1.
Banking Mechanism
A commercial bank deals in the business of banking i.e. accepting money from the public for
the purpose of lending with a view to make profits. Thus, they play a pivotal role as a financial
intermediary in an economy. Around banking system is, therefore, extremely essential for the
development of a nation. As in case of any other business, the soundness of the banking
business can be analyzed through the bank’s profit and loss account and its balance sheet.
The balance sheet of a commercial bank is a statement of its assets and liabilities at a
particular time. The assets of the bank include all the amounts owed by others to the bank.
They represent the application of funds to generate income for the bank. The liabilities of
the bank include all the amounts due to depositors and shareholders. The liabilities
represent the sources of funds through which bank raises funds for its business.
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2.
TYPES OF LOANS
TERM LOAN CASH BANK
CREDIT OVERDRAFT
FACILITY FACILITY FACILITY
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3.
Term Loan Facility
Term Loans are the counter parts of Fixed
Deposits in the Bank. Banks lend money in
this mode when the repayment is sought to be
made in fixed, pre-determined installments.
This type of loan is normally given to the
borrowers for acquiring long term assets i.e.
assets which will benefit the borrower over a
long period (exceeding at least one year).
• Purchases of plant and machinery
• Constructing building for factory
• Infra-structure
• Auto Loan-secured or unsecured
• Housing Loan-secured or unsecured
• Educational Loan-unsecured
• Project Loan-secured
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4.
Cash Credit Facility
This account is the primary method in which Banks lend money against the security
of commodities and debt. It runs like a current account except that the money that
can be withdrawn from this account is not restricted to the amount deposited in the
account. Instead, the account holder is permitted to withdraw a certain sum called
"limit" or "credit facility" in excess of the amount deposited in the account.. Cash
Credits are, in theory, payable on demand.
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5.
Overdraft Facility
Overdraft means the act of
overdrawing from a Bank account.
In other words, the account holder
withdraws more money from a Bank
Account than has been deposited in
it. Overdraft facility may be given
against deposits or any collateral
security.
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6.
Difference between cash credit and overdraft
The difference is very subtle and relates to the operation of
the account. In the case of Cash Credit, a proper limit is
sanctioned which normally is a certain percentage of the
value of the commodities/debts pledged by the account
holder with the Bank. This is also known as drawing
power for that particular account. Overdraft, on the other
hand, is allowed against a host of other securities
including financial instruments like shares, units of mutual
funds, surrender value of LIC policy and debentures etc.
* The main difference being that the current assets cannot
be given as security in case of o/d facility.
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7.
Housing loan Requirements:
 Original properties Documentation
 KNOW YOUR CUSTOMER
a. Passport Size Photo 2 Nos
b. Address Proof
c. Ration Card
d. Electricity Bill
e. Phone Bill
f. Bank Pass Book
g. ID Proof
h. Voters ID Card
 Self Employed or salaried
 3 Years Financials
 6 Month Bank Statements
(Current Account and Saving Account)
 3 Month Salary Slip (if salaried)
 2 years Bank Statement Salary
Account(if salaried)
 Company Id Card
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8.
Education loan Requirements
 Admission letter of the Educational Institute giving
details of year wise fee,
 boarding and lodging expenses.
 Letter confirming scholarship, if any.
 KNOW YOUR CUSTOMER
a. Attested copies of documents for proof of age/date of
birth Attested copies of proof of residential address.
b. Passport size photo of the applicant, co- obligants and
guarantors.
c. Copy of mark sheets/degree certificates of previous
academic qualifications.
d. Income proof/latest income tax return of parents/co-
obligants, guarantors. (if any)
e. Details of collateral security along with valuation
certificate of Government approved valuer (if any).
f. Details/statements of Bank accounts held by the student
applicant/co-obligants/guarantors (if any) for the last six
months.
g. Copy of Passport/Visa, cost of air fare (documentary
detail) in case of studies abroad.
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9.
Eligibility:
Indian National who has secured admission to professional/ technical
courses in recognized institutions in India or Abroad through Entrance Test/
Merit Based Selection Process after completion of H.S.C. (10 plus 2 OR
equivalent).
Courses eligible for Study in India:
i. Approved courses leading to Graduate/ Post-Graduate degree and P.G.
Diplomas conducted by recognized Colleges/ Universities recognized by
UGC/ Government.
ii. Courses like ICWA, CA, CFA etc.
iii. Courses conducted by IIMs, IITs/ IISc, XLRI, NIFT, NID etc.
iv. Regular Degree/ Diploma Courses like Aeronautical, Pilot
Training, Shipping etc. approved by Director General of Civil Aviation/
Shipping, if the course is pursued in India.
v. Approved courses offered in India by reputed Foreign Universities.
Courses eligible for Study Abroad:
i. Graduation: For Job oriented professional/technical courses offered by
reputed Universities.
ii. Post Graduation: MCA, MBA, MS etc.
iii. Courses conducted by CIMA London, CPA in USA etc.
iv. Regular Degree/ Diploma courses like Aeronautical, pilot
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training, shipping etc., the Institute duly recognized by the Competent

10.
REVERSE REPO
REPO RATE
RATE
INTEREST
RATES
CASH RESERVE STATUTORY
RATIO LIQUIDITY RATIO
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11.
• Rate at which banks
REPO(REPURCHASE)
borrow funds from the
RBI to meet the gap
between the demands
they are facing for
money (loans) and how
much they have on
hand to lend.
RATE
• If the RBI wants to
make it more expensive
for the banks to borrow
money, it increases the
repo rate; similarly, if it
wants to make it
cheaper for banks to
borrow money, it
reduces the repo rate.
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12.
• This is the exact opposite of repo rate.
• The rate at which RBI borrows money from the
banks (or banks lend money to the RBI) is
termed the reverse repo rate.
• The RBI uses this tool when it feels there is too
REPO RATE
much money floating in the banking system.
• If the reverse repo rate is increased, it means
REVERSE
the RBI will borrow money from the bank and
offer them a lucrative rate of interest. As a
result, banks would prefer to keep their money
with the RBI (which is absolutely risk free)
instead of lending it out (this option comes
with a certain amount of risk).
• Consequently, banks would have lesser funds to
lend to their customers. This helps stem the
flow of excess money into the economy.
• Reverse repo rate signifies the rate at which the
central bank absorbs liquidity from the
banks, while repo signifies the rate at which
liquidity is injected.
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13.
• Also called the cash reserve ratio, refers to a portion of
deposits (as cash) which banks have to keep/maintain with
RESERVE
the RBI.
RATIO
CASH
• This serves two purposes. It ensures that a portion of bank
deposits is totally risk-free and secondly it enables that RBI
control liquidity in the system, and thereby, inflation by
tying their hands in lending money.
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14.
• Banks are required
LIQUIDITY RATIO to invest a portion of
their deposits in
government
STATUTORY
securities as a part of
their statutory
liquidity ratio (SLR)
requirements. What
SLR does is again
restrict the bank’s
leverage in pumping
more money into the
economy.
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15.
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16.
Elements of KYC
A. Customer Acceptance
Policy;
B. Customer Identification
Procedures;
C. Monitoring of
Transactions; and
D. Risk Management.
• KYC guidelines should be observed by the bank.
• 100% verification of accounts opened should be done.
• CIF (Customer Information file) should be obtained as a part of KYC compliance
guidelines & duly fed in the system while opening accounts
• Whether system generated “Letter of thanks” should be being sent to introducers
and account holders in newly opened accounts & proper record thereof is maintained.
• S.T.R.(Suspicious Transaction report) should be submitted by branch to Zonal office
whenever detected.
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17.
Money Laundering
Money laundering means acquiring, owning, possessing or transferring any
proceeds (or money) of crime or knowingly entering into any transaction related to
proceeds of the crime either directly or indirectly or concealing or aiding in the
concealment of the proceeds or gains of crime, within or outside India. It is a process
for conversion of money obtained illegally to appear to have originated from legitimate
sources.
 Placement - the physical disposal of cash proceeds derived from illegal
activity.
 Layering - separating illicit proceeds from their source by creating
complex layers of financial transactions designed to disguise the audit trail
and provide anonymity.
 Integration - the provision of apparent legitimacy to criminally derived
wealth. If the layering process has succeeded, integration schemes place
Prevention of Money-Launderinginto the economy in such aof the Nature and
the laundered proceeds back (Maintenance of Records way that they re-
Value of the financial system appearing to Manner of Maintaining and Time for
enter Transactions, the Procedure and be normal business funds.
Furnishing Information and Verification and Maintenance of Records of the
Identity of the Clients of the Banking Companies, Financial Institutions and
Intermediaries) Rules, 2005 as amended from time to time. Non-compliance
with the guidelines would attract penal provisions of the Acts concerned or
Rules made there under.
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18.
Non Performing Assets
NPA is a classification used by financial institutions that refer to loans that are in jeopardy of
default. Once the borrower has failed to make interest or principal payments for 90 days the
loan is considered to be a non-performing asset.
Assets Classification
Assets which does not disclose any problem & do not carry more than
a) Standard normal risk
b) Sub-Standard Which remains non-performing for less than or equal to twelve months
-secured exposure 15%
-unsecured exposure 25%
-unsecured exposure i.r.f infrastructure
a/c 20%
Which remains non-performing for more than or equal to twelve
c) Doubtful months
-unsecured portion 100%
-secured portion
upto one year (secured portion) 25%
>one year but <3 year 40%
>3 years 100%
d)loss assests 100%
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19.
Critical Monitoring Analysis
CMA means Critical Monitoring Analysis. This full
form of CMA is as given by Reserve Bank of India.
For arranging working capital finance information
about income, expenses, assets & liabilities is
required to be given in a specific format to the bank
by applicant. This specific format is referred to as
CMA Report / CMA Data. Audited P & L A/c &
Balance Sheet of at least last 1 year, estimates of
current year & projections of next at least 2 years
are provided to bank by the applicant along with
Funds Flow Statement, Ratio Analysis and
Comparative Statement of Current Assets & Current
Liabilities & Statement of Maximum Permissible
Bank Finance. Number of years for which data is
required may vary from bank to bank. Even after
getting the finance, such data is required to be
submitted to the bank periodically.
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20.
Bill Discounting
Bill discounting is a major activity with some of the smaller Banks. Under this type of
lending, Bank takes the bill drawn by borrower on his (borrower's) customer and pay him
immediately deducting some amount as discount/commission. The Bank then presents the
Bill to the borrower's customer on the due date of the Bill and collects the total amount. If
the bill is delayed, the borrower or his customer pays the Bank a pre-determined interest
depending upon the terms of transaction.
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21.
Spread
Lending money is one of the two major activities of any Bank. Banks accept deposit from
public for safe-keeping and pay interest to them. They then lend this money to earn interest
on this money. In a way, the Banks act as intermediaries between the people who have the
money to lend and those who have the need for money to carry out business transactions.
The difference between the rate at which the interest is paid on deposits and is charged on
loans, is called the "spread".
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22.
Letter of Credit
A letter of credit is a document issued
by a financial institution, or a similar
party, assuring payment to a seller of
goods and/or services. The seller then
seeks reimbursement from the buyer
or from the buyer's bank. The
document serves essentially as a
guarantee to the seller that it will be
paid by the issuer of the letter of credit
regardless of whether the buyer
ultimately fails to pay. In this way, the
risk that the buyer will fail to pay is
transferred from the seller to the letter
of credit's issuer. The letter of credit
also insures that all the agreed upon
standards and quality of goods are met
by the supplier.
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23.
BANK GUARANTEE is an irrevocable commitment by a bank
to pay a specified sum of money in the event that the party
requesting the guarantee fails to perform the promise or
discharge the liability to a third person in case of the
requestors default
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24.
Difference between bank guarantee and letter of credit
A bank guarantee and a letter of credit are similar in
many ways but they're two different things. Letters
of credit ensure that a transaction proceeds as
planned, while bank guarantees reduce the loss if
the transaction doesn't go as planned.
A letter of credit is an obligation taken on by a bank
to make a payment once certain criteria are met.
Once these terms are completed and confirmed, the
bank will transfer the funds. This ensures the
payment will be made as long as the services are
performed.
A bank guarantee, like a line of credit, guarantees a
sum of money to a beneficiary. Unlike a line of credit,
the sum is only paid if the opposing party does not
fulfill the stipulated obligations under the contract.
This can be used to essentially insure a buyer or
seller from loss or damage due to nonperformance
by the other party in a contract
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25.
Counter Guarantee: A
counter guarantee is a
guarantee taken by the
bank from the bank's
customer which ensures
that the bank's customer is
liable for any expenses
including costs of
attorney, any interest on
delayed payment, taxes and
other levies in case of
invocation of the bank
guarantee. It is a sort of
security for the bank. It is
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always a good practice for a

26.
Nostro Account
A nostro is our account of our money, held by you
For example the account held by state bank of India
with bank of America in New York is a Nostro account of
the state bank of India.
Vostro Account
A vostro is our account of your money, held by us
For example if bank of America maintains an account
with state bank of India it will be a vostro account for
state bank of India.
Both Nostro and Vostro account are normally used in the context of foreign
exchange transactions done by the banks or during currency settlement.
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27.
 Provides a range of credit risk insurance covers to exporters against loss
in export of goods and services
 Provides Overseas Investment Insurance to Indian companies
investing in joint ventures abroad in the form of equity or loan
 Offers guarantees to banks and financial institutions to enable exporters
to obtain better facilities from them
How does it help exporters?
 Offers insurance protection to exporters against payment risks
 Provides guidance in export-related activities
 Makes available information on different countries with its own credit ratings
 Assists exporters in recovering bad debts
 Provides information on credit-worthiness of overseas buyers
 Makes it easy to obtain export finance from banks/financial institutions
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28.
National Electronic funds transfer
(NEFT)
It is the electronic
exchange, transfer of money from
one account to another, either
within a single financial institution
or across multiple
institutions, through computer-
based systems.
The term covers a number of
different concepts:
 Cardholder-initiated
transactions, using a payment
card such as a credit or debit card
 Direct Deposit payment initiated by
the payer
 Direct Debit payments, sometimes
called electronic checks, Prepared by CA SHWETA CHAUDHARY
1/24/2013
for which 28

29.
Real time gross settlement systems
(RTGS) are funds transfer systems
where transfer of money or
securities takes place from one bank to
another on a "real time" and on "gross"
basis. This "electronic" payment
system is normally maintained or
controlled by the Central Bank of a
country. There is no physical exchange
of money; the Central Bank makes
adjustments in the electronic accounts
of Bank A and Bank The RTGS system
is suited for low-volume, high-value
transactions. It lowers settlement risk,
besides giving an accurate picture of
an institution's account at any point of
time.
Settlement in "real time" means
payment transaction is not subjected to
any waiting period. The transactions
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are settled as soon as they 29 are

30.
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