Page 90 - DMGT303_BANKING_AND_INSURANCE

Unit 4: Treasury Management & Banking Sector Reforms

Notes
which can be as high as 10-20 banks per country in some places. In the past, treasury has
been careful to avoid significant changes to cash management banking in order to minimise
disruption to its clients. However, since the downgrading of many banks, treasury now
looks at the financial strength of banking partners above all other considerations.
Furthermore, the financial crisis has meant that clients have a greater understanding of
the reasons why the company might need to change its banks, although there is still some
education and preparation for change required.
As the company operates internationally, treasury has had to prioritise its cash management
focus, starting with the countries with the largest exposures. The aim is to rationalise its
banking partners to a preferred partner or two in each country. In reality, there are very
few banks (in some countries, only one or two) with asset bases of a sufficient scale to
withstand extreme market conditions.

In a pilot country, for example, treasury has appointed a primary banking partner and a
limited number of collection banks for retail activities, which is a model it would like to
adopt more widely.
Conclusion
The strategy that the company has deployed, which involves working with fewer, high
quality banking providers, and pooling cash in a notional pooling structure, has reduced
liquidity risk and increased the security of cash considerably. With credit becoming less
readily available and more expensive, particularly at a local level, the ability to conduct
self funding has been extremely valuable; similarly, as business units deposit with the
notional pool, investments can be made centrally using diversified investment vehicles,
increasing security of cash.
Source: Cash Management in a Credit Crisis: http://gftt.com/events/pdf/ctm_new.pdf

4.14 Summary

A commercial bank can serve society and help economy to develop only when it operates
successfully. Generation of adequate operational surpluses by banks is necessary to provide
cushion to support their credit risks and also to supplement the finances of the government.
Thus, a bank in order to survive successfully in the long run has to give due importance to profit
as well as social goals. There should not be problem for a banker to strike satisfactory balance of
the two goals if funds are properly managed and there is a conscious and deliberate planning of
the bank's income, expenditure and overall productivity of human resources. Thus, profit
constitutes the base of growth and contributes to inner strength.
Indian banking sector is having a serious problem of non-performing assets. The earning capacity
and profitability of the banks are highly affected due to this.
The level of non-performing assets (NPAs) of the banking system in India has shown a decline
in recent years, but it is still too high. Part of the problem is the carry-over of old NPAs in certain
declining sectors of industry. The problem has been further complicated by the fact that there
are a few banks, which are fundamentally weak and where the potential for return to
profitability, without substantial restructuring, is doubtful.
Narasimham Committee was appointed to examine the effectiveness of the existing financial
system of the country and suggest reforms.
The fundamental objective behind the capital adequacy calculation and fixing up the related
norms is to strengthen the soundness and stability of the banking system.

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