Sectoral Analysis

Corporate Banking

Anchal Mehrotra - 74
Vishal Mehta - 75
Anjali Menon - 76
Mohan Kumar - 77
Asha Motiramani - 78
Rashmi Nangalia - 79
 Introduction

Banks are in the business of providing banking services to individuals, small

businesses and large organizations. The traditional intermediation function
of banking involved borrowing from savers (largely retail depositors) and
lending to borrowers (largely corporates). However, increasing competition,
the growing popularity of other liquid savings instruments such as money
market mutual funds, and the growing trend of corporates directly tapping
the market for meeting their borrowing requirements has diluted this
traditional role. As a result, banks today are also focusing on a range of free
based services, including advisory services, portfolio management,
remittances and financial engineering.

What is Corporate Banking?

The Corporate Banking department provides customized financial
services to mid-size and large corporates to help them succeed in today's
global marketplace. Every company, whether a manufacturer, exporter,
distributor or service organization needs financing for working capital,
capital expenditure, expansion, etc.
Corporate banking basically involves providing banking services to a
clientele consisting of corporate customers. The corporate banking group of
any large commercial bank handles a broad portfolio of companies spread
across a wide variety of industries. Its core function is credit evaluation
and credit delivery.

Operating structure:
The operating structure usually comprises a team of client or
relationship bakers, who work in close association with the product groups to
offer an integrated package of clients. Team members typically specialize in
one or more sectors and handle a portfolio of clients under a group leader.

Products offered:
The products offered to clients are varied and include:
 Term loans
 Corporate loans
 Working capital finance
  Performance and financial guarantees
 Trade finance products including letters of credit and export
packaging credit
 Cash management services
 Structured products designed to meet specific client requirements

Factors considered while lending:

Following are the basic factors that are considered while lending:
 Purpose of the loan
 Capital/Stake of the promoters
 Quality of management
 Technical feasibility
 Financial viability
 Industry outlook
 Reserve Bank of India guidelines, if any
 Adequacy of security

Broad Job Functions:

A career in corporate banking could involve one of three broad job
functions:
1) Relationship Manager – The relationship manager represents the
entire bank to the client and co-ordinates product delivery with the
product specialists. The basic aims of coverage are to deepen
customer relationships by focusing on a well defined list of high
priority clients, developing knowledge of their overall financial wallet
and serving their needs effectively and proactively.

2) Credit Analyst – The credit analyst prepares loan appraisals, and at a

senior level, evaluates loan applications made to the bank. The duties
include projecting a company’s future cash flows, evaluating its
current financial soundness and actively interacting with the finance
manager of the client and other lenders. They usually specialize in
certain industry sectors and work closely with relationship managers.

3) Operations Officer – The operations manager is usually the backbone

behind the success or failure of a bank, as quality of service delivery
is one of the most important considerations in maintaining
relationships with bank.
 Within these functions there are finer categories. Further the
terminology used could vary from bank to bank. Finally, these functions could
overlap depending on the organization structure.

Important Dates-
 1984- Leasing Industry becomes the biggest game in town.
 1986- Bank of America becomes the 1st bank in India to use a new
electronic banking service called microworld.
 1986- SBI introduces an internal courier system.
 1987- CRISIL is set up followed by ICRA (1991) & CARE (1994).
 1987- First Venture capital investment made by ICICI of Rs.90
Lacs to a Bangalore based Computer Company.
 1993-94 – Debt Recovery Tribunal is set up.
 1994- Amendment in Banking Companies Act, 1970 enables
nationalized banks to tap the capital market.
 1994-95 – Interest rates on loans over Rs.2 Lacs deregulated.
 1999-2000 – ICICI merges with ICICI Bank.
 2001-02 – Lowers Bank rate to 6.50% - lowest since November
1973.

The Industry Scenario-

Prior to liberalization wholesale banking was pre-dominant, taking up a

lion’s share of 80% of a bank’s business. But as borrowing patterns began to
change, as markets abroad opened up to Indian Paper and interest rates
overseas turned favourable, the banks had to rediscover themselves and look
for other business opportunities to sustain their bottom-lines. Wholesale’s
share dropped, making way for retail. But if a bank has to grow and survive in
these competitive times, large volumes can be assured only through
wholesale banking channels. This is because the shares of Wholesale banking
channels may have declined but volumes are growing continuously as banks
innovate further.

One of the biggest changes is the shift in the method of lending. From
being purely security based operation where the strength of the collateral
was the key to lending, wholesale banking has come full circle & cash flows of
the companies hold the key to assessing their credit worthiness.
 Today Banking points in two divergent yet complementary directions –
 Aggregation in the form of increased focus upon corporate finance
&
 Disaggregation by way of growing importance of the retail or
personal banking.

Banks have come a long way. They are already taking shape as financial
‘super malls’ catering to a host of financial needs across the economic
spectrum. In this process, corporate banking too has undergone a
metamorphosis over the past two decades.

Present Concerns-

With low levels of fresh investment by industry and banks flush with
funds, corporates freely shop around for the best rates. This short-term
view has brought interest rates under severe pressure with sub-PLR lending
becoming the norm.

With increased emphasis on infrastructure lending, liquidity risk in the

form of Asset-Liability mismatch will be a major concern. This could lead to
increased take-out financing deals, loan swaps, sale of loans and activation of
inter-bank participation certificates on a larger scale.

Integrated risk management is the current buzzword. The multifarious

risks encountered in lending operations – need to be measured & contained.

An efficient MIS & Effective audit decisions will have to be part on

Integral lending operations.

Banking now requires not only prudence and honesty but also the thrust
and parry which characterizes financial markets per se.

CORPORATE BANKING PRODUCTS-

Banks provides working capital facilities in the form of overdrafts,

receivables finance, inventory finance and short-term loans in Rupees and/or
major foreign currencies. Working capital facility is extended to a customer
on a revolving basis for the period of time stated, to be used by the
customer in certain manner and subject to certain terms and conditions. The
customer is expected to conduct the usage of a line of credit within the line
allocated, and the amounts of such sub-limits that may be prescribed by the
bank.

CORPORATE CASH MANAGEMENT SERVICES (CCMS):

Corporate Cash Management Services (CCMS), is a service for speedy

collection of cheques and other instruments, places corporates on a faster-
track. In more ways than one-such as definite funds flow, better cash
management and deployment of funds, better monitoring of funds flow,
optimum allocation of funds and effective planning of investment functions.

What is CCMS?

 An innovative service specifically tailored to meet the requirements

of Corporates/Business houses/Partnership firms
 Speedy collection of outstation cheques and other instruments
 Pooling of funds at designated centres
 More importantly, providing funds to the Corporates as per their need
 Customised MIS reports

TERM LOANS

The Banks offers Term Loans in Rupees Omani and major foreign
currencies for acquisition of capital assets or for any other stated purpose.
Such loans can be offered on fixed or floating interest rate basis.

A Term Loan is a specific sum of money advanced to a customer for

specifically stated purpose and is repayable according to a pre-agreed
repayment schedule. The money can be available to a customer in lump sum,
or in installments over a period of time. Repayment can be lump sum on a
specified date, or in installments over a period of time.

A term loan normally has a maturity date longer than 1 year. A term loan may
have a Grace Period or Moratorium

SHORT TERM LOANS

 Short Term loan is a specific sum of money advanced to a customer for
specifically stated purpose for a tenor of up to three months and is
repayable according to a pre-agreed repayment schedule, either in lump sum
or in installments. Interest on short term loans are normally required to be
charged and met monthly in arrears although in exceptional cases, lump sum
repayment terms together with interest may be agreed to.

ADVANCE AGAINST RECEIVABLES

The Bank also advances a sum of money for a pre-agreed tenor of no

longer than one year against money receivable by the customer at a later
date on account of transactions of business activities he is engaged in. The
advance is made against a promissory note signed by the customer and copies
of documents evidencing money due to him at a later date, i.e. progress
certificate, invoice etc. The receivable must be irrevocably assigned in
favour of the Bank supported by written undertaking from the person/entity
from whom the receivable is due.

REAL ESTATE MORTGAGE LOANS

Real Estate Mortgage Loans are also provided by Banks. A Term Loan is
provided for the sole purpose of part financing the development of a real
estate property, secured by a legally valid mortgage on the property and is
primarily repayable by future income to be derived from the property.

BILLS DISCOUNTING

Extension of credit takes the form of discounting a bill of exchange

where monies are lent by Banks against a bill of exchange drawn by a maker
on and accepted by the acceptor, for a specific sum of money to be due and
payable on the date stated on the bill.

LETTER OF CREDIT

A letter of credit is written for and on behalf of the Bank's customer

(the buyer of goods) to the seller of goods (the Beneficiary), confirming to
the Beneficiary that a sum of money will be payable against submission of
specified documents evidencing supply of goods. Letters of credit are issued
either with or without confirmation by our foreign correspondent Banks. In
either case, the Bank's liability is similar.
 LETTER OF GUARANTEE

Letter of Guarantee offered by the Bank is an irrevocable obligation by

the Bank to pay a sum of money in the event of non-performance of a
contract by a third party. Under the terms of the guarantee the Bank has to
pay on first demand provided that the conditions contained in the guarantee
are fulfilled. Guarantees are, as a rule, subject to the laws of the country of
the issuing Bank unless specified otherwise. Various types of guarantees
issued by the Bank are as under:

 Tender bond/bid bond

 Performance bond (or performance guarantee)
 Advance payment guarantee
 Financial guarantee
 Payment guarantee
 Risk participation guarantee

ACCEPTANCES

A form of credit whereby the Bank undertakes to pay against a bill of

exchange a certain sum of money at a certain future date. At the maturity
of an acceptance, the party that has accepted the acceptance will be obliged
to have funds in its account to cover the payment

CHEQUE DISCOUNTING PURCHASE

This extension of credit takes the form of discounting a cheque drawn in

favour of the Bank's client, either as payee or holder if the cheque has been
so endorsed (Beneficiary), and lodged for collection with the Bank against a
suitable letter of request.

FOREIGN DOCUMENTARY BILLS

Foreign Documentary Bills offered by Banks is a sum of money advanced

to an exporter against documents covering export of goods to a foreign
buyer either under a letter of credit favoring exporter or on collection
basis. The advance is made against a promissory note and the Bank's
standard bills discounting form duly signed by the exporter and the relevant
export documents including original title to the goods exported (bill of
lading, airway bill etc.) duly endorsed in the Bank's favour.
 EXPORT CREDIT

Banks provides Export Credit as a sum of money advanced for a pre-

agreed tenor by the Bank to a commercial customer for the sole purpose of
financing exports to other countries. Export Credit can be broadly classified
into two categories:

Pre-Shipment finance: Money advanced to the borrower to facilitate

sourcing of goods, raw materials etc. prior to their eventual shipment to the
buyer.

Post Shipment finance: Money advanced to the exporter against submission

of documents evidencing shipment of merchandise including original title to
the goods (bill of lading, airway bill etc.)

Competitive Advantages- To be competitive any bank would have to

concentrate on 4 major areas –

 Financial Performance- Banks need to operate on the basis of

operational flexibility and functional autonomy, thereby enhancing
efficiency, productivity and profitability. This should bring
improvement in respect of various parameters determining banks’
performance ranging from revenues, credit management, human
resource development, etc.

With better profits banks would be able to provide loans & other
services at relatively low costs.

 Service Standards – Today banks have started seeing themselves

as part of a service industry that offers solutions to the
customers’ evolving financial requirements. With increasing
competition and globalization the need for specialized one window
service concept will grow. One of the prime thrust areas for the
future would be completion of branch computerization and
networking of banks enabling customers to perform transactions
anywhere. Thus improving the service standards to meet
customers’ requirements.
  Portfolio Quality- Banks would be required to draw business
strategies keeping in view their risk bearing capacity, need for
capital, maintaining profitability in a competitive environment,
developing a proper business mix, management of NPAs,
rationalisation of network of offices in India as well as abroad.

 Corporate Governance- values of fairness, kindness, efficiency and

effectiveness determine the principles of the organization, which
in turn determine the course of action of each employee in every
sphere of activity. It is commitment to the principles of
transparency, integrity, accountability and social responsibility.
o Independent directors from different walks of life –
industrialists, academicians, professionals
o Periodic reviews on micro & macro functioning of the bank
benchmarked against the entire banking sector
o Open discussions with the top management
o Bring in the outside-in perspective
o Guiding the management in identifying opportunities for the
bank
o Clearly documented and transparent management process
o Selection system involves outside specialists thereby
reducing any influences/ biases
o Constant monitoring of performance at all levels for
improving effectiveness

Main Players –

ICICI Bank –

1. Universal Banking & One Stop Bank

2. ICICI Bank has harnessed new technologies and thought
processes to introduce numerous products and services in
the area of Corporate Finance to suit various clientele.
3. Among the few banks having expertise in the area of
Securitization & Structured financing like Investment
Monetisation, Brand Financing etc

HDFC Bank –
 1. Alliance with Chase permits us to offer a vast range of
international products in the field of foreign exchange and risk
hedging.
2. The bank was one of the first four companies which subjected
itself to a Corporate Governance and Value Creation (GVC) rating
by the rating agency, The Credit Rating Information Services of
India Limited (CRISIL).

State Bank of India-

1. Commanding unsurpassed respect and legacy in the Indian financial

expanse, the SBI is committed to offering financial solutions that
extract maximum value from business and market situations.
2. While the bank is strongly positioned to structure financial
packages that anticipate the changing business environment, its
vast network--the world’s largest—ensures delivery channels of
unmatched reach, both in India and abroad.

Citibank-

1. Citibank, winner of the internet cash management award in 2002, has

a number of products that help clients to manage their cash flow
online. It is able to be as flexible as possible for its clients.
2. Citibank has pioneered host-to-host mode of electronic data exchange
with it s customers' back-office systems using EDIFACT standard
messages, and fulfilled the financial settlement and e-credit need of
the participants in e-commerce/closed-user-group supply chain
initiatives in India through its payment gateway solution
(CitiConnectSM)

Common Points –

All leading Banks have been very aggressive in -

o Product Innovation
o Customized Solution for Clients
o Offering a complete Financial Package
o Use of Technology for an effective Information System
SWOT Analysis

Strengths-
 Offering customized solutions to clients & enhancing customer
awareness.
 A one Stop Shop for all financial needs.
 Lower NPAs in the Indian Banking Sector as compared to other
developing nations like China.
 There exists a firewall between the corporate sector & the
banking sector which to an extent immunizes problems of conflict
of interest that may otherwise exist.
 Technological advancements in the Indian Banking sector are no
less than those of the developed world especially with world class
Indian software companies concentrating on banking solutions.

Weaknesses-
 Under developed debt markets in India reduces the commercial
viability & liquidity of Corporate Papers.
 Global Presence of Indian Banks is absent except for a few like
SBI. Also, the Indian banks with presence abroad have very few
networks across the globe.

Opportunities-
 There is a strong correlation between the economy & the Banking
sector. India being considered as one of the BRIC nations &
forecasts of growing economy will certainly be a boost to the
corporate banking industry.
 Globalization & Liberalization of the Indian Economy has brought in
volumes in the form of MNCs borrowing from local banks.
 Indian Banks can tap foreign markets in the future.

Threats-
 Corporates are now able to tap foreign funds at lower interest
rates by accessing foreign markets.
 With falling interest rates in the country banks will come under
severe pressure to reduce spreads.