The present issue brings forth three papers. The first paper, “A Review of Real
Option Practices Followed by Corporate for Expansion and Deferral Decision”, by
Urvashi Varma, tries to capture different types of real options and their valuations. The author opines that real option is synonymous with financial flexibility. Traditional valuation has always ignored this flexibility and has provided with an inappropriate estimate of the projects for decisions. The paper focuses on the valuation of real options in practical situations faced by organizations. Real options have been valued using Black-Scholes model of option pricing, decision tree analysis and Monte-Carlo simulation. The Black-Scholes model as suggested by many researchers can be applied only to European option, but the author finds studies which value American option using Black-Scholes approach with slight modification. The binomial lattice model is an alternative to value American option but to avoid complexity binomial tree is more preferred. Given the priori probabilities, decision tree approach provides a simplistic method to value real options. The objective of the paper is to study the application of options to capital budgeting decision.
The second paper, “Revisiting the Valuation of Bank Credit Agreements”, by Marco Realdon, proposes a valuation model for revolving credit agreements and loan commitments under such realistic features as the Material Adverse Change (MAC) condition, the firm’s options to drawdown fractions of the loan, to cancel the credit agreement, or to prepay the outstanding loan. The focus has been on uncertain loan drawdown time and amount. Valuation requires finite difference numerical solutions. The modeling effort required of commercial banks for fairly pricing all loan commitments and revolvers according to their contract specifications as required by International Financial Reporting Standards (IFRS) seems demanding. The uncertain parameters that characterize the drawdown, repayment and MAC decisions can significantly affect the reliability of credit agreements’ fair valuation. The problem is not just one of competent valuation. Banks may ‘strategically’ choose or ‘strategically’ calibrate the credit agreement valuation model. To alleviate these valuation concerns, the author suggests that IFRS may simply require that the banks measure credit agreements as if they were completely drawn down on the valuation date. The requirement of measuring credit agreements at ‘the payoff from immediate drawdown’, rather than at ‘fair value’ as per IAS 37 and IAS 39, would reduce the scope for ‘strategic’ valuation.
Bank Asset-Liability Management (ALM) has gained increasing relevance in recent years, especially with the implementation of the Basel II norms for the regulation of Indian banks by the Reserve Bank of India, and particularly, in the wake of the global financial crisis. At the heart of ALM is the fundamental trade-off between liquidity, profitability and interest rate risk. The final paper, “A Linear Programming Model for Assessing Asset-Liability Management in Banks”, by Mihir Dash and Ravi Pathak, proposes a linear programming model for ALM, which seeks to maximize the rate of return/profit, subject to constraints dictated by liquidity and statutory requirements. The model was applied to a sample of banks operating in India, resulting in a recommended optimal asset-liability mix of the banks in the sample. Using these results, the study assesses the nature of ALM of different bank groups, in terms of its implications on liquidity, profitability and interest rate sensitivity.
Automated Teller Machines (ATMs): The Changing Face of Banking in India
Bank Management
Information and communication technology has changed the way in which banks provide services to its customers. These days the customers are able to perform their routine banking transactions without even entering the bank premises. ATM is one such development in recent years, which provides remote banking services all over the world, including India. This paper analyzes the development of this self-service banking in India based on the secondary data.
The Information and Communication Technology (ICT) is playing a very important role in the progress and advancement in almost all walks of life. The deregulated environment has provided an opportunity to restructure the means and methods of delivery of services in many areas, including the banking sector. The ICT has been a focused issue in the past two decades in Indian banking. In fact, ICTs are enabling the banks to change the way in which they are functioning. Improved customer service has become very important for the very survival and growth of banking sector in the reforms era. The technological advancements, deregulations, and intense competition due to the entry of private sector and foreign banks have altered the face of banking from one of mere intermediation to one of provider of quick, efficient and customer-friendly services. With the introduction and adoption of ICT in the banking sector, the customers are fast moving away from the traditional branch banking system to the convenient and comfort of virtual banking. The most important virtual banking services are phone banking, mobile banking, Internet banking and ATM banking. These electronic channels have enhanced the delivery of banking services accurately and efficiently to the customers. The ATMs are an important part of a bank’s alternative channel to reach the customers, to showcase products and services and to create brand awareness. This is reflected in the increase in the number of ATMs all over the world. ATM is one of the most widely used remote banking services all over the world, including India. This paper analyzes the growth of ATMs of different bank groups in India.
International Scenario
If ATMs are largely available over geographically dispersed areas, the benefit from using an ATM will increase as customers will be able to access their bank accounts from any geographic location. This would imply that the value of an ATM network increases with the number of available ATM locations, and the value of a bank network to a customer will be determined in part by the final network size of the banking system. The statistical information on the growth of branches and ATM network in select countries.
Indian Scenario
The financial services industry in India has witnessed a phenomenal growth, diversification and specialization since the initiation of financial sector reforms in 1991. Greater customer orientation is the only way to retain customer loyalty and withstand competition in the liberalized world. In a market-driven strategy of development, customer preference is of paramount importance in any economy. Gone are the days when customers used to come to the doorsteps of banks. Now the banks are required to chase the customers; only those banks which are customercentric and extremely focused on the needs of their clients can succeed in their business today.
