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MBN F658 - BANKING
MANAGEMENT
SEMESTER III
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MBN F658 - BANKING
MANAGEMENT
SEMESTER III
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Introduction to Banking
Banking means the accepting, for the purpose of
lending or investment, of deposits of money from
the public, repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise.
Banking Company means any company which
transacts the business of banking.
A bank is a financial institution that serves as a
financial intermediary. Banking Management provides a comprehensive
knowledge about the managerial skills required for
effectively managing the banking sector and the
related industries.
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Types of Banks
Banking institutions of a country can beclassified in to the following types on the basis
of their functions:
1) Central Bank
2) Commercial Banks
3) Industrial Banks
4) Exchange Banks
5) Co-operative Banks
6) Agriculture Land Mortgage Banks
7) Indigenous Banks
8) Regional Rural Banks
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Role of Banks
Banks play a vital role in modern economy
- by accepting deposits the banks promote the habit ofsaving among the people.
- the banks encourage industrial innovations and
business expansion through funds provided toentrepreneurs
- the banks exercise considerable influence on the levelof economic activity through their ability to create ormanufacture money in the economy.
- through their lending policy the banks can influencethe course and direction of economic activity.
- the various utility functions performed by the banksare of great economic significance for the economy.
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Role of Banks for a Developing Country
Capital Formation
Monetisation
Innovations Finance for priority sector
Provision for Long-Term Finance
Cheap Money Policy
Need for a Sound Banking System
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Functions of Banks
The fundamental functions of a bank are : Acceptance of deposits
- Savings Bank Account
- Current Account
- Fixed Deposit Account
Advancing of Loans
- Making Ordinary Loans- Cash Credit
- Overdraft, Discount of BOE
Promote the use of Cheques
Agency functions of the Bank- Transfer of funds
- Collecting Customers funds
- Purchase and Sale of Shares and Securities
- Collecting Dividends on the Shares of the Customers
- Payment of Premium
- The bank acts as a Trustee and the Executor
- Income Tax Consultant
- Act as Correspondent
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Functions of Banks
Purchase and Sale of Foreign Exchange
Financing Internal and Foreign Trade
Other Functions of the Bank
- Safe Custody of Valuable Goods- Issuing Travellers Cheque
- Giving Information about its Customers
- Collection of Statistics
- Underwriting of Company Debentures
- Accepting Bills of Exchange on behalf of Customers
- Giving advice on Financial Matters
Creation of Credit
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Banking Structure
The different types of Banking Structure are :
Branch Banking Unit Banking
Group Banking
Chain Banking
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Banking Structure
Branch Banking a typical commercial bank in most countries having anetwork of branches scattered all over the country.Advantages
- Economies of large scale operation
- Economy of Reserves
- Remittance Facilities
- Spreading of Risks- Increasing Mobility of Capital
- Clearing of Cheques made easy
- Service of Powerful and affluent banks
- Good Social relation with Customers
Disadvantages
- Need to consult the Head Office- Transfer of Managers
- Lack of Effective Control
- Economic Repurcussions of Failure
- Lack of Initiative and Personal touch
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Banking Structure
U
nit Bankingsystem of banking in which the banks operations
are in general confined to a single office.
Advantages:
- Catering of Local needs
- Knowledge of local Industries and Conditions
- Effective Management and Supervision
- Elimination of Bad Debts
Disadvantages:
- Limited Financial Resources and Vulnerability to Failure
- Limited scope for offering Customer services
- Difficulty in assessing Loan Applications
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Banking Structure
Group Banking is a legal form of bank organisation in which two ormore independently incorporated banks are controlled by a HoldingCompany.
A holding company is a corporate body which owns stock in other corporation.
There are no restrictions as regards the types of banks which may belong tothe group these may be either unit banks or branch banks.
Advantages:
- Centralised management and control of group units by a holding company.
- Chief merit of this banking system lies in economising in the maintenance of
large cash reserves.- all members of the group can pool their resources to finance largeburrowers.
- advantages of economies of scale
- better and extensive customer services
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Banking Structure
Disadvantages:- it is difficult to exercise a direct control over the member units
- the failure of one member of the group affects all others.
- it is difficult to supervise all units simultaneouly and the holding
company may utilise the surplus reserves of the group for furthering its
own economic interests.
- the group banking system lends to monopoly thereby restricting
efficiency which grows as a consequence of healthy competition among
banks.
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Banking Structure
Chain Banking is a variant of Group Banking System. Thissystem of banking is similar or group banking except that theholding company technique is not used.
- the main feature of the chain banking is the control of two ormore banking companies by a single person, by members of thesame family, by the same group of persons through ownership of
stock, through common membership on the board of directors ofthe banks.
- chain banking system are small confined to two or threebanks, although some chains involve substantially large number ofbanks.
- the extent of centralisation shows wide variations.
- the chain banking has also developed as a substitute forbranch banking and has more or less the same advantages anddisadvantages of group banking system.
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RBI act, 1934
The objective of The Reserve Bank of India Act, 1934 is toregulate the issue of bank notes and keeping of reserve with a
view to secure monetary stability in India and generally to
operate the currency and credit system of the country to its
advantage.
In 1935, the Reserve Bank of India was established under the
Reserve Bank of India Act as the central bank of India.
the Reserve Bank of India was nationalized in 1949 and given
wide powers in the area of bank supervision through the
Banking Companies Act As a central Bank, the main function of RBI is to regulate the
monetary mechanism comprising of the currency, banking
and credit systems of the country.
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Functions of the RBI
Monopoly of Note issue
Monetary policy Bank rate, Open Market
operations, Variable reserve ratio method Bankers Bank
Lender of the Last Resort
Banker to the Government Exchange Control
Development Role
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RBI
Legal RequirementsCash Reserve Ratio (CRR) - Banks in India are required statutorily
to hold cash reserves, called cash reserve ratio (CRR), with the
RBI. Increase/decrease in CRR is used by the RBI as an
instrument of monetary control.Statutory Liquidity Ratio (SLR) - Banks are required under law to
invest prescribed minimum proportions of their total
assets/liabilities in government securities and other approved
securities.
PrimeLending Rate (PLR) - The interest rate charged by banks to
their largest, most secure, and most creditworthy customers
on short-term loans.
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Banking Regulation Act, 1949
The Banking Regulation Act was passed as the Banking
Companies Act 1949 and came into force wef 16.3.49.
Subsequently it was changed to Banking Regulations Act 1949
wef 01.03.66.
Objectives of the Banking Regulation Act broadly are:
to safeguard the interest of depositors;
to develop banking institutions on sound lines; and
to attune the monetary and credit system to the largerinterests and priorities of the nation.
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Modern Banking in India As a rule, banking systems are adopted to the
structure and needs of the particular economy theyexist in.
The concept of banking has undergone a dynamic
change in keeping with the need to achieve rapid
socio-economic progress.
In such way Indian Banking System has several
outstanding achievements to its credits,
its reach its network
in terms of no. of branches
close association of banks with the countrys
development efforts
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Breakthroughs in Indian Banking
Industry
From Security Orientation to Purpose Orientation
Correction of Regional Imbalances
Development of Banking habit
Attitudinal change in the part of Banks
Emergence of Retail Banking
Breakthru in Virtual Banking
Move towards Universal banking
From Money Lending to Development Banking
Establishment of Specialised branches
Customer Focus
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E- Banking
Internet banking (or E-banking) means any user with apersonal computer and a browser can get connected to his
bank -s website to perform any of the virtual banking
functions.
Internet banking in indiaThe Reserve Bank of India constituted a working group on
Internet Banking. The group divided the internet banking
products in India into 3 types based on the levels of access
granted. They are:
i) Information Only System: General purpose information like
interest rates, branch location, bank products and their
features, loan and deposit calculations are provided in the
banks website.
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E - Banking
ii) ElectronicInformation Transfer System: The systemprovides customer- specific information in the form ofaccount balances, transaction details, and statement of
accounts.
iii) Fully Electronic Transactional System: This systemallows bi-directional capabilities.
Automated Teller Machine (ATM)
Credit Cards/Debit Cards
Smart Card
Bill payment serviceFund transfer
Credit card customers
Investing through Internet banking
Recharging your prepaid phone
Shopping
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Core Banking
Corebanking is a general term used to describe theservices provided by a group of networked bank
branches. Bank customers may access their funds
and other simple transactions from any of the
member branch offices. Core Banking is normally defined as the business
conducted by a banking institution with its retail and
small business customers.
Banks treat the retail customers as their core bankingcustomers.
Larger businesses are managed via the corporate
banking division of the institution.
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Core Banking
Most banks use core banking applications to supporttheir operations where CORE stands for "centralized
online real-time exchange".
The bank's branches access applications from
centralized datacenters.
Normal core banking functions will include deposit
accounts, loans, mortgages and payments.
Banks make these services available across multiplechannels like ATMs, Internet banking, and branches.
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Reforms in Banking SystemsVarious reform measures introduced in India have indeed
strengthened the Indian banking system in preparation for the
fresh global challenges ahead.
The Narasimham Committee had proposed wide-ranging
reforms for:
1. Improving the financial viability of the banks;
2. Improving the macroeconomic policy framework for banks;
3. Increasing their autonomy from government directions;
4. Allowing a greater entry to the private sector in banking;
5. Liberalizing the capital markets;
6. Improvement in the financial health and competitive position
of the banks;
7. Furthering operational flexibility and competition among the
financial institutions.
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Reforms in Banking Systems
A number of reforms initiatives have been taken to removeor minimize the distortions impinging upon the efficient and
profitable functioning of banks. These include the followings:
1. Reduction in SLR & CRR
2. Transparent guidelines or norms for entry and exit of private
sector banks
3. Public sector banks have been allowed for direct access to
capital markets
4. The regulated interest rates have been rationalized and
simplified.
5. Branch licensing policy has been liberalized
6. A board for Financial Bank Supervision has been established to
strengthen the supervisory system of the RBI.
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Reforms in Banking Systems
The second report was submitted on 23rd April, 1998,
which sets the pace for the second generation of banking
sector reforms. These include:
1. Merge strong banks, close weak banks unviable ones
2. Two or three banks with international orientation, 8 to 10national banks and a large number of local banks
3. Increase Capital Adequacy to match enhanced banking risk
4. Rationalize branches and staff, review recruitment
5. De-politicize Bank Boards under RBI supervision
6. Integrate NBFCs activities with banks.
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Best Practiced Code
RBI with other 11 banks in India set up the Banking codes and
Standards Board in Feb 2006 to monitor and ensure that
banking codes and standards voluntarily adopted by banks are
adhered to, while providing service to customers.
Code of Banks commitment to Customers came in to
existence in July 2006.
The individual customer has been provided with a charter of
rights which he can enforce against his bank.
The code sets minimum standards of banking practices for
banks to follow and emphasize transparency in bank dealings
with its customers.
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Best Practiced Code
Some features of Code:
Documentation of Banks fees and service charges in form of a
tariff schedule.
Banks to set a cheque collection policy, compensation policyand a security repossession policy.
To provide full information to the customer before a product
or service is sold to him.
Banks should not rely on implicit consent from customers. Provisions of code are applicable to third party products sold
thru bank branches.
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Corporate governance in Banks
The Corporate Governance refers to conducting the affairs of
a banking organisation in such a manner that gives a fair deal
to all the stake holders i.e. shareholders, bank customers,
regulatory authority, society at large, employees etc.
The system of corporate governance is important for banks in
India because, majority of the banks are in public sector,
where they are not only competing with one another but with
other players in the banking system as well as in financialservices system including Financial Institutions, Mutual Funds
and other intermediaries, in a new environment of
liberalization and globalization.
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Corporate governance in Banks
The concept of corporate governance, which emerged as a
response to corporate failures and widespread dissatisfaction
with the way many corporates function, has become one of
the wide and deep discussions across the globe recently.
It is about the value orientation of the organisation, ethicalnorms for its performance, the direction of development and
social accomplishment of the organisation and the visibility of
its performance and practices.
Corporate Governance is different from day to day
management of a bank, which is the basic responsibility of the
operating management.
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Corporate governance in Banks
Corporate governance covers a variety of aspects such asprotection of shareholders' rights, enhancing the
shareholders' value, issues concerning the composition and
role of the Board of directors, deciding the disclosure
requirements, prescribing the accounting systems, putting in
place effective monitoring mechanism etc.
There are a number of parameters on the basis of which the
level of corporate governance can be judged for a banking
organisation. It includes the suggested model code for best
practices, preferred internal system, recommended disclosurerequirements including the level of transparency, role of
Board of directors and committees, reporting system to the
Board of directors, policies formulated by the Board and
monitoring of performance.
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Corporate governance in Banks
Need for Corporate Governance in Banks:o Since banks are important players in the Indian financial
system, special focus on the Corporate Governance in the
banking sector becomes critical.
o The Reserve Bank of India, as a regulator, has the responsibilityon the nature of Corporate Governance in the banking sector.
o To the extent that banks have systemic implications, Corporate
Governance in the banks is of critical importance.
o Given the dominance of public ownership in the banking
system in India, corporate practices in the banking sector
would also set the standards for Corporate Governance in the
private sector.
o With a view to reducing the possible fiscal burden of
recapitalising the PSBs
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Prerequisites for Good Governance
There are some pre-requisites for goodcorporate governance. They are:
o A proper system consisting of clearly defined and adequate
structure of roles, authority and responsibility.
o Vision, principles and norms which indicate development path,normative considerations and guidelines and norms for
performance.
o A proper system for guiding, monitoring, reporting and control.
The success of corporate governance lies in minimising the
regulatory norms and adoption of voluntary codes.
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Universal Banking
Universal banking' refers to those banks that offer a
wide range of financial services, beyond the
commercial banking functions like Mutual Funds,
Merchant Banking, Factoring, Credit Cards, Retailloans, Housing Finance, Auto loans, Investment
banking, Insurance etc.
A Universal Banking is a superstore for financial
products under one roof.
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Narrow Banking
Narrow banking is a proposed type of bank called a narrowbank also called a safe bank.
System of banking under which a bank places its funds in risk-
free assets with maturity period matching its liability maturity
profile, so that there is no problem relating to asset liability
mismatch and the quality of assets remains intact without
leading to emergence of sub-standard assets.
The concept is practically being implemented by the Indian
banking system partly, as a large part of the deposits
mobilised (i.e. more than 46%) by the banks, has beendeployed in Govt. securities (against a prescription of 25% in
the form of SLR) as it provides a safe avenue of investment
but at a very low return.
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Narrow Banking
Key attributes ofnarrow banks include -
1. no lending of deposits (reducing a key risk materially but
constraining return on investment for depositors andshareholders alike)
2. extremely high liquidity (typically short-term assets e.g.
bonds)
3. extremely high asset security (typically government bonds)
4. lower interest rates paid to depositors (as a function of the
no lending and other constraints)
5. possibly specific regulatory framework with higher level of
scrutiny and operational/investing restrictions
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Investment Banking
An investment bank is a financial institution that assists
individuals, corporations and governments in raising capital by
underwriting and/or acting as the client's agent in the
issuance of securities.
An investment bank may also assist companies involved in
mergers and acquisitions, and provide ancillary services such
as market making, trading of derivatives, fixed income
instruments, foreign exchange, commodities, and equity
securities. Unlike commercial banks and retail banks, investment banks
do not take deposits.
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Investment Banking
There are two main lines of business in investment banking,
Trading securities for cash or for other securities or the
promotion of securities is the "sell side.
Dealing with pension funds, mutual funds, hedge funds, andthe investing public constitutes the "buy side".
Main activities
Investment banks offer services to both corporations issuing
securities and investors buying securities.
For corporations, investment bankers offer information on
when and how to place their to an investment bank's
reputation, and hence loss of business.
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Private Banking
Privatebanking is a term for banking, investment and other
financial services provided by banks to private individuals
investing sizable assets.
The term "private" refers to the customer service being
rendered on a more personal basis than in mass-market retail
banking, usually via dedicated bank advisers.
The word "private" also alludes to bank secrecy and
minimizing taxes through careful allocation of assets or by
hiding assets from the taxing authorities.
A high-level form of private banking (for the especially
affluent) is often referred to as wealth management.
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Private Banking
For wealth management purposes, HNWIs have accrued far
more wealth than the average person, and therefore have the
means to access a larger variety of conventional and
alternative investments.
For private banking services clients pay either based on the
number of transactions, the annual portfolio performance or
a "flat-fee", usually calculated as a yearly percentage of the
total investment amount.
Services include: protecting and growing assets in the present,providing specialized financing solutions, planning retirement
and passing wealth on to future generations.
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Private Sector Bank Guidelines
Private Sector Banks gained dominance after the economic
reforms in 1991.
It is general principle that greater financial depth, stability and
soundness contribute to economic growth.
But broadening and deepening the reach of banking is the
important factor for growth to be truly inclusive.
In spite of crossing such long steps in resource mobilization,
geographical and functional reach, financial viability,
profitability and competitiveness, vast segments ofpopulation, especially the underprivileged sections of society
have still no access to formal banking services.
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Private Sector Bank Guidelines
RBI is therefore taking into account granting licenses to alimited number of new banks.
A large number of banks would foster greater competition
and thereby reduce costs, and improve quality of service.
The objective of guidelines issued in january 1993 andsubsequently revised in January 2001 was to instill greater
competition in banking system to increase productivity and
efficiency.
Formation of Banks
Capital
Operations
Opening of Branches
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Know Your Customer
Know Your Customer (KYC) is the due diligence and bankregulation that financial institutions and other regulated
companies must perform to identify their clients and
ascertain relevant information pertinent to doing financial
business with them.
Know your customer policies are becoming increasingly
important globally to prevent identity theft fraud, money
laundering and terrorist financing.
A key aspect of KYC controls is to monitor transactions of a
customer against their recorded profile, history on thecustomers account(s) and with peers.
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Know Your Customer
The objective of KYC guidelines is to prevent banks from beingused, intentionally or unintentionally, by criminal elements for
money laundering activities.
Banks should frame their KYC policies incorporating the
following four key elements:
Customer Acceptance Policy
Customer Identification Procedures
Monitoring of Transactions
Risk management
Know Your Customer processes are also employed by regular
companies of all sizes, for the purpose of ensuring their
proposed agents', consultants' or distributors' anti-bribery
compliance.
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Anti Money Laundering
Money laundering is the practice of disguising the
origins of illegally-obtained money.
Money laundering often occurs in three steps:
cash is introduced into the financial system by some
means (placement)
the second involves carrying out complex financial
transactions in order to camouflage the illegal source
(layering)
the final step entails acquiring wealth generated from the
transactions of the illicit funds (integration).
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Anti Money Laundering
Anti money laundering (AML) is a term mainly used in the
financial and legal industries to describe the legal controls
that require financial institutions and other regulated entities
to prevent or report money laundering activities.
Today, most financial institutions globally, and many non-
financial institutions, are required to identify and report
transactions of a suspicious nature to the financial intelligence
unit in the respective country.
A bank must perform due diligence by verifying a customer's
identity and monitor transactions for suspicious activity.
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Role of Bank as Financial Intermediary and
Constituent of Payment System
A financial intermediary is a financial institution that
connects surplus and deficit agents.
Financial intermediaries provide 3 major functions:
Maturity transformation
Risk transformation
Convenience denomination
There are 2 essential advantages from using financial
intermediaries:1. Cost advantage
2. Market failure protection
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Role of Bank as Financial Intermediary and
Constituent of Payment System
Banks enjoy the benefit of being the only institutions through
which the money can be transferred from one person to
another and from one place to another.
Therefore, banks become the constituent of the payment
system of the economy.
Banks, because of their reach, trust of the people, and other
roles that they play, have enabled them to emerge as the
largest financial intermediaries of the world.
Banks are able to lend a major portion of their deposits, and
play the role of a financial intermediary and constitute the
payment system because of the understanding that banks will
honor the commitments that they have made to the people.
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Bank as Financial Service Provider
Financial services refer to services provided by the finance
industry.
The finance industry encompasses a broad range of
organizations that deal with the management of money.
Financial Service providers are those who provide financial
services to customers.
Among these organizations are credit unions, banks, credit
card companies, insurance companies, consumer finance
companies, stock brokerages, investment funds and some
government sponsored enterprises.
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Banking of Business Mathematics
Business mathematics is mathematics used
by commercial enterprises to record and manage
business operations.
Commercial organizations use mathematicsin accounting, inventory management, marketing,
sales forecasting, and financial analysis.
The practical applications typically include checking
accounts, price discounts, markups and
markdowns, payroll calculations, simple and
compound interest, consumer and business credit,
and mortgages.
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Banking of Business Mathematics
WHY MATHEMATICS REQUIRED IN BANKING
To calculate interest on deposits and advances
To calculated yield on bonds in which banks have to
invest substantial amount.
To calculate depreciation
To decide on buying/selling rates of foreign
currenciesTo calculate minimum capital required by the bank
To appraise loan proposals
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Money Market Operations
Money market is a place where short term surplus investible
funds at the disposal of many financial institutions and
individuals are borrowed by various commercial institutions
and also the government inself who are in need.
Money Market is a market for lending and borrowing of short
term loans.
Not dealing in money but in trade bills, promissory notes and
treasury bills which are drawn for short periods.
Funds can be borrowed for a day, week, month or 3 to 6months against different types of securities such as BOE,
Bonds, etc.
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Money Market Operations
Dealers in Money Market
Consists of the government, commercial and
industrial concerns, stock exchange brokers, dealer in
govt. securities, merchants, commercial banks and
central bank, financial and insurance companies.
Borrowers
Traders, brokers, speculators, manufacturers, govt.
who need funds to meet their current requirement.Institutions
Central Bank, Commercial Banks, Institutional
investors, private individuals
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Money Market Operations
Composition of Money Market
Call Money Market
Collateral Loan Market
Acceptance Market
Bill Market
Discount Market
Functions of Money Market
Outlets to commercial banks, non-bank finance concerns,
investors
Short term funds to businessmen, industrialist, traders to
meet day to day requirements
Short term funds to govt. and govt. agencies
Medium which have control on the creation of credit
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Money Market OperationsCharacteristics of a developed Money Market:
Highly organised commercial banking system
Presence of a central bank
Availability of proper credit instruments
Mobility of funds
Existence of sub markets
No. of dealers in sub market
Availability of ample resources, frequent transactions
Other conditioning factors:
Habits of commercial practices in the community
Industrial development and corporate organization
Development of related markets
Monetary policy of the govt.
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Profitability of Banks
How does a bank make profit?
Bank profits are derived from the spread between the rate
they pay for funds and the rate they receive from borrowers.
Basically, when the interest that a bank earns from loans isgreater than the interest it must pay on deposits, it generates
a positive interest spread or net interest income.
The size of this spread is a major determinant of the profit
generated by a bank.
Banks face expenses (salaries, rent, etc.)
other sources of income are fees and services.
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Negotiable Instrument Act
A negotiable instrument is one which represents contractual
rights that are generally accepted as money.
It is written contract evidencing a right to receive money and
it may be transferred by negotiation.
Accr. To NI Act, 1881 A Negotiable Instrument means a
promissory note, BOE, Cheque payable either to order or to
bearer.
Negotiable Instruments share warrants, dividends, demand
draft, treasury bills, etc.
Non Negotiable Instruments bill of lading, LC, deposit
receipts, share or stock certificates, etc.
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Negotiable Instrument Act
Essential features ofNegotiableInstruments: Can be transferred from one person to another like cash
A bonafide transferee for value of NI gets complete,
independent title
Certain presumptions apply to all NIs. (Example Consideration)
These instruments are in writing and signed by the parties,
they are used as evidence of the fact of indebtedness because
they have special rules of evidence.
These instruments relate to payment of certain money in legal
tender.
These instruments can be transferred in infinitum till they are
at maturity.
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Collection of Cheques A chequeis a document/instrument (usually a piece of paper)
that orders a payment of money from a bank account.
Cheques are a type of bill of exchange and were developed as
a way to make payments without the need to carry around
large amounts of gold and silver.
Technically, a cheque is a negotiable instrument instructing afinancial institution to pay a specific amount of a specific
currency from a specified transactional account held in the
drawer's name with that institution.
Any cheque crossed with two parallel lines means that thecheque can only be deposited directly into an account with a
bank and cannot be immediately cashed by a bank over the
counter.
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Collection of ChequesCheques can be of two types:-
1. Open or an uncrossed cheque - An open cheque is a chequewhich is payable at the counter of the drawee bank.
2. Crossed cheque - A crossed cheque is a cheque which is
payable only through a collecting banker.
Types of Crossing General Crossing
Special Crossing
Account Payee or Restrictive Crossing
'Not Negotiable' Crossing
-A bank's failure to comply with the crossings amounts to a
breach of contract with its customer. The bank may not be
able to debit the drawer's account and may be liable to the
true owner for his loss.
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Collection of ChequesCheque collection policy of the Bank is a reflection of on-
going efforts to provide better service to customers and sethigher standards for performance.
Local Cheques
All cheques and other Negotiable Instruments payable locally
would be presented through the clearing system prevailing atthe centre.
Bank branches situated at centres where no clearing house
exists, would present local cheques on drawee banks across
the counter and it would be the banks endeavour to credit
the proceeds at the earliest.
For local cheques presented in clearing credit will be afforded
as on the date of settlement of funds in clearing and the
account holder will be allowed to withdraw funds as per
return clearing norms in vogue.
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Collection of Cheques
Outstation Cheques Cheques drawn on other banks at outstation centres will
normally be collected through banks branches at those
centres.
Where the bank does not have a branch of its own, the
instrument would be directly sent for collection to the drawee
bank or collected through a correspondent bank.
Cheques presented at any of the four major Metro Centres
(New Delhi, Mumbai, Kolkata and Chennai) and payable at any
of the other three centres : Maximum period of 7 days.
Metro Centres and State Capitals (other than those of North
Eastern States and Sikkim): Maximum period of 10 days.
In all other Centres : Maximum period of 14 days.
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Collection of Cheques
Cheques payable in Foreign Countries Cheques payable at foreign centres where the bank has
branch operations (or banking operations through a
subsidiary, etc.) will be collected through that office.
Cheques drawn on foreign banks at centres where the bank or
its correspondents do not have direct presence will be sent
direct to the drawee bank with instructions to credit proceeds
to the respective Nostro Account of the bank maintained with
one of the correspondent banks.
Such instruments are accepted for collection on the best ofefforts basis. Bank would give credit to the party on credit of
proceeds to the banks Nostro Account with the
correspondent bank after taking into account cooling periods
as applicable to the countries concerned.
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Dishonour of Cheques A dishonoured cheque cannot be redeemed for its value and
is worthless
The NI Act makes the drawer of cheque liable for penalties
in case of dishonour of cheques due to insufficiency of funds
or for the reason that it exceeds the arrangements made by
the drawer. The NI Act also contains sufficient safe guards to protect the
drawer of cheques by giving him an opportunity to make good
the payment of dishonoured Cheque when a demand is
made by the payee.
In case of dishonour, the main thrust of the amendment of NI
Act is to provide for a speedy and time bound
trial, punishment of 2 years and double the amount of the
cheque as fine.
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Dishonour of Cheques
Offenceunder theNIAct:
Offence under Section 138 of the N I Act shall be deemed
to have been committed, if the following conditions are
satisfied:
a) Cheque must have been drawn by a person(the drawer) infavour of a payee on his bank account for making payment
b) Such payment must be either in whole or partial discharge
of a legally enforceable debt
c) Cheque must have been returned by the Banker to the
payee or holder in due course due to insufficient balance in
the account of the drawer or it exceeds the
arrangement he had with the bank
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Dishonour of Cheques
Proviso requires fulfillment following additional
conditions:
a) Cheque must be presented within a period of 6 months
from the date of cheque or its validity period which ever is
earlier.
b) The payee or holder in due course must demand payment
of the cheque amount by written notice within 15 days of
receipt of notice
c) Such notice must be issued within 30 days from the date of
receipt of intimation of dishonour from bank andd) The drawer of cheque fails to pay demanded sum within 15
days from the date of receipt of the notice
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Bank Customer Relationship
Banker customer relationship,is just a special contract where a
person entrusts valuable items with another person with an
intention that such items shall be retrieved on demand from
the keeper by the person who so entrust.
It begins as soon as the acceptance of cash or a cheque for
collection on an understanding that relations will continue if
references are found to be satisfactory.
The relationship can be suspended or rescinded by (1) mutual
assent, (2) giving notice by one party to the other and (3)operation of law in as in the case of death, insanity,
insolvency, war, liquidation of the bank itself, etc.
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Bank Customer Relationship
The legal relationship between a banker and a customer is oftwo kinds,
1) The General or Primary relationship
- The general relationship between a banker and a customer
is that of a debtor and creditor.
- Thus the customer is the creditor who has the right of
demand on the money from the banker.As long as the
banker is keeping the customer items,the banker is indebted
to the customer.
- The terms and conditons governing the relationship should
not be leaked to a third party,particularly by the banker.Also
the items kept should not be released to a third party
without due authorisation by the customer.
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Bank Customer Relationship
2) Special or Subsidiary relationship
- The first special relationship between the banker and the
customer is that of an Agent and Principal, where the banker
performs a number of agency services for his customer by
charging a very nominal commission.- The next is that of Trustee and Beneficiary relationship that
arises when the banker accepts valuables or securities from
the customer for safe custody.
- This relationship gives the customer a right to claim any duesfrom his banker or recovering the debt due to him from the
bank when goes into liquidation.
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Bankers Obligation
Acceptance of deposit
Honouring of cheques
Maintenance of secrecy of the accounts Notice to be given in case of closure of
accounts
Payment of interest Furnishing statement
Providing services
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Right of Appropriation Lien is the right of the creditor to retain goods belonging to
the debtor until the amount due to the former is completely
discharged.
Bank can transfer money from the customers personal
account into a joint account, to cover a debt on an account
held jointly by the customer, without the permission of thecustomer.
If the account is overdrawn, the customer can choose how
any further money paid into the account is used (for example
to pay mortgage or rent). This is called Right of appropriation.
The customer need to write to the bank with new instructions
each time he makes a deposit.
Under common law customer have a right of appropriation
over his own money and money he pays to another.
Different types of Customers
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Different types of Customers- Lunatics
- Drunkards- Undischarged Bankrupts
- Minors
- Married Woman
- Agents
- Partnership
- Joint Stock Companies
- Local Authorities
- Trust Accounts
- Unincorporated Bodies
- Joint Accounts
- Joint Hindu Families
Ch C itt R t
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Chore Committee Reports Financing of working capital had always been an exclusive
domain of commercial banks. Projects promoted by technically qualified entrepreneurs with
no tangible security to offer found it difficult to raise finance
for the working capital required by them from banks.
Small sector and other segments of priority sector were to be
the major beneficiary of nationalisation and were preferred
claimants of credit.
The factor which called for reforms was the inbuilt weakness
in the cash credit system linked with emphasis on security.
A major part of credit limits sanctioned by the bank remainedunutilised and there was a strong tendency within the banks
to oversell the credit.
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Chore Committee Reports In 1973 when a sudden demand on bank credit was made due
to unprecedented rate of inflation and the banks had toarbitrarily freeze the credit limits of their borrowers.
In view of such a situation obtaining at that time, Reserve
Bank of India constituted a 'Study Group' with Shri Prakash
Tandon as Chairman in July, 1974 to frame necessary
guidelines on bank credit with the following terms of
reference :
To suggest guidelines for commercial banks to follow up and
supervise credit from the point of view of ensuring proper
end-use of funds and keeping a watch on the safety of theadvances and to suggest the type of operational data and
other information that may be obtained by banks periodically
from such borrowers and by the, Reserve Bank of India from
the lending banks,
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Chore Committee Reports
To make recommendations for obtaining periodical forecastsfrom borrowers of (a) business/production plans, and (b)
credit needs,
To make suggestions for prescribing inventory norms for
different industries both in the private and public sectors and
indicate the broad criteria for deviating from these norms,
To suggest criteria regarding satisfactory capital structure and
sound financial basis in relation to borrowings,
To make recommendations regarding the sources for financing
the minimum working capital requirements,
To make recommendations as to whether the existing pattern
of financing working capital requirements of cash
credit/overdraft system etc., requires to be modified, if so, to
suggest suitable modifications, and
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Chore Committee Reports
To make recommendations on any other related matter as the
Group may consider relevant to the subject of enquiry or any
other allied matter which may be specifically referred to it by
the Reserve Bank of India.
Based upon these terms of reference the Group attempted to
identify the various constituents of working capital that could
be financed by the banks and suggested norms for build up of
inventory. Far reaching recommendations on the style of
lending and improvement in the present system of CashCredit were also made. These recommendations were mostly
accepted by Reserve Bank and were referred to banks for
implementation in late 1975. Many modifications have since
been suggested by 'Chore Committee'.
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Chore Committee Reports
The quality of lending improved considerably but the
cash credit system continued to pose few difficulties.
Bifurcation of working capital limit in two parts as
demand loan and a fluctuating cash creditcomponent, as suggested by Tandon Group, was not
done by many banks.
Reserve Bank to review the system of cash credit in
all its aspects and for this purpose a 'Working Group'headed by Sh. K. B. Chore was appointed in 1979.
Ch C i R
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Chore Committee ReportsThe terms of reference to the 'Group' were as follows:
To review the operation of cash credit system in recent years,particularly with reference to the gap between sanctioned
credit limits and the extent of their utilisation;
In the light of the review, to suggest:
(a) modifications in the system with a view to making the systemmore amenable to rational management of funds by
commercial banks, and/or
(b) alternative types of credit facilities, which would ensure
greater credit discipline and also enable banks to relate creditlimits to increases in output or other productive activities, and
To make recommendations on any other related matter as the
'Group' may consider germane to the subject.
The 'Group' gave its recommendations in 1979.
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Chore Committee Reports
Important recommendations which are accepted
by Reserve Bank and have a direct bearing on credit
limits of the borrowers are
No Structural Change-Continuation of Cash Credit, Loan andBills Facilities
Review of Borrowal Accounts
Bifurcation of Cash Credit Limit
Application of 2nd Method of Lending Working Capital Term Loan
'Peak Level' and 'Normal Non-Peak Level' Limits
(Contd..)
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Chore Committee Reports
Adhoc or Temporary Limits
Fixation of Operative Limits
Cash Credit Limits against Book Debts
Drawee Bill Scheme - Acceptance system, Bill discountingsystem
Non Submission of QIS statements
Slip Back in Current Ratio
Diversion of working capital finance
C di Ri k M
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Credit Risk Management Due to regulated environment, banks could not afford to take
risks.
But of late, banks are exposed to same competition and hence
are compeled to encounter various types of financial and non-
financial risks.
Risk is associated with uncertainty and reflected by way ofcharge on the fundamental/ basic i.e. in the case of business it
is the Capital, which is the cushion that protects the liability
holders of an institution.
Risk Management system is the pro-active action in thepresent for the future.
As per the Reserve Bank of India guidelines issued in Oct.
1999, there are three major types of risks encountered by the
banks and these are Credit Risk, Market Risk & Operational
Risk.
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Credit Risk Management
Credit Risk is the potential that a bank borrower/counterparty fails to meet the obligations on agreed terms.
Credit risk is inherent to the business of lending funds to the
operations linked closely to market risk variables.
The objective of credit risk management is to minimize the
risk and maximize banks risk adjusted rate of return by
assuming and maintaining credit exposure within the
acceptable parameters.
The process of credit risk management needs analysis of
uncertainty and analysis of the risks inherent in a creditproposal.
Credit risk consists of primarily two components, viz Quantity
of risk and the quality of risk.
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Credit Risk ManagementThe management of credit risk includes
a) measurement through credit rating/ scoring,
b) quantification through estimate of expected loan losses,
c) Pricing on a scientific basis and
d) Controlling through effective Loan Review Mechanism and
Portfolio Management.
Tools of Credit Risk Management
Exposure Ceilings
Review/Renewal
Risk Rating Model
Risk based scientific pricing
Portfolio Management
Loan Review Mec
hanism
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Corporate Debt Restructuring Inspite of their best efforts and intentions, sometimes
corporates find themselves in financial difficulty because offactors beyond their control and also due to certain internal
reasons.
For the revival of the corporates as well as for the safety of
the money lent by the banks and FIs, timely support throughrestructuring in genuine cases a Corporate Debt Restructuring
System was evolved, and detailed guidelines were issued vide
circular DBOD No. BP.BC. 15/21.04.114/2000-01 dated August
23, 2001 for implementation by banks.
The objective of the Corporate Debt Restructuring (CDR)
framework is to ensure timely and transparent mechanism for
restructuring the corporate debts of viable entities facing
problems, outside the purview of BIFR, DRT and other legal
proceedings, for the benefit of all concerned.
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Principles of Lending
There are certain precautions and principles
the banker needs to follow while granting
advances in relation to specific securities.
Liquidity
Profitability
Safety and Security
Purpose
Social Responsibility
Industrial and Geographical Diversification
Recommendations of the Talwar
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Recommendations of the Talwar
Committee It was observed that the problems peculiar for borrowers
arise due to difficulties in attitudinal adjustment of bank staff
to the new client and new environments and inadequate job
knowledge coupled with inexperience.
The committee made some recommendations with a view tobringing about a measure of improvement.
Each bank should immediately undertake a sample study of
the information and data sought for examination of small loan
proposals from clients in the priority sector.
The task of simplification and consolidation of documentsand
bringing them out in regional languages.
Banks must enjoin on their operating staff to call for
information data, etc., for examination of loan applicatons
Recommendations of the Talwar
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Recommendations of the Talwar
Committee
In considering loan applications for small amounts in prioritysectors, especially from small agriculturists, artisans, etc., loan
officers should be encouraged to adopt flexible approach.
Repayment installments in regards to small loans should be in
relation to applicants paying capacity.
Controlling offices of banks should advice their branches
detailed reasons for rejection of loan proposals.
Customers should be advised of the reasons for rejection of
their loan applications backed by counseling in appropriate
cases.
At every office of each bank, a separate record, in appropriate
form, should be maintained of all loan applications received,
their disposal and full reasons for delay in sanctions and for
rejections.
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Types of Capital
Fixed capital
This is money which is used to purchase assets that will
remain permanently in the business and help it to make a
profit.
Factors determining fixed capital requirements
Nature of business
Size of business
Stage of development Capital invested by the owners
location of that area
Types of Capital
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Types of CapitalWorking capital
Working capital is that part of capital invested which is usedfor running the business such like money which is used to buy
stock, pay expenses and finance credit.
Factors determining working capital requirements
Size of business
Stage of development
Time of production
Rate of stock turnover ratio
Buying and selling terms
Seasonal consumption
Seasonal product
profit level
growth and expansion
production cycle
general nature of business
business cycle
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Non fund based facilities
The credit facilities given by the banks where
actual bank funds are not involved are termed
as 'non-fund based facilities'.
Letter of Credit
Guarantee
Pledge
Mortgage
Hypothecation
Letter of Credit
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Letter of Credit Article 2 of UCPDC defines a letter of credit as under:
The expressions "documentary credit(s) and standby letter(s)
of credit used herein (hereinafter referred to as "credit(s)"
means any arrangement, however, named or described
whereby a bank (the issuing bank), acting at the request and
on the instructions of a customer (the applicant of the credit)
or on its own behalf. Letter of credit is a written undertaking by a bank (issuing
bank) given to the seller (beneficiary) at the request and in
accordance with the instructions of buyer (applicant) to effect
payment of a stated amount within a prescribed time limit
and against stipulated documents provided all the terms and
conditions of the credit are complied with".
Letters of credit thus offers both parties to a trade transaction
a degree of security.
Letter of Credit
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Letter of Credit Parties to a Letter of Credit
The buyer
The beneficiary
The issuing bank
The notifying bank
The negotiating bank
The confirming bank
The paying bank
Letter of Credit Mechanism1. Issuing of Credit
2. 2. Negotiation of Documents by beneficiary
3. Settlement of Bills Drawn under Letter of Credit by the
opener.
Guarantee
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Guarantee A contract of guarantee can be defined as a contract to
perform the promise, or discharge the liability of a thirdperson in case of his default.
Bank provides guarantee facilities to its customers who may
require these facilities for various purpose. The guarantees
may broadly be divided in two categories as under :
Financial guarantees - Guarantees to discharge financial
obligations to the customers.
Performance guarantees - Guarantees for due performance
of a contract by customers.
The banker has to assess the character, capacity and capital of
the guarantor
Pledge
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Pledge Transfer or assignment of assets to secure payment of an
obligation. The borrower assigns an interest in the property to the lender,
which becomes a lien on the collateral.
If the borrower offers stocks, bonds, or other securities as
collateral, the lender generally takes possession or is assignedownership of the collateral until the loan is paid.
Essential features of pledge
There must be a bailment of goods
The bailment must be by way of securityThe security must be for payment of debt or performance of a
promise
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Mortgage
A mortgage is the transfer of an interest in a specific
immovable property for the purpose of securing the payment
of money advanced or to be advanced by way of loan, an
existing or future debt or the performance of an engagement
which may give rise to pecuniary liabilityThe essentials of a mortgage are
1) There must be a transfer of interest in an immovable
property
2) The immovable property must be a specific one3) The consideration of a mortgage may be either money
advanced or to be advanced by way of loan, or the
performance of a contract.
Hypothecation
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Hypothecation A mortgage of movables where no possession is given.
A document known as letter of Hypothecation is executed.The main contents of the letter of hypothecation are
1) Affirmation by the borrower that the goods are free from
encumbrances, that further encumbrances will not be
created on them and he is the absolute owner of the goods.
2) Undertaking by the borrower that proceeds arising from the
sale of the hypothecated goods will be utilised for the
repayment of the advance
3) Undertaking by the borrower to meet all expenses relating
to the safe custody of the hypothecated goods
4) Provision to the effect that the banker has the right to take
possession of the hypothecated goods and realize them in
the event of the borrower making default in the repayment
of the advance.
Predential Norms
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Predential Norms As per recommendations by the Narasimham committee, the
RBI introduced in a phased manner, prudential norms forIncome Recognition, Asset Classification and Provisioning for
the advances portfolio of the banks so as to move towards
greater consistency and transparency in the published
accounts.
Income Recognition
The policy of income recognition has to be objective and
based on the record of recovery.
Income from NPAs is not recognised on accrual basis but
is booked as income only when it is actually received.
The banks should not charge and take to income account
interest on any NPA.
Predential Norms
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Predential Norms
Asset Classification Banks are required to classify NPAs based on the period for
which the asset has remained non performing and the
realisability of the dues
1) Sub standard assets
2) Doubtful Assets
3) Loss Assets
Classification of assets into above categories should be donetaking into account the degree of well defined credit
weaknesses and the extent of dependence on collateral
security for realization of dues.
Predential Norms
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Predential NormsAsset classification
Accounts with Temporary Deficiencies
Accounts regularised near the Balance sheet date
Asset classification to be Borrower-wise and not Facility-wise
Advances under Consortium Arrangements
Accounts with Erosion in the Value of Security
Advances to PACS/ FSS Ceded to Commercial Banks
Advances against Term Deposits, NSCs, KVP, etc
Loans with Moratorium for Payment of Interest
Agricultural Advances
Government Guaranteed Advances
Predential Norms
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Predential Norms Provisioning
In conformity with the prudential norms, provisions should bemade on the NPAs on the basis of classification of assets.
Taking in to account the time lag between an account
becoming doubtful of recovery, its recognition as such, the
realisation of the security and the erosion overtime in the
value of security charged to the bank, the banks should make
provision against sub-standard assets, doubtful assets and loss
assets.
Loss assets
- the entire asset should be written-off
- If the assets are permitted to remain in the books for any
reason, 100% of the outstanding should be provided for.
Predential Norms
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Doubtful Assets
- 100% to the extent to which the advance is not covered by
the realisable value of the security
- In regard to the secured portion, provision may be made on
the following basis
upto one year 20%
One to three years 30%
More than three years 50%
- Banks are permitted to phase the additional provisioning
consequent upon the reduction in the transition perion from
substandard to doubtful asset from 18 to 12 monthsSub-standard Assets
- A general provisioning of 10% on total outstanding should be
made without making any allowance for DICGC/ ECGC
guarantee cover and securities available.
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Asset Liability Management
Asset and liability management is the practice of managing
risks that arise due to mismatches between the assets and
liabilities (debts and assets) of the bank.
It is the management of structure of balance sheet (liabilities
and assets) in such a way that the net earning from interest ismaximised within the overall risk-preference (present and
future) of the institutions.
The ALM functions extend to liquidly risk management,
management of market risk, trading risk management,funding and capital planning and profit planning and growth
projection.
Asset Liability Management
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Asset Liability Management
The ALM process rests on three pillars:
ALM Information Systems
Management Information Systems
Information availability, accuracy, adequacy and expediency
ALM Organisation
Structure and responsibilities
Level of top management involvement
ALM Process
Risk parameters
Risk identification Risk measurement
Risk management
Risk policies and tolerance levels.
C i l Ad i B k
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Capital Adequacy in Banks
The capital requirement is a bank regulation, which sets a
framework on how banks and depository institutions must
handle their capital.
Regulators try to ensure that banks and other financial
institutions have sufficient capital to keep them out ofdifficulty.
Capital adequacy requirements have existed for a long time,
but the two most important are those specified by the Basel
committee of the Bank for International Settlements.
C i l Ad i B k
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Capital Adequacy in Banks
Basel 1
The Basel 1 accord defined capital adequacy as a single
number that was the ratio of a banks capital to its assets.
There are two types of capital, tier one and tier two.
The first is primarily share capital, the second other types
such as preference shares and subordinated debt.
The key requirement was that tier one capital was at least 8%
of assets.
C i l Ad i B k
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Capital Adequacy in Banks
Basel 2
The Basel 1 accord has largely been replaced by new rules.
Basel 2 is based on three pillars: minimum capital
requirements, supervisory review process and market forces.
The first "pillar" is similar to the Basel 1 requirement, the
second is the use of sophisticated risk models to ascertain
whether additional capital (i.e. more than required by pillar 1)
is necessary.
The third pillar requires more disclosure of risks, capital andrisk management policies. This encourages the markets to
react to the taking of high risks.
CAMELS Rating of Banks
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CAMELS Rating of Banks
The CAMELS rating is a United States supervisory rating of the
bank's overall condition and to identify its strengths and
weaknesses: Financial, Operational, Managerial
This rating is based on financial statements of the bank and
on-site examination by regulators.
The scale is from 1 to 5 with 1 being strongest and 5 being
weakest.
The components of a bank's condition that are assessed:
(C) Capital adequacy
(A) Asset quality (M) Management
(E) Earnings
(L) Liquidity and
(S) Sensitivity to market risk
CAMELS Rating of Banks
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CAMELS Rating of Banks Capital Adequacy - The capital requirement is a bank
regulation, which sets a framework on how banks anddepository institutions must handle their capital.
Asset Quality - Asset represents all the assets of the bank,
current and fixed, loan portfolio, investments and real estate
owned as well as off balance sheet transactions. Management - Management includes all key managers and
the Board of Directors.
Earnings - All income from operations, non-traditional
sources, extraordinary items.
Liquidity - The ability to generate cash or turn quickly short
term assets into cash.
Sensitivity to market risks is not taken into consideration at
present.
Credit Risk, Market Risk & Operational
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, p
Risk
Credit risk is an investor's risk of loss arising from a borrowerwho does not make payments as promised. Such an event is
called a default. Another term for credit risk is default risk.
Market risk is the risk that the value of a portfolio, either an
investment portfolio or a trading portfolio, will decrease due
to the change in value of the market risk factors. The four
standard market risk factors are stock prices, interest rates,
foreign exchange rates, and commodity prices.
Operational Risk is a risk arising from execution of a
company's business functions. It is a very broad conceptwhich focuses on the risks arising from the people, systems
and processes through which a company operates. It also
includes other categories such as fraud risks, legal risks,
physical or environmental risks.
B ki O b d S h
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Banking Ombudsman Scheme
Banking Ombudsman is a quasi judicial authority functioning
under Indias Banking Ombudsman Scheme 2006, and the
authority was created pursuant to the a decision by the
Government of India to enable resolution of complaints of
customers of banks relating to certain services rendered bythe banks.
The Banking Ombudsman Scheme was first introduced in
India1 in 1995, and was revised in 2002. The current scheme
became operative from 1st January 2006, and replaced and
superseded the banking Ombudsman Scheme 2002. From
2002 until 2006, around 36,000 complaints have been dealt
by the Banking Ombudsmen.
Banking Ombudsman Scheme
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Banking Ombudsman SchemeThe Banking Ombudsman Scheme consists of several chapters :
CHAPTER I - PRELIMINARY1. Short Title, Commencement, Extent and Application
2. Suspension of the Scheme
3. Definitions
CHAPTER II- ESTABLISHMENT OF OFFICE OF BANKINGOMBUDSMAN
4. Appointment & Tenure
5. Location of Office and Temporary Headquarters
6. Secretariat
CHAPTER III- JURISDICTION, POWERS AND DUTIES OF
BANKING OMBUDSMAN
7. Powers and Jurisdiction
Banking Ombudsman Scheme
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g CHAPTER IV- PROCEDURE FOR REDRESSAL OF GRIEVANCE
8. Grounds of Complaint9. Procedure for Filing Complaint
10. Power to Call for Information
11. Settlement of Complaint by Agreement
12. Award by the Banking Ombudsman13. Rejection of the Complaint
14. Appeal Before the Appellate Authority
15. Banks to Display Salient Features of the Scheme for
Common Knowledge of Public CHAPTER V- MISCELLANEOUS
16. Removal of Difficulties
17. Application of the Banking Ombudsman Schemes, 1995
and 2002
SARFAESI Act, 2002
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SARFAESI Act, 2002 The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, allows banks andfinancial institutions to auction properties when borrowers
fail to repay their loans. It enables banks to reduce their non-
performing assets (NPAs) by adopting measures for recovery
or reconstruction.
If a borrower defaults on repayment of his/her home loan for
six months at stretch, banks give him/her a 60-day period to
regularise the repayment, that is, start repaying. On failure to
do so, banks declare the loan an NPA and auction it to recover
the debt. Auction price depends on the market value of the property. If
the price fetched exceeds the banks dues, the excess amount
i i t th b