Banking and finance
Mohammad asim
MBA finance Ii year
Dr.c.v.raman university

Evaluation of banking institutions
The modern banking system began with the opening of Bank of England in 1694. The bank of
Hindustan was the first bank to be established in India, in 1770
Phase I : Early phase from 1786 to 1969 of Indian banks.
Phase II : Nationalization of Indian Banks prior to the Indian Banking sector reforms
Phase III : New phase of Indian banking system after 1991

On the issue of aggregate foreign investments in private banks form all sources (FDI,FII,NRI) *,
the guideline stipulate that it cannot exceed 74% of the paid-up capital of a banks. If FDI (other
than by a foreign banks or foreign bank groups) in private banks exceeds 5%, the equity
acquiring such stake would have to meet the ‘fit’ and ‘proper’ criteria indicate in the share
transfer guidelines and gets the Reserve bank’s acknowledgement for transfer of the shares.
The aggregate limit for all FII investment is restricted to 24% which can be raised to 49% with
the approval of the board/shareholders. The current aggregate limit for all NRI investments is
24% with the individual NRI limits being 5 % subject to approval of board/shareholders.

Major private banks in India
1. Banks of Rajasthan
2. Bharat overseas bank
3. Catholic Syrian bank
4. Centurion Bank of Punjab
5. Dhanalakshmi bank
6. Federal bank
7. HDFC bank
8. ICICI bank
9. IDBI bank
10. IndusInd bank
etc

Indian banks operation abroad
As on October 20, 2005, 14 Indian Banks- 9 form the public sector and 5 form the private
sector has operation overseas spread across 42 countries with a network of 101 branches
( including 6 offshore units), 6 joint venture,17 subsidiaries and 30 representative offices. The
Bank of Baroda has the highest overseas presence, followed by the SBI & BOI

Local area banks
The concept of local area banks was launched by the RBI on 1996 with the purpose of
developing backward and less developed districts. In order to facilitate its formation, RBI
prescribed a minimum capital of Rs.500 lakhs for its formation by
individuals/trust/Societies/Corporates.

Function of banks
Banking regulation Act of India, 1949 defines banking as:
1. To accept deposit from public
2. Lending money to public and others
3. To make remittance
4. Providing safe custody for valuables
5. Government business
These activities are related to traditional banking system. But today there are so many activities
that a bank perform today. These are………….

1. Issue of bank notes/promissory notes
2. Processing of payments by telegraphic transfers*, internet banking or other means
3. Transfer of money: issuing draft and cheques
4. Accepting term deposits
5. Lending money by way of cash credits, overdraft. Installment loan or otherwise
6. Providing documentary and standby letter of credit, guarantees, bonds, securities
underwriting commitments and other forms of balance-sheet exposure
7. Providing lockers
8. Foreign currency exchange.

Banking structure in India
The banking structure in India is consisted of
central banks,
public sectors banks and
 private sectors banks

Central banks
The RBI is the central bank. It is fully owned by the Government of India. It is
governed by the Central board and headed by a governor, who appointed by
the central government. It issue the guidelines for the functioning of all banks
within the country.

Public sector Banks
The scheduled bank group : the SBI and its associates banks
20 other nationalized banks
Regional rural banks : they are sponsored public sectors banks

Private sectors banks
Private banks
Foreign banks operating India
Scheduled co-operative banks
Non-scheduled banks

Co-operative banks
The co-operative sectors banks are related with Rural Areas and serve rural people mainly, the
co-operative banking
The co-operative banking sectors is divided into the following categories.
State co-operative banks
Central co-operative banks
Primary agriculture credit societies

Commercial banking
The commercial banking system in India consists of publics sectors scheduled banks and private
sectors scheduled as well as non-scheduled banks. These are the banks, which basically provides
services relating to accepting money as deposits as giving business loans.
Primary functions
Secondary functions

Primary functions (commercial banking )
Accepting deposits
Granting loan and advances

Secondary functions (commercial banking)
Agency services : these are service rendered by the bank on the behalf of its customer. Here, the banks act as an agent of their
customers
the agency services includes
a) Collection and payment of cheques and bills
b) Collection of dividends, interest and other payments
c) Purchase and sale of shares and securities
d) Payment of interest and subscription
e) To act as a trustee or executor etc
 Other services :
a) Issuing letter of credit and traveler’s cheques
b) Underwritings of shares bond
c) Locker facilties
d) Keeping their customers abreast with useful information regarding trade and business
e) Underwriting foreign exchange business

Development Banks
These are the banks dedicated to finance new and upcoming business and projects crucial to
economic development by providing equity capital and/or loan capital. The roles and functions
of the developments banks can better understood while looking at the objectives and activities
of major development banks.

Industrial development bank of India
(IDBI)
It is India’s premier development Financial Institution (DFI) and the 10th
largest development
bank of the world. It was established 1964 as a wholly owned subsidiary of RBI. Its ownership
was transferred to governments of India on 1976, which now holds 72% of shares. its
authorized capital is 1000 Crores which can be further increased to 2000 crores. During₹ ₹
1995-96, it issued 17.31 lakhs shares to the publics at a premium of 120 per shares₹

*
FDI (foreign direct investments)
A foreign direct investment is an investments in the form of a controlling ownership in a
business in one country by an entity based another country
FII ( foreign institutional investors)
A FII is an investors or investment fund registered in a country outside of the one in which it is
investing. Institutional investors most notably include hedge funds, insurance companies,
pension funds, mutual funds.etc
telegraphic transfer (TT)
A telegraphic transfer (TT) is an electronic method of transferring funds utilized primarily for
overseas wire transactions. These transfers are used most commonly in reference to Clearing
House Automated Payment System (CHAPS) transfers in the U.K. banking system.

Industrial investment bank of India(erstwhile
Industrial reconstruction bank of India )
Industrial investment bank of India Ltd.(IIBI) set up under the companies Act, 1956 in March
1997 ( by converting the erstwhile industrial reconstruction banks of India ), is fully owned by
the government of India. IIBI assist industry- mainly in medium and large sectors through a wide
ranging products and services. They acquire and trade in varied financial instruments from term
loan, equity, or debenture and bonds, structure products besides providing various services like
deferred payment guarantee, loan syndication merchant banking services such as issue
management, underwriting and guarantees, projects/reconstruction/one-time-settlement
consultancy / appraisal.

Industrial credit and investment corporation of India
bank(ICICI) erstwhile Industrial credit investment corporation of India-limited
ICICI was established by the government of India in the 1960s as a financial institution ( FI, other
such institution were IDBI and SIDBI ) with the object of finance large industrial projects. ICICI
was not a bank-it could not take retail deposits; and not was it required to comply with Indian
banking requirement for liquid reserves. ICICI borrows funds from many multilateral agencies
(such as the world banks ), often at concessional rates. These funds were deployed in large
corporation loans.
All this changed in 1990s. ICICI founded a separate legal entity –ICICI bank which undertook
normal banking operation- taking deposit, credit cards , car loan etc.
The experiment was so successful that ICICI merged into ICICI bank ( “reverse merger”) in
2002.

Small industrial development bank
(SIDBI)
It was under SIDBI Act 1988 on 2.4.90, as subsidiary of IDBI bank taking over the latter’s
activities relating to SSI. The charter establishing it “ The small Industries Development banks of
India Act, 1989” envisaged SIDBI to be the principal financial institution for the promotion,
financing, and development of industry in the small scale sector and to co-ordinate the function
of the institutions engaged in the promotion and financing or developing industry in the small
scale sector and for matters connected therewith () or incidental thereto.
The basic objectives are set out .
a) Financing
b) Promotion
c) Development
d) Coordinate

SIDBI contd…….
SIDBI scheme can be broadly divided into 4 categories
a) Refinancing scheme
b) Bills finance scheme
c) Project related direct finance scheme
d) Promotion and development

What corporate internet banking
offers –An Overview

How corporate internet banking
DIFFER form Retail internet
banking
Particular Retail Corporate available to
Individual Joint A/cs, sole proprietorship All types of customer
URL Customer to select- corporate clients
option on website
Customer to select – Retail Customer
option on website
Users Customer himself uses the services Facility to appoint accounts Administrator
for managing director
Login time restriction N/A Facilities available to restrict login time for
users
Accounts status Available by giving date range Customer can generate statement of
accounts with different filtering options
Transfer of funds Option to transfer funds within own
accounts and others accounts
Feature available to debit linked accounts
e.g. in case dealer accounts ets.
Individual themselves have to initiate funds
transfers
Feature of multi-users authentications
defined in workflow
Requests Requests relating to retail customers Additional request like opening of LC, BG ,
Bills
Mail Relationship managers can communicate
with customers attached to
Relationship managers can also send alters
in addition to mails to customers.

E-commerce
Business and trade is developing into a cross border phenomenon on a large scale, breaking down
barriers in term of time, formalities and convenience. E-commerce ( electronic commerce) means
buying and selling of goods or services ( banking includes) through the Internet.
Uses of E-commerce
a) Lower purchasing cost
b) Reduction in quality of inventory
c) More efficient and effective customers services
d) Lower sale/marketing costs
e) New sales opportunities.

Different type of E-Commerce
1. B2C ( business to consumer)
in this types, business directly sell to the end consumer and are also referred s E-tailing or as
virtual storefronts on the web site. It offers scope for 24H direct retail shopping and global reach
providing customer information and ordering.
3. B2B ( Business to Business )
this medium include buying and selling of products and services between business
organization through the net.
5. C2C ( consumer to consumer)
it includes business where consumer themselves deals with other consumer for buying and
selling goods and product which may include rare, special categories, second hands goods. The
most important of such site are auction site, which let anyone to list any thing for sale so that
every one visiting that site can bid for it.

Online tax accounting system-OLTAS
1. Online tax accounting system (OLTAS) a new system for payment of direct taxes and
monitoring of tax collections has become operative from 2004
2. Under this system, taxpayers would mentions TIN and not required to enclose challans with
their tax returns.
3. All collecting branches of various banks have been networked and integrated with tax
information network (TIN) and income tax Dept.
4. The challans would be identifiable by a unique challans identification NO (CIN) and also PAN
or TAN (tax deduction and collection account number). The new challan has a main copy and
a counterfoil
5. The transmission of data from bank to TIN will take place on T+2 basis instead of over 15
days as at present.

Electronic Accounting system in
Excise and Service tax
(EASIEST)= very easy
A committee to suggest step towards electronic accounting system in excise and service tax was
appointed by government of India under the chairmanship of J.N. Nigam (member) CBEC.
At the first meeting of high power committee on 2005, it was decided that the projects may
be implemented in two phases viz. the first Excise and Services Tax.
I n t e rm e d iary : N SD L ( n at io n a l s e c u rit ie s d e p o s i to ry lim i te d ) was
id e n t if ie d as t h e i n te rm e d ia ry f o r t h e t ran s m is s io n o f ta x
in f o rm a ti o n .

EASIEST contd….
Challans Identification Number (CIN):
In place of the Quadruplicate (4th
copy), only a single copy of challan would be submitted and the tear of
portion containing the challan Identification Number (CIN) would be handed over by the collecting bank
branches to the assessee. The CIN number is unique identifier for a challan. It consists—
1. Challan number
2. Date of submission
3. BSR code *
Pilot projects :
A pilot was started at chennai form 2005 involving 5 branches of each of the 8 banks authorized to collect
excise at chennai. A single copy challan with a tear of counterfoil (HALF SHEET) called GR7 was
introduced during the chennai pilot.

BSR codes ( BASIC STATISTICAL
RETURNS)
BSR stands for BASIC STATISTICAL RETURNS. It is a 7 digit code allotted to bank by the RBI. When
filling TDS/TCS return BSR codes is used in challans details and deducted details. Banks BSR
code is different from the Branch code used for bank draft.

2. Commercial Banking
The banking operation started in India as early 1786 with the inception of general Bank of
India. After that Allahabad Bank was the first completely India ownership Banks, which came
into existence in 1865.
Commercial banks in India are categorized into scheduled commercial banks and unscheduled
commercial banks. The scheduled commercial Banks have been listed under the 2nd
schedule of
the reserve bank of India Act, 1934. The Public sector banks category on the basis of the
government stake holding.

Activity of commercial banks
With the passing of time banks have moved on from traditional banking to the modern day
financial intermediary. They cater to the financial needs of different sectors. However the basic
functions of the commercial banks comprise of transfer of funds, acceptance of deposit and
the offering those deposits as loan for different purpose and to different sectors. But now the
business expanding activities of the banks have changed the banks orientation from passive
funds mobiliser to the active financial intermediaries. So, the relationship between the bankers
and the customers is not the same like before. The market has undergone a sea change
( conservation). The customers have become more demanding today. The transition from seller
market to buyer market has compelled the bankers to understand the pulse and the needs of
the customers. It may not be incorrect to say that the banking products and services today are
designed by the customers.

Retail banking
The commercial banking of India offer variety of the products and services like Investment,
Advisory services, Tax Advisory Services, Cash Management services, Debit cards, ATM card,
Credit cards, Personal Loans, Housing Loan, Cars loans, Education Loans, & Consumer Loans.
So, the customer orientation Approach of the banks have given rise in retail banking.
Retail banking has wider connotation (hidden meaning) and is not same as the retail lending.
Retail banking refers to the efforts of the bankers to reach up to the customers on both front of
balance sheet i.e. Liabilities side as well as assets side .
Under the Liabilities side we have deposit.
Unless the banker design the products according to the needs of the customers and facilitates
better bargain to them in term of the rate interest, time and delivery channel, it’s not easy for
them to solicit (seek) business in this segment.

Retail Banking Contd..
In the Asset side, we have credit/loan scheme of the various banks.
The job of the bankers has become very difficult in this segment too. Bankers today are offering various sops to attract the potential
customers.
For instance: payment of free insurance premium by the banks come along with the vehicle loans in respect of few banks.
The following channels are effectively utilized by the bankers to mobilize business from potential clients:
i. Premises baking or banking at doorstep
ii. ATM
iii. Debit/ Credit Cards
iv. Telephone banking
v. Internet banking
vi. Mobile banking
vii. NEFT/RTGS. Etc.

Retail lending scheme
There has been a great heat of competition in selling ideas, product and services under this
segments between one banks to another banks.
Retail lending, a departure form conventional to advance, offer higher yield, quicker, the
possibility of less incidences of the going bad or non performing if it is monitor on and ongoing
basis. Monitoring of account is easier in retail lending segment as compared to the conventional
advances, for the reason the installments and repayment scheduled have been monitored in
respect of retail lending whereas in respect of conventional advances,
For example : an advance to an industrial units, security verification, conduct of the account by
the borrower, compliance with the statutory norms by the units, submission of periodic returns
like balance sheets, Income tax assessment order and other regulatory ones form time to time.

Margin as the banking approach
The contribution brought in by the borrower is termed as margin.

Retail banking—Liability focused
segment ( deposit accounts )
Type of Deposit account
i. Demand deposit:
means a deposit received by the bank which is withdraw able on demand.
ii. Saving deposits:
means a formed of demand deposit which is subject to restrictions as to the number of withdrawals as also the amounts of withdrawals
permitted by the banks during any specified period.
iv. Term deposits:
means a deposit received by bank for a fixed period withdrawal able only after the expiry of the fixed period and include deposits such as
recurring/double Benefits deposits/ Fixed deposit etc.
vi. Notice deposits:
means a deposit for specific period, but withdraw able on giving at least one complete banking day’s notice
V current accounts:
means a form of demand deposit wherefrom withdrawal are allowed any number of times depending upon the balance in account or up to a
particular agreed amount, with neither saving deposit nor term deposit.

Saving fund account/ Saving bank
account
A saving fund account may be opened by a properly introduced individual singly or jointly,
minor of the age of the 10 years and above and minor under natural/legal guardianship saving fund account
cannot be opened in the name of any business concern.
Saving fund account cannot be opened in the name of :
a. Government department
b. Municipal corporation
c. Panchayat samiti
d. State housing board
e. Industrial development authorities
f. State electricity board
g. Etc…….

Contd……
The following funds account can be opened in the name of the following:
a. Companies licensed under section 25 of the companies act 1956. which are permitted not to add to their
names the word “LIMITED” ,e.g., Indian bank Association.
b. Societies Registered under Societies Registration Act 1860 or any other corresponding law.
c. Primary co-operative society being financed by the banks
d. Any government department released for implementation of scheme sponsored by the central government
subject to production of an authorization from respective Govt. department to open saving funds accounts;
e.g. Khadi and village Industries Board.
e. Any trust whose entire income is exempted form payment of income tax.
f. Any other institution permitted by RBI on application made by the bank
g. SF A/c in the name of the HUF can be opened if it is not engaged in any business activities.
h. Development of children and women in rural areas
i. Self Help group
j. Farmer club

Minimum Balance/Account opening
Requirement
The minimum balance to be maintained in the account may differ from one bank to another
bank since this area has been deregulate by the apex monetary body, the RBI.
Non core banking
Solution branches
Core banking solution
branches
Sl.No. Area Minimum Balance ( )₹ Minimum
1 Rural As prescribed by the
individual banks
As prescribed by the
individual banks
2 Semi—urban As prescribed by the
individual banks
As prescribed by the
individual banks
3 Urban As prescribed by the
individual banks
As prescribed by the
individual banks
4 Metropolitan As prescribed by the
individual banks
As prescribed by the
individual banks

Generally, Banks don’t insist on the maintenance of minimum balance amount respect of staff
member, pensioners, students, and salaried accounts

Interest paid on depositor accounts
of deceased depositor
Banks’ of the India guidelines, Individual banks can decide upon this issue. However India Bank’s
association(IBA) in this model deposit policy has laid down that
1. In case of death before maturity, contracted rate be paid till the date of maturity and from
the date of maturity till the date of payment, simple interest at the rate applicable (term
deposit) on the date of maturity for the period of deposit remained with the bank be paid.
2. In case of death after maturity, the bank shall pay interest at saving rate applicable on the
date of maturity, form date of maturity till the date of payment.

Operation of the joint account
At the request of the depositor, the bank will register mandate/power of attorney given by him
to another person to operate the account of his behalf

Minor account
The minor can open SB A/c and the same can be operate by natural guardian or by minor
himself. He is above the 10 years.

Accounts of illiterate/blind person
The banks may at its discretion open deposit accounts other than the current accounts of
illiterate person
The account of such person may be opened provided he calls on the banks personally along
with witness who is known to both the depositor and the bank.
Normally no cheques books facilities is provided for such saving accounts.

Secrecy of customers accounts
The bank shall not disclose detail/particular of the customer’s accounts to third person without
the consent of the customer.

Premature withdrawal of the term
deposit
The bank on request from the depositor may allow withdrawal of the term deposit before
completion of the period agreed upon at the time of placing the deposit.

Commercial banks: loans and
advances
Efficient management of loans and advances portfolio has assumed greater significance as it is
largest assets of the banks having direct impact on its profitability.
Banks extend loans facilities by way funds based facilities and non- fund based facilities. The
fund based facilities are usually allowed by way of term loans, cash credit, bill discounted,
demand loans, overdraft etc.
Further the banks also provide non—fund based facilities by way of issuance of Inland and
foreign Letter of credit, issuance of guarantees, deferred payment guarantees, bills acceptance
facilities under IDBI rediscounting facilities

Overdraft
All overdraft account is treated as current accounts. Normally, overdraft are allowed against the
bank’s own deposits, government securities, approved share, and debenture of the companies,
life insurance policies, government supply bills, cash incentives, and duty drawback, personal
securities. Etc
Overdraft accounts are kept in the ordinary current accounts head of the bank branches.
Temporary clean overdraft in current accounts are maintained in the ordinary current account
ledgers, today in an electronic form.

Demand loans
A demand loan is a rare form of a loan that can be called for complete repayment without any
prior warning to the borrower. In other words when the lender demands the money the
borrower must pay it.
One good example of demand loans is a bank overdraft. These loan have an open repayment
plan with low interest, which is great for the borrower, but they also provide the lender with
the opportunity to response the loan and demand payment on the spot, which is not great for
the borrower!

Term loans
Term loan are sanctioned for acquisition of fixed assets like land, building, plant & machinery,
office equipment, etc., for the purpose of transport vehicle, for the purpose of agricultural
equipment, machinery and other movable assets e.g. tractor, pump sets, cattle etc.
Term loan normally granted for periods varying 3-7 years and in exceptional case beyond 7
years. Term loan for infrastructure projects are allowed with longer repayment period

Cash Credit advances
Cash credit account is a drawing account against credit granted by the bank and is operated in
exactly the same way as a current accounts on which an overdraft has been sanctioned. The
various type of securities against which cash credit are allowed are pledge/ hypothecation of
goods or produce, pledge of document of title to goods, mortgage of immovable property,
books debts, trust securities, etc.
In cash credit accounts borrower is allowed to draw an account within the prescribed limit, as
an when required.

Bill finance
Advances against Inland Bills are sanctioned in the form of limits of purchase of bills ( bills
purchase limits) or discount of bills ( bill discounting limits) or bills sent for collection advances
against bill sent of collection (ABC limit) to borrow for the genuine trade transaction. Bills are
entire payable on demand.

Packing credit
packing credit is basically a loan provided to exporters or seller to finance the goods’
procurement before shipment. The bank will make the fund available to a letter of credit issued
fevering the seller and a confirmed order for selling the goods or services.

Inland Letter of credit
Inland Letter of credit is an obligation of the banks that opens the letter of credit ( the issuing
bank) to pay the agreed amount to the seller on behalf of the buyer, upon receipt of the
document specified in the letter of credit under domestic business transaction.

Guarantee
Guarantee is an contract to execute the promises, or discharge the liabilities of a 3rd
person
incase of his default.

Documentation
No advances is expected to be disbursed by the banks until documents are properly executed
strictly in accordance with the prescribed guideline of the respective bank.

Mortgages – immovable property
A mortgage of immovable property is taken either as a primary security or as an
additional/collateral (Subsidiary) security of the bank’s advances as may be provided in the
sanction. Before a mortgage is taken, managers are expected to satisfy themselves by an
examination of deeds that the title of prima facie in order an property is unencumbered.

Valuation of property and plant and
machinery
The valuation of security i.e. Immovable property is done by the bankers by competent
personnel approved for the purpose before the consideration and sanction of the loan.

Project appraisal
Project finance is one of the key areas for any lending institution. As such, before taking a final
decision about financing any project, whether individually or jointly, a detail and critical
appraisal for the project is necessary.
For fundamentals are carefully and examined
a) Market and economic aspect
b) Technical aspects
c) Financial aspects
d) Managerial aspects.

Post—sanction supervision and
follow up of loan
Is an important function as it helps in keeping a watch on conduct and operational/financial
performance of the borrowed accounts.

Protested advances
With the introduction of Income recognition, asset classification and provisioning norms by RBI,
borrowal accounts are classified as Standard, Sub-Standard, Doubtful and Loss Assets.
In case of accounts, where the borrowers are not forthcoming for adjustment of bank dues
through compromise/negotiated settlement, banks takes recourse to legal action by
filling suits in court of law/debt recovery tribunals/sarfesai/

Credit—risk management
“credit risk”, means the possibility of loss associated with diminution in the credit quality of
borrowers or counter parties. These counter parties may include an individual, corporate,
banks, financial institutions etc.

Consideration before making or
recommending advances
I. The means() of the applicant and guarantors should be verified by independent enquiries and if possible
by examination of their books.
II. The detail of the asset of the applicant, with specific reference to his liquid assets viz. cash book debts,
stocks etc.
III. The detail of the liabilities of the applicant –whether short-term or long-term.
IV. The extent of the margin available with the applicant, which is indicated by the excess of liquid assets
over the current liabilities.
V. The experience of the applicant in the business or the line of activity in which he purpose to utilize the
money to be borrowed form the bank.
VI. The purpose for which the advance is required and the probable date of repayment.
VII. The detail of the primary and collateral securities offer to secure the loan need to be ascertained.
VIII. That amount of the advance is need—based and is in relation to the applicant’s means. The same should
also bear a reasonable relationship to the amount of the self—owned capital provided by him.

Pre—sanction and post—sanction
follow up check list
In order to make strong the pre—sanction appraisal and to avoid the quick mortality cases,
banks today have evolved check lists governing area of pre-sanction appraisal and post sanction
follow up for meticulous compliance by all those association with the credit dispensation.

Advances to LLP companies.
Before and advance to granted an LLP, certified two copies of the company’s up to date
memorandum and article of association and its three year audited balance sheet[if it is holding
company of its subsidiary company as well as vice versa in the case of subsidiary company]
and certified copy of the certificate of incorporation should be obtained.

Advance to a partnership firm
When making an advance or setting up a credit limit in favor of partnership concern, all the loan
documents must be signed by all partners on behalf of the firm. The bank can proceed
simultaneously against the firm as well as the partners for recovery of its dues and the account
opening form be signed by all partners in their individual capacity while specimen signature to
be obtained thereon in their representative capacity.

General safe guard suggested by the
RBI
1. Branches should open letters of credit and purchases/discount negotiate bills under LCs only
in respect of genuine, commercial and trade transaction of their borrower constitute who
have been sanctioned regular credit facilities.
2. Branches should not extend the fund based or non-fund based facilities like opening of LCs,
providing guarantees and acceptance to constituents borrower etc.
3. All proposal for advances, without exception, should emanate form the branches and
sanction should be made only after proper appraisal.
4. No excess limit beyond the delegated power should be sanctioned unless it is absolutely
essential.
5. Adhoc amount/excesses wherever sanctioned should be promptly reported to higher
authorities without waiting for regularization for advances.

Contd….
6. Sanctions without discretionary power should also be promptly reported to the controlling authorities in the
stipulated manner.
7. Incase of non-reporting, the controlling authorities should obtain the prescribed return/statement and scrutinizes
the same diligently and take prompt and follow up action.
8. caution should be exercised against attempts by main borrowers to float fictitious companies.
9. In case of oral/ telephonic sanctions, proper record of the same should be maintained by the sanctioning as well as
Disbursing authorities.
10. written conformation of the competent sanctioning authorities must invariably be obtained by the disbursing
authorities in such case as also in sanctioned beyond discretionary powers.
CONCLUSION
Overall conclusion is the when providing any type of loan/ advances then we must have to maintain the record,
whether that are normal loan or beyond the limit.

Overdraft / demand loan against
Bank deposit
Overdraft/demand loan may be granted to customer against deposit lying at the credit of the
borrowers and third parties in the books of the branch making some advances or any branch of
the banks subject to the observation of the precaution.

Loans against NRE & FCNR deposit
In case of loan/overdraft against securities of a deposits under—resident (external) accounts
and foreign currency (non– resident) accounts branch manager ensure that these advances are
strictly in term of instruction issued by exchange control department of RBI from time to time
contained in the exchange control manual/ circular issued by international Banking Division.

Loan against life policies
Overdrafts and demand loans are granted against the life insurance policies issued by private
sector insurance companies approved by insurance regulatory development (IRDA) in addition
to life policies issued by LIC of India. Before allowing an advances against the securities of the
life insurance policy it should be ensure that :
1. This are weight on the relative policies.
2. The age of the assured stand admitted in the books of the company/corporation :
3. Premia are paid up to date.

Advances against government
securities
All government promissory notes allowed as security for advances must invariably be sent to
the appropriate public debt officer for examination in order to ascertain that:
1. The endorsement are in order
2. The note are not stopped or seize, that none of them is a duplicate; and
3. No alteration have been made in the principal amounts.

Advances against companies share/
debenture & PSU bonds
Banks are expected to follow the statutory provision regarding grant of advances contained in section
19(2) and (3) and 20(1) (a) of the banking regulation Act 1949 which are briefly explained :
SECTION 19(2) AND (3)
A bank cannot hold shares in any company, whether a pledgee, mortgage or absolute owner of an
amount exceeding 30% of the paid up share capital of the companies or 30% of own paid up share
capital and reserve, whichever is less.
Further a bank cannot hold shares, whether a pledgee, mortgagee or absolute owner, in any
companies in the management of which any managing director or manager of the banks in any
manner concerned or interested
SECTION 20(1) (a)
A bank cannot grant any loan and advances on the security of its own shares.

Contd…
ADVANCE AGAINST DEBENTURE
The debenture of the companies whose share can be financed against, can also be financed by
maintaining the prescribed margin.
ADVANCE AGAINST PSU BONDS (PUBLIC SECTOR UNDERTAKING)
May also be financed against by maintaining the prescribed margin and by following all other
terms and conditions as are applicable in case of advance against share and debenture, as PSU
bonds are akin to the debentures of the companies.

Advance against jewelry/ornaments

Advance against government supply
bills
-- Is a clean advance and therefore proper attention is paid by the bankers as to the mean of the
borrower, his financial position, business integrity beyond doubt, his credit in the market, his
experience of business and banks past experience with the party, as also availability if adequete
security.

Working capital assessment
WC is defined as the total amount of funds required for a day to day operation of a unit. It is
often classified as gross working capital and Net working capital.
Gross WC referred to the funds required for financing total current assets of a business.
Net WC , on the other hand is the difference between CA-CL, which is nothing but surplus of
long-term sources over long-term uses.
A +ve WC is always desirable because of the fact that is provides margin for the WC
requirement.

.Area Gross WC Net WC
Meaning Refers to the sum of current asset employed in the
business for day2day operation and for utilizing the FA
@ optimum level. Total of the CA is not deducted
from the total of CL
Refers to the Difference between CA-
CL. Excess of CA over CL is net working
capital
Components •Cash & bank balance
•S. debtors and bills receivable
•RM
•WIP
•FG
•Consumable stores
•Prepaid expenses
•Advances given to supplier of RM
Total CA said in the Opposite side
Minus–
• Creditor for Rm
• Bills payable
• Advances payment
• Received form customer
• Deferred installment payment
within a year
• Term loan & debenture payable
within a year
• Salary, wages PPF ESI etc.
• Dividend and tax payable

Contd…
Financing Generally CA are financed by Both
long-term and Short-term ,
Long-term sources of Funds refer to
the share capital , debenture, term
loan and short-term sources refers
to the banks overdraft, cash credit,
and sundry creditors.
Net working capital is financed only
by long term sources
For Eg. Share capital, debtors, term
loan.etc
Sign conversion It always a +ve Figure which suggest
that without CA, a company cannot
run, hence Gross concept is
nothing, but he sum of all current
assets
It may be +ve or –ve
+ve figure give the companies
financial strength.
-ve figure indicates the companies
poor financial condition.

Parameters for various stage
Stage Time Value
1.RM Holding period Value of RM consumed during the
period
2.Stock in process Time taken in converting the RM
into FG
RM+MFG. Exp. During the period
(Cost of production)
3.FG Holding period of finished goods
before being sold
RM+MFG.Exp+ADM overheads for
the period (cost of sale)
4. Receivables Credit allowed to buyer RM+MFG.Exp.+ADM Exp.+ profit for
the period (sales).

Credit management
Credit management is of crucial importance in banking activity. A commercial banks are mainly
engaged with providing loan term loans, they have to be extra precaution in deciding the credit
worthiness of the client……………..

Credit rating of loan account key
parameters
CURRENT RATION
Current ratio measures the proportion of a party’s CA to its CL and thus gives a measure of the
short term liquidity.
RELEVANCE
CA are the asset is the form of input and outputs necessary to the run the business operation which
are supposed to be liquidated and converted into cash within the normal business cycle. CL are
those liabilities which are due/expected become due in the current business period. A high CR
indicated that’s the borrower is in a good position to repay it’s current liabilities.
COMPUTATION
CA
CL

Contd…..
HOW TO RATE
The ratio for the party is compared to the benchmark ratio and the score is awarded to the party
based on its position within the benchmark, as shown in the table below.
CURRENT RATIO
BENCHMARK < 1.0 1.0 & up to 1.25 >1.25 & up to 1.5 >1.5 & up to 2.00 > 2.00
SCORE 0 2 4 6 8

Debt service coverage
Ratio/Repayment period
Only one appropriate parameter i.e. DSCR in case of existing companies and already available
term loan /DPG or repayment period in case of existing companies proposed to avail fresh term
loan /DPG to be evaluate.
DSCR ( in case of existing parties and already availing term loan/DPG limit):
Debt service coverage ratio measure the number of times a party’s cash profit cover its
repayment obligations ( i.e. interest and principal repayment in term loans) over a period of
one year.

Contd…..
This ratio is a good indicator of the long term solvency of a party and its ability to service its
debt obligation. Default risk covers both non-payment of interest as well as principal. This ratio
is a measure of the degree off comfort that the borrower would have in repaying its long term
debt out of cash generated by the parties.
COMPUTATION
The profit before depreciation and interest is divided with installment due during the year
plus interest on term loan.
PBDIA
Interest + LT installment

Contd…….
HOW TO RATE
the ratio for the party is compared to the benchmark value and the rate is given to the party
based on its position within the benchmark…….
DEBT SERVICE COVERAGE RATIO
Benchmark > 1.25 1.25 & up to 1.75> 1.75 & up to
2.25
> 2.25 & up to
2.5
> 2.5
Score 0 3 6 9 12

Estimated cash profit of current year
to Net repayment obligation
The ratio has been designed to determine future ( after the Balance sheet date), cash flow
adequacy of the party to meet its repayment obligation during the current year.
COMPUTATION =
The estimated cash profit plus interest on S-term and L-term borrowing for current year is
amount of debt repayable + interest on short term and long term borrowing during the
current year
The ratio will be converted to % to ascertained the score
ESTIMATED CASH PROFIT OF THE CURRENT YEAR TO NET REPAYMENT OBLIGATION FOR
CURRENT YEAR
Bench mark
value
<100% 100-125% >125 & up to
175%
>175 & up to 250
%
>250%
Score 0 2 4 6 8

Inventory and debtor holding
This ratio indicates number of times the inventory and debtors are recycle to generate sales and
hence measures the operating efficiency in management of working capital.
COMPUTATION
The ratio is worked out by dividing the average amount of inventory and receivables standing at
the beginning and at the end of the year with the average monthly net sale
Debtors + inventory
Average monthly net sale
How to rate:
Inventory and debtor holding
Benchmark > 5 Month >4 & up to 5 m > 3 -4 m 2-3 month <2 month
Score 0 2 4 6 8

Return on capital employed
This ratio measure the income earned per unit of capital employed in the business.
COMPUTATION:
PBIT
Average capital employed
HOW TO RATE
Return on capital employed
Benchmark <4 % 4-8% >8-12% >12-16% >16%
Score 0 2 4 6 8

Total outside liabilities/ tangible Net
worth
This ratio measure the total outside liabilities as a proportion of tangible net worth.
This ratio measure of the extent to which outside funds are invested in the business compared to
capital provided by the promoters or shareholders/profits ploughed back into the business.
Lower the ratio, greater is the long –term stability of the party and the margin of the safety
for the creditors.
COMPUTATION
Total outside liabilities
Total Net tangible worth

Here please see the notes of the financial management ….. Because all of the lecture is related
to the FM on this chapter.

Operational risk management on
commercial Banks
The RBI vide its circular no. DBOD.BP.(SC)>BC.98/21.04/103/99 dated 07/10/1999 came out
with guideline on “Risk management system” in banks. The RBI has suggested that the broad
parameters of risk management function should encompasses
i. Organizational structure
ii. Comprehensive risk management approach
iii. Risk management policy approach by the board, which should be consistent with the
broader business strategies, capital strength management expertise and overall willingness
to assume risk.
iv. Guideline and another parameter used to govern risk taking including detailed structure of
prudential limit .
v. Store MIS. For risk management

3.
Commercial banks and Priority sector Advances
The term priority sector itself suggests that certain sectors of the economy are need to be take
on a priority basis for repaid economic development.

The priority sectors
1. Agriculture
2. Small scale industries ( including setting up of industrial estates).
3. Small road and water transport operators ( owning up to 10 vehicle)
4. Small business ( original cost of equipment used for business not exceed rs. 20 lakhs)
5. Retail traders
6. Professional and self employed persons ( borrowing Limit ≤ 10 L and of which not more than
rs. 2 L for working capital , in case of Qualified Medical practitioners setting up practice in
rural area limit Rs. 15 L. and Rs.3 L purchase of one motor vehicle within these limit can be
included under priority sector.
7. State sponsored organization for scheduled caste/scheduled tribes

Contd…..
8. Education loan
9. housing both direct or indirect up to 15 L irrespective of the Rural/semi urban/urban/metro
area/ loans up to 11 L . Rs. 2 for repairing of house in rural/urban/semi-urban.
10. consumption loan under the consumption credit scheme for weaker sections.
11. Micro-credit provided by banks either directly or through any intermediary.
12. loans for software industries ( having credit Limit not exceeding 1 Crores.)
13. loans to specified industries in the food and agro-processing sectors having investment in
plant and machinery up to Rs. 5 crores.
14. investment by banks in venture capital( venture capital funds /companies registered with
SEBI)

Mode of finance to priority sectors
DIRECT AGRICULTURAL ADVANCES
This denotes advances given by banks directly to farmer for agricultural purposes. This
include short term loans for raising crops i.e. for crop loans. In addition advances up to Rs. 5 L to
farmers against hypothecation of agriculture produce for a period not exceeding 12 months.
The sub-target for direct agriculture is 13.5% Net Bank credit.(NBC)

Indirect finance to agriculture
Finance provided by banks indirectly to farmers. Through other agencies. Sub- target for indirect
agricultural advances is 4.5 % of net bank credit.

RBI rules out credit line for NBFCs
for now
The board discusses a revised notification that would replace the controversial February 12,
2018, circular
The RBI board on Tuesday suggested not extending a credit line to struggling NBFCs because it
felt there was no systematic liquidity but there were solvency concern in some large entities.
The board , headed by RBI governor shaktikant das meet in chennai and discussed the NBFCs
crisis as well as the revised circular that would replace the controversial “RESOLUTION OF
STRESSED ASSETS” frame work realeased by the central bank on 12 Feb, 2018.

Regulator’s take
 RBI views NBFCs woes as solvency issues, not Liquidity crisis.
RBI board suggest not to extend credit Line.
To come out with a liquidity framework for NBFCs.
One—day default norm stay
Banks should either take companies to NCLT or given loans.

4. Banking Law
The first Banking legislation in India was Imperial Banks of India Act 1921. another important
landmark was passing of Reserve bank of India, 1934.

Banking Law
RESERVE BANK OF INDIA ACT, 1934---IMPORTANT SECTION
SECTION 2(e) Definition of the scheduled Bank : Name in 2nd
scheduled with minimum capital
paid up capital and reserve of Rs. 5 Lac.
SECTION 17 RBI can transact business like :
 Accepting deposits of central/state government free of intt.
 Purchase /rediscount of bills of exchange from banks
 Purchase / sale of foreign Exchange to/form banks.
 To give loans to Banks, SFCs etc.
 To purchase sale Government Securities etc.
 To deals in derivatives, repo or reverse repo

Contd……
SECTION 18 Emergency loan to banks
SECTION 21 Central government is obliged to give its banking business to RBI and to entrust
management of public debt to RBI
SECTION 22 Exclusive right to issue banks notes
SECTION 24 Maximum denomination of bank notes can be Rs.10000/-
SECTION 28 RBI can frame rules of refunding value of mutilated, soiled or imperfect notes as a
matter of grace
SECTION 31 No body other than RBI and central government is authorized to make promissory
note payable to bearer Demand. Similarly, Expect the RBI and central government
nobody is authorized to draw or accept bills of exchange payable to bearer on demand
(Exception : cheques payable to bearer on demand can be drawn by anybody)

Contd…..
SECTION 42(1) Every scheduled bank shall maintain with RBI an average daily balance the
amount of which shall not be less than a specified % of its total demand and liabilities in India.
Average daily balance shall mean average of Balances held at the close of business on each day
of fortnight( period from Saturday to second following Friday, both day inclusive ). Liabilities
shall not include paid up capital / reserve/ any credit balance in P& L a/c of the bank/ the loan
taken from bank/ Exim Bank/ reconstruction Banks/ NHB bank/ National Bank/ Small industries
bank. Presently CRR is 5.75% wef 17.02.7 and will be raised to 6% wef 03.03.07