Managing Banks and Financial Institution (MBA II Year IV Sem)

Unit III: Banking Regulation Act:

-Banking business, Commercial Banking: Functions and Services of Commercial Banks,
-Credit Management and sound credit culture,
-Branch licensing and opening of new branches,
-Acquisition of Business, Winding up and amalgamation, Bank Management. -Investment
banking- Evolution of investment banking in India, nature and scope, role and services provided
by investment banking in India.
-Wealth management - Definition, Importance, role and functions of wealth manager.
-Risk management- Definition, importance, types of risk faced by bank, impact of risk
management on banking.

 Banking regulation act 1949

Different types of banks, such as commercial banks, cooperative banks, rural banks, and
private sector banks exist in India. The Reserve Bank of India (RBI) is the governing
body for regulating and supervising the banks. Banking Regulation Act, 1949 is an Act
that provides a framework for regulating the banks of India. The Act came into force on
16th March 1949. This Act gives RBI the power to control the behaviour of banks. This
Act was passed as Banking Companies Act, 1949. It did not apply to Jammu and
Kashmir until 1956. This Act monitors the day-to-day operations of the bank. Under this
Act, the RBI can licence banks, put regulation over shareholding and voting rights of
shareholders, look over the appointment of the boards and management, and lay down the
instructions for audits. RBI also plays a role in mergers and liquidation.

History of the Banking Regulation Act, 1949

The concept of banking started in India with the establishment of the Bank of Hindustan.
Before nationalisation took place in India, the banking system of India was more of a
private nature. Banks were struggling to keep their branches open. Low capital and
reserves and greed for obtaining high profits became a reason for the failure of the
banking system. The banks were supervised under the Companies Act, 1913, but this Act
was not sufficient to regulate banks. The economy was not performing well, and this
started to damage the banks. Also, the concept of banks was mostly used by the upper-
class people. Frauds were also one of the reasons for the decline in the usage of banks.
This gave a need to regulate the banking system of India. As a result, the Banking
Regulation Act was introduced in 1949. It was initially applicable to banking companies,
but after the Amendment in 1965, the Act was also applicable to cooperative banks.

Objectives and functions of Banking Regulation Act 1949

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1. The provision of the Indian Companies Act 1913 was found inadequate and
unsatisfactory to regulate banking companies in India. Therefore a need was felt to
have a specific legislation having comprehensive coverage on banking business in
India.
2. Due to inadequacy of capital many banks failed and hence prescribing a minimum
capital requirement was felt necessary. The banking regulation act brought in certain
minimum capital requirements for banks.
3. One of the key objectives of this act was to avoid cut throat competition among
banking companies. The act was regulated the opening of branches and changing
location of existing branches.
4. To prevent indiscriminate opening of new branches and ensure balanced development
of banking companies by system of licensing.
5. Assign power to RBI to appoint, reappoint and removal of chairman, director and
officers of the banks. This could ensure the smooth and efficient functioning of banks
in India.
6. To protect the interest of depositors and public at large by incorporating certain
provisions, viz. prescribing cash reserve and liquidity reserve ratios. This enable bank
to meet demand depositors.
7. Provider compulsory amalgamation of weaker banks with senior banks, and thereby
strengthens the banking system in India.
8. Introduce few provisions to restrict foreign banks in investing funds of Indian
depositors outside India.
9. Provide quick and easy liquidation of banks when they are unable to continue further
or amalgamate with other banks.

Importance of Banking Regulation Act 1949

1. The Banking Regulation Act provides the capacity to RBI to permit banks and the
regulation of the shareholding awards capacity to RBI to direct the arrangement of the
boards and the executives‘ individuals from banks
2. It additionally sets down bearings for reviews to be overseen by RBI, and control
consolidating and liquidation
3. RBI issues directives on banking strategy in light of a legitimate concern for public
interest and can force punishments whenever required
4. Co-operative Banks were formed under this act in the year of 1965

Features of the Banking Regulation Act, 1949

The Act has been divided into five parts comprising 56 sections.

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The main features of the Act are mentioned below:

 Non-banking companies are forbidden to receive money deposits that are payable on
demand.
 Non-banking risks are reduced by prohibiting trading by banking companies.
 Maintaining minimum capital standards.
 Regulation on the acquisition of shares of banking companies.
 Power of the Central Government to make schemes for the banks.
 Provisions regarding liquidation proceedings for banking companies.

Important provisions of the Banking Regulation Act, 1949

Some important provisions of the Act are stated below:

Definitions

The Act has defined some terms such as banking, banking company, branch office, etc.

A banking company means a company that conducts banking business in India.

Banking means to accept for lending or investment of deposits of money from the public
which can be repaid on demand.

Subsidiary banks have the same meaning as given under the State Bank of India
(Subsidiary Banks) Act, 1959. A secured loan or advance means an advance or a loan
secured against the security of assets.

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 Business of Banking

Forms of business in which banking companies may engage.—

(1) In addition to the business of banking, a banking company may engage in any one or
more of the following forms of business, namely:—

(a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon
or without security; the drawing, making, accepting, discounting, buying, selling, collecting and
dealing in bills of exchange, hoondees, promissory notes, coupons, drafts, bills of lading, railway
receipts, warrants, debentures, certificates, scripts and other instruments, and securities whether
transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques
and circular notes; the buying, selling and dealing in bullion and specie; the buying and selling of
foreign exchange including foreign bank notes; the acquiring, holding, issuing on commission,
underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations,
securities and investments of all kinds; the purchasing and selling of bonds, scripts or other
forms of securities on behalf of constituents or others, the negotiating of loans and advances; the
receiving of all kinds of bonds, scripts or valuables on deposit or for safe custody or otherwise;
the providing of safe deposit vaults; the collecting and transmitting of money and securities;

(b) acting as agents for any Government or local authority or any other person or persons; the
carrying on of agency business of any description including the clearing and forwarding of
goods, giving of receipts and discharges and otherwise acting as an attorney on behalf of
customers but excluding the business of a 1 [managing agent or secretary and treasurer] of a
company;

(c) contracting for public and private loans and negotiating and issuing the same;

(d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying
out of any issue, public or private, of State, municipal or other loans or of shares, stock,
debentures or debenture stock of any company, corporation or association and the lending of
money for the purpose of any such issue;

(e) carrying on and transacting every kind of guarantee and indemnity business;

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(f) managing, selling and realising any property which may come into the possession of the
company in satisfaction or part satisfaction of any of its claims;

(g) acquiring and holding and generally dealing with any property or any right, title or interest in
any such property which may form the security or part of the security for any loans or advances
or which may be connected with any such security;

(h) undertaking and executing trusts;

(i) undertaking the administration of estates as executor, trustee or otherwise;

(j) establishing and supporting or aiding in the establishment and support of associations,
institutions, funds, trusts and conveniences calculated to benefit employees or ex-employees of
the company or the dependents or connections of such persons; granting pensions and
allowances

and making payments towards insurance; subscribing to or guaranteeing moneys for charitable or
benevolent objects or for any exhibition or for any public, general or useful object;

(k) the acquisition, construction, maintenance and alteration of any building or works necessary
or convenient for the purposes of the company;

(l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or

turning into account or otherwise dealing with all or any part of the property and rights of the
company;

(m) acquiring and undertaking the whole or any part of the business of any person or company,
when such business is of a nature enumerated or described in this sub-section;

(n) doing all such other things as are incidental or conducive to the promotion or advancement of
the business of the company;

(o) any other form of business which the Central Government may, by notification in the Official
Gazette, specify as a form of business in which it is lawful for a banking company to engage.

(2) No banking company shall engage in any form of business other than those referred to
in sub-section (1).

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 Commercial Banking:
In our routine life, we must have visited banks. These banks help us in many banking activities
like maintaining our savings account, depositing cash, and withdrawing the same, thus we see
these banks are always at our service. These are the commercial banks, which operate
commercially for serving the common people.

Before diving straight into the topic of functions of commercial banks, first, it is obligatory to
know what are Commercial Banks.

A commercial bank is a typical financial institution that accepts as well as deposits from the
general public and also, they give loans for the purposes of consumption activities and
investment activities, to make their own profit.

Commercial banks are profit-based institutions that offer financial services like loans, as well as
services like deposits, electronic transfers of funds, etc. to their customers. Commercial banks
have a significant role in a country‘s economy as these organizations fulfill the short and mid-
term financial requirements of industries.

The functions of commercial banks are primarily based on a business model of accepting public
deposits and utilizing that fund for various investment purposes. Such functions can be classified
into two categories, primary and secondary functions.

Functions of Commercial Bank

Primary Functions

 Accepting Deposits – Commercial banks accept deposits from their customers in the
form of saving, fixed, and current deposits.

 Savings Deposits – Savings deposits allow a customer to credit funds towards their
accounts for up to a certain limit. These deposits are preferred by individuals with a fixed
income, utilized to create savings over time.

 Fixed Deposits – Fixed deposits come with a predetermined lock-in period. Fixed
deposits are also referred to as time deposits as the funds are deposited for a specific time
frame.

 Current Deposits – Current deposits allow account holders to deposit and withdraw
money whenever necessary. In some cases, current accounts also offer overdrafts until a
pre-specified limit to individuals and businesses.

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 Providing Loans – One of the main functions of commercial banks is providing credit to
organizations and individuals, and profit from the earned interest. Usually, banks retain a
small reserve for their expenses while offering the remaining amount to customers as
various types of short and long-term credits.

 Credit Creation – A unique function of commercial banks is credit creation. Instead of

offering liquid cash, banks create a line of credit and transfer the loan to a business or
commercial body all at once.

Categories of Secured and Unsecured Loans provided by Commercial Banks

 Cash Credit – Commercial Banks and their Functions include extending advances to
individuals and organizations against bonds, inventories, and other types of securities.
This facility, commonly known as cash credit, provides a more substantial sum when
compared to other forms of credit.
 Short-Term Credits – Short-term loans are usually pledged without any security,
offering a smaller loan amount and repayment tenor. These are also referred to as
personal loans.

Secondary Functions

The following can be considered as the secondary functions of commercial banks –

 Providing locker Facilities – Commercial banks provide locker facilities to customers

who want to store valuables safely. Locker facilities eliminate the impending risk of theft
or loss, which prevail when kept at home.

 Dealing in Foreign Exchange – Commercial banks help provide foreign exchange to

individuals and organizations that export or import goods from overseas. However, only
certain banks which have the license to deal in foreign exchange are eligible for such
transactions.

 Exchange of Securities – Another function of commercial banks is to trade in bonds and

securities. Customers can purchase or sell the units from the financial institution itself,
which offers more convenience than alternate approaches.

 Discounting Bills of Exchange – The main function of a commercial bank in today‘s

date is to discount bills of businesses. Bill discounting is considered a profitable
investment for banks. Bills create a steady flow of funds, while not becoming a risky
venture during payment as it is considered as a negotiable instrument. These also do not
involve the financial institution in any litigation.

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 Bank as an Agent – Commercial Bank and its Function also require them to provide
finance-related services to customers, fulfilling the role of an agent. These services
usually include –

 Acting as an administrator, trustee, or executor of a customer-owned estate.

 Assisting customers with tax returns, tax refunds, and other similar tasks.
 Serving as a platform to pay premiums, repay loan installments, etc.

 Offering a platform for electronic transaction of funds, processing of cheques,

drafts, bills, etc.

Importance of Commercial Banks

Thus, we now know how important are commercial banks in performing the balanced function in
an economy. In a parallel universe, if commercial banks cease to perform these banking
functions, then the economy will collapse out of thirst for money liquidity. Along with the
growth, economic and social stability will be shattered completely.

Types of Commercial Banks

It is necessary to understand the different types of financial institutions to explain the functions
of commercial banks effectively. Commercial banks are commonly categorized into three types.
They are as follows:
 Public sector banks
 Private sector banks

 Foreign banks

Public Sector Banks

Public sector banks refer to a type of financial institution that is state-owned by the
corresponding Government. A significant part of the share of such organizations is held by the
Government. In India, the Reserve Bank of India, which acts as the central bank, creates
operating guidelines for the public sector banks.

Private Sector Banks

Private sector banks are financial institutions registered as companies with limited liabilities. The
major part of the share capital of such companies is owned by individuals or private businesses.

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Foreign Banks

Foreign banks are financial institutions that are operating overseas within a foreign nation. Post
the financial reform of India (in 1991), there was a marked increase in the number of foreign
banks on Indian soil. They are essential for the economic development of a nation.

Apart from these commercial banks that lend and deposit money, there is Central Bank which is
known as the ‗head honcho‘ in terms of banks. The Central Bank supervises the commercial
banks, sets their interest rates, and controls the money flow in the economy. This bank, unlike
the commercial banks, does not engage with the general public in terms of providing banking
services. Thus, Central Bank will never be as helpful as commercial banks to the general mass.

 Credit Management and sound credit culture

CONCEPT OF CREDIT:

The word credit has been derived from the Latin word credo which means I believe or I trust,
which signifies a trust or confidence reposed in another person. The term credit means, reposing
trust or confidence in somebody. In economics, it is interpreted to mean, in the same sense,
trusting in the solvency of a person or making a payment to a person to receive it back after some
time or lending of money and receiving of deposits etc.In other words, the meaning of credit can
be explained as,

 A contractual agreement in which, a borrower receives something of value now and

agrees to repay the lender at some later date.
 The borrowing capacity provided to an individual by the banking system, in the form of
credit or a loan. The total bank credit the individual has is the sum of the borrowing
capacity each lender bank provides to the individual

Definition:

Prof. Gide: ―It is an exchange which is complete after the expiry of a certain period of time‖.

Prof. Cole: ―Credit is purchasing power not derived from income but created by financial
institutions either as on offset to idle income held by depositors in the bank or as a net addition to
the total amount or purchasing power.‖

CONCEPT OF CREDIT MANAGEMENT:

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Credit management is the process of monitoring and collecting payments from customers. A
good credit management system minimizes the amount of capital tied up with debtors.

It is very important to have good credit management for efficient cash flow. There are instances
when a plan seems to be profitable when assumed theoretically but practical execution is not
possible due to insufficient funds. In order to avoid such situations, the best alternative is to limit
the likelihood of bad debts. This can only be achieved through good credit management
practices.

For running a profitable business in an enterprise the entrepreneur needs to prepare and design
new policies and procedures for credit management. For example, the terms and conditions,
invoicing promptly and the controlling debts.

Banks and financial institutions mobilize deposits and utilize them for lending. Generally lending
business is encouraged as it has the effect of funds being transferred from the system to
productive purposes which results into economic growth. The borrower takes fund from bank in
a form of loan and pays back the principal amount along with the interest. Sometimes in the non
– performance of the loan assets, the fund of the banks gets blocked and the profit margin goes
down. To avoid this situation, bank should manage its overall credit process. Bank should deploy
its credit in such a way that every sectors of economy can develop.

Credit management comprises two aspects; from one angle it is that how to distribute credit
among all sectors of economy so that every sector can develop and banks also get profit and
from the other angle, how to grant credit to various sectors, individuals and businesses to avoid
credit risk. Credit management is concerned mainly with using the bank‟s resource both
productively and profitably to achieve a preferable economic growth.

At the same time, it also seeks a fair distribution among the various segments of the economy so
that the economic fabric grows without any hindrance as stipulated in the national objectives, in
general and the banking objectives, in particular.

CREDIT INSTRUMENTS:

Credit instruments prove very helpful in encouragement and the development of credit and help I
the promotion and development of trade and commerce. Some of the credit instruments are,

1. Cheque: Cheque is the most popular instrument. It is an order drawn by a depositor on the
bank to pay a certain amount of money which is deposited with the bank.

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2. Bank draft: Bank draft is another important instrument of credit used by banks on either its
branch or the head office to send money from one place to other. Money sent through a bank
draft is cheaper, convenient and has less risk.

3. Bill of exchange: It enables a seller of commodity to issue an order to a buyer to make the
payment either to him or to a person whose name and address is mentioned therein either on the
site of the bill or within a period of time specified therein.

4. Promissory note: According to the Indian negotiable instrument act, „a promissory note‟ is an
instrument in writing containing an unconditional undertaking signed by the maker to pay a
certain sum of money only to or the order of certain person or the bearer of the instrument.

5. Government bonds: Government issues a sort of certificate to the person who subscribes to
these loans. Such certificates are called government bonds. Some of them are income tax free.

6. Treasury bills: These bills are also issued by the government. They are issued in anticipation
of the public revenues. 7. Traveler‟s cheque: This is the facility given by bank to the people. It
was most useful when recent technological instrument like ATMs were not available. A
customer was used to deposit money with the banks and banks give traveler‟s cheque in turn. It
was used to avoid risk of having cash while travelling.

Principles of Credit Management

Credit management plays a vital role in the banking sector. As we all know bank is one of the
major source of lending capital. So, Banks follow the following principles for lending capital −

Liquidity

Liquidity plays a major role when a bank is into lending money. Usually, banks give money for
short duration of time. This is because the money they lend is public money. This money can be
withdrawn by the depositor at any point of time.

So, to avoid this chaos, banks lend loans after the loan seeker produces enough security of assets
which can be easily marketable and transformable to cash in a short period of time. A bank is in
possession to take over these produced assets if the borrower fails to repay the loan amount after
some interval of time as decided

A bank has its own selection criteria for choosing security. Only those securities which acquires
enough liquidity are added in the bank‘s investment portfolio. This is important as the bank
requires funds to meet the urgent needs of its customers or depositors. The bank should be in a
condition to sell some of the securities at a very short notice without creating an impact on their

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market rates much. There are particular securities such as the central, state and local government
agreements which are easily saleable without having any impact on their market rates.

Shares and debentures of large industries are also addressed under this category. But the shares
and debentures of ordinary industries are not easily marketable without having a fall in their
market rates. Therefore, banks should always make investments in government securities and
shares and debentures of reputed industrial houses.

Safety

The second most important function of lending is safety, safety of funds lent. Safety means that
the borrower should be in a position to repay the loan and interest at regular durations of time
without any fail. The repayment of the loan relies on the nature of security and the potential of
the borrower to repay the loan.

Unlike all other investments, bank investments are risk-prone. The intensity of risk differs
according to the type of security. Securities of the central government are safer when compared
to the securities of the state governments and local bodies. Similarly, the securities of state
government and local bodies are much safer when compared to the securities of industrial
concerns.

This variation is due to the fact that the resources acquired by the central government are much
higher as compared to resourced held by the state and local governments. It is also higher than
the industrial concerns.

Also, the share and debentures of industrial concerns are bound to their earnings. Income varies
according to the business activities held in a country. The bank should also consider the ability of
the debtor to repay the debt of the governments while investing in their securities. The
prerequisites for this are political stability and peace and security within the country.

Securities of a government acquiring large tax revenue and high borrowing capacity are
considered as safe investments. The same goes with the securities of a rich municipality or local
body and state government of a flourishing area. Thus, while making any sort of investments,
banks should decide securities, shares and debentures of such governments, local bodies and
industrial concerns which meets the principle of safety.

Therefore, from the bank‘s way of perceiving, the nature of security is very essential while
lending a loan. Even after considering the securities, the bank needs to check the
creditworthiness of the borrower which is monitored by his character, capacity to repay, and his
financial standing. Above all, the safety of bank funds relies on the technical feasibility and
economic viability of the project for which the loan is to be given.

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Diversity

While selecting an investment portfolio, a commercial bank should abide by the principle of
diversity. It should never invest its total funds in a specific type of securities, it should prefer
investing in different types of securities.

It should select the shares and debentures of various industries located in different parts of the
country. In case of state governments and local governing bodies, same principle should be
abided to. Diversification basically targets at reducing risk of the investment portfolio of a bank.

The principle of diversity is applicable to the advancing of loans to different types of firms,
industries, factories, businesses and markets. A bank should abide by the maxim that is ―Do not
keep all eggs in one basket.‖ It should distribute its risks by lending loans to different trades and
companies in different parts of the country.

Stability

Another essential principle of a bank‘s investment policy is stability. A bank should prefer
investing in those stocks and securities which hold a high degree of stability in their costs. Any
bank cannot incur any loss on the rate of its securities. So it should always invest funds in the
shares of branded companies where the probability of decline in their rate is less.

Government contracts and debentures of industries carry fixed costs of interest. Their cost varies
with variation in the market rate of interest. But the bank is bound to liquidate a part of them to
satisfy its needs of cash whenever stuck by a financial crisis.

Else, they follow their full term of 10 years or more and variations in the market rate of interest
do not disturb them. So, bank investments in debentures and contracts are more stable when
compared to the shares of industries.

Profitability

This should be the chief principle of investment. A bank should only invest if it earns sufficient
profits from it. Thus, it should, invest in securities that have a fair and stable return on the funds
invested. The procuring capacity of securities and shares relies on the interest rate and the
dividend rate and the tax benefits they hold.

Broadly, it is the securities of government branches like the government at the center, state and
local bodies that hugely carry the exception of their interest from taxes. A bank should prefer
investing in these type of securities instead of investing in the shares of new companies which

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also carry tax exception. This is due to the fact that shares of new companies are not considered
as safe investments.

Now lending money to someone is accompanied by some risks mainly. As we know that bank
lends the money of its depositors as loans. To put it simply the main job of a bank is to rent
money from depositors and give money to the borrowers. As the primary source of funds for a
bank is the money deposited by its customers which are repayable as and when required by the
depositors, the bank needs to be very careful while lending money to customers.

Banks make money by lending money to borrowers and charging some interest rates. So, it is
very essential from the bank‘s part to follow the cardinal principles of lending. When these
principles are abided, they assure the safety of banks‘ funds and in response to that they assure
its depositors and shareholders. In this whole process, banks earn good profits and grow as
financial institutions. Sound lending principles by banks also help the economy of a nation to
prosper and also advertise expansion of banks in rural areas.

 Branch licensing and opening of new branches- Section 23 of Banking

Regulation Act 1949
The opening of branches by banks is governed by the provisions of Section 23 of the Banking
Regulation Act, 1949 (the Act). In terms of these provisions, banks without the prior approval of
the RBI, cannot open a new place of business in India or abroad or change otherwise than within
the same city, town or village, the location of the existing place of business. Foreign banks are
allowed to operate in India through branches only. A foreign bank desirous of opening its maiden
branch in India may apply to RBI giving relevant information about the bank, its major
shareholders, financial position, etc. The branch licensing falls within the ambit of RBI.

Condition for Branch Licensing

The Reserve Bank of India may grant permission for opening new branch or transfer existing
place of business, if is satisfied with:

 financial condition and history of bank

 the general character of its management
 the adequacy of its capital structure and earning prospects

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 public interest will be served by the opening or as the case may be

The Reserve Bank may require to be satisfied by an inspection under section 35 of Banking
Regulation Act.

The regional rural bank requires the permission of the Reserve Bank shall forward its application
to the Reserve Bank through the NABARD which shall give its comments on the merits of the
application and send it to the Reserve Bank.

General policy on Branch Licensing relating to Indian Scheduled Commercial Banks.

The Board of Directors of banks are required to decide on the policy and strategy for setting up new
branches taking into account the yearly business plan, potential for business at the new centres for
opening of branches, profitability of the proposed branches, the efficacy of the internal control system,
redeployment of staff where surplus manpower has been identified and for extending prompt and
costeffective customer service to the clientele.

Banks should obtain prior approval of their Board/Committee of Directors before opening, shifting or
closing of offices/branches etc. The proposal for opening/shifting of branches is to be submitted along
with the prescribed application in Form VI (Rule 12) of Banking Regulation (Companies Rules), 1949 to
Reserve Bank of India for approval/licence. (Annexure I)

Requests received from banks for opening of branches are considered by Reserve Bank of India on merits
of each case and taking into consideration overall financial position of the bank, quality of its
management, efficacy of the internal control system, profitability and other relevant factors.

After the receipt of authorisations from Reserve Bank of India, the banks should finalise premises and
infrastructure etc. and approach the concerned Regional Office of Reserve Bank of India for the actual
licence for opening of the branch.

Further, if the branch proposes to undertake government business it should obtain prior approval from the
concerned Government authority and Reserve Bank of India. The banks should approach the Regional
Director, RBI of the concerned jurisdiction for conducting business of the State Government, and the
Department of Government & Bank Accounts, Central Office, RBI, Mumbai in regard to Central
Government business. The branch should be opened only after obtaining a licence from Reserve Bank of
India. There should not be inordinate delay by banks in utilisation of authorisations / licences for opening
of branches

OPENING OF BRANCHES.

1. General branches

1.1 At Rural centres

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It is left to the judgement of the individual banks to assess the need for opening additional
branches at rural centres (population less than ten thousand) within their Service Area. The
banks' proposals for opening branches at rural centres are to be approved by concerned District
Consultative Committee (DCC) and submitted to the Central Office of Department of Banking
Operations and Development (DBOD) for prior approval through the concerned State
Government (Directorate of Institutional Finance). However, new private sector banks may
forward their proposals directly to Reserve Bank of India since these banks are required to open
a minimum of 25% of their total branches in Rural/Semi Urban areas as a condition of the
licence issued to them under Section 22 of the B.R.Act, 1949. The rural branches of these banks
have to accept the allocation under the Annual Credit Plan, if allocated to them by the respective
District Consultative Committee.

1.2 At Hilly and Tribal Areas

Having regard to the peculiar topography in hilly/tribal areas and sparsely populated regions
there could still exist need for additional bank branches in such areas. Also, in States like Bihar
and North Eastern States viz Assam, Manipur, Tripura etc, the Average Population Per Bank
Office is comparatively higher and hence such areas and States should be given preference in
opening new bank branches.

1.3 At Semi-urban/Urban and Metropolitan Centres

The banks can identify Semi-Urban centres (population more than ten thousand but less than one
lakh), Urban centres (population more than one lakh but less than ten lakh) and Metropolitan
centres (population more than ten lakh) for opening of branches depending upon the business
potential and profitability of the proposed branches. They should forward the proposals together
with relative Board Resolutions to Central Office of DBOD for prior approval. Requests from
the banks for opening branches at these centres will be considered on merits of each case. Note:
Population criteria mentioned above will be as per latest census report figures of the centre
(revenue unit and not locality).

2. Specialised branches.

Banks can open the following categories of Specialised branches without prior approval but only
after obtaining a licence from the concerned Regional Office of RBI prior to the opening of these
branches.

(a) Industrial Finance branches

(b) Overseas branches

(c) SIB/SSI branches

(d) Treasury branches, and

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(e) NRI branches

The banks should ensure that the specialised branches opened do not adversely affect the
viability of other branches of the bank in the area. (cf. para 3(vii) of circular DBOD
No.BL.BC.132/22.01.001/92 dated 20.05.1992).

For opening of all other categories of specialised branches, such as personal banking branches,
merchant banking branches, asset recovery branches etc., banks are required to seek the prior
approval of Central Office of Department of Banking Operations and Development. (cf. para. II
of circular DBOD No.BL.BC.41 /22.01.001/92 dated 9.10.1992)

Further, banks have been permitted to categorise their general banking branches having 60% or
more of their advances to SSI sector as specialised SSI branches. However, banks should ensure
that after their classification as Specialised SSI branches, non-SSI Clientele of SSI branches are
not put to inconvenience / deprived of banking facilities. (cf. Circular DBOD. No.
BL.BC.74/22.01.001/2002 dated 11 March 2002)

Banks are required to obtain necessary amendment to the licences from the concerned Regional
Office immediately on classification of these branches as Specialised SSI branches.

3 Housing Finance branches

The banks should designate one of their specific branches in each district for the purpose of
housing finance. The housing finance branch so designated could also undertake other normal
banking functions. Banks are however required to obtain prior amendment to the licence from
the concerned Regional Office of Reserve Bank of India. (para 3(VII) of circular DBOD
No.BL.BC.132/22.01.001/92 dated 20.05.1992).

4 Industrial/Project Area Branches

Project sites, industrial areas/estates promoted by the State Governments and new markets are
expected to require additional bank branches. In considering these requirements, the existing
banking arrangements of such projects/industrial areas are to be taken into account. While
applying for opening of branches at such centres banks are required to provide the following
information :

(a) Project description together with the estimated outlay thereon;

(b) Stage of implementation of the project;

(c) Deficiencies in the existing banking arrangements and whether arrangements could be
worked out for the purpose with a nearby bank branch functioning at/near such project centre;

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(d) Whether the project place falls in an existing service area; if so, the bank whose branch is
servicing such area;

(e) The involvement of the banks, if any, in financing such projects;

(f) Existing branches, if any, and the viability of the proposed branch

5. Opening of Satellite Offices.

Where the banks do not find it viable to open branches in rural areas, they may open satellite
offices after obtaining approval of concerned District Consultative Committee and Directorate of
Institutional Finance of the concerned State Government. The application for opening of the
satellite office along with relative Board approval should be forwarded to the Central Office of
Department of Banking Operations and Development for prior approval. The following
guidelines may be followed by the banks for establishing Satellite Offices:

a) The Satellite Offices should be established at fixed premises in the surrounding villages and
should be controlled and operated from a base branch located at a Central Village/Block Head
Quarters.

b) Each Satellite Office should function on a few specified days(at least twice) in a week at
specified hours.

c) All types of banking transactions may be conducted at these offices.

d) The customers of the Satellite Offices may be permitted to transact business at the base branch
on non-operating days of such offices.

e) While separate ledgers/registers/scrolls may be maintained for each Satellite Office, all the
transactions carried out at these offices should be incorporated in the books of account of the
base branch.

f) The staff attached to the base branch, preferably consisting of a member of supervisory staff, a
cashier-cum-clerk and an armed guard, may be deputed to the Satellite Offices.

g) Adequate arrangements for insurance of furniture, cash-in-transit, etc. may be made. (cf.
circular DBOD.No.BL.BC.72/C-168(64-D)-87 dated 14.12.1987 )

6. Service branches

The banks can open, without the approval of Reserve Bank of India, Service branches/Regional
Collection Centres for facilitating clearing and allied work at large centres. However, banks are
required to obtain a licence from the concerned Regional Office of RBI prior to the functioning
of these branches. Similarly, banks can shift or close these offices at their discretion without
approval of RBI. In case of shifting, banks are required to obtain necessary amendment to the

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licence from the Regional Office of RBI under whose jurisdiction the proposed location for
shifting falls before the shifting of the office. In case of closure of such offices, the licence has to
be surrendered to the concerned Regional Office of RBI for cancellation immediately after the
closure of the office under advice to Department of Statistical Analysis and Computer Services
(DESACS) of RBI. (cf. para 3(VI) of circular DBOD No.BL.BC.132/22.01.001/92 dated
20.05.1992)

7 Regional/Administrative/ Zonal/Controlling Offices.

Banks may at their discretion open Regional/ Administrative/ Zonal/ Controlling offices which
are not permitted to transact any banking business. However banks are required to obtain a
licence from the concerned Regional Office of Reserve Bank of India before functioning/opening
of these offices. Banks can also shift or close these offices at their discretion without approval of
RBI. In case of shifting, banks are required to obtain necessary amendment to the licence from
the Regional Office of RBI under whose jurisdiction the proposed location for shifting falls
before shifting of the concerned offices. In case of closure of such offices, the licence has to be
surrendered to the concerned Regional Office of RBI for cancellation immediately after the
closure of the office under advice to DESACS of RBI. (cf. para 3(V) of circular DBOD
No.BL.BC.132/ 22.01.001/ 92 dated 20.05.1992)

 Merger (amalgamation) & Acquisition of Banks

The banking sector of a country is considered to be an integral part of its financial system. A
nation‘s economy revolves around its banking system. Strong banking indicates that the financial
backbone of a country is strong and that a concrete path has been laid for growth and
development. The Indian banking sector is advancing at a phenomenal rate, and its condition is
considered to be far better than that of the other major economies in the world. Indian banks have
proven resilient to global economic downturns. The financial market and technology are also
constantly changing, and banks often have to compete fiercely in order to capture a substantial
customer base. This is where the role of mergers and acquisitions (―M&As‖) becomes vital for
the banks. Merger refers to the amalgamation of two separate entities into a single entity, with
one losing its corporate existence. An acquisition is the act of taking over the controlling interest
in the share capital of a smaller entity from a bigger entity. M&As have been used by banking
companies throughout the world to increase their market dominance. It is considered to be the
best and most effective way to enter new markets and gain the existing customer base of the
target bank along with its technological capabilities. The modern corporate world has resorted to

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the strategy of M&As for the extension of the domain of its business as well as to manage the
financial struggles that have emerged due to the economic slowdown.

As the economy opened, Indian industries were exposed to international and domestic
competition, forcing them to restructure their business operations with the support of M&As. For
the Indian banking industry, the adoption of M&As has proved to be rewarding, as they have
been able to expand their global outreach through mergers. And as acknowledged by the RBI in
its occasional paper, acquirer banks‘ efficiency and financial performance have been reported to
have improved post-merger.

Benefits of M&A for Indian banks

The following are the benefits of M&As for Indian banks:-

1. A survival necessity for weaker banks

With the advent of international banks in the Indian market, a lot of banks struggle to survive
amidst the increased competition. M&As tend to stabilise weaker banks by diversifying risk
management. The existence of weaker banks is not wiped out with the support of stronger banks,
and the stronger banks get to expand their customer base as well.

2. Economics of scale

Due to the amalgamated customer base, the product becomes more profitable. The range of
banking products is expanded for the revised customer pool, and broader options for financial
instruments are provided as well. The merged bank gets a stronger risk management plan along
with an expansion in market capitalization.

3. Increased financial liquidity

M&As ensure direct access to capital for a cash-strapped bank. Mergers guarantee an increase in
financial liquidity and enable the banks to utilise their pool of resources properly. Post-merger,
several projects can be undertaken by the merged bank that could not be undertaken due to the
paucity of financial resources.

4. Advancement in the technological aspect of banking

The advent of E-banking has somewhat replaced the traditional methods of banking. Having a
technological edge is imperative for a modern bank in order to retain and expand its customer

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base. M&As enable banks to adopt the latest technology for delivering better services to their
customers.

5. New opportunities for skilled and talented

With the amalgamation of two banks, their workforce also combines. Hence, with an increased
workforce, banks can utilise their talented workforce to gain an edge over their competitors.
M&As also provide fresh opportunities for the employees of the merged bank, as they provide
better networking opportunities and expose them to a larger pool of resources.

Amalgamation between two banking companies

According to Section 44A of the Banking Regulation Act of 1949, no banking company may
merge with another banking company unless a scheme outlining the terms of the merger has
been presented in draft form to the shareholders of each of the relevant banking companies
separately and approved by a resolution passed by a majority of the shareholders of each of the
aforementioned companies present in person or by proxy at a meeting of shareholders.

Prior to the shareholders' approval, the boards of directors of the two banking companies must
accept the draft scheme. The following factors should be taken into account while considering
such approval:

1. The value of the proposed merged company's assets, liabilities, and reserves, and if the
proposed incorporation will result in an increase in the asset value;
2. The type of compensation the merging banking company will provide to the shareholders
of the merged company;
3. Whether the required amount of due diligence has been done with regard to the proposed
merger;
4. Whether the swap ratio has been determined by independent valuers and whether such
swap ratio is fair and appropriate.
5. The shareholding structure of the two banking companies and if, as a result of the merger
and the swap ratio, any person's, entity's, or group's ownership of shares in the merged
banking company will violate RBI's policies;
6. The planned modifications to the board of directors' composition and whether the
resulting membership of the board would be in compliance with the RBI Guidelines; and
7. The impact on the viability and the capital adequacy ratio of the amalgamating banking
company.

If such a scheme is adopted by the required number of shareholders, it must be presented to the
RBI for approval, which if granted, will be binding on the relevant banking companies.

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Amalgamation of an NBFC with a banking company

In the event its proposed to merge an NBFC with a banking company, the banking company
should procure RBI's permission after its board has authorized the proposed merger but before it
is filed to the Tribunal for approval.

With respect to the approval of the scheme, in addition to the considerations listed above, the
board should also consider the following aspects:

1. Determine whether any RBI/SEBI regulations have been violated or are likely to be
violated by the NBFC, and if so, ensure that they are complied with, before the scheme is
approved;
2. Whether ―Know Your Customer‖ norms are complied with by the NBFC for all its
accounts which will become accounts of the banking company;
3. Whether the NBFC has used credit facilities from banks or financial institutions, and if
so, whether the loan agreements require the NBFC to obtain the consent of the bank or
financial institution concerned for the proposed merger.

Reasons for M&As in banks

The following are the reasons for the mergers in banks:

1. Merger of weaker banks

The objective of combining weaker banks with stronger banks has been supported in order to
stabilize weak banks and diversify risk management. By joining forces with a more powerful
bank, the weaker ones can maintain its presence and avoid going out of business completely.

2. Synergies and Economies of scale

Due to the synergies created by the combined client bases of the two banks, the amalgamated
product will be more profitable and provide improved customer satisfaction. The merged bank
will have superior business portfolio, risk management plans, and market capitalization. It also
benefits from economies of scale and lower costs through better utilization of available
resources.

3. Financial liquidity and economies of scale

A merger increases liquidity, ensures direct access to cash resources, and assists in the
disposition of surplus and obsolete assets. It aids to pool the resources of the individual banks
and use them in an effective and efficient manner. After the merger, the banks will be better
equipped to fund massive projects that they previously wouldn't be able to do so on their own,
making the funding procedure for those projects swift and simple.

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4. Technology advancement
With the advent of the internet, banks can now offer services with the touch of a screen, allowing
them to utilize the latest technologies. Through the merger, banks work together and make use of
cutting-edge technology to deliver better services and support the expansion of the banking
industry.

5. Skill & Talent

When two banks merge or are acquired by one another, staff and expertise are also amalgamated,
creating a larger talent pool that gives the merged entity an advantage over its competitors.

 Winding up of banking companies under Banking Regulation Act, 1949

India has a vast population. All their financial needs are met by a lot of banking companies in
India. Similarly, an enormous amount of money is deposited with the banking companies.
So, to ensure that citizens‘ hard-earned money is vested in the hands of reliable banking
companies, the Reserve Bank of India (RBI) regulates their activities as per the Banking
Regulation Act 1949. Along with regulating their general activities, the RBI also governs the
banking companies‘ winding-up process. Such processes are governed by the Banking
Regulation Act 1949.

Ways to wind up a banking company

Part III of the Banking Regulation Act 1949 (hereafter referred to as ―the Act‖) deals with the
suspension of business and winding-up of banking companies. Section s 38 to 44 exclusively
deal with the winding up of such companies. There are two ways by which the process to wind
up any banking company can be initiated, which are:

1. Winding up by the High Court, and

2. Voluntary winding up.

The general rule for liquidating any banking company‘s assets was given in the landmark
case Mann v. Goldstein [1968] 1 WLR 1091; in this case, it was held that whenever any banking
company is unable to pay off its debts it should avail the aid of judicial proceedings.

1. Winding up by the high court:

Part III Section 38 to 43 exclusively deal with the winding up of banking companies by the High
Court (hereafter referred to as ―The Court‖). The High Court mentioned under these sections
denote the High Court exercising jurisdiction in the place where the registered office of the
banking company in concern is situated; if it is a banking company incorporated outside India,

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then the High Court exercising jurisdiction in the place where the principal office of such
company is located would be the mentioned High Court.

Section 38(1) of the Act provides the grounds based on which the Court shall order a banking
company to wound up. The grounds are:

1. The banking company is unable to pay its debts, or

2. RBI applies for the winding up of such s company under s.37 of the Act.

Section 37 of the Act

Section 37 of the Act deals with the suspension of the banking company if it is temporarily
unable to meet its obligations. On the application submitted by such a company, the High Court
can make an order to stay any actions or proceedings against the banking company for a fixed
period, not exceeding six months. The Court must furnish a copy of the stay order to
RBI. Section 37 of the Act also states that the said application must be filed along with the
report of RBI stating that such a banking company would be able to pay off its debts if the
application is granted. However, it is not needed if the High Court is convinced by sufficient
reasons; under such a situation the stay order can be granted even without the RBI‘s report. But
the report should be submitted during the suspension period.

2. Voluntary winding up:

Section 44 of the Act deals with the voluntary winding up of banking companies. It states that a
banking company can voluntarily wind up only if RBI furnishes a written certification stating the
company can pay off all its debts. Meaning, a written certificate by RBI must accompany any
application filed by a banking company to the Court for its voluntary winding up. Further, Court
has the power to order the voluntary wind up to continue on its supervision.While the voluntary
winding up is in process, the Court, on its own motion or the application of RBI, can order
winding up by the Court itself (that is, as under Section 38 of the Act) on the following grounds:

1. The banking company is unable to pay off its debts during the voluntary winding-up
process; or
2. When the banking company is undergoing the voluntary winding up under the
supervision of the Court, the Court finds that the winding-up cannot take place
without having any detrimental effect on the depositors.
 Investment Banks

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Investment banking constitutes a distinct sector within banking that facilitates the
acquisition of funds for individuals or entities and delivers financial advisory solutions.
Operating as intermediaries connecting security issuers with investors, they aid emerging
companies in becoming publicly traded. Their role involves either purchasing all
accessible shares at a value determined by their specialists and subsequently reselling to
the general public, or marketing shares on behalf of the issuer and earning a commission
for each share sold.

An Investment Bank is a large financial organization that specialises in high finance.

The organisation assists businesses in gaining access to capital markets such as the stock
and bond markets. This aids in the raising of funds for expansion or other purposes.

 An investment bank is a type of financial services firm that acts as an intermediary in

large and complex financial transactions.
 When a startup company prepares to launch an initial public offering (IPO) or when
a corporation merges with a competitor, an investment bank is usually involved.
 It also acts as a broker or financial adviser for large institutional clients like pension
funds.
 JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup, Bank of America,
Credit Suisse, and Deutsche Bank are among the world's largest investment banks.
 A typical investment bank might do the following:
o Raising equity capital.
o Raise debt capital.
o Whether it's insuring bonds or introducing new products
o Proprietary trading, Teams of in-house money managers have the authority to
invest or trade the company's own funds for its personal account.
 Let's imagine a company that wanted to sell Rs1000 crores in bonds to fund the
construction of new operations in India. An investment bank, working with a team of
attorneys and accountants, would assist it in finding purchasers for the bonds and
handling the paperwork.

 Evolution of investment banking in India

For more than three decades, the 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

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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 totally different from commercial banks 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.

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 was lot of fluctuations in the issue
market affecting the merchant banking industry. SEBI started regulating the merchant
banking activities in 1992 and a majority of the merchant bankers were registered with it.
The number of merchant bankers registered with SEBI began to dwindle after the mid
nineties due to the inactivity in the primary market. Many of the merchant bankers were
into issue management or associated 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.

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 be performed by a single entity
for two reasons:

1. To prevent excessive exposure to business risk.

2. To prescribe and monitor capital adequacy and risk mitigation mechanisms.

 The commercial banks are prohibited from getting exposed to stock market investments and
lending against stocks beyond certain specified limits under the provisions of RBI and Banking
Regulation Act.
 Merchant banking activities can be carried out only after obtaining a merchant-banking license
from SEBI.
 Merchant bankers other than banks and financial institutions are not authorized to carry out any
business other than merchant banking.

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 The Equity research activity has to be carried out independent of the merchant banking activity
to avoid conflict of interest.
 Stock broking business has to be separated into a different company

Regulatory Framework for Investment Banking in India

An overview of the regulatory framework is furnished below:

 All investment banks incorporated under the Companies Act, 1956 are governed by the
provisions of that Act.
 Those investment banks that are incorporated under a separate statute are regulated by their
respective statute. Ex: SBI, IDBI.
 Universal banks that function as investment banks are regulated by RBI under the RBI Act,
1934.
 All Non-banking Finance Companies that function as investment banks are regulated 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 are governed by Foreign Exchange Management Act, 1999 with respect
to foreign investment.

Major Players in the Indian Industry

Several big investment banks have set many group entities in which the core and non-core
business segments are distributed. SBI, IDBI, ICICI, IL&FS, Kotak Mahindra, Citibank and
others offer almost all of the investment banking activities permitted in the country. The long-
term financial institutions like ICICI and IDBI have converted themselves into full service
commercial banks (called as Universal banks). The Indian investment banks have not gone
global so far though some banks do have a presence in the overseas. The middle level constitutes
of some niche players and a few subsidiaries of the public sector banks. Certain banks like
Canara bank and Punjab National bank have had successful merchant banking activities while
some other subsidiaries have either closed their operations or sold off their business due to a
couple of securities scam in the industry.

There are also merchant banks structures as NBFCs such as Alpic Finance, Rabo India Finance
ltd and so on. Some of the pure advisory firms that operate in the Indian market are Lazard
Capital, Ernst & Young, KPMG, and Price Water Coopers etc.

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Scope of Investment Banking in India

 Increased Economic Growth – In terms of economic growth, India has continuously

surpassed other major economies over the years. With more than 1.4 billion people living
in India, it has been a big domestic market with profitable investment opportunities. The
dynamic and young labour force, growing middle class and increasing consumer
purchasing power have bolstered the country‘s GDP growth rate. A situation analysis
illustrates the untrapped potential for achieving long-term growth and more economic
formalisation. This is because, barely 6% of the population pays income taxes and only
6% participates in Digital commerce, despite the country‘s enormous population.
 A stable government and structural reforms – The Indian government has
demonstrated a strong commitment to implementing structural reforms that promote
growth and encourage investment. Because of schemes like GST and the Made in India
initiative, business operations have been simplified and transparency has been enhanced.
These investor-friendly measures and political stability provide a solid foundation for
long-term growth.
 Progress in Technology and Digital Transformation – To create inclusion and
prevalence, India has embraced the digital revolution. With the increasing scope of
investment banking, India is expected to have 8.9 billion digital payments and 10 million
GST-registered businesses by last year. The incredible acceleration and transformation, it
is attributed to India‘s Digital Public Infrastructure which employs open network
standards. As the emphasis is on digital transformation and innovation, India has
established itself as a tech-savvy global leader. This in turn boosts small businesses and
offers appealing investment prospects.

 Role and services provided by investment banking in India

Underwriting
Investment banks serve as intermediaries and help corporations raise capital by underwriting new
securities offerings, meaning they purchase securities from the issuing company and then sell
them to investors.
Advice on Mergers and Acquisitions
This advice can be comprehensive, from tracking the market in search of a company to or
punctual for the moment of negotiation and purchase. And is that when a company buys another
or merges, it needs to carry out risk studies, propose formulas to finance the purchase and close
all legal issues.

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Asset Management
Some investment banks also offer asset management services. Their main job is to manage the
investment portfolios of their clients.
Risk Management
Investment banks help their clients manage risk by providing hedging strategies and other risk
management solutions.
Issuance and Creation of Structured Products
This would fall within the advisory part and is much less complex than it may seem. These
services are used when a company wants to offer financial products to the general public or to
structural investors that go beyond debt issues for use. Business banks can take charge of
designing these debt issuances and even go further with the creation of structured products.
Private Wealth Management (PWM)
Investment banks provide customized investment and financial management services to high-net-
worth individuals. Several banks have specialized divisions or subsidiaries offering such services
to their clients. Private wealth management typically includes services such as investment
planning, portfolio management, tax planning, and estate planning.
Financing of New Projects
Financing projects is another of the activities that characterize investment banks. In these
activities, the bank intervenes to create an attractive design that allows partners to be found who
can provide the necessary resources for the project.
Design Financial structure
Investment banks are also in charge of designing an appropriate financial structure, seeking
sources for the necessary financing, intervening in negotiations, managing the procedures related
to the guarantees demanded by investors, and executing contracts, among others.

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 Wealth management - Definition, Importance, role and functions of

wealth manager
Wealth Management is not just a buzzword in the Indian financial landscape; it's a strategic
approach to managing your financial well-being. This is where your financial dreams are
nurtured, protected, and grown. In this comprehensive guide, we'll explore what is wealth
management, how it works, its benefits, key strategies, and even help you distinguish between
wealth managers and financial planners.

Wealth management meaning, at its core, is the comprehensive management of an individual's

financial life. Wealth management represents a strategic and comprehensive process, intricately

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weaving together various financial facets. It encompasses the art of financial planning, skillful
investment management, astute tax optimization, meticulous estate planning, and the art of risk
management. These elements are meticulously customized to cater to individuals' and families'
unique financial needs and aspirations.

When you embark on a wealth management journey, a skilled wealth manager becomes your
trusted guide. They craft a strategic financial plan that outlines how to achieve these objectives,
considering the client's risk tolerance and unique circumstances.

Wealth management offers a personalized, all-encompassing strategy to ensure financial goals

are achieved and financial resources are efficiently managed. It provides peace of mind,
professional expertise, and a roadmap to financial prosperity tailored to the client's unique
circumstances.

Example of Wealth Management

Imagine Raj, who is 35 years old and has financial goals, including retirement planning, his
daughter‘s marriage, and purchasing a second home in 20 years. Raj's current net worth is ₹1
crore, and he has a monthly surplus of ₹50,000 to invest.

Considering Raj's goals, risk tolerance, and current financial situation, a wealth manager designs
a comprehensive plan. They recommend an investment portfolio management with an expected
annual return of 8%, accounting for the historical performance of Indian financial markets.

The plan includes a tax-efficient investment strategy, helping Raj minimize his tax liability. As
Raj's income and assets grow, the wealth manager suggests periodic portfolio management and
financial strategy adjustments to align with his wealth preservation goals and risk profile.

Over the years, this wealth management approach has helped Raj accumulate wealth. By the time
he reaches 60, his wealth has grown to ₹5 crores, ensuring a comfortable retirement.
Furthermore, he's financially prepared to fund his daughter‘s marriage and buy a second home.

Benefits of Wealth Management

Let's explore the numerous advantages of embracing wealth management:

1. Holistic Financial Guidance

Wealth managers take a 360-degree view of your financial life. They consider your current
situation, future goals, and personal values. This holistic approach ensures your financial plan
aligns with your life vision.

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2. Expertise and Experience

Wealth managers are highly trained professionals with years of experience. Their expertise helps
you make informed financial decisions and navigate complex financial markets.

3. Personalized Investment Strategies

Your portfolio is tailored to your unique goals and risk tolerance. This personalization allows
you to maximize returns while managing risk effectively.

4. Tax Efficiency
Wealth managers use tax-efficient strategies to reduce your tax burden, allowing for more
investment and spending opportunities.

5. Peace of Mind
Knowing that your financial future is in capable hands can provide tremendous security and
peace of mind.

6. Time Savings
By delegating the intricacies of financial management to experts, you free up time for the things
that matter most to you.

7. Legacy and Estate Planning

Wealth managers can assist in preserving your wealth for future generations, ensuring your
legacy lives on.

8. Risk Mitigation
A well-structured wealth management plan includes strategies to mitigate financial risks,
protecting you from unexpected setbacks.

Functions of Wealth Management

There are many wealth management functions, let‘s know about them one to one.
 The primary function is to help you reach your financial goals. This can be done by increasing
your net worth, reducing your debt and improving your cash flow. The advisor will also help
you plan for retirement or other needs that may arise in the future.
 The main reason why you should use wealth management is to improve your financial
situation. A good advisor will help you make better decisions, leading to more money in your
pocket. The advisor will also provide advice on tax and estate planning so that you can ensure
that your assets are passed on to the right people after death. When choosing an advisor, look
for one with experience and a proven track record of helping clients achieve their goals.

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 Your financial advisor doesn‘t have to be your only source of financial help, but he or she
should be one of the first people you turn to. The right advisor can make a huge difference in
your life and improve your financial situation.
 The financial world is full of jargon and complex terminology, which can overwhelm the
average consumer. Your financial advisor should be able to break down everything into
simple terms you can understand and apply in your daily life. If you have any questions or
concerns about your finances, don‘t hesitate to ask your financial advisor.
 Wealth management is essential because it will help you meet your long-term goals. A good
financial advisor will work with you to create a plan that helps you achieve your financial
goals for meeting personal goals such as a child‘s education, a house, or a car.
 The importance of wealth management can‘t be ignored because it will help you set aside
money for a rainy day, pay off debt and save for retirement. Your financial advisor can also
help you invest in the right financial products to help you grow your savings faster.
 Wealth management can save you from making terrible financial decisions with long-term
consequences and help you avoid financial pitfalls that could cause you to lose your hard-
earned money. A good financial advisor will work with you to create a plan that helps you
achieve your financial goals while minimizing unnecessary risks.
Advantages of Wealth Management?
 Wealth management plans are tailor-made to patron-particular desires. The monetary
merchandise is blended to attain the monetary desires of the patron efficiently.
 The advisory offerings entail the managing of patron touchy facts. Investment advisors should
preserve the confidentiality of facts received during monetary-making plans and advisory
offerings.
 A wealth management marketing consultant uses numerous monetary disciplines, including
monetary and accounting, tax offerings, funding recommendations, felony or property-making
plans, and retirement-making plans, to manage a prosperous patron‘s wealth as a package deal
of offerings.
 It practices and the corresponding offerings may also fluctuate from one place to any other,
relying on the kingdom of the economy, according to capita earnings and the saving conduct
of the people.
 Wealth management is different from funding recommendation. The former is a different
holistic technique wherein an unmarried supervisor coordinates all of the offerings had to
manage their cash and plan for the patron‘s desires, which include the contemporary and
destiny desires of the patron‘s family.

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 While maximum wealth managers offer offerings in any monetary field, sure wealth managers
focus on particular regions of finance. The specialization could be primarily based on the
wealth supervisor‘s location of information.
 Wealth management offerings are typically suitable for wealthy people who have a wide array
of numerous desires. The advisors are high-stage experts and experts.
 Wealth managers may match, in my view, as an unmarried person, a part of a small-scale
enterprise, or a part of a more prominent company. Based on the character of the enterprise,
wealth managers may also be characteristic below specific titles, which encompass monetary
representative or monetary adviser. A patron may also acquire offerings from an unmarried
distinctive wealth supervisor or may have to get the right of entry to the individuals of a
distinctive wealth management team.
Example of wealth management
A few examples of wealth management include:
 Asset allocation: This strategy involves investing in a combination of different asset classes,
such as stocks, bonds, and cash, to reduce the overall risk on your investment portfolio.
 Insurance planning: Insurance can help protect you from unforeseen events that could cause
financial loss or hardship. A good insurance plan will help you secure your family‘s future by
providing coverage for disability income, life insurance, and long-term care expenses.
 Retirement planning: A retirement plan provides a plan for your future financial security. It
can help you assess your current financial situation and determine how much money you need
to save for retirement.

Characteristics of an Ideal Wealth Manager

Wealth managers are essential to investors looking to grow their wealth. A good financial
advisor should be able to help you build a solid financial plan that is customized to your needs
and goals. Here are some of the most important characteristics of an ideal wealth manager:
Credibility: You need to trust your financial advisor. You should feel that he or she has your
best interests in mind. If you don‘t feel comfortable with someone‘s character, then it‘s time to
move on.
Competence: Your advisor should be able to clearly explain the benefits of various investment
options and how they relate to your goals. They should also be able to provide references from
past clients who can confirm their level of expertise.
Innovation: Most clients today expect their advisors to provide more than just investment
advice. They want someone to help them manage their financial situation, including retirement
planning, college savings, and insurance coverage.

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Sustainability: When it‘s time for you to retire and draw income from your investments, there
should be enough money left over to support you throughout your golden years. Your financial
advisor should guide you properly in retirement planning.
Customer Service: A good financial advisor should be available when you need them. They
should also be willing to put in the time and effort required for proper planning, including
considering your unique situation and goals.
Communication: You should be able to speak freely with your financial advisor without feeling
pressured into making decisions that benefit them but not you.
Complementary Services: A good financial advisor should be able to offer you more than just
investment advice. They should also be able to provide tax planning, estate planning and
insurance services if necessary.
Compensation: You should know how much money your financial advisor is making off of
your investments at all times.

 Risk management-
As we all know, the banking sector plays a key role in the regulation and management of the
economy of any country. Banks not only help channelize savings to investments but also
encourage economic growth by allocating these savings to investments for higher returns. Just
like in any sector, there is a considerable possibility of ―risk‖ in the banking industry as well.

Risk

Risk can be defined as ‗a condition wherein there is a possibility of undesirable occurrences of a

particular result, known or best quantifiable and therefore insurable.‘ In other words, risk can be
understood as an unpredictable event with financial consequences resulting in reduced earnings
or loss.

Just like any other commercial organization, banks also take risks, which are found in any
business. Many times, higher the risk taken by the banks, greater are the gains. However, higher
risks may also result in huge losses.

Risk Management in Banking

Just like any business, banks face a myriad of risks. However, given how important the banking
sector is and the government‘s stake in keeping risks in check, the risks weigh heavier than they
do on most other industries. There are various types of risks that a bank may face and is
important to understand how banks manage risk.

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Banking risk management is the process of a bank identifying, evaluating, and taking steps to
mitigate the chance of something bad happening from its operational or investment decisions.
This is especially important in banking, as banks are responsible for creating and managing
money for others

The Importance of Risk Management in Banking

Banks are cornerstone institutions of national and global financial systems. So while they are
allowed to have some degree of risk, they are typically afforded much less risk than other
industries. This is because if they fail, it slows or halts the creation and exchange of money,
which has far-reaching impacts on the rest of the economy.

Some specific reasons for the importance of risk management in the banking sector are that it
helps banks to:

 Avoid wasting or needlessly losing the money they need to stay in business
 Avoid disruptions to their operations
 Maintain confidence from investors and customers to continue doing business with
them
 Comply with laws and regulations to avoid paying non-compliance fines

Types of Risks faced by Banks

1. Credit Risk
Credit risk is one of the most common types of risk for banks. Put simply, it‘s the risk of bank
lending money to a customer and not having it paid back. This can decrease the amount of assets
a bank has available to meet its financial obligations. It can also cost the bank extra money if it
deploys methods of trying to recoup the money it‘s owed.
How to Mitigate Credit Risk
Mitigating credit risk boils down to knowing two things. First is the bank‘s overall financial
position, in terms of how much in losses it can take while still being able to operate effectively.
Second is knowing a specific customer—understanding their financial history and situation, as
well as their general financial behavior, to evaluate the amount of risk they pose of defaulting on
a loan. A bank can then tailor a customer‘s lending agreement to have tighter or looser terms,
depending on their level of risk.

2. Market Risk
Also known as systematic risk, market risk is the chance that an adverse event outside the
banking industry itself will negatively affect a bank‘s investments. This could be from an issue in
a single industry—such as the US housing market collapse in 2008—or from a general national

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or international economic downturn. Other types of crises, such as political instability or natural
disasters, can also increase market risk.
How to Mitigate Market Risk
In some cases, market risk can be mitigated by diversifying a bank‘s investment portfolio.
However, there are other times where this strategy won‘t work because a crisis will affect
multiple interdependent industries. Some other tactics that can work include investing in staple
industries (such as utilities or consumer packaged goods), employing a long-term investing
strategy, or keeping more of a bank‘s assets in liquid form.

3. Operational Risk
Operational risk refers to risks incurred based on how a bank is run from day to day. For
example, if employees are poorly trained, they may make more errors that cost the bank time and
money to correct. Or if the bank has an inadequate IT infrastructure, its systems may break
down, disrupting services to customers.
A component of operational risk is cyber security risk. This is how likely cybercriminals are to
successfully attack a bank‘s digital systems. The resulting theft or destruction of digital money or
sensitive information can significantly hinder a bank‘s ability to operate effectively. It can also
put customers and stakeholders at risk.

How to Mitigate Operational Risk

Operational risk can be limited in a few ways. One is to hire the right people and properly train
them on both the bank‘s processes and its ethical culture. Another is to secure the bank‘s tech
stack, including thoroughly vetting third-party service providers, as well as staying up-to-date
with cyber security threats and trends.
Automating processes with technology—such as customer onboarding—can help reduce human
error. Implementing feedback and data collection programs can help address any updates needed
as the bank‘s risk profile changes over time.

4. Reputational Risk
Reputational risk refers to the risk that a bank will lose confidence from its investors and
customers, and thus lose funding or business (respectively). It‘s basically a side effect of any
other risk a bank encounters, but that doesn‘t mean it‘s any less threatening. It can be caused
directly by the bank‘s business practices or employee conduct, or indirectly by the bank being
associated with a person or group that has a negative reputation.
For example, reputational risk might result from a client receiving poor customer service from
the bank and then telling others about it—either through word of mouth or on social media. Or a
news outlet may publish a story revealing corruption among some of a bank‘s management staff.
How to Mitigate Reputational Risk
Minimizing reputational risk starts with defining the bank‘s core ethical values. Develop these in
concert with stakeholders, and conduct proper training on them so employees understand how
they are expected to conduct themselves. A bank should also research its reputation in news
outlets and on social media, addressing concerns and taking responsibility for mistakes whenever
appropriate. Reputation management software can help with this.

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The bank should also develop a contingency plan in case a reputation-affecting incident occurs.
It should focus on quick and transparent communication, outlining what controls are being used
to help minimize the damage, as well as how the bank will determine what it will do differently
in the future to avoid the same mistake happening again. A bank may want to hire a public
relations firm, or use specialized reputation management software, to assist with this and other
reputational risk management processes.

5. Liquidity Risk
Liquidity risk refers to the chance that a bank will run out of physical money, including if it can‘t
convert its other assets into cash fast enough. Thus, it becomes unable to meet its short-term
obligations to creditors or customers.
A recent trend that threatens to elevate banks‘ liquidity risk is an increase in the number of bank
runs. A bank run happens when rumors that a bank may fail in the near future cause its
customers to panic. They then try to withdraw as much cash as possible from the bank before
they potentially lose access to their money.
Bank runs rapidly decrease the amount of liquid assets a bank has available to meet its short-term
debts. So while rumors of the bank failing may not have been completely accurate, the bank run
still causes a spike in the bank‘s liquidity risk. This makes it much more likely that the bank
actually will fail.
Especially if they result in bank failures in this way, bank runs can also damage overall
consumer confidence in the entire financial system. This can lead to a domino effect of further
bank runs, and potentially more bank failures as a consequence.
To make matters worse, with the advent of the internet, bank runs are becoming more
threatening than ever. Rumors of a bank‘s financial troubles can spread very quickly over online
communications, especially social networks. And the ability to make electronic funds
transfers means that customers can withdraw money almost instantaneously without actually
setting foot in a bank, making it difficult for the bank to control how fast it‘s drained of available
cash.
How to Mitigate Liquidity Risk
Banks can manage their liquidity risk by more regularly forecasting their cash flow—that is, how
fast liquid assets are coming into a bank versus leaving it. Part of this is understanding the
potential risks associated with the different ways a bank is funded, from investing to customers.
A bank should also have a contingency funding plan (CFP) in place to address liquidity
shortfalls.
Banks can also conduct stress tests—creating hypothetical risk scenarios that would cause a loss
of liquidity, and estimating how much liquidity would be lost in each instance. This can allow a
bank to create baseline liquidity rates, helping to ensure it has enough working capital in the
event of a crisis.

6. Compliance Risk
Bank compliance risk involves the risks a bank takes by not fully complying with applicable
government laws or industry regulations. These can include punitive fines, civil lawsuits,
criminal charges, and even economic sanctioning.

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Compliance risk includes a component of reputational risk, as well. Banks exposed as being non-
compliant often lose the trust of their investors and customers, which hurts their ability to make
money. They can also cause a downturn in overall consumer and investor trust in the entire
banking industry or financial system.
How to Mitigate Compliance Risk
A bank can manage compliance risk by having employees on staff familiar with applicable laws
and regulations—for most organizations, this is an AML compliance officer. It‘s also essential to
equip them with the right tools to automate processes where possible, quantify and analyze
activity patterns, and keep on top of any other obligations.
One of these obligations should be to understand the other types of risks that a bank faces, as
well as assess how likely they are and how impactful they would be. This allows a bank to
identify areas of residual risk where it may not entirely be meeting compliance requirements, and
strengthen controls there.
Finally, a bank should make compliance part of its overall culture. This means educating
employees outside of the compliance and risk management teams on what laws and regulations
the bank has to comply with, and why they can play important roles in ensuring this happens. It
can also mean proactively addressing reputational risk. A bank can do this by summarizing what
it‘s doing (in a practical sense) to remain compliant, and how that protects the interests of
customers and other stakeholders.

Impact of risk management on banking

 Risk Management, according to the knowledge theorists, is actually a combination of

management of uncertainty, risk, equivocality and error (Mohan, 2003).
 Uncertainty – where outcome cannot be estimated even randomly, arises due to lack of
information and this uncertainty gets transformed into risk (where estimation of outcome
is possible) as information gathering progresses.
 As information about markets and knowledge about possible outcomes increases, risk
management provides solution for controlling risk. Equivocality arises due to conflicting
interpretations and the resultant lack of judgment.
 This happens despite adequate knowledge of the situation. That is why, banking as well
as other institutions develop control systems to reduce errors, information systems to
reduce uncertainty, incentive system to manage agency problems in riskreward
framework and cultural systems to deal with equivocality.
 Initially, the Indian banks have used risk control systems that kept pace with legal
environment and Indian accounting standards. But with the growing pace of deregulation
and associated changes in the customer‘s behaviour, banks are exposed to mark-to-
market accounting (Mishra, 1997).
 Therefore, the challenge of Indian banks is to establish a coherent framework for
measuring and managing risk consistent with corporate goals and responsive to the
developments in the market.

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 As the market is dynamic, banks should maintain vigil on the convergence of regulatory
frameworks in the country, changes in the international accounting standards and finally
and most importantly changes in the clients‘ business practices.
 Therefore, the need of the hour is to follow certain risk management norms suggested by
the RBI and BIS.

 The BASEL Committee on Banking Supervision (Unit 2)

At the end of 1974, the Central Bank Governors of the Group of Ten countries formed a
Committee of banking supervisory authorities. As this Committee usually meets at the Bank of
International Settlement (BIS) in Basel, Switzerland, this Committee came to be known as the
Basel Committee. The Committee‘s members came from Belgium, Canada, France, Germany,
Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, United Kingdoms and
the United States. Countries are represented by their central banks and also by the authority with
formal responsibility for the prudential supervision of banking business where this is not the
central bank.

The Committee reports to the central bank Governors of the Group of Ten countries and seeks
the Governors‘ endorsement for its major initiatives. addition, however, since the Committee
contains representatives from institutions, which are not central banks, the decision involves the
commitment of many national authorities outside the central banking fraternity. These decisions
cover a very wide range of financial issues.

BASEL I

Basel I is the first set of international banking regulations set up by the Basel Committee on
Banking Supervision and is a part of Basel accords, including Basel II and Basel III. The

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accord‘s goal was to standardise banking practices all over the world. Basel I mainly focuses on
the goal of minimising credit risk. It was released in 1988 to provide a framework for risk
management from a bank‘s capital adequacy perspective. Its regulations were intended to
improve the safety and stability of the bank system worldwide. Basel I is not much in use now,
but it is laid out as a framework for Basel II and III.

Implementation

Basel, I was introduced in 1988, and countries of G10 followed it in 1992. Basel, I regulations
improve the financial system‘s stability by setting the optimum capital ratio required for
international banks. It provided a simplified structure for overseeing credit risk by calculating the
percentage of risk weighting of different assets. Banks having an international presence were
required to maintain 8% of their risk-weighted assets as cash reserves. Basel, I classified risk-
free assets based on risk weight percentage. The following points explain the classification in
detail.

 0% for assets such as Cash, Government debt, central bank debt, and government organisation
debts.
 10% for assets such as Central bank debt of countries with high inflation
 20% for development bank debts
 50% for municipal revenue bonds residential mortgages
 100% for corporal debt

Tier 1 capital refers to fixed capital. It is at least 50% of the total bank‘s capital. Tier 2 is short-
term capital.

Base II

Basel II is a set of international banking regulations first released in 2004 by the Basel
Committee on Banking Supervision. It expanded the rules for minimum capital requirements
established under Basel I, the first international regulatory accord, provided a framework for
regulatory supervision and set new disclosure requirements for assessing the capital adequacy of
banks.

 Basel II, the second of three Basel Accords, has three main tenets: minimum capital
requirements, regulatory supervision, and market discipline.
 Building on Basel I, Basel II provided guidelines for the calculation of minimum
regulatory capital ratios and confirmed the requirement that banks maintain a capital
reserve equal to at least 8% of their risk-weighted assets.
 The second pillar of Basel II, regulatory supervision, provides a framework for national
regulatory bodies to deal with systemic risk, liquidity risk, and legal risks, among others.

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 One weakness of Basel II emerged during the subprime mortgage meltdown and Great
Recession of 2008 when it became clear that Basel II underestimated the risks involved
in current banking practices and that the financial system was overleveraged and
undercapitalized.

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