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Category Archives: Banking
People & Power – Banking on it – 09 May 07 – Part 1
In this episode of People & Power Max Keiser investigates whether the World Bank really alleviates poverty.
Investment Banking Explained: An Insider's Guide to the Industry
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Insider guidance to the modern world of investment banking today In Investment Banking Explained, Wharton professor and global financier Michel Fleuriet provides a complete overview of investment banking in its modern form; defines key terms; identifies structures, strategies, and operational aspects; and analyzes the strategy in each of the main functional areas of an investment bank…. More >>
Investment Banking Explained: An Insider’s Guide to the Industry
Money, Banking, and Financial Markets Study Guide
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Monetary policy has changed. Has your textbook? Ball’s Money, Banking, and Financial Markets closes the gap between economic theory and the day-to-day behavior of banks and financial markets. Working from a macro framework based on the Fed’s use of the interest rate as its major policy instrument, Ball presents the core concepts necessary to understand the problems affecting the stock market and the causes of recessions and banking crises. Underlying this… More >>
DEMOCRACTIC DEFICIT IN AN INDEPENDENT CENTRAL BANK: THE QUEST TO BALANCE THE SCALES
DEMOCRACTIC DEFICIT IN AN INDEPENDENT CENTRAL BANK: THE QUEST TO BALANCE THE SCALES
By
Leonard Nkole Kalinde*
Central banking is of cardinal importance in any country because of the legal right normally granted to central banks to create money. This money can serve as a means of payment, a unit of account and a store of value. One of the important issues immediately arising after granting this right to a central bank, is whether this function should fall under the ultimate control of the executive branch of government – the cabinet and its administrative departments – or whether parliament should leave this responsibility to be freely executed by an independent, autonomous powerful institution run by unelected people.
The traditional argument in favour of a strong, independent central bank is that the power to spend money should in some way be separated from the power to create money. Numerous episodes in the world’s economic history testify to a government’s potential abuse of its power to create money. However, one potential objection to a completely independent central bank is lack of democratic accountability and transparency. This paper discusses the challenges of ensuring central bank accountability and transparency in an environment where the central Bank is independent. Part two discusses the concept of central bank independence. Part three examines and analyses the need to have democratic accountability and transparency in the operations of a central bank. Part four concludes that proper democratic accountability and transparency in central operations is not a counterweight to the principle of central bank independence.
Nowadays it is widely believed that a high level of central bank independence coupled with some explicit mandate for the bank to restrain inflation are important institutional devices to assure price stability. It is thought that an independent central bank can give full priority to low levels of inflation, whereas in countries with a more dependent central bank other considerations, notably, re-election perspectives of politicians and a low level of unemployment, may interfere with the objective of price stability. Indeed, there is considerable evidence for a negative relationship between central bank independence and inflation. The extent and nature of central bank independence can be assessed on the basis of its legal provisions However, central bank independence also hinges on a broad series of factors and customary practices, which are partly determined by historical developments in the different countries. In particular, the way in which certain conflicts with other bodies of government have been resolved influences the extent to which a central bank is effectively protected against external interferences and marks the boundaries of independence.
Central Bank independence refers to three areas in which the influence of government must be excluded or drastically curtailed, that is to say, independence in personnel matters, financial autonomy and policy independence. These are now discussed hereunder:
2.1. Personnel Independence
The nomination and dismissal of the Governor and members of the central bank’s decision-making bodies pertain to the political authorities. In practice, it is not feasible to exclude government influence completely when appointments are made to such an important public institution as central banks. Personnel independence thus refers to the influence that government has in appointment procedures. Various criteria are relevant here, like governmental representation in the governing body of the central bank, appointment procedures, terms of office and procedures governing dismissal of the board of the bank.
The legal framework for central banking in Zambia, which is the Bank of Zambia Act No. 43 of 1996, in Section 10, vests the power of appointing the Governor in the President of the Republic of Zambia. However, this is subject to ratification by the National Assembly. Furthermore, Section 13(1)(b) vests the power of appointing Members of the Bank of Zambia Board of Directors in the Minister of Finance and National Planning. Finally, Sections 10(7) and (14(2) gives the power to disappoint the appointment of the Governor and Members of the Board of Directors to their respective appointing authorities. Their tenure of office is specified in sections 10(1) and 14(1), which gives the Governor five years and Directors three years, respectively.
Financial Independence
A central bank cannot operate credibly in an independent way without proper financial means. It is clear that politicians can influence central bank policy if the government is able to finance its expenditure either directly and or indirectly via central bank credits. In that case there is no financial independence. The concept of financial independence should, thus, be assessed from the perspective of whether any third party is able to exercise either direct or indirect influence not only over the central bank tasks but also its ability to fulfil its mandate. In this regard, four aspects of financial independence – the right to determine its own budget; the application of central bank-specific accounting rules; clear provisions on the distribution of profits; and clearly defined financial liability for supervisory authorities – are particularly relevant in this respect.
The Bank of Zambia Act has several provisions that regulate how the Bank is to conduct its financial affairs and what the government responsibility is towards its financial well-being. In the first instance, Section 6(3) makes it clear that the Government is the sole subscriber to the paid-up capital of the Bank and its holdings of the paid-up capital is not transferrable in whole or in part nor can it be subject to any encumbrance whatsoever. According to Section 6(5), whenever the Bank of Zambia Board certifies that the assets of the Bank are less than the sum of its capital and other liabilities, the Minister is required to cause to be transferred to the ownership of the Bank negotiable and interest bearing securities issued by the Government for such amount as is necessary for the purposes of preserving the capital of the Bank from any impairment. In addition, Section 7 has elaborate provisions on how the net profits of the Bank are to be determined for each financial year, and where the Bank makes a loss on its profit and loss statement, as certified by the auditors, the Minister is again required to cause to be transferred to the ownership of the Bank, cash or negotiable instruments bearing market interest rates and such securities shall be delivered to the Bank within sixty (60) days from the date of certification of the accounts by the auditors.
2.3. Policy Independence
Policy independence is related to the room for manoeuvre given to the central bank in the formulation and execution of monetary policy. It may be useful to distinguish between goal independence and instrument independence. A central bank has goal independence if it can decide on the formulation of its ultimate objective(s). In practice, most central bank laws formulate one or more objectives. For instance, Section 4 of the Bank of Zambia Act provide that the functions of the Bank shall be to formulate and implement monetary and supervisory policies that will ensure the maintenance of price and financial system stability so as to promote balanced macroeconomic development. However, if the central bank has been trusted with various (possibly conflicting) goals – such as achieving low inflation and low unemployment – it has considerable scope in deciding on its priorities. In that case, the central bank has considerable goal independence since it is relatively free to set the final goals of monetary policy. It could, for inst
ance, decide that price stability is less important than output stability, and act accordingly. Finally a central bank must wield effective instruments in order to defend its objective(s). A bank that has instrument independence is free to choose the means by which it seeks to achieve its goals. Clearly, if government approval is required for the central bank’s use of policy instruments, no instrument independence exits. Perhaps, the most disconcerting provision of the Bank of Zambia Act is Section 5, which provides that the Minister may convey to the Governor such general or particular Government policies as may affect the conduct of the affairs of the Bank and the Bank shall implement or give effect to such policies. This provision could lead to serious interference with the operations of the Bank.
At a glance, the concept of central bank independence seems to be in conflict with the democratic principle that government policies should be controlled by elected officials rather than by an elite group that is insulated from the political process. Although there are plenty of other areas of national life where decision-making is delegated to independent unelected officials, the judiciary being a prime example, there is a fundamental confusion here between being independent and lacking accountability and transparency. It is often argued that central bank independence and democratic accountability are contradictory. This is, however, only correct as far as decisions about the ultimate goal of and final responsibility for monetary policy are concerned. In other words, a central bank should not be goal independent but must be granted instrument independence.
The corollary of this view is that the institutional commitment to macroeconomic stability should come from the government in the form of an explicit, legislated mandate for the central bank to pursue, for instance, price stability as its overriding long-run goal. Indeed, as Issing argues, the more clearly and precisely this mandate is defined, the easier it will also be in a democracy to monitor the performance of the central bank. Moreover, in order to maintain credibility, an independent central bank must not only be open and clear about the reasons for its actions but it must also be accountable to democratic institutions.
3.1. Central Bank Accountability
In any evaluation of the democratic accountability of the central bank, the relationship between the central bank itself and the legislature has to play a major role. No central bank can be totally independent, in the sense that it is not answerable to anyone. Even the most independent central bank has to report in some form or another to the legislature, which in any case also has the ultimate power to change the laws governing the central bank. In this regard, it has been argued that the legislature holds the ultimate responsibility for monetary policy since it can change the legal basis of the central bank. The mere threat of a change of the law may induce even independent central banks to ensure that monetary policy will in general be in accordance with the wishes of elected politicians. However, there is a difference between a situation where policy decisions are under continuous scrutiny and an arrangement where the central bank reports to the legislature periodically.
In the Zambian context, Section 9 (1) of the Bank of Zambia Act requires the Bank, in consultation with the Minister, to publish in the Government Gazette, every six (6) months interval, a policy statement that shall contain: (a) a description and an explanation of the reasons for the monetary policies to be followed by the Bank during the following six (6) months; (b) a description of the principles that the Bank proposes to follow in the formulation and implementation of monetary policy during the next two years or such other period of time as the Minister may decide; and (c) a review and assessment of implementation, by the Bank, of monetary policy during the period to which the last proceeding six months policy statement relates. The Minister is required, within the first sitting of the National Assembly next after the receipt of the monetary policy report, to lay it before the House.
In addition, Section 27 requires the Board of the Bank of Zambia to, as soon as is practicable but not later than six months after the expiry of each financial year, submit to the Minister a report concerning its activities during such financial year. The Minister may also request the Board to submit to him such other reports, returns or statements, duly certified by an auditor, as he may consider necessary. Furthermore, the Bank of Zambia is also required, under Section 28(1), to cause to be published in the Government Gazette a return of its assets and liabilities, and to deliver to the Minister a return of its monthly assets and liabilities whenever he so requires.
It is important to note that the issue of independence and accountability also turns on the nature of the relationship between the government and the legislature as the political authorities on the one hand and the central bank on the other. Without encroaching on the independence of the central bank, there should be a legal requirement for the central bank to report to the legislature and/or explain policy actions in the legislature. The legislature should have the opportunity to review the performance of the central bank with regard to monetary policy on a regular basis, while the central bank at the same time can explain and justify its conduct. In the European case, the Treaty establishing the European Community imposes precise reporting obligations on the European Central Bank. The European Central Bank must deliver an annual report on the activities of the European System of Central Banks to the European Parliament, the European Council and the European Commission. The European Parliament can also summon the President of the European Central Bank and the other members of the Executive Board to appear before it and make the necessary presentations.
Furthermore, a central bank may not only be directly accountable to the legislature but also to the government, which is, in turn, accountable to the legislature. In that case, it is important that the government is able to influence the central bank’s behaviour. Without such influence, accountability would not go beyond mere reporting by government to parliament of central bank policies, for which government cannot be held responsible. Finally, the dismissal procedure for a central banker can amount to a mechanism of ex post accountability if a central banker official can be dismissed on the grounds of bad performance, that is to say, not realising stated objectives. Dismissal may function as a sanction for poor performance by linking the tenure of central bank officials to policy results, that is to say, meeting the predetermined monetary policy target. This is the case for the Reserve Bank of New Zealand where the policy target agreement between the Governor of the Bank and the Minister of Finance lays down the policy targets, which the former has to achieve. Inadequate performance can result in the dismissal of the Governor.
3.2. Central Bank Transparency
Another very important element of central bank accountability is central bank transparency. In this regard, central bank transparency cannot be logically separated from accountability. This is because whatever other arrangements concerning democratic accountability may exist, their scope is limited without transparency because information concerning the behaviour of the central bank is crucial for the evaluation its performance. Where the reasoning behind, and strength of opinion supporting, certain monetary policy decisions are transparent, it is easier to make a judgement and to hold central bank officials accountable for their behaviour. Indeed, as Buiter argues, the entire monetary
policy process must be transparent for democratic accountability. Therefore, a central bank should be required to report at regular intervals on its current and future plans for monetary policy in accordance with the monetary objective. This is even more important where a clear monetary objective is missing because in such cases the central bank can only be judged on the basis of its own statements.
As transparency should not be left to the discretion of the central bank, the law should prescribe certain procedures for explaining monetary policy. There are various possibilities, ranging from reports, minutes and other communication devices. Transparency will certainly be improved if the monetary authorities have to explain the extent to which they were able to reach the final objectives of monetary policy. In the European case, Article 15.1 of the Statute of the European System of Central Banks and European Central Bank requires the European Central Bank to publish reports on the activities of the European System of Central Banks at least once every quarter. However, in its attempts to enhance transparency, the European Central Bank has committed itself to go beyond the reporting requirements specified in the Treaty. The President explains the reasons behind the Governing Council’s decisions in a press conference and details of the Governing Council’s views are published in the ECB Monthly Bulletin.
4.0. CONCLUSION
This paper has argued that at a glance, the concept of central bank independence seems to be in conflict with the democratic principle that government policies should be controlled by elected officials rather than by an elite group that is insulated from the political process. The basic principle of democracy, which expects the public to be able to exercise control over government actions, strongly suggests that elected politicians should decide on the explicit definition and ranking of the objectives of monetary policy. Central bankers should never forget that they are ultimately accountable for their policies to the elected politicians and to the public at large (including future generations). In this respect, it is misleading to think of proper accountability and transparency as a ‘counter-weight’ to central bank independence. On the contrary, accountability is the ‘other side of the coin’ of independence and the two concepts are mutually reinforcing rather than antagonists, as is sometimes suggested. Any weakening of the democratic control over an independent institution may lead to excessive discretion and unclear objectives, which risks creating political backlashes against independence and may overtime undermine independence itself. Therefore, independence is sustainable in the long term only if accompanied by strong accountability and transparency in the operations of the independent institution. The legal provisions can more easily be circumvented if there are no provisions ensuring central bank transparency and accountability.
Money, Banking and the Federal Reserve
Thomas Jefferson and Andrew Jackson understood “The Monster”. But to most Americans today, Federal Reserve is just a name on the dollar bill. They have no idea of what the central bank does to the economy, or to their own economic lives; of how and why it was founded and operates; or of the sound money and banking that could end the statism, inflation, and business cycles that the Fed generates. Dedicated to Murray N. Rothbard, steeped in American history and Austrian economics, and …
Banking Restructuring ? Lessons for Georgia
Restructuring: concept, goal and contest. Termini restructuring is of Latin origin and means changing-improvement of the structure of some object or system, i.e. its forms and consistence (morphology). It basically means unchanged character of directions of its functioning. They use restructuring from large plan in the economical texts mostly with debts, including foreign ones, payments and taxation (trade) balance, corporation sector of the economy and of separate enterprises, of banking system entirely and separate banks (other credit organizations).
They define “restructuring” in legislation in the following way: restructuring of credit organization is a complex of activities directed towards eradication of financial fluctuations of the organization and recovering its pay abilities or towards realization of liquidity of this organization. This definition doesn’t make needed opinion about the occasion to be discussed, as, in the first place, here they mean only separate credit organizations and not banking system itself, and, second, it has very technical character and mixes the essence and contest of the process of restructuring with the activities, which may (or must) be realized in this process.
Thus, there is not common, widely excepted definition of restructuring, though majority agrees with the idea, that we must consider restructuring to be readjustment of (cure) of banking system and its taking out of the crisis phase, also its returning to the conditions of good labor abilities. They sometimes use termini of “stabilization of banking system”, but we consider it to be comfortable. The fact is, that achieving stability may be provided in various ways, including the one of liquidating whole system. There is another point of view, that they consider restructuring to be the process for overcoming difficulties, appeared during the crisis. This point of view is not quite fluent.
Thinking of the essence of the affair and not its definition, hen we must consider in reconstruction of banking system as a process – totality of decisions and actions. Its basic elements are:
Foreseeing these elements, we can state following definition: restructuring banking system in managed process of its global readjustment (improvement), supported by changing in industrial, cash, taxation, budgetary and information policy, also in the policy of the banks themselves, and which is directed towards formation of banking system adequate to effective, trustful and dynamically developed modern requests.
According to this definition, restructuring effective, stabile and healthy banking system in not needed (though, it is possible to improve or reform it). Thus, restructuring is a cure (curing something that is not healthy), i.e. restructuring may be understood and must be understood to be the process, with the help of which banking system of concrete country transit to the new level of development. It is also evident, that restructuring is curing of such systems, which are in crises and can not get out of it without help. Finally, from the point of restructuring (privately displaying necessity of financial curing) we must discuss absolutely every bank. In this case, restructuring, as a process of readjustment, seems to have its own instrumentation, which will not be bounded only with the instruments of ordinal procedure banking management?
According to the mentioned above, we can make main goal of restructuring process of banking system – its recovery and taking its movement to the relatively new trajectory, at which it already gains earlier lost potential of progressive development and becomes adequate to the real sector of the economy again.
while processing activities of reforming banking system they must clearly define a circle of those problems, which must be solved during the process of reforming with the help of renewed banking system and they must set the price of activities;
effective restructuring requests combined methods of approaches towards the problems. World practice processed principles and methods of approaches of solving banking crisis, approbation of which showed their sufficient effectiveness. It is nonprofessional and not expedient to use some principles and refusing others;
a process of solving crisis may not be fast, simple or cheap.
Th8is common goal, mentioned above, in its turn, may be concreted into the list of those problems, working at which must form real concept of restructuring process according to the conditions in modern Georgia:
There is an idea about the fact, that main goal of restructuring banking system is recapitalization of the banks (recovering lost a capital and its further growth), but it is not quite correct: since today the hardest problem is, that a spectra of profitableness and trustfulness of capital investment is very tight.
Some bankers offer such understanding of restructuring and such pragmatic activities of radical reforming of banking system, the essence of which finally has been brought to the regrouping of the almost bankrupted banks according to the principles of specialization (specialized banks working in the country scale, banks oriented towards export or those obligated in the groups of large enterprises, also regional banks). they meant, that new “system forming” groups would obey to the strict control of appropriate governmental structures or groups of enterprises, in exchange of it, it will have right for working on budgetary resources. Suggestions of separate bankers were not related with the problems of recovering whole banking system.
We can form basic problems of restructuring banking system in the following way:
Transiting to the foundation of a healthy market banking system by readjustment of separate problematic banks, providing structural reform of banking system;
Increasing whole capital of banks and filling banking system with long-termed resources;
Creation conditions stimulating growth of the quality of market commercial banks, including those in the regions.
Main goal of restructuring program must be: creating such layer of technological market commercial banks, which provides marketing policy and makes basic profit from credit-operations. It is interesting, that within the bound of 2-3 years program share of such capital in the banking system may reach up to 30-40%, and credit share in the credit portfolio of banking system – 30%. Share of profit made from crediting in whole income of banking system must not be less, than 6%. Half of such healthy banks must still function in the regions.
The concept of those first steps, which must make foundation to the realization of effective program of restructuring banking system, must be formed in this way:
Restructuring: principles and conditions. We can name following to be the obligatory principles (main rules) of the process restructuring banking system:
A principle of solidary obligations. The essence of it is, that in the mentioned process there participate (with out resources) and coordinate the banks themselves (in the first place – the owners), their creditors and the government. It is impossible to restructure banking system without state support. Though, it is evident, that the state will not be able to support every bank, having extremely reduced resources. Accordingly, the banks in the first place must try to solve their problems independently and the managers and creditors of the cured banks must stand on the advantage position.
The principle of minimizing loss and expenses. It says, that while realizing restructuring we must consider those activities, which give the opportunities of overcoming crisis with the less budgetary expenses (financial expenses of the society) and with little loss from the side of banking system and the clients of banks to be more prior.
Liquidation of problematic banks is much losable, but socially more difficult way. It needs especially measured method of
approach towards the problems of the depositors the banks to be liquidated. Fast liquidation of not solvent banks may deepen the crisis (an Indonesian example in 1997-1998). According to the estimation of numbers of experts, best way out of it is confluence of the problematic bank with the healthy one, though this is quite doubtful recommendation.
A principle of minimizing liquidation requests to give priorities to the activities of reorganization and support and not bankrupting in the process of restructuring and financial curing.
A principle of just distribution of expenses on restructuring mean, that the stated part of expenses on curing banks must be compensated by those, who receive risks related with these banks, are responsible for their loss and make profit after restructuring (i.e. participants of the banks, its highest administration). Economical obligation of not solvent managers and owners of the banks may be expressed, for example, by adequate reduction of their own banking capital, their participation in the restructuring process in the way of additional entering in the bank capitals. Part of the loss may be covered at the expense of the depositors.
A principle of strategic method of approach means definition of the strategic problem, what kind of banking system is wanted by the society after restructuring (in the condition if it conforms to the new purposes and functions of the banks at the new stage). Only after this they must select advantage and agreed activities, which may be recommended for readjustment of separate banks and its entire system.
A principle of complex method of approach means, that a system defined by the program must be fulfilled completely. It is impossible to bring whole concept of reconstruction process to its separate consisting parts (for example, everything mustn’t be bounded only with solving financial problems displayed in one concrete period of time).
We can name such principles of providing restructuring, as transparency (necessity) of distributing expenses related with it, strengthening management of those banks, which are supported by the state, encouraging independent adaptation of the banks with the changed situation and others.
Following conditions of restructuring are also of great importance:
According to the mentioned above, we can separate some leading questions about restructuring banking system, on which there still is no satisfying answers.
Foreign experience of restructuring banking system. Bank reconstruction is not a unique problem. Banking crisis has been noticed almost in 70 countries during 20 years. A process of recovering balance has been continuing very difficultly everywhere and the state participated in them (though, scales of this participation were different in the different places and periods. Sometimes reasons of the crisis coincided with each other, sometimes they were specific. But forms of their solving coincided in many cases: stabilizing crediting, filling own capital of the banks, purchasing their assets (including passed debts) and others. As a rule, basic financial heaviness leaned upon the state directly, or in the way of financing specially founded agencies by it.
USA was a pioneer in the field of banking restructuring, where a system of guaranteed deposits and a special institute managing these deposits has been founded under the influence of the crisis in 1929-1933. This institution was a federal corporation insuring deposits (FCID).Next stage of restructuring banking sphere is related with the series of banking crisis took place in absolutely different countries during last 20 years.
In 1980-1991 1300 banks and 1400 borrowing-saving associations stopped existence in the USA. According to the different estimations, restructuring banking system cost 300-500 billion dollars (5% of the WIP). In 1995 banking crisis took place in Japan, in 1994-1995 – in France, in 1989-1990 – in Australia, in 1987-1989 – in Norway, in 1991 – in Sweden, in 1991-1993 – in Finland, in 1980-1982, 1900-1991 and 1995 – in Argentina, in 1990, 1994-1995 – in Brazil, in 1981-1982, 1990-1991 and 1995 – in Argentina and Mexico, in 1982-1984 – in Chile, in 1994-1995 – in India, in 1994 – in Indonesia, in 1985-1988 – in Malaysia, in 1981-1987 – in Philippines, in 1991-1995 – in Hungary, in 1990s – in Poland, Bulgaria, Lithuania, Latvia, Estonia and others. In some countries systemic crisis used to be repeated periodically. Some countries were able to avoid systemic basic crisis with the help of having insurance system, in the first place, at the expense of effective banking management and regulation.
Price of restructuring banking system is very different: 5% of WIP in the USA, 10 – in Hungary and Brazil, more, then 40 – in Chile and 55% – in Argentina.Central banks can support problematic banks in the crisis situation, especially in case of spoiling their current liquidity. In Venezuela, eight not solvent banks used special lines of liquidity for compensating money resources. Though, they were not able to cover borrowed sources in the future.
In other cases, crediting is an important step of central banks. They are supported during banking crisis and give them resources and terms for restructuring credit organizations. A long termed support provided by the central bank of Poland is a good example of it, when it purchased low profitable shares and long-termed bonds from the banks. Granting long-termed credits by the central bank sometimes depends on creation of complex plans of improving situation by the banks (list of stated activities and expected results).
Reducing the level of obligatory reserves (or increasing percentage payments on them) is another way of supporting banks, for example, part of obligatory reserves of deposits poste restates were set free for financing purchasing certificates of termed deposits of the institutions, which had been working by the program of restructuring banks.
They use special tax advantages very seldom in the process of bank restructuring. Notwithstanding this, Brazil used tax stimuli for encouraging confluence: “swallowed” bank could exclude then value of not active credits, “the sallower” received credits equaled to the distinction between the purchase and balance prices. Some countries use tax stimuli for shares and bonds issued during the realization of restructuring program.
They somehow make the rules of regulation and management under the conditions of restructuring banking system simple. They compensate this by creation such middle-termed system of regulation and management (in the crisis period), which foresees risks of banking activities more adequately.
To save the banks being in hard position actions provided by the state may support weakening the feeling of responsibility of the banks. In such conditions, the following is of great importance not to give rise to the weakening encouragement of irresponsible behavior of the banks in the future. It is considered, that it is necessary to grant a sum for making large profit and participants of the banks must be responsible for their obligations. They requested from the banks to discard a capital partially a conditions for making support in South Korea; the state obliged itself with bad debts of credit organizations in Mexico only in case if its participants used to make additional income; while bankrupting of credit organizations in Brazil and India, their participants were obliged to enter additional sum equal to the size of their initial entering in the nominal fund.
Herewith, participant of the banks are not always obliged with the responsibilities, for example, in case of the loss received from those credits, which are granted by banks by the state indications, it is necessary to range the size of responsibility, as the participants may not have possibility for solving problems in the credit organization because of the not having transparency and of the organization calculations and other reasons.
They founde
d specialized institutions in the most part of the countries during restructuring banking system, which have been obliged with the problems of managing this process.
A government and central banks of many countries solved problems with bank crisis and restructured own banking system in different ways. Practice has shown up, that there is neither ideal form of restructuring, nor the universal strategy of normalizing situation in banking sector. Very often this or that action depends on concrete occasion. Notwithstanding this, we may separate total signs of successful programs, which have been realized abroad:
the fastest definition of the scales of problems, its recognition on the state level and readiness of the government for granting important financial resources for solving problems;
passing transparent, activities adequate to the essence of the problem, moving “bad” assets from the problematic banks off;
processing complex, transparent, operative program, its correct and successive development;
fulfillment of the procedures of banking management.
Chile. A complex of activities. Large scaled restructuring of banking system in Chile has started since 1984, when a central bank of the country started granting stabilizing credits for supporting liquidity of the banks and purchasing their not trustful credits or changing not active assets on liquidity. Deregistration of the bank debts took place in the way of turning creditors into the shareholders.
State became a guarantor for foreign debts of the private banks. Size of the debts transited to the central bank of Chile by the end of 1985 overcame whole capital of problematic banks 3 times and consisted 6 billion dollars (25% of WIP). About 60% of expiated credits were changed on its bonds by the central bank.
They involved straight state control in numbers of system forming banks of the country.
Recapitalization of the banks transited under the state control used to be realized in the way of additional issuing of the shares placed among small and middle investors. A state corporation of supporting development (CORFO) worked on this program.
Results. The banks practically fulfilled their obligations in the part of the deposits of physical and juridical persons with the help of the used activities. Though the quantity of national private banks was reduced from 22 to 15, but they were able to keep every large bank and improve their working by 1987. After 1996 every commercial bank of Chile has been considered to be competitionable.
The value. By the end of 80s, expenses provided on restructuring banking system of Chile consisted from 30 to 40% of the country WIP.
Mexico. A complex of activities. Restructuring of banking system in Mexico has been started in 1995 after devaluation of national currency and strengthening of financial situation, which followed devaluation. One of the nominal activities of Mexican bank (main bank of the country) was involving special calculation unit UDI (unidades de inversion), which was indexed with the level of prices. Whole assets of the banks were calculated by it, for avoiding devaluations of credit portfolios of the banks.
Basic organ working on restructuring banks was banking fund of protecting savings (FOBAPROA). During the process of readjustment it expiated securities from the bank and banks provided deposing of received resources in the Mexican bank. They gave five years to the banks for expiating these papers. In other cases they were going to convert them into the shares of these banks and their realization at the market.
For solving problems with foreign debts of national banks central bank granted short-termed currency credits from these banks to them, who passed payment of these obligations. At the same time FOBADROA published doubtful assets of commercial banks. Herewith, the shareholders, in its turn, were obliged to enter sums equal to the half of resources granted by FOBAPROA. Banks were to enter resources received from this operation into the 10 year bonds.
They involved outer management of problematic banks. In some cases they granted their shares to the foreign banks. At the same time they supported bank debtors, provided restructuring of their liabilities.
Results. With the help of restructuring Mexico could avoid destroying of banking system. Deposits of the people practically were not defected. They kept trust of foreign investors in the banks of the country.
The value. Restructuring of banking system of Mexico costs 60-65 billion dollars (about 14.5% of national WIP).
Argentina. A complex of activities. State governmental organs in Argentina supported more trustful banks for solving problems of banking crisis. They used differenced method of approach. They separated banks into several groups:
I group – Middle and large banks having temporal problems of liquidity because of loosing clients. They granted them credits of central bank of Mexico and Banco de la nacio Argentina;
II group – small banks, which were to confluence with large, relatively healthier banks or were to be swallowed by them;
III group – small banks, which were at the edge of bankrupting. They stopped operations in these banks and they desired to readjust, sell and liquidate them;
IV group – 12-15 state banks owned by the administration of Argentinean provinces, which were to be privatized.
Expiation of “bad” debts was provided not by state agencies, but file largest commercial banks, which founded a special trust-fund in January 1995 together with the central bank. For compensating provided expenses they reduced a normative of reserved requests.
Results. A complex of anti-crisis activities in Argentina provided stabilization of banking system in one year. Though during this period position of foreign banks were significantly strengthened. There share in the total assets of banking system of the country drew up 42%.
The value. Expenses wasted on restructuring banking system of Argentina drew up 2.5-3.5% of the country WIP according to the various estimations.
Scandinavian countries. A complex of activities. notwithstanding distinctions in the reasons provoking crisis in every Scandinavian country, a conception of restructuring banking system leaned upon practically united conditions and principles of state support. They are:
Programs of restructuring banking systems of these countries were being realized by optimal conformity of responsibilities and stimuli at every level including owners, organs of managing separate banks and regulating organs of whole system.
A value. Expenses in Sweden consisted 4.3% of WIP and 9.9% – in Finland.
Hungary. A complex of activities. Restructuring banking system has been continuing in two stages. At the first stage (1992-1995) the state used to transfer important sum of money in problematic and, in the first place, large banks. At the same time clearing of bank assets in the way of changing “bad” credits at state bond took place. They used state guarantees very actively. They tried to use special structure for centralized restructuring – capital investment and development bank of Hungary, but by 1995 the banks appeared again under the critical situation.
At the second stage (1995-1997) method of approach in relation with restructuring has been changed. They used state resources only for supporting those large state banks, which were to be privatized. Restructuring made them attractive for western investors.
Results. State share in the bank capital after first stage has been increased from 41.4% in 1991 till 69% in 1994. The result of second stage was increasing the share of foreign capital in the banking system of the country till 60% by 1997 (in 1996 – 48%, in 199535%, in 1991-1994 – 12-15%) and reduction of the share of state property till 20.66%. Share of “bad” debts in total sum of debts by 1993-19
97 has been reduced from 13.2 till 1.2%. There was no occasion of selling deposits or refusing returning money to the debtors.
A value. Expenses provided at restructuring banking system of Hungary consisted from 12 till 18% of its WIP.
Estimating restructuring in Russia. Necessity of restructuring Russian banking system has become evident in the middle of the 90s. They began appropriate practical activities from August in 1998, which at the beginning had an operative anti crisis character. Herewith, they paid special attention in the first variant of restructuring program to the saving of many-profiled (“system forming”), interregional banks, but later they decided to gather middle and small banks.
Operative anti-crisis activities. In 1998-1999 bank of Russia (central bank) together with the government of the country provided operative activities for recovering ability of the bank, to be able to realize basic complex of service.
1.They provided three many-sided interbank clearing, which made it possible to register 30 billion rubles for recovering taxation system. In many regions this gave opportunity to the banks to release from the cargo of nonpayment wholly or partially.
2.They decided to move obligation of numbers of banks towards physical persons to the savings bank of Russia.
3.they used a mechanism of refinancing banks from September 1998 for supporting bank liquidity: they granted Lombard credits to the more, then 80 banks, overnight – to 34, one year credits to 15 on them; they changed normative of obligatory reserves (total 5% normative). They gave banks right of regulating obligatory reserves.
4.Changes took place in the requests towards banks. Central bank postponed usage of activities influencing in case of not consisting minimal normative of own capital of the banks for two years.
5.They involved special norms regulating activities of the selected circle of banks, in which there were: rule of calculating absolute sizes of economical normative, changing of calculating rules of some normative, rule of influencing activities. this gave the banks damaged by the crisis, though having good perspectives opportunity for leaning upon the quantity of their capital owned by the banks till the first of August 1998, or changing currency course of Ruble while taking risks.
6.They reduced limit of open currency positions, strengthened rule of calculating liquidity normative.
7.They reduced 10 times registration of payment and size of the price for opening branch.
8.They changed prohibition for paying entering in the nominal capital by foreign currency.
9.They involved requests towards registration of currency risks formed by balance-free operations and termed agreements. They managed activities of credit organizations working on the consolidated basis. They involved a rule of foreseeing bank risks in the banks.
10. They continued foreseeing licensing of those banks, which abolished law, had not satisfying financial situation, and had no perspectives of development.
At the same time, Bank of Russia and a government processed long-termed activities for solving basic problems of restructuring banking system. We can separate following:
Participating in processing those legislative acts, which are necessary for success of restructuring banking system;
Working of executive government with the local organs for the purpose of defining their possible participation in normalizing banking activities in the regions;
Participation in foundation of the Agency of restructuring banking system (ARBS) and collaboration of central bank with it in the fields of restructuring separate banks;
Creation regime of prior support for restructuring banks.
For the purpose of widening possibilities of postponing own capital by the banks:
They abolished prohibition on paying entering in the nominal capital of the banks and receiving subordination loans by the foreign capital;
They processed a rule of making entering in the nominal capital of the banks, when it takes place at the expense of converting bank obligations in the licenses of participating in the nominal capital;
They changed methods of approach towards requests of minimal size of own capital. These requests are still active for newly founded banks and are abolished for the active ones;
The involved the rule of paying nominal capital of the banks by the state securities.
By the end of 1999 Russian bank announced finishing of the first stage of restructuring banking system, which means, that this system recovered ability of providing basic complex of service, they kept viable kernel of the banks.
According to the Russian bank data, quantity of problematic banks by the first of January 2000 has been reduced from 480 till 199, and by the first of November – till 155. They widened the scales of bank activities, increased their assets. Whole capital of the active banks (except saving banks) has been increased per 2.7, though its size consisted only 46% towards the August of 1998, they reduced the number of those banks, normative of liquidity of which was less, then the obligatory level H3 per 70%.
The affair has been being interrupted by the absence of an evident economical policy of the government. The bank of Russia had no conception of recovering and developing banks, which would be received by the totality of banks and finally state role and the place of central bank, instruments to be used in relation with commercial banks, main goals and directions of working with restructuring. At the way of restructuring lack of resources still remained to be the main problem.
Bank of Russia and ARBS estimated possibilities of forming quite effective instrument, which would give them possibility for organizing, managing and transformation of banking system, also,, their possibilities and readiness in the wealth of the resources of bank refinancing and self-curing.
It is more dangerous, that bank of Russia considers liquidation of the banks to be prior way of working with problematic banks.
Herewith, liquidation of the banks loosing license is processing very slowly and is followed by large expense. To the mind of Bank Association of Russia (BAR), restructuring process is continuing slowly and not progressively. They consider, that bank of Russia has been able to define banks to be supported, discuss the programs of their curing and supporting realization of these programs. They have had enough time for avoiding not viable banks, but they haven’t done that. 40% of credit organizations of banking system have lost their licenses, and only 3/5 of them have been rubbed out of the registration book. Middle term of liquidation procedures is 2-3 years. Herewith, almost half of competition mass is worked for organizing competition management and current expenses. Creditors of the banks in such occasion loose their money forever. It seems that n case of liquidating bank only those of the interested persons win, who provides the procedure of liquidation and bankrupting.
Finally, it must be mentioned, that bank of Russia practically refused providing credit support to the banks for the purpose of providing stabilizing activities. The state refused to support practical programs of restructuring banking system as well. After these, the society suffers more and more loss.
They often call a process of transforming banking system in Russia “slowly progressive restructuring”. Truly, in fact it is brought to the individual and spontaneous “conformity” of the banks to the new request of the time. This makes it dangerous, that this will recover only earlier banking system – with the same weaknesses and defects.
Experience of overcoming banking crisis in the USA. US economy has been influenced by banking problems several times. One of them appeared during the period of large depression of 1929-1933. Thousand
of bank deposits were devaluated because of ineffective operations of the banks, also not returning of the granted loans and total degradation of the economy. They closed hundreds of banks and provided confiscation of thousands of objects because of not returning of loans. US congress passed laws about founding federal corporations insuring deposits and also those insuring loans and savings. Except insuring, these corporations were obliged to research a lot of financial institutions for the purpose of finding defects in bank legislation and procedures and regulation of banking operations. This system has been working effectively during many years.
By the end of 1970 and beginning of 1980 banking industry of the USA was fluctuated by another financial catastrophe. To the analytical mind, reason of this was defective practice of granting doubtful credits, also, not transparency of the activities of regulating organs. Such organs that time were department of currency control, corporations mentioned above and institutions of Federal Reserve System. Exactly this time they destroyed reductions on percentage rates set for the banks on the attracted resources. They gave the banks right to pay any percents to the depositors (but higher, then market rates). That’s why rates in the 80s overcame annual 20%. It is evident, that the banks were to grant credits in higher percents (25% and more) for keeping profitableness.
Prices were being grown, especially those of immovable property (mostly because of expensive inner prices on oil). They abolished reductions to the borrower-saving associations on realization financing venture projects related with immovable property and speculative commercial operations (at whole US territory). Then they let the commercial banks grant credits on reconstruction projects and other risky operations related with immovable property (the government stimulated such operations), as in the country, so abroad. Herewith, for guaranteeing such credits, banks attracted deposits with very high percents. By the end of the 80s it was impossible to return such credits because of high percents and side spread of speculative character of the borrowers’ operations. Scales of bankrupting companies and private persons in those years were extreme. Finally, values of oil and immovable property have been significantly cheapened. Because of low level of banking management and under the conditions of deregulation reduced the number of hundreds of borrow-saving associations and financing resources of commercial banks, that they started using deposits attracted by the higher rates for payments on the old deposits and, they continued granting risky credits. By the end of 1988 both mentioned corporations were nearly bankrupted, as they were to give all their resources to the not solvent banks and associations in the way of insurance payment. The US congress was to provide banking reform again.
Under such conditions the congress passed the law about reforming, recovering obligations of financial institutions and compulsory payment (FIRREA). This law signed in 1989 became the most fluent banking law, had ever being passed in the USA. For its realization and according to it they founded Trust Corporation of returning resources (RTC), which has following goals:
The congress didn’t pass those parts of the legislative act, which foresaw financial support of the shareholders of problematic credit organizations and thus didn’t help massive restructuring of such organizations. Thus, Credit Corporation started playing functions of liquidations department and not those of restructuring agency.
Restructuring separate banks of the USA was realized only in exceptional occasions and even if the share-holders were ready to enter additional important resources into the capital and the creditors agreed to find compromised solution of obligations related with discounting. Herewith, they were to like restructuring plan. During whole history, they provided restructuring only of several banks in the USA.
During the six year of existence, Trust Company managed and liquidated 747 not solvent borrow-saving corporations (40% of such organizations). A corporation, usually, was able to find firm and easily managed bank, which would oblige itself with obligations existed at the deposits of the bankrupted organizations. According to the FIRREA law, corporation used to give such banks cash or liquid assets of same volume. When transition of deposits didn’t take place in such banks, the corporation according to the corporation normative paid the depositor guaranteed part of their deposits (not more, then 100 000 dollars). Middle rest on the depository account in the bankrupted organizations consisted 7500 dollars, total quantity of their depositors overcame 25 million people. Total balance value of the shares of these organizations was 451 billion dollars. By the end of the activities of RTC, in December in 1995, 95% of these assets were sold per price equal to the 87% of balance value, or the corporations was able to return 87 cents on every dollar.
RTC processed and involved special methods of marketing and realization of bank assets, most of which have been used widely in other countries, they are:
RTC administration knew, that mission of this corporation would be hard to be fulfilled, without having correctly planned strategy, strictly processed methodology and procedures, also without strict control. The most difficult problem was conforming conditions of selling assets, covering loans and restructuring, also stating responsibilities and limits of wasting RTV resources.
They found way out by setting limits and wide distributing obligations. The procedures of transiting obligations to the staff workers foresaw preparing statement on every asset.
As a rule, main reason of banking problems is bad management. Inability of the setting good inner control and strict keeping of the procedures finally brought the bank to the strengthening problems and bankrupting. Unprofessional management may give rise to the mistakes in managing risks and liquidity. When these questions are guaranteed by the managers and administration of the banks, this is followed by problematic assets and problematic banks. Exactly this took place in the USA in 1970-80s. There were too many banks and they granted huge credits, and this was absolutely incorrect. Weak organization of selecting borrowers by the banks, entering of payments and controlling financial position of the borrowers and also weak management showed up.
Lamara Qoqiauri
Date and place of birth: October 6, 1948
Working place: Tbilisi Iv. Javakhishvili State University
Tel.: (+99532) 79-07-10; (+99532) 760595
Web-site: www.nino.skola.dlf.ge
e-mail: qoqiauri@yahoo.com
Address: Tbilisi, Varketili, 159, Gakhokidze St.
Working experience
A republican department of Georgian State Bank (National Bank) ———from 1970 1976
Tbilisi, 3/5, Kirov (now Leonize) St. – Accountant economist, An inspector of providing accountant-loan operations, cash fulfillment of budget.
A republican department of “MshenBank ————————————— from 1976 – 1977
As a Chief economist
Tbilisi Iv. Javakhishvili State university —————————————— from 1977 – till now
As a Laboratory assistant of a cathedra, Research worker, Associate professor, Professor.
Gori Economical Institute (now State university)
English private school-college “Nino”- Owner
Education/training
Tbilisi, Komarov high school of physics and mathematics
Tbilisi, technical school-college of finances and economy
Tbilisi, Iv. Javakhishvili State University, Faculty of economy (evening department)
Post-graduate course of Georgian scientific academy of economy and logistics
Tbilisi State University, Economical faculty
Nongovernmental association of private schools
Qualification
Scientific status – Professor
Doctor of economical science
Doctor of economical science, professor.
Accountant-economist of Bank
Candidate of economical sciences, associate professor
Published works
Quantity of works -108
Monographs between them ? 14
Manuals between them -5
Quantity of works during last 10 years ? 84
Quantity of works in the referred magazines- 43
A Study the Strategies Issue in Indian Banking Sector
1.0 INDIAN BANKING SYSTEM
A banking company in India has been defined in the banking companiesact,1949.as one “which transacts the business of banking which means the accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise.” Most of the activities a Bank performs are derived from the above definition. In addition, Banks are allowed to perform certain activities which are ancillary to this business of accepting deposits and lending. A bank’s relationship with the public, therefore, revolves around accepting deposits and lending money. Another activity which is assuming increasing importance is transfer of money – both domestic and foreign – from one place to another. This activity is generally known as “remittance business” in banking parlance. The so called forex (foreign exchange) business is largely a part of remittance albeit it involves buying and selling of foreign currencies.
Functioning of a Bank is among the more complicated of corporate operations. Since Banking involves dealing directly with money, governments in most countries regulate this sector rather stringently. In India, the regulation traditionally has been very strict and in the opinion of certain quarters, responsible for the present condition of banks, where NPAs are of a very high order. The process of financial reforms, which started in 1991, has cleared the cobwebs somewhat but a lot remains to be done. The multiplicity of policy and regulations that a Bank has to work with makes its operations even more complicated, sometimes bordering on illogical. This section, which is also intended for banking professional, attempts to give an overview of the functions in as simple manner as possible. Banking Regulation Act of India, 1949 defines Banking as “accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft, and order or otherwise.”
KINDS OF BANKS
Financial requirements in a modern economy are of a diverse nature, distinctive variety and large magnitude. Hence, different types of banks have been instituted to cater to the varying needs of the community. Banks in the organized sector can be classified in to the following
1. COMMERCIAL BANKS:-
Commercial banks are joint stock companies dealing in money and credit. In India, however there is a mixed banking system, prior to July 1969, all the commercial banks-73 scheduled and 26 non-scheduled banks, except the state bank of India and its subsidiaries-were under the control of private sector. On July 19, 1969, however, 14mejor commercial banks with deposits of over 50 Corers were nationalized. In April 1980, another six commercial banks of high standing were taken over by the government.
2. CO-OPERATIVE BANKS:-
Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative societies Act of the states. The main objective of co-operative banks is to provide cheap credits to their members. They are based on the principle of self-reliance and mutual co-operation. Co-operative banking system in India has the shape of a pyramid a three tier structure, constituted by:
3. SPECIALIZED BANKS:-
There are specialized forms of banks catering to some special needs with this unique nature of activities. Foreign exchange banks, Industrial banks, Development banks, Land development banks, Exim bank are important.
4. CENTRAL BANK:-
A central bank is the apex financial institution in the banking and financial system
of a country. It is regarded as the highest monetary authority in the country. It acts as the leader of the money market. It supervises, control and regulates the activities of the commercial banks. It is a service oriented financial institution. India’s central bank is the reserve bank of India established in 1935.and it was nationalized in 1949.It is free from parliamentary control.
ROLE OF BANKS IN A DEVELOPING ECONOMY
Banks play a very important and dynamic role in the economic life of every modern state. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and 19th centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to the developing countries may be viewed thus:
1. PROMOTING CAPITAL FORMATION:-
A developing economy needs a high rate of capital formation to accelerate the tempo of economic development, but the rate of capital formation depends upon the rate of saving. Unfortunately, in underdeveloped countries, saving is very low. Banks afford facilities for saving and, thus encourage the habits of thrift and industry in the community. They mobilize the ideal and dormant capital of the country and make it available for productive purposes.
2. ENCOURAGING INNOVATION:-
Innovation is another factor responsible for economic development. The entrepreneur in innovation is largely dependent on the manner in which bank credit is allocated and utilized in the process of economic growth. Bank credit enables entrepreneurs to innovate and invest, and thus uplift economic activity and progress.
3. MONETSATION:-
Banks are the manufactures of money and they allow many to play its role freely in the economy. Banks monetize debts and also assist the backward subsistence sector of the rural economy by extending their branches in to the rural areas. They must be replaced by the modern commercial bank’s branches.
4. INFLUENCE ECONOMIC ACTIVITY
Banks are in a position to influence economic activity in a country by their influence on the rate interest. They can influence the rate of interest in the money market through its supply of funds. Banks may follow a cheap money policy with low interest rates which will tend to stimulate economic activity.
5. FACILITATOR OF MONETARY POLICY
Thus monetary policy of a country should be conductive to economic development. But a well-developed banking system is on essential pre-condition to the effective implementation of monetary policy. Under-developed countries cannot afford to ignore this fact.
PRINCIPLES OF BANK LENDING POLICIES
The main business of banking company is to grant loans and advances to traders
as well as commercial and industrial institutes. The most important use of banks money is lending. Yet, there are risks in lending. So the banks follow certain principles to minimize the risk:
1. SAFETY
Normally the banker uses the money of depositors in granting loans and advances. So first of all initially the banker while granting loans should think first of the safety of depositor’s money. The purpose behind the safety is to see the financial position of the borrower whether he can pay the debt as well as interest easily.
2. LIQUIDITY
It is a legal duty of a banker to pay on demand the total deposited money to the depositor. So the banker has to keep certain percent cash of the total deposits on hand. Moreover the bank grants loan. It is also for the addition of short term or productive capital. Such type of lending is recovered on demand.
3. PROFITABILITY
Commercial banking is profit earning institutes. Nationalized banks are also not an exception. They should have planning of deposits in a profitability way pay more interest to the depositors and more salary to the employees. Moreover the banker can also incur business cost and ca
n give more benefits to customer.
4. PURPOSE OF LOAN
Banks never lend or advance for any type of purpose. The banks grant loans and advances for the safety of its wealth, and certainty of recovery of loan and the bank lends only for productive purposes. For example, the bank gives such loan for the requirement for unproductive purposes.
5. PRINCIPLE OF DIVERSIFICATION OF RISKS
While lending loans or advances the banks normally keep such securities and assets as a supports so that lending may be safe and secured. Suppose, any particular state is hit by disasters but the bank shall get benefits from the lending to another states units. Thus, he effect on the entire business of banking is reduced.
OBJECTIVES OF THE STUDY
The following are the main objective of the studies.
1. To study the problem in financial crisis and money related query.
2. To evaluate banking is one of the most regulated businesses in the India.
3. To Analysis the role developing economy for the nation.
4. To study dynamic role in delivery and purchase of consumer durables.
Scope of the Study
All persons need money for personal and commercial purposes. Banks are the oldest lending institutions in Indian scenario. They are providing all facilities to all citizens for their own purposes by their terms. To survive in this modern market every bank implements so many new innovative ideas, strategies, and advanced technologies. For that they give each and every minute detail about their institution and projects to Public. They are providing ample facilities to satisfy their customers i.e. Net Banking, Mobile Banking, Door to Door facility, Instant facility, Investment facility, Demat facility, Credit Card facility, Loans and Advances, Account facility etc. And such banks get success to create their own image in public and corporate world. These banks always accept innovative notions in Indian banking scenario like Credit Cards, ATM machines, Risk Management etc. So, as a student business economics I take keen interest in Indian economy and for that banks are the main source of development.
So this must be the first choice for me to select this topic. At this stage every person must know about new innovation, technology of procedure new schemes and new ventures.
METHODOLGY
Theoretical study conducted on the basis of secondary data, collected from books, journal and annual reports.
2. BANK PROFILE:
Indian Bank
Name of the Branch : Karaikal. [0090]
Date of Opening : 1971
District/Port Open : Karaikal/Port Town.
Category/Size : Large.
Population : Urban.
Computerisation : CBS.
Name of the Branch Head : R.Muralitharan,(Senior Branch
Manager)
Staff Strength Officers : 06
Award Staff : 06
Sub Staff : 03
Productivity : Rs. 281.39 Lacs.
Branch Classification : Profit Centre.
Location of the Branch : No. 96-98 Bharathiyar Road,
Karaikal-609607
Competition in the area : Almost All Banks are functioning.
Potential Available : Situated in a Commercial Area with a number of shops around Scope for trade finance. Branch has to tap more trade finance.
Computerised : ATM/CBS.
Commercial Activity : Being a union territory, large commercial Industrial activities are on.
TARGETS vis-à-vis ACHIEVEMENTS
Rupees in Lacs
Particulars
31-03-2007
31-03-2008
30-06-2008
targets
target
actual
target
actual
target
actual
30-09-08
31-03-09
S.B
2900
2914
3343
2778
3400
3062
3557
4200
C.D
1610
1621
1814
924
2365
1700
1915
2200
T.D
4800
5281
5654
5890
6064
6099
5841
6400
TOTAL
9310
9816
10811
9592
11329
10361
11329
12900
ADVANCES
4389
3674
3883
3733
5487
5768
5487
6430
PROFIT
474
520
175
120
156
147
289
411
NPA LEVEL
320
368
379
601
457
604
478
581
SLIPPAGE
118
251
234
268
276
337
CASH REC.
40
62
38.33
13.01
40
18.98
121
200
UPGRADE
20
60
13.33
3.5O
16.65
5.52
26
47
IOB JEEVAN
224
432
385
543
600
HEALTH+
47
80
110
136
200**
** Number of Accounts. * Cumulative Figures.
Source: Computed Balance sheet of Indian Bank
Inspection Report Rating:
Inspection Report dated
Business Growth
Profitability
Credit Mgt.
NPA Mgt.
House keeping
Branch Image
Overall Rating
25.08.2003
B
B
C
C
B
B
B
12.02.2005
A
A
C
B
B
B
B
29.08.2006
B
A
B
A
B
A
A
Source: computed balance sheet.
STRATEGIC ISSUES IN BANKING SERVICES
Strategic Planning is the process of analyzing the organizational external and internal environments; developing the appropriate mission, vision, and overall goals; identifying the general strategies to be pursued; and allocated resources.
• Mission is an organization’s current purpose or reason for existing.
• Vision is an organization’s fundamental aspirations and purpose that usually appeals to its member’s hearts and minds.
• Goals are what an organization is committed to achieving.
• Strategies are the major courses of action that an organization takes to achieves goals.
• Resource Allocation is the earmarking of money, through budgets, for various purposes.
• Downsizing Strategy signals an organization’s intent to rely on fewer resources primarily human-to
accomplish its goals.
Tactical Planning is the process of making detailed decisions about what to do, which will do it, and how to do it-with a normal time and horizon of one year or less. The process generally includes:
• Choosing specific goals and the means of implementing the organization’s strategic plan,
• Deciding on courses of action for improving current operations, and
• Developing budgets for each department, division and project.
TOTAL QUALITY MANAGEMENT
While Total Quality Management has proven to be an effective process for improving organizational functioning, its value can only be assured through a comprehensive and well thought out implementation process. TQM is, in fact, a large scale systems change, and guiding principles and considerations regarding this scale of change will be presented. Without attention to contextual factors, well intended changes may not be adequately designed. As another aspect of context, the expectations and perceptions of employees will be assessed, so that the implementation plan can address them. Specifically, sources of resistance to change and ways of dealing with them will be discussed. This is important to allow a change agent to anticipate resistances and design for them, so that the process does not bog down or stall. Next, a model of implementation will be presented, including a discussion of key principles. Visionary leadership will be offered as an overriding perspective for someone instituting TQM. In recent years the literature on change management and leadership has grown steadily, and applications based on research findings will be more likely to succeed. Use of tested principles will also enable the change agent to avoid reinventing the proverbial wheel. Implementation principles will be followed by a review of steps in managing the transition to the new system and ways of helping institutionalize the process as part of the organization’s culture. Finally, some miscellaneous do’s and don’ts will be offered.
Planned change processes often work, if conceptualized and implemented properly; but, unfortunately, every organization is different, and the processes are often adopted “off the shelf” “the ‘appliance model of organizational change’: buy a complete program, like a ‘quality circle package,’ from a dealer, plug it in, and hope that it runs by itself” (Kanter, 1983, 249). Alternatively, especially in the underfunded public and not for profit sectors, partial applications are tried, and in spite of management and employee commitment do not bear fruit. This chapter will focus on ways of preventing some of these disappointments. In summary, the purpose here is to review principles of effective planned change implementation and suggest specific TQM applications. Several assumptions are proposed:
1. TQM is a viable and effective planned change method, when properly installed
2. Not all organizations are appropriate or ready for TQM
3. Preconditions (appropriateness, readiness) for successful TQM can sometimes be created
4. Leadership commitment to a large scale, long term, and cultural change is necessary.
While problems in adapting TQM in government and social service organizations have been identified, TQM can be useful in such organizations if properly modified.
For survival, banks have to make efforts to improve their quality and competitiveness by planning and taking innovative in fall areas:
· Increase emphasis on customer focused activities
· Intro a “total quality” program
· Developing differential value added services
· Educating employees through involvement programs
· Increase quality through management and system
· Increase effectiveness of product development
· Developing product with lower uses costs
TQM principles
· Customer satisfaction
· Plan-do-check-act (PDCA) cycle
· Management by ‘fact’ – 5Ws (what, why, who, when, and where) + 1H(how) approach
· Respect for people
TQM elements
· Total employee involvement (TEI)
· Total waste elimination (TWE)
· Total quality control (TQC)
TQM focus areas
· Customer satisfaction
· Product quality
· Plant reliability
· Waste elimination
Benefits achieved through TQM
· Increased focus on the customer
· Mindset of ‘continuous improvement’
· Better product quality
· Better systems and procedures
· Better cross-functional teamwork
· Increased plant reliability
· Waste elimination in offices and factories.
KNOWLEDGE MANAGEMENT
According to Peter Drucker and Daniel Bell, the management Gurus knowledge is the only meaningful economic resource. Knowledge management can be defined as a systematic and integrative process of coordinating organization-wide activities of acquiring, creating, storing, sharing, diffusing, developing and deploying knowledge by individual and groups in the pursuit of major organizational goals. It also involves the creation of an interacting learning environment where organization members transfer and share what they know; and apply knowledge to solve problems, innovate and create new knowledge.
Knowledge management is as much about people and culture as it is about technology. Knowledge management thrives only when the human communication network operates freely across the shortest path between the knowledge providers and knowledge seekers. There must be a culture that promotes and rewards the pooling together of knowledge resources. Thus organizations must build a culture that motivates people to create, share and use knowledge.
After the preoccupation with system and procedures to collect data ad translate it into information, its time for firms to focus on the next plane- knowledge. Knowledge management is not a buzzword. Every knowledge management solution, if currently implemented, has definite measurable business benefits.
Future business success increasingly depends on the retention and the creative use of the knowledge ideas and experiences of an organization and its employees. And in knowledge economy corporations need for workers will be more than the workers need for employer.
INNOVATION IN BANK
Innovation drives organizations to grow, prosper and transform in sync with the changes in the environment, both internal and external. Banking is no exception to this. In fact, this sector has witnessed radical transformation of late, based on many innovations in products, processes, services, systems, business models, technology, governance and regulation. A liberalized and globalize financial infrastructure has provided an additional impetus to this gigantic effort.
The pervasive influence of information technology has revolutionaries banking. Transaction costs have crumbled and handling of astronomical number of transactions in no time has become a reality. Internationally, the number brick and mortar structure has been rapidly yielding ground to click and order electronic banking with a plethora of new products. Banking has become boundary less and virtual with a 24 * 7 model. Banks who strongly rely on the merits of relationship banking’ as a time tested way of targeting and serving clients, have readily embraced Customer Relationship Management (CRM), with sharp focus on customer centricity, facilitated by the availability of superior technology. CRM has, therefore, become the new mantra in customer service management, which is both relationship based a
nd information intensive.
Risk management is no longer a mere regulatory issue.basel-2 has accorded a primacy of place to this fascinating exercise by repositioning it as the core of banking. We now see the evolution of many novel deferral products like credit derivatives, especially the Credit Risk Transfer (CRT) mechanism, as a consequence. CRT, characterized by significant product innovation, is a very useful credit risk management tool that enhances liquidity and market efficiency. Securitization is yet another example in this regard, whose strategic use has been rapidly rising globally. So is outsourcing.
TECHNOLOGY IN BANKING
Nobel Laureate Robert Solow had once remarked that computers are seen everywhere excepting in productivity statistics. More recent developments have shown how far this state of affairs has changed. Innovation in technology and worldwide revolution in information and communication technology (ICT) have emerged as dynamic sources of productivity growth. The relationship between IT and banking is fundamentally symbiotic. In the banking sector, IT can reduce costs, increase volumes, and facilitate customized products; similarly, IT requires banking and financial services
to facilitate its growth. As far as the banking system is concerned, the payment system is perhaps the most important mechanism through which such interactive dynamics gets manifested. Recognizing the importance of payments and settlement systems in the economy, we have embarked on technology based solutions for the improvement of the payment and settlement system infrastructure, coupled with the introduction of new payment products such as the computerized settlement of clearing transactions, use of Magnetic Ink Character Recognition (MICR) technology for cheque clearing which currently accounts for 65 per cent of the value of cheques processed in the country, the computerization of Government Accounts and Currency Chest transactions, operationalisation of Delivery versus Payment (DvP) for Government securities transactions. Two-way inter-city cheque collection and imaging have been operationalised at the four metros. The coverage of Electronic Clearing Service (Debit and Credit) has been significantly expanded to encourage non-paper based funds movement and develop the provision of a centralized facility for effecting payments. The scheme for Electronic Funds Transfer operated by the Reserve Bank has been significantly augmented and is now available across thirteen major cities. The scheme, which was originally intended for small value transactions, is processing high value (upto Rs.2 crore) from October 1, 2001. The Centralized Funds Management System (CFMS), which would enable banks to obtain consolidated account-wise and centre-wise positions of their balances with all 17 offices of the Deposits Accounts Departments of the Reserve Bank, has begun to be implemented in a phased manner from November 2001.
A holistic approach has been adopted towards designing and development of a modern, robust, efficient, secure and integrated payment and settlement system taking into account certain aspects relating to potential risks, legal framework and the impact on the operational framework of monetary policy. The approach to the modernization of the
payment and settlement system in India has been three-pronged: (a) consolidation, (b) development, and (c) integration. The consolidation of the existing payment systems revolves around strengthening Computerized Cheque clearing, expanding the reach of Electronic Clearing Services and Electronic Funds Transfer by providing for systems with the latest levels of technology. The critical elements in the developmental strategy are the opening of new clearing houses, interconnection of clearing houses through the INFINET; optimizing the deployment of resources by banks through Real Time Gross Settlement System, Centralized Funds Management System (CFMS); Negotiated Dealing System (NDS) and the Structured Financial Messaging Solution (SFMS). While integration of the various payment products with the systems of individual banks is the thrust area, it requires a high degree of standardization within a bank and seamless interfaces across banks.
The setting up of the apex-level National Payments Council in May 1999 and the operationalisation of the INFINET by the Institute for Development and Research in Banking Technology (IDRBT), Hyderabad have been some important developments in the direction of providing a communication network for the exclusive use of banks and financial institutions. Membership in the INFINET has been opened up to all banks in addition to those in the public sector. At the base of all inter-bank message transfers using the INFINET is the Structured Financial Messaging System (SFMS). It would serve as a secure communication carrier with templates for intra- and inter-bank messages in fixed message formats that will facilitate ‘straight through processing’. All inter-bank transactions would be stored and switched at the central hub at Hyderabad while intra bank messages will be switched and stored by the bank gateway. Security features of the SFMS would match international standards.
In order to maximize the benefits of such efforts, banks have to take pro-active measures to:
· further strengthen their infrastructure in respect of standardization, high levels
· of security and communication and networking;
· achieve inter-branch connectivity early;
· popularize the usage of the scheme of electronic funds transfer (EFT); and
· Institute arrangements for an RTGS environment online with a view to integrating into a secure and consolidated payment system.
Information technology has immense untapped potential in banking. Strengthening of information technology in banks could improve the effectiveness of asset-liability management in banks. Building up of a related data-base on a real time basis would enhance the forecasting of liquidity greatly even at the branch level. This could contribute to enhancing the risk management capabilities of banks.
REGULATIONS AND COMPLIANCE
Progressive strengthening, deepening and refinement of the regulatory and supervisory system for the financial sector have been important elements of financial sector reforms. In the long run, it is the supervision and regulation function that is critical in safeguarding financial stability. There is also some evidence that proactive and effective supervision contributes to the efficiency of financial intermediation. Financial sector supervision is expected to become increasingly risk-based and concerned with validating systems rather than setting them. This will entail procedures for sound internal evaluation of risk for banks. As mentioned earlier, bank managements will have to develop internal capital assessment processes in accordance with their risk profile and control environment. These internal processes would then be subjected to review and supervisory intervention if necessary. The emphasis will be on evaluating the quality of risk management and the adequacy of risk containment. In such an environment, credibility assigned by markets to risk disclosures will hold only if they are validated by supervisors. Thus effective and appropriate supervision is critical for the effectiveness of capital requirements and market discipline.
In certain areas, as for instance, in the urban cooperative banking segment, the regulatory requirements leave considerable scope for regulatory arbitrage and even circumvention. The problem is rendered more complex by the existence of regulatory overlap between the Central Government, the State Governments and the Reserve Bank. Regulatory overlap has impeded the speed of regulatory response to emerging problems. The ne
ed for removing multiple regulatory jurisdictions over the cooperative banking sector has been reiterated on several occasions. In this regard, the Reserve Bank has proposed the setting up of an apex supervisory body for urban cooperative banks under the control of a high-level supervisory board consisting of representatives of the Central governments, the State governments, the Reserve Bank and experts. The apex body is expected to ensure compliance with prudential requirements and also supervise on-site inspections and off-site surveillance.
Recent developments in certain segments of the financial sector have also brought to the fore issues relating to corporate governance in banks. As part of on-going reforms, boards have been given greater autonomy to prescribe internal control guidelines, risk management and procedures for market discipline and accountability. It is extremely important that greater vigilance over adherence to these norms goes hand-in-hand with greater autonomy. Recent evidence of transgression of prudential guidelines by a few banks has raised the issue of the audit and supervisory functions of boards. As we move towards a more deregulated financial regime, these functions have to be transferred from either the Government or the Reserve Bank to bank boards. This imposes a greater responsibility and accountability on the bank management. It is in this context that a consultative group of directors of select banks and other experts has been set up to recommend measures to strengthen the internal supervisory role of boards. The objective is to obtain a feedback on how boards function vis-à-vis compliance with prudential norms, transparency and disclosure, functioning of the audit committee, etc., and to devise effective mechanisms for ensuring management discipline.
Several other initiatives in improving the supervisory function have been undertaken, including a prudential supervisory reporting system for financial institutions, improvements in procedures for financial inspection, sensitizing the general public for better regulation of the activities of NBFCs and enactment of appropriate legislation to protect depositor interests in some States. Major legal reforms have been initiated in areas
such as security laws, the Negotiable Instruments Act, bank frauds and the regulatory framework of banking. The Reserve Bank has also accepted the principle of transfer of ownership to the Government in respect of some financial institutions in view of the conflict of interest that may arise in the conduct of its supervisory function. It is expected that these initiatives will pave the way for an efficient, and risk-based supervisory environment in India.
The largest set of consolidated regulations that mandate integrity of data in India are the IT Act and SEBI’s clause 49 for listed companies. These regulations do not currently enforce the kind of security standards that are common in Europe and the US. In a global economy, however, no company is an island and India Inc is adopting US and European compliance procedures and certifications such as Sarbanes Oxley, Safe Harbour, BS, and ISO.
Compliance, regulatory or otherwise, does not directly concern the IT department. In manufacturing for instance, compliance controls don’t really involve system security, and a large part of the quality control required by authorities cannot be imposed or enforced using IT. Companies that deal with sensitive information, financial services and BPOs, banks, MNC subsidiaries or those with plans to expand beyond Indian shores are all affected. These will continue to make strides towards compliance. For the mediumscale segment (Rs 100-300 crore turnover), security and audits are not a priority. This segment is comfortable with public mail servers, and exchanging information over not very secure connections.
CORPORATE GOVERNANCE – CODE OF CONDUCT
1. Need and objective of the Code
Clause 49 of the Listing agreement entered into with the Stock Exchanges, requires, as part of Corporate Governance the listed entities to lay down a Code of Conduct for Directors on the Board of an entity and its Senior Management. The term “Senior Management” shall mean personnel of the company who are members of its core management team excluding the Board of Directors. This would also include all members of management, one level below the Executive Directors including all functional heads.
2. Bank’s Belief System
This Code of Conduct attempts to set forth the guiding principles on which the Bank shall operate and conduct its daily business with its multitudinous stakeholders, government and regulatory agencies, media and anyone else with whom it is connected. It recognizes that the Bank is a trustee and custodian of public money and in order to fulfill fiduciary obligations and responsibilities, it has to maintain and continue to enjoy the trust and confidence of public at large.
The Bank acknowledges the need to uphold the integrity of every transaction it enters into and believes that honesty and integrity in its internal conduct would be judged by its external behavior. The bank shall be committed in all its actions to the interest of the countries in which it operates. The Bank is conscious of the reputation it carries amongst its customers and public at large and shall endeavor to do all it can to sustain and improve upon the same in its discharge of obligations. The Bank shall continue to initiate policies, which are customer centric and which promote financial prudence.
A. General Standards of conduct
The Bank expects all Directors and members of the Core Management to exercise good judgment, to ensure the interests, safety and welfare of customers, employees and other stakeholders and to maintain a cooperative, efficient, positive, harmonious and productive work environment and business organization. The Directors and members of the Core Management while discharging duties of their office must act honestly and with due diligence. They are expected to act with that amount of utmost care and prudence, which an ordinary person is expected to take in his/ her own business. These standards need to be applied while working in the premises of the Bank, at offsite locations where business is being conducted whether in India or abroad, at Bank-sponsored business and social events, or at any other place where they act as representatives of the Bank.
B. Conflict of Interest
A “conflict of interest” occurs when personal interest of any member of the Board of Directors and of the Core management interferes or appears to interfere in any way with the interests of the Bank. Every member of the Board of Directors and Core Management has a responsibility to the Bank, its stakeholders and to each other. Although this duty does not prevent them from engaging in personal transactions and investments, it does demand that they avoid situations where a conflict of interest might occur or appear to occur. They are expected to perform their duties in a way that they do not conflict with the Bank’s interest such as :
· Employment /Outside Employment – The members of the Core Management are expected to devote their total attention to the business interests of the Bank. They are prohibited from engaging in any activity that interferes with their performance or responsibilities to the Bank or otherwise is in conflict with or prejudicial to the Bank.
· Business Interests – If any member of the Board of Directors and Core Management considers investment in securities issued by the Bank’s customer, supplier or competitor, they should ensure that these investments do not compromise their responsibilities to the Bank. Many factors including the size and nature of the investment; their ability to influence the Bank’s decisions, their access to confidential
information of the Bank, or of the other entity, and the nature of the relationship between the Bank and the customer, supplier or competitor should be considered in determining whether a conflict exists. Additionally, they should disclose to the Bank any interest that they have which may conflict with the business of the Bank.
C. Applicable Laws
The Directors of the Bank and Core Management must comply with applicable laws,regulations, rules and regulatory orders. They should report any inadvertent non -compliance, if detected subsequently, to the concerned authorities.
D. Disclosure Standards
The Bank shall make full, fair, accurate, timely and meaningful disclosures in the periodic reports required to be filed with Government and Regulatory agencies. The members of Core Management of the bank shall initiate all actions deemed necessary for proper dissemination of relevant information to the Board of Directors, Auditors and other Statutory Agencies, as may be required by applicable laws, rules and regulations.
E. Use of Bank’s Assets and Resources
Each member of the Board of Directors and the Core Management has a duty to the Bank to advance its legitimate interests while dealing with the Bank’s assets and resources. Members of the Board of Directors and Core Management are prohibited from:
· Using Corporate property, information or position for personal gain,
· Soliciting, demanding, accepting or agreeing to accept anything of value from any person while dealing with the Bank’s assets and resources,
· Acting on behalf of the Bank in any transaction in which they or any of their relative(s) have a significant direct or indirect interest.
F. Confidentiality and Fair Dealings
(i) Bank’s confidential Information
· The Bank’s confidential information is a valuable asset. It includes all
trade related information, trade secrets, confidential and privileged information, customer information, employee related information, strategies, administration, research in connection with the Bank and commercial, legal, scientific, technical data that are either provided to or made available each member of the Board of Directors and the core Management by the Bank either in paper form or electronic media to facilitate their work or that they are able to know or obtain access by virtue of their position with the Bank. All confidential information must be used for Bank’s business purposes only.
· This information includes the safeguarding, securing and proper disposal of confidential information in accordance with the Bank’s policy on maintaining and managing records. The obligation extends to confidential of third parties, which the Bank has rightfully received under non-disclosure agreements.
· To further the Bank’s business, confidential information may have to be disclosed to potential business partners. Such disclosures should be made after considering its potential benefits and risks. Care should be taken to divulge the most sensitive information, only after the said potential business partner has signed a confidentiality agreement with the Bank.
· Any publication or publicly made statement that might be perceived or construed as attributable to the Bank, made outside the scope of any appropriate authority in the Bank, should include a disclaimer that the publication or statement represents the views of the specific author and not the Bank.
(ii) Other Confidential Information
The bank has many kinds of business relationships with many companies and individuals. Sometimes, they will volunteer confidential information about their products or business plans to induce the Bank to enter into a business relationship. At other times, the Bank may request that a third party provide confidential information to permit the Bank to evaluate a potential business relationship with the party. Therefore, special care must be taken by the Board of Directors and members of the Core Management to handle the confidential information of others responsibly. Such confidential information should be handled in accordance with the agreements with such third parties.
· The Bank requires that every Director and the member of Core Management, General Managers should be fully compliant with the laws, statutes, rules and regulations that have the objective of preventing unlawful gains of any nature whatsoever.
· Directors and members of Core Management shall not accept any offer, payment, promise to pay or authorization to pay any money, gift or anything of value from customers, suppliers, shareholders/ stakeholders etc that is perceived as intended, directly or indirectly, to influence any business decision, any act or failure to act, any commission of fraud or opportunity for the commission of any fraud.
4. Good Corporate Governance Practices
Each member of the Board of Directors and Core Management of the Bank should adhere to the following so as to ensure compliance with good Corporate Governance practices.
(a) Dos
§ Attend Board meetings regularly and participate in the deliberations and discussions effectively.
§ Study the Board papers thoroughly and enquire about follow-up reports on definite time schedule.
§ Involve actively in the matter of formulation of general policies.
· Be familiar with the broad objectives of the Bank and policies laid down by the Government and the various laws and legislations.
· Ensure confidentiality of the Bank’s agenda papers, notes and minutes.
(b) Don’ts
· Do not interfere in the day to day functioning of the Bank.
· Do not reveal any information relating to any constituent of the Bank to anyone.
· Do not display the logo / distinctive design of the Bank on their personal visiting cards / letter heads.
· Do not sponsor any proposal relating to loans, investments, buildings or sites for Bank’s premises, enlistment or empanelment of contractors, architects, auditors, doctors, lawyers and other professionals etc.
· Do not do anything, which will interfere with and/ or be subversive of maintenance of discipline, good conduct and integrity of the staff.
5. Waivers
· Any waiver of any provision of this Code of Conduct for a
member of the Bank’s Board of Directors or a member of the Core Management must be approved in writing by the Board of Directors of the Bank.
The matters covered in this Code of Conduct are of the utmost importance to the bank, its stakeholders and its business partners, and are essential to the Bank’s ability to conduct its business in accordance with its value system.
ENTREPRENEURSHIP
Entrepreneurship is the practice of starting new organizations, particularly new businesses generally in response to identified opportunities. Entrepreneurship is often a difficult undertaking, as a majority of new businesses fail. Entrepreneurial activities are substantially different depending on the type of organization that is being started. Entrepreneurship may involve creating many job opportunities.
Many “high-profile” entrepreneurial ventures seek venture capital or angel funding in order to raise capital to build the business. Many kinds of organizations now exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs. Schumpeter (1950), an entrepreneur is a person who is willing and able to convert a new idea or invention into a successful innovation. Entrepreneurship forces “creative destruction” across markets and industries, simultaneously creating new products and business models and eliminating others. In this way, creative destruction is largely responsible
for the dynamism of industries and long-run economic growth. Despite Schumpeter’s early 20th-century contributions, the traditional microeconomic theory of economics has had little room for entrepreneurs in their theories.
Characteristics of entrepreneurship:-
§ The entrepreneur, who has a vision and the enthusiasm for this vision, is the driving force of an entrepreneurship
§ The vision is usually supported by a set of ideas that have not been aware by the majority of the market/industry
§ The overall blueprint to realize the vision is clear, however details may be incomplete, flexible, and evolving
§ The entrepreneur promotes the vision with an influential passion
§ With a persistent and deterministic mindset, the entrepreneur devises a set of entrepreneurial strategies to thrive for the vision
PERFORMANCE AND BENCHMARKING
• PERFORMANCE MANAGEMENT:-
Performance management is a systematic approach to improving worker productivity through a year-round, ongoing process of communicating and managing performance expectations. With Performance-based Management, performance improvement becomes the joint responsibility of employees and their managers. Generally there are two things which determine how successful a performance appraisal system is in place in an organization.
1) The contents/design of the performance appraisal form and
2) The manner in which Performance Appraisal is conducted.
While organizations lay great emphasis on the contents/design part, spending much of time, money and energy on designing most suitable, objective, comprehensive formats, it serves no purpose if the appraising process is not conducted properly.
Performance-based Management measures, evaluates and improves performance on the job. You can expect employee productivity to increase because performance assessments and performance feedback will always be job-related, even if the duties of a particular job expand or change. Furthermore, because this type of performance management focuses on productivity and not personality and since it involves ongoing, open, two-way communication between manager and employee, it greatly reduces many of the stereotypes, problems and anxieties associated with traditional labor-intensive
A benchmark is a point of reference for a measurement. The term presumably originates from the practice of making dimensional height measurements of an object on a workbench using a graduated scale or similar tool, and using the surface of the workbench as the origin for the measurements.
Benchmarks are designed to mimic a particular type of workload on a component or system. “Synthetic” benchmarks do this by specially-created programs that impose the workload on the component. “Application” benchmarks, instead, run actual real-world programs on the system. Whilst application benchmarks usually give a much better measure of real-world performance on a given system, synthetic benchmarks still have their use for testing out individual components, like a hard disk or networking device. Computer manufacturers have a long history of trying to set up their systems to give unrealistically high performance on benchmark tests that is not replicated in real usage. For instance, during the 1980s some compilers could detect a specific mathematical operation used in a well-known floating-point benchmark and replace the operation with a mathematically-equivalent operation that was much faster. However, such a transformation was rarely useful outside the benchmark. Manufacturers commonly report only those benchmarks (or aspects of benchmarks) that show their products in the best light. They also have been known to mis-represent the significance of benchmarks, again to show their products in the best possible light. Taken together, these practices are called bench-marketing.
Users are recommended to take benchmarks, particularly those provided by manufacturers themselves, with ample quantities of salt. If performance is really critical, the only benchmark that matters is the actual workload that the system is to be used for. If that is not possible, benchmarks that resemble real workloads as closely as possible should be used, and even then used with skepticism. It is quite possible for system A to outperform system B when running program “furble” on workload X (the workload in the benchmark), and the order to be reversed with the same program on your own workload.
• BENCHMARKING:-
Benchmarking (Comparing) is a selective method of finding out how and why some companies can perform tasks much better than other companies. There can be as much as a tenfold difference in the quality, speed and cost-performance of an average company versus a world-class company.
It involves the following seven steps
1) Determine functions to benchmark.
2) Identify the key performance variables to measure.
3) Identify the best-in-class companies.
4) Measure performance of best-in-class companies
5) Measures the company’s performance.
6) Specify programs and actions to close the gap
7) Implement and monitor results
A company can identify “best practices” companies by asking employees, customers, suppliers and distributors what they rate as doing the best. Major Consulting Firms can also be contacted for this purpose. To keep costs under control, a company should focus primarily on benchmarking those critical tasks that deeply affect customer satisfaction and Cost Management and where substantially better performance is known to exist.
Benchmarking is a process used in management and particularly strategic management, in which businesses use industry leaders as a model in developing their business practices. This involves determining where you need to improve, finding an organization that is exceptional in this area, then studying the company and applying it’s best practices in your firm. Benchmarking systematically studies the absolute best firms, then uses their best practices as
Nidheesh K B
Lecturer
Department of Commerce
School of Management
Pondicherry University.
Pondicherry India.
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Banking 1
Introduction to how banks make money and the value they (potentially) add to society.