Professional Documents
Culture Documents
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8. No advance is granted against term deposits of other Banks. Ans: The deposit is subject to the paramount lien of the issuing bank; also, it may refuse to register our lien. It will also act as a disincentive for public to have a deposit account with us. RBI has reiterated this instruction in view of many frauds in this area. 9. When a life insurance policy is reassigned after the advance has been repaid, is policyholder is advised to make a fresh nomination or an assignment? Ans: Under S 39(4) of the Insurance Act the nomination would stand automatically cancelled if the policy is assigned to third party. Cancellation of an assignment does not revive earlier nomination. Hence, as a measure of good customer services such a letter is sent. 10. Eraz-ex ink is not used in correcting documents. What is so? Ans: Any such alteration will make it difficult for the Bank to prove any unauthorized alteration. The Registrar of Assurances may not allow registration of such documents. The court may reject the documents as evidence. To protect the Banks interest.
11. Break even level of sales is an important concept in appraising term loans Ans: A unit will make profit only if it operates above the break even level; it will make loss if it operates below this level. Hence, it is necessary to ensure that the projections are based on operations at a viable level above the break even point. The unit cannot repay the installment if it works at or below the BE level. The working capital limit will become irregular. 12. What are advantages of banks derive out of non-fund business such as issue of Bank Guarantees, letters of credit, etc., are encouraged by Banks? Ans: There is no immediate outlay of funds; also only a small percentage of such commitments may crystallize into liabilities over a period of time. The income earned by banks from such businesses is sizeable resulting in increased profitability. The servicing costs are low. On account of disintermediation, the rate of growth of fund-based business would be less compared to the growth in the past.
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obligation is absolute and therefore it should pay without delay or demur as otherwise it would reflect adversely on the image of the bank. RBI directions; Court judgments.
14. Why Credit Exposure norms have been prescribed for Banks? Ans: Introduced by RBI as a prudential measure aimed at better and balanced risk management. Avoidance of concentration of credit risks To ensure that failure of a single advance/single group does not affect the capital stability of the bank. 15. Why the Credit policy is reviewed by RBI twice a year? Ans: Indian economy has two distinct phases in a year the busy season after the monsoon ( Oct-April); and the off season (Apr Oct); the money supply needs will be high during the busy season to keep the economy going; also, RBI can control money supply based on monsoon / growth-needs of agriculture/industry and inflation. (Note: Of late, the April policy is designated as the Credit and Monetary Policy for the whole year and the Oct policy is referred to as a Mid Term Review of the credit policy. This enables RBI to have an overall perspective for the financial year). 16. How the Credit Risk Assessment is vital for the lending bankers. ? Ans: CRA system is primary trigger for pricing i.e., charging interest rates based on the credit risk. Indirectly, this promotes efficiency in borrowers and better discipline in the conduct of bank accounts. Banks can charge differential rate of interest based on the credit rating of the borrower. 17. The consent of the guarantor is necessary to rephrase term loan installments. Ans: Replacement of term loan installments is a material change in the contract and as such requires the consent of the guarantor (S133 of Contract Act). Otherwise, the guarantor will be relieved of his liability.
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account has been conducted properly (egg; return of cheques, excess drawings availed, return of bills, etc.). Adequate facilities commensurate with the current level of operations can be extended.
20. Why the Registered letters which were sent to customers returned
should not be opened by banks. Ans: Quite often, these have to be produced in the court as evidence of our having served due notice on the borrowers / guarantors; as also of our having followed the normal business practice. If opened, he may contend that the notice was not enclosed in the cover. 21. While advancing loans against motor vehicles (including tractors/ power tillers) why the vehicle is insured in the sole name of the borrower only? Ans: If any instrument is done in the joint-names of the Bank and the borrower, third party claims may be made against the Bank as a co-owner in case of accidents. Also, the Bank Interest clause is sufficient to protect the interest of the Bank. 22. While granting advances to partnership firms, why the personal guarantee of partners is also obtained? Ans: If personal guarantee is obtained, the Bank could rank as a first creditor along with the personal creditors in respect of the personal assets of the partners, in the event of the insolvency of the firm and its partners. 23. Goods are preferably insured, for the full market value. Why? Ans: If the borrower insures for a lesser amount than the full market valuer of the entire stock, in case of loss, Average clause would operate and he would get only a proportionately lesser amount. 24. Can the Bank sell the goods pledged to it without serving a notice of sale n the borrower even though the account has been called up? Ans: A notice of sale giving reasonable time for payment is a statutory requirement (S. 176 Indian Contract Act. It is also called a statutory notice)
25. Banks name-boards are exhibited in the factories/ godowns in which stocks pledged to the Bank are stores. Ans: This serves as a notice to the outside world of the Banks security and the advance made by the Bank. Thus, the Banks first change over the assets is protected. 26. Why we consider is good to grant advances to companies against hypothecation of stocks rather than against pledge. Ans: Sex. 125 of the Companies Act provide provides for registration of the hypothecation charge which serves as notice to the subsequent creditor; pledge charge cannot be registered.
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41. Articles in Safe Deposit and gold ornaments are not deliverable against succession certificate. Why? 42. Ans: Succession certificate is applicable only to debts and securities. It is not an appropriate legal authority for the Bank to deliver goods. These are assets which can be delivered only against probated will or Letters of Administration.
43. S.B. Accounts are not opened for Companies and Firms. Why?
Ans: Savings Bank Account is meant to encourage thrift and savings among individuals. Companies and firms require a bank account to carry on their day to day transactions. Hence, RBI has imposed the restriction that ordinarily no SB a/c can be opened for a trading concern. 44. Is a paying banker is protected even if an endorsement on a cheque happens to be forged. Ans: It is the collecting bank's responsibility to ensure that it collects for the true holder of the cheque; further, the paying bank has no means of verifying the signature of the endorsees in a cheque. 45. What is the status of Bank in the case of a safe custody a/c? Ans: The articles/securities are entrusted to the Bank for. Safe- keeping; These have to be returned to the customer intact on demand. The Bank has to take care of these goods as an ordinary prudent man would take care of his own goods in similar Circumstances. Bar* is liable for any loss or damage arising out of his negligence. but he is not liable for loss etc. due to Act of God, natural calamity etc. 46. Right of General Lien cannot be exercised on securities handed over to the Bank for safe custody. Is it true? Ans: In terms of Indian Contract Act. Banker's General lien can be exercised only in respect of moneys/securities which come into the hands of the Bank in the normal course; it cannot be exercised when these are entrusted to the Bank for a specific purpose like safe custody.
47. Why Introduction is obtained for opening bank accounts? Ans: To get collecting banker's protection under N.I. Act. Further Banks are anxious to deal with honest and law-abiding citizens and avoid benami/black-money transactions through their accounts. Also RBI/Govt. directives.
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Ans: The bank has to ensure that the funds of the Trust are utilized for the purposes of the Trust in terms of the Trust deed and that the trust funds are not utilised for purposes other than the trust purposes. Also the conduct of accounts must be as per the Trust Deed. 50. Interest on advances is linked to the amount of advance / the period of advance whereas interest on deposits is linked only to the period of the deposit irrespective of the amount of deposit. Ans: To induce the depositor to invest tot. Longer maturity periods, greater incentive/reward in the form of higher rate of interest is given. In the modern times, inflation rate has also to be taken into account (Longer the period of the deposit, the greater will be the erosion of value due to inflation). Generally lower quantum of advances is availed by the low- income/medium income groups in the society whose earnings are low. (Recently this position is changing). Now, interest rates vary between banks for the same maturity period on account of competition. 51. There has been a gradual reduction in the lending/deposit rates in the recent past. Comment? Ans: [During the years 1990 to 1992.the rate of inflation was very high; the deficit in the budgets was also very high. Steps like reduced Govt. spending etc coupled with consecutive good monsoons for many years have contained inflation]. To stimulate credit and reverse the recessionary trends in industrial production; also, inflation has been contained at 4% to 5% in the last year. (The economy is turning active only recently). 52. RBI has directed banks to obtain photographs in respect of all deposit accounts with some exceptions. What purposes does it serve? Ans: To curb opening of benami accounts; it will enable banks to identify customers quickly and prevent impersonation. Transactions can be put through fast. 53. Can the Administrator/Executor of the estate of a deceased delegate his powers to operate on the bank account ?. Ans: No. These are fiduciary capacities and hence delegation is not permissible. They have to personally ensure that the fiduciary funds are dealt with as per Will, Letters of Administration etc. 54. DDo we require the nominee's signature in the nomination form ? Ans: The nominee is not a party to the contract of deposit; the depositor may change the nominee any time further, the depositor may not like to divulge the fact of nomination to the nominee. introducer and the customer. Explain? Ans: The letter to the introducer is sent to reciprocate his goodwill and as a mark of courtesy. In a rare case, where the introducer's signature is forged, he will write to us so that we can protect our interest. Letter to the customer is
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sent to show that we value his connection; it is also an indirect cheek on the address of the customer. 56. No nomination is permitted on loan accounts. Ans: No one can make it obligatory for his legal heirs to pay for his debts, unless he leaves property to them. (Hence, no nomination on loan accounts). Hence, Nomination relates to deposits and a few other assets only under Banking Regulation Act.
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All the Banks do not offer uniform rates of interest on deposits for the same maturity periods. Is it so ? Ans: Under the de-regulated environment, banks have more flexibility in quoting interest rates. Banks decide on interest rates keeping in mind their Credit/Deposit mix as well as the cost of operations. The rates are influenced by competition also. 57. The cheque drawn by the director of a company is paid even after his death; but a cheque drawn by a partner of a partnership firm is not paid after his death. Ans: A company has a legal status independent of that of the shareholders. It is an artificial person which has perpetual existence, limited liability and a common seal. So cheque issued by the company has to be paid oven after the death of the directors. Partnership is dissolved on the death of a partner. 58. When an account is opened in the name of a partnership firm, the signature of the minor partner is not obtained; but it is obtained, if the account is opened in his sole name. Ans: A minor can only be admitted to the benefits of partnership and cannot be made a full fledged partner. He cannot be made liable for any debts of the partnership incurred before he attains majority. The position is different if an account is opened in his sole name for his exclusive benefits where he is allowed to operate. The signature will serve as a reference while making payments to him. Also, the bank has to adopt standard safeguards while opening accounts.
59. Do we require the Photographs of the account holder for all the deposit
accounts? Ans: This is as per RBI instructions. This will enable the banks to ensure proper identification of the customers. This is also to ensure against impersonation. Customer transactions will be speeded up. Will minimise opening of accounts in benami/fictitious names. 60. Can we accept a conditional Power of Attorney ?. Banks accept only unconditional power of attorney. Ans; No. It will be difficult for the bank to ensure that the conditions are complied with by the power of attorney holder. Hence, it will be risky to accept a conditional power of attorney. (eg: "A is authorised to operate while 1 am out of India").
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Explain about capital Adequacy norms? Ans: To conform to international standards; To bring in financial discipline in the banks. In a market driven economy, much importance will be given to the capital adequacy of banks by customers/ public; recommendations of Narasimham/Ghosh committee. Different assets carry different degree of risks and hence these are given different weights. Why Costing of bank services is very important?. Ans: The profitability of the banks has been eroded considerably while the cost of operations has been steadily mounting up; unlike in earlier years, cross-subsidisation has become very difficult in view of customer resistance. Bank's pricing policies has to become scientific and realistic. In the liberalised set up, the bank may prefer not to extend loss-making products to customers. Why RBI has appointed ombudsman for banks at some centres ?. Ans: To settle grievances of customers quickly and satisfactorily and based on principles of natural justice. As eminent persons would be appointed as ombudsman, the customer and the bank would accept his decision. The process would be fast and cheap. The bank can avoid bad publicity. Why the Board for Financial Supervision has been set up by RBI? Ans: It is an independent Board directly under a Dy. Governor of RBI set up for monitoring/overseeing Banks/FIs/NBFCs It has been insulated from other wings of RBI like DBOD and, therefore, can act with speed and without any pressures from other wings of RBI. Under what circumstances Banks are required to deposit with RID Fund ( (Rural Infrastructure Fund of NABARD any shortfall in priority sector lending). Ans: The objective of allocation of bank funds for financing priority sector is achieved indirectly. Acts indirectly as an incentive for banks to achieve the PS. target. Why RBI has permitted reduction of capital of PS Banks. Ans: Accumulated losses can be eliminated front the Assets side of the Balance Sheet; hence, Balance Sheets will look more acceptable to the investors. Further capital earl be raised in the market. Password of the computer system given to an authorised official should he kept as a confidential information. Why ? Ans: Password enables the official to access the accounts of customers, office accounts etc. If the password is known to another person, them is a risk of fraud, misappropriation etc putting the bank to loss. The official also will be accountable for this serious lapse.
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Why Time norms have been introduced for various transactions? Ans: (As these are exhibited) the customers know the time required for various transactions and hence develop realistic expectation of service. Further, staff also
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will develop an urge to comply with the time-norms. The general image of the Banks has to be improved in the minds of the customers. 76. Explain about the 'exposure norms' prescribed by RBI for Banks ? Ans: The concentration of credit risk is avoided. Failure of an advance will not affect the capital/stability of the Bank. It is a prudential control measure aimed to minimise credit risk for banks.
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Can the financial statements alone sufficient to take credit decisions ? Ans: The basic parameters are honesty and integrity; the other vital parameters are need for the advance, reasonable stake etc. Also credit needs have to be assessed bearing in mind the future prospects for the business. Why Advances against book-debts are not granted on pledge basis? Ans:As per law only movable goods can be secured by 'pledge'. Book debt is an actionable claim which can only be assigned or hypothecated as security. Why banks should take more than ordinary care in the case of pledged goods? Ans: As a pledgee, the Bank has to exercise the standard of care of a baileei.e. as an ordinary prudent man taking care of his goods of a similar nature. Bank would be liable for any loss/damage to the goods arising out of his negligence. Can we take take recourse to partners' personal assets for the dues of partnership firm? Ans: Partners have unlimited liability for the payment of the partnership debt; i.e. the partners' personal assets are liable to meet the partnership debt.
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Why the banker attaches great importance to the current ratio of a borrowal unit ? Ans: Banks grant working capital advances to business units generally. A comfortable current ratio indicates sufficient current assets with the unit; The unit can carry on its commercial production smoothly in such a case; high current ratio is a good safety cushion for the working capital advance. What is System of 'Syndication Loans? Ans: Customer gets the freedom to choose a bank; different terms can be quoted to the customer; it need not be uniform for all banks. What is the purpose of scrutinising Funds flow statement while sanctioning term loans? Ans: Term loan is repaid out of cash accruals. Funds flow statement will show whether adequate cash would be generated periodically so that instalments can be met on the due dates. Why Moratorium period is given to Term Loan borrowers in respect of repayment of instalment? Ans: A unit requires adequate time for acquisition of land, construction of factory building, erection of machinery and trial production. It will work above the BEL only when it achieves commercial production. Hence, during the construction period, no repayment should be stipulated. The unit's working Capital a/c will become irregular. The projects require generally 12 to 24 months for achieving commercial level of operations. At this level only, it can make profit and the repayment can commence. What is the new the procedure for registration of charges? Ans: There was lot of delay and uncertainty in the previous procedure. The present procedure is very simple. The Registrar will sign the 3 copies of Form 8 with the legend'. 'Registered' and immediately deliver them, No separate certificate of registration of charge is given. Explain the objectives of Debt Recovery Tribunals?. Ans: The legal suits are costly, time-consuming and vexatious; the procedures in the Tribunals will he based on natural justice. Also, execution of the decrees by the court officials will make recovery process fast. Appeal system also provides for quick disposal. (Narasimham Committee recommendations.) The Bank refers to Lok Adalat many court cases in respect of advances upto Rs. 5 lakhs Comment? Ans: Judgements are fast as the procedure is based on principles of natural justice; The recovery processes will be fast so that the funds can be recycled. Productive time/effort of staff can be saved. Why RBI/Bank attaches utmost importance and urgency in reducing the NPA to an absolute minimum ?
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Ans: Higher provisions have to be made for such accounts. Interest income on these accounts cannot be taken into Profit and Loss a/c. Also capital adequacy ratio will be affected by NPA 92. 1Why great Caution has to be exercised while granting loans against minor's deposits ?. Ans: The guardian can borrow only for the 'benefit' of the minor; if there is a misapplication of funds by the Guardian and if the bank is deemed to have knowledge of the same, the bank may be obliged to pay the minor. What is Break even level of sales ? Why it is an important concept in Appraising term loans? Ans: A unit will make profit only if it operates above the break-even level., it will make loss if it operates below this level; Hence, it is necessary to ensure that projections are based on operations at a viable level above the break even point. Loan system of credit has to he adopted for financing borrowers with assessed maximum permissible bank finance of Rs.10 er. and above along with cash credit system Ans: Cash credit system of advance poses cash management problems to the banks, as they do not have the mechanism to regulate the drawings of the borrowers. Under the loan system, major portion of the advance is committee for a definite period. It will enable the bank to review at the time of maturity of WCDL whether roll-over of the loan for the next period is justified or not. 95. 96. WWhy do we prefer an advance against bills to advance against bookdebts. AAns: The drawee would be obliged to meet the commitment under a bill (usance bill) on the due date lest tile bill should be protested for non-payment. Hence bill advance is self-liquidating in nature. There is no such compulsion to pay book-debts.
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1 What is risk involved in granting an against the Term Deposit Receipts of other Banks. Ans: The deposit is subject to the paramount lien of the issuing Bank. It is cumbersome to verify the genuineness of the signature on the Receipt. Further, if such advances are given there will be no incentive for customers to open Term deposit A/cs with us. Recently RBI has reiterated the instructions, Why Two signatures of the executants are obtained on a DP note, one on the revenue stamp and another by the side of it ? Ans: Though very rare the stamp may fail off from the DP note due to defective gumming etc. In such Cases, the additional signature can be relied upon as ready evidence for proving the execution of tile DPN (It is an established practice to obtain the additional signature).
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100. 118. Why an usance bill, if dishonoured requires noting and protest? ( but not a cheque or a draft ? ) Ans: Unlike a draft or a cheque which is payable on demand, a usance bill is a time bill and acceptance of such a bill establishes liability. Dishonour of: such a bill after acceptance requires noting/ protesting which serves as a proof of dishonour. Further, the dishonoured draft or cheque is returned to the payee which itself is a proof of dishonour.
101. 121. RBI has advised Banks to introduce cash credit system for Agricultural
Advances. What purpose does it serve? Ans: To ensure adequate and timely flow of rural credit as also to meet the composite needs of farmers; the corporate sector is entering hi-tech agriculture which requires continuous flow of credit. 102. 122. Why NABARD grants Gestation period is on term loans granted to farmers under the various its schemes ? Ans: The Bank avails refinance from NABARD. After carrying out many technical studies NABARD has prescribed repayment period, gestation period, economic units for an activity etc. It is essential to conform to these. Otherwise, NABARD refinance will not be available; the bank's advances will be in jeopardy. 103. 1 Why strict norms for income recognition, capital adequacy and provisioning for bad debts have been introduced by RBI ? Ans: Banks have been making losses in the recent years leading to erosion of their credibility; to make the balance sheet of banks transparent; to meet international norm of capital adequacy of 8% of risk weighted assets; to follow international banking practice of recognising income only on realisation basis. These measures would make Indian Banks credit-worthy in foreign markets.
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