Notes on Portfolio Management by Banks

After reading this article you will learn about the portfolio management by banks.

Mr. F.E. Perry in his dictionary has explained the portfolio and also the portfolio management.

As per him:

Portfolio means the securities held by or on behalf of, an investor, the list of such securities; the holding of bills of exchange by banks.

The management by a bank or financial institution of the quoted securities of a customer. This includes safe keeping of securities dealing with scrip and right issues, the collection of dividend and the preparation of valuations.

In a simple, wider but less precise sense the word securities means investment securities generally traded at stock exchange. Any individual having more than one securities is having an investment portfolio and the investment is done with the sole motive of earning the income. With this sense one goes on increasing his portfolio by investing more money in stocks, bonds, mutual funds or other investments.

At the same time it is not always true that the investment done will go up in price every time one invests. Here comes a very popular saying to help everyone i.e., “Do not keep your all eggs in one basket”. It is meant to guide to create diversified portfolio in different type of securities.

This practice must be followed to minimize the Risk. In a position of diversified investments, some securities may loose at price and some other may produce good returns to make good the losses.

From above it is clear that portfolio management has inherent link with investment for earning income and there are uncounted investment vehicles. It becomes difficult for any individual to make a right choice in selecting right financial instruments, at right time and to sell it at right time in order to enhance his portfolio.

All this needs a specific knowledge and expertise and it can be provided by the Portfolio Management. For this purpose certain organizations develop their own portfolio Departments and in some other cases Portfolio Managers are appointed.

The main aim of portfolio management always remains to ensure that the investment in securities is made in such a manner which brings maximum returns with minimum risk Keeping multiple financial vehicles and a healthy balance between the competing objective is a sign of good portfolio.

Portfolio management by banks is the process of effectively and prudently managing mix of assets and liabilities. In this process banks acquire and dispose of its assets meant for earning income. A large percentage of bank’s funds contain deposits in different type of accounts both demand and term deposits.

These are payable back to customers either on demand or on maturity of the term as the case may be for meeting immediate requirements banks keep, as per policy, certain liquidity in the form of cash money also. The earning assets for any bank and the cash held combined both is known as portfolio of the bank.

While deploying funds banks either give money on loans or make their own investments. In case of loans banks advances loans for a certain period and therefore earns income by way of interest received on the loan amount. This income by way interest is earned for a specific period after the loan has been adjusted by the borrower income of bank is stopped. Sometimes loans also become bad and recovery of loan amount becomes difficult.

On the other hand banks own investments are deployed mostly in Government Securities, Financial Instruments like promissory notes, bills of exchange, stocks etc. but own investment is comparatively more risky because in case of loans banks take due precautions and may also obtain collateral security or a third party guarantee, But there is high level of risk in own investments.

As such the regulatory authority the Reserve Bank of India after due analysis and study of the portfolio market issues guidelines for the banks with regard to their portfolio investments. In recently issued Prudential norms for classification, valuation and operation of investment portfolio by banks the RBI has prescribed certain limits of investment by banks.

1) Banks investments in unlisted Non-SLR securities should not exceed 10% of its total investment in non-SLR securities as on 31^st March of the previous year.

2) Banks investments in unlisted non-SLR securities may exceed the limit of 10 %, by an additional 10 %, provided the investment is made in Securitisation Papers issued for Infrastructure projects and Bonds/debentures issued by securitization companies (popularly known as (SCs) and Reconstruction companies popularly known as (RCs) set up under the Securitisation & Reconstruction of Financial Assets and Enforcement of Security Act 2002 (SARFEASI ACT) and Registered with RBI.

In other word the investments by banks exclusively in Non-SLR securities could be up to maximum permitted limit of 20%.

The Non-SLR investment includes shares, Bonds, Debentures, subsidiaries/Joint Ventures and others But SLR is a statutory requirement of Scheduled Commercial Banks which is a form of liquidity required to be maintained by all commercial banks in India.

The value of such assets (SLR assets) should not be less than such percentage not exceeding 40% of bank’s total demand and time liabilities as on the last Friday of the second preceding fortnight as the RBI may by notification in the Official Gazette, specify from time to time. Last it was prescribed as 24% from 8^th November 2008.