-term loans only but they help industrial
enterprises in many other ways too.
These banks subscribe to the bonds and debentures of the
companies, underwrite their shares and debentures and,
guarantee the loans raised from foreign and domestic sources.
They also help undertakings to acquire machinery from within
and outside the country.

Undertake Entrepreneurial Role:
Developing countries lack entrepreneurs who can
take up the job of setting up new projects.
It may be due to a lack of expertise and managerial
ability.
Development banks were assigned the job of
entrepreneurial gap filling.
They undertake the task of discovering investment
projects, promotion of industrial enterprises,
provide technical and managerial assistance,
undertaking economic and technical research,
conducting surveys, feasibility studies, etc.
The promotional role of the development bank is very
significant for increasing the pace of
industrialization.

Commercial Banking Business:
Development banks normally provide medium and
long-term funds to industrial enterprises. The
working capital needs of the units are met by
commercial banks. In developing countries,
commercial banks have not been able to take up
this job properly. Their traditional approach in
dealing with lending proposals and assistance on
securities has not helped the industry.
Development banks extend financial assistance for
meeting working capital needs to their loan if they
fail to arrange such funds from other sources. So
far as taking up other functions of banks such as
accepting of deposits, opening letters of credit,
discounting of bills, etc. there is no uniform practice
in development banks.

Joint Finance:
Another feature of the development bank’s operations is
to take up joint financing along with other financial
institutions. There may be constraints of financial
resources and legal problems (prescribing maximum
limits of lending) which may force banks to associate
with other institutions for taking up the financing of
some projects jointly.
It may also not be possible to meet all the requirements of
concern by one institution, So more than one institution
may join hands. Not only in large projects but also in
medium-sized projects it may be desirable for a
concern to have, for instance, the requirements of a
foreign loan in a particular currency, met by one
institution and under the writing of securities met by
another.

Refinance Facility:
Development banks also extend the refinance
facility to the lending institutions. In this
scheme, there is no direct lending to the
enterprise. The lending institutions are
provided funds by development banks against
loans extended’ to industrial concerns.
In this way, the institutions which provide funds
to units are refinanced by development banks.
In India, the Industrial Development Bank of
India (IDBI) provides reliance against term
loans granted to industrial concerns by state
financial corporations. commercial banks and
state co-operative banks.

Credit Guarantee:
The small scale sector is not getting proper financial
facilities due to the clement of risk since these units
do not have sufficient securities to offer for loans,
lending institutions are hesitant to extend the loans.
To overcome this difficulty many countries including
India and Japan have devised the credit guarantee
scheme and credit insurance scheme.
―In India, a credit guarantee scheme was introduced in
1960 with the object of enlarging the supply of
institutional credit to small industrial units by granting a
degree of protection to lending institutions against
possible losses in respect of such advances.
―In Japan, besides credit guarantee, insurance is also
provided. These schemes help small-scale concerns to
avail loan facilities without hesitation.

Underwriting of Securities:
Development banks acquire securities of industrial units through
either direct subscribing or underwriting or both. The securities
may also be acquired through promotion work or by converting
loans into equity shares or preference shares. So, as learn
about development banks may build portfolios of industrial
stocks and bonds.
These banks do not hold these securities permanently. They try to
disinvest in these securities in a systematic way which should
not influence the market prices of these securities and also
should not lose managerial control of the units. Development
banks have become worldwide phenomena.
Their functions depend upon the requirements of the economy
and the state of development of the country. They have
become well-recognized segments of the financial market.
They are playing an important role in the promotion of
industries in developing and underdeveloped countries.

Objectives of Development Banks:
―They promote industrial growth.
―To develop backward areas.
―To create more employment opportunities.
―The generate more exports and encourage import
substitution.
―To encourage modernization and improvement in
technology.
―To promote more self-employment projects.
―The revive sick units.
―To improve the management of large industries by
providing training.
―To remove regional disparities or regional imbalance.
―They promote science and technology in new areas by
providing risk capital, and.
―To improve the capital market in the country.

FUNCTIONS OF DEVELOPMENT BANKS IN
INDIA
• Small Scale Industries (SSI):
• Development banks play an important role in the
promotion and development of the small-scale
sector. The government of India (GOI) started the
Small Industries Development Bank of India
(SIDBI) to provide medium and long-term loans to
Small Scale Industries (SSI) units. SIDBI provides
direct project finance and equipment finance to
SSI units. It also refinances banks and financial
institutions that provide seed capital, equipment
finance, etc., to SSI units.

Development of Housing Sector:
Development banks provide finance for the
development of the housing sector. GOI
started the National Housing Bank (NHB) in
1988.
NHB promotes the housing sector in the
following ways:
It promotes and develops housing and
financial institutions.
It refinances banks and financial institutions
that provide credit to the housing sector.

Large Scale Industries (LSI):
The development bank promotes and
develops large-scale industries (LSI).
Development financial institutions like IDBI,
IFCI, etc., provide medium and long-term
finance to the corporate sector.
They provide merchant banking services,
such as preparing project reports, doing
feasibility studies, advising on the location
of a project, and so on.

Agriculture and Rural Development:
Development banks like the National Bank for
Agriculture & Rural Development (NABARD)
helps in the development of agriculture.
NABARD started in 1982 to provide refinance to
banks, which provide credit to the agriculture
sector and also for rural development
activities.
It coordinates the working of all financial
institutions that provide credit to agriculture
and rural development.
It also provides training to agricultural banks and
helps to conduct agricultural research.

Enhance Foreign Trade:
Development banks help to promote foreign
trade.
The government of India started the Export-
Import Bank of India (EXIM Bank) in
1982 to provide medium and long-term
loans to exporters and importers from India.
It provides Overseas Buyers Credit to buy
Indian capital goods. Also, encourages
abroad banks to provide finance to the
buyers in their country to buy capital goods
from India.

Review of Sick Units:
Development banks help to revive (cure)
sick-units. The government of India (GOI)
started the Industrial Investment Bank of
India (IIBI) to help sick units.
IIBI is the main credit and reconstruction
institution for a revival of sick units.
It facilitates modernization, restructuring, and
diversification of sick-units by providing
credit and other services.

Entrepreneurship Development:
Many development banks facilitate
entrepreneurship development.
NABARD, State Industrial Development
Banks, and State Finance Corporations
provide training to entrepreneurs in
developing leadership and business
management skills.
They conduct seminars and workshops for
the benefit of entrepreneurs.

Regional Development:
The development bank facilitates rural and
regional development.
They provide finance for starting companies
in backward areas.
Also, they help companies in project
management in such less-developed areas.

Contribution to Capital Markets:
The development bank contributes to the
growth of capital markets.
They invest in equity shares and debentures
of various companies listed in India.
Also, invest in mutual funds and facilitate the
growth of capital markets in India.

205 fmbo unit4e

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