Essential of Bank Computerization

Local Area Network

Topology: The way in which the devices are interconnected is known as topology. The method of operation for the transfer of data over networks is called packets switching. The data user wishes to send, commonly referred to as a message is broken down into smaller units called packets. Each packet consists of some data bits and a header containing its destination address. The packets are passed from one packet by switching exchange to another until they reach their destination.

Star Topology			Ring Topology				Bus Topology
Central node is often the		Devices are connected in				·	All	devices	are
master		a	closed	loop	and		connected to a single
Each of the other nodes		information is passed					continuous cable
are   joined	to   the	from  one		node	to	Transmission  from			any
master  by	separate	another in series.					station	travels	the
links.		Data is transmitted in one					length of the bus, in
It one station fails, it will		direction only.					both	directions	and
not affect the rest of		The	breakdown  of		any		can be received by all
the network		station on the ring can					other stations.
		disable the entire LAN				·	It one	station fails, it
							will not affect the rest
							of the network
Protocols

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  Data Communication Network and EFT Systems

Data communication consists of various data communication components. It has three basic components.

1.  Transmission Devices and Interface Equipment

Modem conversion between the digital and analog forms is carried out by an interface device called Modem

2.     Transmission Medium Terrestrial Cables

Twisted-wire Pair		A twisted pair consists of two insulated copper wires
Coaxial Cable		The  Coaxial  cable  consist  of  an  inner  copper
		conductor held in position by circular spacers.
Optical Fibre		Optical fibre has been a technological breakthrough in
		communications.  It  supports  data  rate  of  2  giga
		bits/sec. Fibre Optics provide high quality transmission
		of  signals  at  very  high  speeds.  Not  affected  by
		electromagnetic interference. The transfer of data is
		through very thin glass or plastic fibres with a beam of
		light. The light source is the laser beam driven by a
		high speed high current driver.

3.    Microwave System microwave signals may be passed on to the satellite.

4.    Transmission Processors

Message Switcher is used to store and forward data to large number of terminals over a single communication channel.

Multiplexer send more than one signal simultaneously over a single communication channel.

Front End Processors used to intercept and handle communication activities for the host computer. A device located at the site of the CPU or the host computer. It relives the computer of the communication tasks leaving it free for processing application programs.

Modes Of Transmission 

·         Simplex – transmitting data in only one direction (commercial radio)

·         Half-Duplex – transmission is both directions, but in only one direction at a time.WALKY TALKY

·         Full Duplex – Simultaneous two-way transmission.MOBILE

Major Networks

INET

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NICNET

INDONET

Emerging Trends in Communication Networks For Banking RBI’s VSAT Network

Internet – The connection to the host computer of the ISP is established through the interface protocol software, using following two protocols

Serial Line Protocol (SLIP)

Point to Point Protocol (PPP)

Automated Clearing Systems

CHIPS    - Clearing House Inter-bank Payment System

CHAPS – Clearing House Automated Payment System

CHATS – Clearing House Automated Transfer System.

Two-Level Funds Transfer System

Fed Wire

Bank Wire

Point of Sale Systems

Real-Time Gross Settlement (RTGS) System PI – Participant Interface

The message is passed on by PI to IFTP (Inter – Bank Fund Transfer Processor) which acts as a broker.

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Role of Technology Up gradation and Its Impact on Banks

Data Warehouse: Data from heterogeneous sources is stored to generate critical information for decision support systems. The main characteristics of the data stored in a Data Warehouse are:

It is Subject-Oriented

It is integrated, and there are no inconsistencies

The data in a Data Warehouse is non-volatile

It is time variant

Data Warehouse can be established even across multiple computer platforms as long as the transaction details are made available to the data warehouse in standardized formats.

Data Mining is a technique to reveal the strategic information hidden in Data Warehouse(s). It helps in exposing the patterns that are critical to business and provide an advantage through insight and knowledge of:

1.    Sound predictions of customer behavior

2.    Highly targeted market focus

3.    Maximized operational effectiveness

4.    Optimal return on Investment.

·         Establishment of Data Warehouse : Vasudevan Committee

·         Data Mining techniques can be applied in

Predicting future trends based on information available Credit Risk Analysis

Analyzing demographic information about customers

a.     Dissemination of information

b.     Financial Advice

c.      To highlight non-banking activities

d.     A node for commerce

e.     Selling financial products

f.       Gateway to the internet

g.     Account Services

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 Security Considerations

A typical computerised environment constitutes three independent but separate components Software, Hardware and Data

The Risks broadly lead to

Incorrect decision-making leading to setback to business

Interruption in activities due to loss of data, hardware, software, Peopleware. Violation of Privacy

Direct Financial loss due to computer frauds.

The objective of Computer Auditing is:

Assets safeguarding

Preserving data integrity

Achieving system efficiency

Risk prone components in computerised systems

Errors and omissions in data and software

Unauthorised disclosure of confidential information

Computer abuse and mis-utilisation of banks assets

Effective Control Mechanism in computerised environment

Preventive

Detective

Corrective

Scope of System Audit is

Review of operations to establish compliance Review of the adequacy of procedures and controls

Integrity review focused at fraud detection/prevention of IT system

Audit Trail is a chronological record of all events occurring in a system.

Legal Framework for Electronic Transactions

Consequent upon the recognition given to the electronic records, electronic

documents and electronic signatures, incidential amendments have also been

made in the following acts:

The Indian Penal Code, 1860

The Indian Evidence Act, 1872

The Bankers’ Books Evidence Act, 1891

The Reserve Bank Of India Act 1934

Loans and Advances

Cardinal Principles of Lending

Are Safety, Liquidity, Profitability and diversification of risks, productive purpose and security.

Safety: is the most important principle of good lending. The banker should ensure that the enterprise or business for which loan is sought is sound one and capable of carrying it out successfully.

Liquidity: Liquidity with banker means Cash on Hand, Cash and Bank Balances, Short term current assets to convert into cash.

Profitability: Customer profitability analysis means exercise before opening a new branch

Productive Purposes: Loans for non-productive and speculative purposes cannot be granted.

Diversification of Risks:

Security:

Banker can reduce risk in lending to a borrower by ensuring that there will be no default on account of lack of liquidity and lack of willingness to pay on the part of the borrower.

In Bankers parlance, credit risk in lending refers to default of repayment by a borrower.

Non-Fund Based Limits

Bank Guarantees

Letters Of Credit

Working Capital

1.    Gross Working Capital = total assets

2.    Net Working Capital = current assets – current liabilities

3.    Major Current Assets are Marketable investments and cash/receivables/ inventories

4.    The major Sources of Working Capital for investments in current assets are Trade credits, Unsecured Loans, Deposits, Bank borrowing, advance payments, Net Working Capital.

5.    Working capital means – requirements for day to day transactions.

6.    Working capital needs are estimated by Cash Budget Method.

	Term Loan			Working Capital Finance
1	The  term  loans  are  utilized  for			Working  capital  finance  is  for
	establishing,	expanding	or	operating  purposes  resulting  in
	modernizing a manufacturing unit by			creation   of   current   assets   for
	acquisition of fixed assets.			production and sale of the finished

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goods

2     Term Loans are usually of medium The WCF is generally availed of a or long term duration and are cash-credit Hypothecation accounts repayable in quarterly/half yearly with frequent drawings and installments over an agreed period repayments within the time fixed

of time.

and is payable on demand.

Estimation of Working Capital Needs

The Operating Cycle Method:

While assessing working capital requirement creditors will not be set off against stock.

The borrower will submit age-wise list of sundry creditors and sundry debtors as well as stock statement.

Only those debtors will be considered which are outstanding for less than the period specified (up to 180 days) on case to case basis.

Total Outstanding (Creditors – Debtors) ; if debtors are in excess, the bank could consider financing the surplus debtors as per banks policy.

The borrower will have to hypothecate his entire book debts to the bank. The bank will not finance the borrower’s book debts, if creditors exceed

debtors.

The Projected Networking Capital

·

The Projected turnover Method the bank as a matter of policy and based on RBI guidelines assess the working capital including village industries, tiny industries with fund based working capital limit up to Rs. 4 crore by the turnover method.

·         20%  of minimum of their projected sales turnover

·         Drawing power may be worked out through stock statements, unpaid stocks are not to be financed as it would result in double financing.

·         5% should be contributed by borrowers.

The Cash Budget System: (if fund based limits in excess of Rs. 10 Crore) Advantages

1.    Borrower plans to advance cash requirements.

2.    Banker is able to spot danger signal quickly and corrective measures could be taken.

3.    Banker can plan his resources to meet credit requirements.

	Cash Budget	Cash Flow
1	It deals with Cash transactions only	It deals with cash and no-cash funds
2	Cash budgets for short periods	Cash flow statement are for quarterly
		or half yearly.
3	It is projection in the future	It is historical

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Credit Management (273)

Credit Management is the management of the credit portfolio of bankers and financial institutions. It includes

i.    Capital Adequacy Norms

ii.    Risk management including ALM

iii.    Exposure norms

iv.    Risk pricing policy and credit risk rating

v.    Asset Classification, Credit decision-making and loan review mechanism

Credit decisions are affected by Credit Risk/Market Risk / Operational Risk. Credit Risk is defined as the possibility of losses associated with diminution in

the credit quality of borrowers or counter parties. Such risks are Principal / Interest amount may not be paid.

Funds may not be forthcoming from clients upon invocation of L/C Funds/Securities settlement may not be affected in securities trading.

Market Risk is defined as on possibility of loss to a bank caused by changes in market variables –

Liquidity Risk

Interest Risk

Foreign Exchange Rate Risk

Commodity price Risk

Equity Price Risk

The Operational Risk arises from human or technical error or acts of commission and commission.

Standard Asset

Sub-standard

Non-performing

Loss making

Exposure ceiling for banks in providing advances / loans to borrowers - 15% of capital funds for single borrower and 40% in a borrower’s group.

Non-Performing Assets

A loan is classified as non-performing when the interest and/or installment of principle remain overdue for a period of more than 90 days.

Various Committees on Credit Disbursements (276)

Tandon Committee (1974) - RBI advised all banks in August 1975 to implement the first two methods for borrowers having credit limit in excess of Rs. 10 lakhs.

1^st Method: Working Capital Gap = Current Assets – Current Liabilities Net Working Capital = 25% of Working Capital Gap +75% MPBF

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2^nd Method: Total current Assets 25% of this be NWC MPBF = Current assets – 25% of CA – current Liabilities

3^rd Method: MPBF = Current assets – Core Assets – NWC 25% - Current Liabilities

Chore Committee (1979)

Laxminarayan Committee (1973)

Nayak Committee

Vaz Committee (1993)

Shetty Committee – For Consortium Advances

Kannan Committee (1997) – To assess the complain received from the mercantile community - the method of Tandon Committee for assessment of inventory and receivable and insistivity for 1.33 current ratio were not providing them enough credit.