Critically analyse and evaluate an operation using one or two of the topics from the module.
Punjab National Bank International Ltd bank (PNBIL)
At the PNBIL bank, 70% of the loan given to the customers is based on The London Inter-Bank Offered Rate(LIBOR) interest rate, the underline interest is uniform set by Financial Conduct Authority of which this product is crucial to the bank and interest rates are not updated loan accounts as per facility letter. This is a revenue leakage to the bank and results in interest amount being wrongly calculated and financial reporting breach.
The existing operations procedure and ﬂow will be redesign. Also, whether it is more eﬃcient to improve existing operations gap.
PNBIL Bank was incorporated in the UK in 2006 and registered with the Companies House in England & Wales. PNBIL Bank started banking operations in the UK on 10th of May 2007 from two branches. At present we are having 7 branches all over England. The Bank offering Loans and Deposit products to corporate and retails customers. PNBIL bank Is currently lending term loans and over drafts to customers on LIBOR based. The bank must follow Credit Sourcebook (CONC) as per Financial Conduct Authority(FCA).
The Operations Department is required to maintain different types of relations including those with Customers(external); Clients (internal such as HR, Information Technology and Treasury); Counterparties; Suppliers; The authorities.
The London Inter-Bank Offered Rate(LIBOR):
LIBOR- London Intra Bank offered rate is generally used as a base rate or as a reference rate, which will be fluctuating from time to time and this is added to the margin to arrive at the interest rate. This is applicable to all floating rate loans unless another base rate, which can either be Bank’s own base rate or Bank of England base rate, is identified and approved.
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The LIBOR rates are different for different currencies such as GBP, USD and EURO for different periods. For example, LIBOR for USD is different from LIBOR for GBP. Similarly, USD LIBOR for 1 month is different from USD LIBOR for 3 months or 6 months etc. LIBOR generally fluctuates as per the market interest rate movements. It generally moves around base rate of the currency, this implies that if the base rate of a currency goes up, the LIBOR will also move up.
How do we fix the LIBOR rates?
LIBOR rates are provided by Banks treasury from time to time as declared in the market. In case of USD and Euro, the LIBOR rate for a day (say 01.02.2018) could be based on the LIBOR (spot) rate prevailing two working days before the date (in this case rate prevailing on 30th Jan 2018 if 30th & 31st are working days). In case of GBP, LIBOR rates for same day could be considered.
PNBIL Bank prescribes floating rates for credit facilities by way of 1-month LIBOR/ 3 months LIBOR/ 6 months plus margin. While margin remains fixed, the LIBOR fluctuates daily. However, LIBOR fixed for a period, say one month or three months or six months will remain fixed for the period irrespective of daily movements. Currently rates are being updated every month on first working day as per Thomson Reuters.
How do we fix the rates for different dates?
This can be done by fixing LIBOR on the same day of each month for monthly LIBOR or same day of each quarter and so on. For example, 1-month LIBOR for a loan arranged on 10th of Jan will be charged on 10th of every month and for 3 months LIBOR it will be charged on 10th April /July/October/ January. Generally, for syndicated loans where the interest rates are stipulated by the Agent Bank and communicated to the member Banks, this methodology is followed. In such cases the branches should change the LIBOR accordingly based on the LIBOR provided by the Agent Bank.
Another way of fixing LIBOR has fixed the LIBOR for the break-in period and then fix the rate at the beginning of each month or quarter or half year. For example, 1-month LIBOR a loan disbursed on 10th February – a LIBOR will be fixed on 10th February for 19 days till 28th Feb and then 1st of every month. Similarly, for a credit facility disbursed on 10th Feb with 3 months LIBOR, LIBOR will be fixed for the number of days till 31st March and then onwards on 1st April/ 1st June etc. Broken period LIBOR is arrived at by interpolation. Say 3 months LIBOR fixed for period from 10th Feb to 31st March will be arrived by interpolating 3 months LIBOR of 10 Feb and 2 months LIBOR of 10th February.
PNBIL last three years bank lending details given below
(A) Term Loan MM($)
(B) Over draft MM($)
(A+B) Total MM($)
Total Bank Loan value ($) MM
*These figures are taken down from the Core banking system
This process is highly critical because bank give loans to customers of $2568 million out of $3507 million.
PNBIL is currently receiving lots of complaints regarding annual loan account statements not being correct and every time they are getting different values and are currently not treating customers as per “treating customer fairly” policy. Some of the loan accounts went to “non-performing assets” and bank’s civil cases are filed against the borrower while submitting a loan account statement in the court, borrower counter challenges the loan value in the court.
PNBIL balance sheet is disclosed to the Governing board and regulator on regular interval, such as Monthly, Quarterly, Half yearly and annual as per International Financial reporting standards.
These reporting may explain incomplete picture about interest income because correct rate not was not applied in a timely manner. This results in misleading profits which further affects reputation within customers, investors and regulators. Lot of the decisions taken by Strategic board are based on balance sheet and financial statements.
The PNBIL treasury team get the rates from the Thomson Reuters and circulate to the Information Technology (IT team) to update in the core banking system on first working day of every month
LIBOR rates for November 2017 were not circulated to the IT team due to oversight. No procedural guidelines available.
The Information Technology team then send those to PNB India IT team to update rates in the scheme code wise as per existing practice. However, there are no centralised policies and procedures governing the same. The work is being performed as per existing practice.
As per my knowledge, I personally observed the following findings:
There are no controls in the system which prohibit staff from entering wrong interest rate especially in LIBOR deals. For instance, interest can be offered for a wrong interval.
On conversation with IT team, I realized that employees do not have adequate knowledge about LIBOR and they are manually updating the rates in the core banking system instead of regular basis for existing loan accounts.
Sometimes while opening the loan account Branch picks up wrong interest code for example 3months LIBOR instead of 1month LIBOR. This affects customer interest amount, repayment amount and interest amount.
While opening the loan account frequency was not mentioned so interest for loan account was not applied in a timely manner.
The credit administration team submits the interest income report difference figures for the same period to the respective committee. On reviewing it I found, incompetence was displayed about the loan process and negative strategic decisions were taken by management.
PNBIL does not have a formal training programme in place for core banking systems and job card every operation.
PNBIL does not have “The Key Risk Indicators and Risk Incident Reporting model” including internal operational loss reporting system as per UK regulator standards.
As of now inherent risk “HIGH” related to loan account interest income area and various sub-processes.
A lot of manual processes are involved in loan account processes and existing control measures are ineffective in terms of existing design.
There are not standard operating procedures in place and monitoring of loan accounts for monthly interest payment not being performed in a regular interval.
The existing process cycle starts from branch to disbursement loan
Operational Challenges: Growth of loan books can be hindered by interest rates which are not being updating during regular interval, low level of computer literacy, limited human resources and process knowledge gaps. The bank currently faces main challenge like manual calculation work and lack of knowledge about loan process and interest calculations particularly LIBOR method including liner interpolations. The customers experience as provided by banks is not secure and economical and can create some problems in case of monthly or annual loan account statement.
Psychological challenges: Psychological challenges can happen when clients are not acquainted with advance account interest calculations and are afraid of it. Psychological challenges will negatively affect customer loan portfolio. These difficulties can be; Conservation and the wavering of clients and dissatisfaction because of absence of specialized information or accounting knowledge.
Technology challenges: PNBIL existing system was upgraded in January 2017 and there were lots of issued not addressed by service providers such as some loan accounts product interest table codes were not configured as per bank’s requirement and accrued compounding interest was not calculated correctly. PNBIL faces technologies related because they are not performed seniors based “User Acceptance Test” before upgrade the systems.
In terms of various risks which associated with the loan process:
Operational Risk is the risk of loss resulting from inadequate of failed internal processes, people and systems or from external events.
Credit Risk: Credit hazard emerges when a client neglects to pay a commitment when due or whenever from now on for its full esteem and last.
Strategic Risk: Strategic risk might ascend from lack of appropriate planning and implementation of interest rate process or from a failure to adequately evaluate how interest income will impact the bank’s overall business strategies.
Transactional Risk: While loan opening accounts staff can enter wrong details such as principal amount, interest rate, repayment schedule, tenure and currency. The bank’s takes more time to re process entire loan account and they breach normal turnaround time and overall cost is increasing due to transaction risk.
Reputational Risk: The customer account loan annual statement sent by error and later another set of documents to customers is sent in case of error. The customer gets annoyed and Bank’s reputation risk arise then customer complaints to respective regulators for incontinences.
Legal Risk: some of loan account under “Non-Performing Assets” bank filed a case against the borrower and submitted all the documents in the court and after some time bank submitted another set of documents in the court and then borrower / judge they may say your calculation was wrong. Because there are some legal limitations to deny the revised figures.
Compliance Risk: Banking Compliance risk is the current and prospective risk to earnings or capital arising from violations of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies, and procedures, or ethical standards.
4 V’s of PNBIL
For further consideration of the PNBIL various sub process of loan operations, 4vs are used in analyzing the PNBIL.
Above analysis found process gap, revenue leakage, customer complaints and financial reporting breach. Now they need to redesign the process for the LIBOR rate update in the loan accounts through using Plan, Do, Check and Act( PDCA) tools.
A SIPOC is a high-level view of a process which stands for Suppliers, Inputs, Process, Outputs, and Customers. Each Process begins with Suppliers who give Inputs to the Process which results in an Output that is conveyed to Customers.
PDCA cycle option for redesign the operations process
Plan: The PNBIL faced operations issues regarding LIBOR rates not being updated correctly in the CBS and it has further affected bank’s interest income and customer loan account balances for last three years for around 256 clients, including the corporate and retail customer getting affected due to wrong calculation. This issue has been discussed with company senior management and board members are aware what is exactly going on.
PNBIL should create plan to open new scheme codes and move the existing loan account to new scheme codes that called data cleansing.
Do: The working committee with versatile skills people from the Operations, Information Technology, Risk, Credit, Treasury and Internal Audit and created a “Data cleaning” project.
The team should go through existing processes as well as standard market practice along with regulatory requirements. The PNBIL first should create detailed operational procedures manual and clear process owner along with accountability. The manual should contain end to end process of LIBOR rates as well as a timeline.
PNBIL should incorporate risk management points also such as (a) Identification (b) Assessment (c) Monitoring (d) Reporting and (e) Controlling / Mitigating.
PNBIL encourage a risk culture within the organisation and share monthly learned lesson to staff for knowledge purpose.
Technology has achieved a vital change in the working of the bank. With years banks are likewise adding administrations to their clients. with solid rivalry and progression of innovation, the administration given by the bank has turned out to be more simple and helpful. The Bank must use systemic based calculation instead of manual calculation.
For staff dealing with loan account processing in the Core Banking system, bank may also focus on providing training and ensuring uniformity in terms of operational procedures across UK operations.
Re-check monthly twice, or thrice if, required at least a sample basis for our internal control purpose.
Timeliness is everything, rates should be as per the most up to dated list through the Thomson Reuters website.
Your escalation process: Any rate incorrectly updated in the system or wrongly downloaded from the website should be escalated to the respective team for investigations.
MI / Reporting
Check: Analysed the first round of test outcome which requires improvement like further parameters to add or control points increase and instruct Information Technology to customize systems. The new systems capabilities work as per regulators requirements and credit source book. The operations team should perform scenario tests before implementing. Create a business continuity plan for outage of systems and updated company policy. Audits trail records are vital and should be kept on record as per record management policy.
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Act: The working committee was fulfilled about the outcome of the new process design and they sent a full report along with recommendations to senior management and submitted to board for approval Once board approved to implement the new process. Any future modifications this process new base and continues to improve things for customers. The Internal Audit and Independent audit firm conduct product and process audit and submits the report to the board.
This is a continuous flow process aimed to improve performance dramatically in terms of cost, quality, customer services, accuracy, reduce customer complaints and satisfy regulator expectations.
- SIPOC, 1998. SIPOC . In: Chapter 3, The Leader’s Handbook. s.l.:s.n.
- PNBIL, 2018. https://www.pnbint.com/financial-reports.aspx. [Online]
- LIBOR 2018. https://www.theice.com/iba/libor. [Online].
- Edwards, D. W., 1950. Deming Cycle – PDCA/PDSA. In: s.l.:s.n.
- 4Vs SLACK, N., 2018. OPERATIONS AND PROCESS MANAGEMENT. s.l.:Peasron.
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