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Banking and finance

  1. Banking and finance Mohammad asim MBA finance Ii year Dr.c.v.raman university
  2. 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
  3. 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.
  4. 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
  5. 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
  6. 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.
  7. 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………….
  8. 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.
  9. Banking structure in India The banking structure in India is consisted of central banks, public sectors banks and  private sectors banks
  10. 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.
  11. 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
  12. Private sectors banks Private banks Foreign banks operating India Scheduled co-operative banks Non-scheduled banks
  13. 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
  14. 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
  15. Primary functions (commercial banking ) Accepting deposits Granting loan and advances
  16. 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
  17. 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.
  18. 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₹
  19. * 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.
  20. 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.
  21. 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.
  22. 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
  23. 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
  24. What corporate internet banking offers –An Overview
  25. 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.
  26. 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.
  27. 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.
  28. 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.
  29. 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 .
  30. 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.
  31. 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.
  32. 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.
  33. 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.
  34. 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.
  35. 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.
  36. 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.
  37. Margin as the banking approach The contribution brought in by the borrower is termed as margin.
  38. 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.
  39. 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…….
  40. 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
  41. 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
  42. Generally, Banks don’t insist on the maintenance of minimum balance amount respect of staff member, pensioners, students, and salaried accounts
  43. 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.
  44. 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
  45. 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.
  46. 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.
  47. 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.
  48. 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.
  49. 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
  50. 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.
  51. 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!
  52. 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
  53. 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.
  54. 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.
  55. 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.
  56. 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.
  57. Guarantee Guarantee is an contract to execute the promises, or discharge the liabilities of a 3rd person incase of his default.
  58. 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.
  59. 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.
  60. 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.
  61. 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.
  62. 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.
  63. 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/
  64. 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.
  65. 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.
  66. 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.
  67. 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.
  68. 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.
  69. 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.
  70. 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.
  71. 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.
  72. 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.
  73. 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.
  74. 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.
  75. 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.
  76. 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.
  77. Advance against jewelry/ornaments
  78. 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.
  79. 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.
  80. .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
  81. 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.
  82. 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).
  83. 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……………..
  84. 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
  85. 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
  86. 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.
  87. 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
  88. 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
  89. 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
  90. 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
  91. 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
  92. 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
  93. Here please see the notes of the financial management ….. Because all of the lecture is related to the FM on this chapter.
  94. 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
  95. 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.
  96. 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
  97. 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)
  98. 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)
  99. 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.
  100. 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.
  101. 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.
  102. 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.
  103. 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
  104. 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)
  105. 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

Notas do Editor

  1. This is new circular 2019 based on the Business standard news paper. &amp;lt;number&amp;gt;