Management in Banking - Assignment Example

Management in Banking Introduction The key to a bank's success is the selection of sources and uses of funds. The source consists of capital funds, deposits and borrowings. Capital funds are the owned funds that serve as a protection against risk and insolvency. Similarly, deposits are the primary source of bank funds. The size of the deposits determines the funds available for profitable deployment. (Deming, 2009, 34) In addition, banks borrow funds from time to time in the money market to meet the temporary deficiency as well as to expand their assets. All these funds are to be deployed in various avenues considering the risk and return factors. These avenues are, however, not alike in their returns. The assets, such as cash in hand, money at call and short notice, are held as per the liquidity requirements, and the return on these funds is almost zero, except money at call and short notice. Investments under Statutory Liquidity Ratio (SLR) serve the purpose of liquidity as well as income. (Alberto and Lapuz, 2005, 7)The rate of return on such investments should be adequate enough to cover financial and operating costs. Further, lending is a significant area of employment of funds in terms of size of funds involved as well as quantum of revenue generated. However, it carries a high degree of credit risk. In addition, banks also use a portion of their funds for creating their business infrastructure, which facilitates an enabling environment to conduct business and generate income. Efficient management of funds essentially includes raising of funds and their use in the manner that generates revenues sufficient to meet the operational as well as financial costs and contributes a reasonable return on capital. Thus, the objective of earning profits shall be fulfilled by an appropriate design of funds management on sound commercial principles. This dunking necessitated to conduct a study on cost-benefit analysis of bank funds. The development of an analytical framework for cost-benefit approach to funds management is based on a comprehensive review of literature. Literature Review Researchers analyzed the problem of decline in profitability of banks and recommended for mobilization of potential deposits through special deposit mobilization cell, judicious borrowings, control on mounting over-dues, and construction of professional investment portfolio to increase the profitability and liquidity. (Uppal, 2007, 121) Maintenance of low cash balance, careful credit appraisal and regular monitoring of advances, cost-benefit approach towards all banking transactions is the important recommendation of the study. Peter S Rose (2007) found that the banks across the world today are facing a crucial challenge in raising and using of funds. He suggested for short-term borrowings in the domestic money markets, selling old loans, and scrutinizing loans and other assets, focusing on innovations and new techniques for mobilization of funds. Alberto, Lapuz and Glenn (2005) suggested for changes in deposit and loan mix for improving the banks' profitability. Peter (2007) observed that funds management has become difficult due to large network of branches, diversified business and increasing competition among banks. Richard (2005) emphasized on stable call money rates, switching across the short dated and long dated securities on the basis of yield, planned growth of deposits with favorable mix, etc., for die effective management of bank funds. Thus the review reveals that the funds management in banks is examined by die researchers from different perspectives. A study on profitability of funds management with the cost and benefit perspective is found to be unexamined by the researchers. Aims and Objective of the study The objectives of the study are as follows: 1. To examine the cost of sources of funds 2. To analyze the return from deployment of funds 3. To trace die pattern of utilization of deposits and examine the underlying profitability of funds management. Methodology The study will be based on the data drawn from the annual reports of the 12 selected Public Sector Banks (PSBs). It will cover a period of one year from May 2011- May 2012. The sources and uses of funds as represented by various items of liabilities and assets contained in balance sheets will be considered for die purpose of analysis. Similarly, the items such as interest cost, interest income, etc., will be drawn from P&L accounts of these banks. For the purpose of the present study the banks will be reclassified as High Profile Banks (HPBs), Medium Profile Banks (MPBs) and Low Profile Banks (LPBs) based on their performance. In each category, four banks will be randomly selected. The relevant data of these banks will be aggregated for the purpose of analysis. The data will be presented through tables and analyzed with the help of ratios, percentages, arithmetic means, standard deviation (Std. Dev) and coefficient of variation (C.V.). The analysis of each point will be done from the point of view of banking industry as a whole as well as the segments. The inferences will be drawn from the information contained in financial statements of the selected banks using the interrelated financial ratios. The size of the sample is adequate i.e. 12 out of 27 PSBs. In addition, these selected banks represent the cross-section of the public sector banking industry as a whole belonging to high profile, medium profile and low profile segments. The period covered for the study (one year) is also a long one and therefore, the findings can be generalized for the entire banking industry in the sphere of management of funds. The approach of analysis of cost benefit of management of funds in this paper is developed from three broad perspectives: cost approach, return approach and an integrated approach to funds management. In each perspective key financial indicators will be used. The indicators of cost approach to funds management will include cost of deposits, cost of borrowings, and cost of total funds. Similarly, the indicators of return approach to funds management cover return on investments, and return on advances. Finally the ratios such as ratio of deposits to total liabilities, ratio of investments to deposits, and ratio of credit to deposits will be used under integrated approach to funds management. References Alberto, G., Lapuz, (2005). "Effective Treasury Management for Today's Banking", Bankers Journal, Malaysia, p.7. Deming, E, (2009). "Global Financial Meltdown-Challenges and Opportunities for Banks", Pg 34. Ciampa, D, (2003). "Issues in Funds Management", p.13. Peter Rose, (2007). "The Quest for Funds: New Directions in a New Market", Canadian Banker, Sept-Oct, p.46. Dale & Oakland, (2005) Quality Improvement through Standards, Stanley Thomas Publishers Ltd. Richard. D, (2005). "Funds Management Policies in Banks: Challenging Tasks Ahead", Monthly Review, May, p.265. Uppal R.K., (2007). "Cost-Benefit Analysis of Commercial Banks In the Global Age: Future Strategies for Fund Management", Business Horizon- A Journal of Commerce and Economics, Vol. 1 July-Dec, 2007. p.121. Read More