Professional Documents
Culture Documents
With a view to bring out more transparency in the balance sheets of the
banks, Reserve Bank of India has decided to introduce more disclosures in
the banks annual reports. As a result, banks now disclose in their balance
sheets, (a) percentage of shareholding of the Government of India in
nationalized banks. (b) percentage of net non-performing assets to net
advances (c) the amount of provision made towards NPAs (d) towards
depreciation in the value of investments and (e) provision made towards
income tax, (f) amount of sub-ordinated debt raised as Tier II Capital, (g)
interest income as percentage to working funds (h) non-interest income as
percentage to working funds (i) operating profit as percentage to working
funds (j) return on assets (k) business per employee (l) net profit per
employee etc.
The following details relating to Working Capital assessment and FBF will be
presented under the head Working Capital Assessment in lieu of MPBF
Calculation in the revised Credit Appraisal Format.
(Rs. in lacs)
Previous
Current
Next
Year
Year
Year
Risk Weight
Zero when the Govt is obligant, 20% when the bank is obligant and 100% for
others.
Netting
In case of off the balance sheet items, the cash/deposit margin should be
deducted before applying credit conversion factor.
ASSET-LIABILITY MANAGEMENT
Asset-Liability Management is a recent phenomenon in India. The
implications of deregulation on the balance sheets of banks are multifacet.
For example, in 1998 99 , the average cost of deposits of Union Bank of
India was 8.17%, which came down marginally to 8.00% in 1999-2000.
Therefore, the fall in average cost of deposits was 0.17%. During the same
period, the yield on advances declined from 12.74% to 12.12%, a fall of
0.62%. Both the above phenomena were generally due to general fall in
interest rates in the economy. However, this also gives an insight that in a
falling interest rate scenario, fall in yield on advances could be steeper than
fall in costs of deposits. Why is it so? The reasons can be traced to
mismatches in the maturity and re-pricing profile of deposits and advances.
While deposits of the bank would generally re-priced over a period of time, the
advances would get re-priced frequently as most of the advances are floating
in nature, anchored to the PLR of the bank. Therefore, greater volatility in
interest rates poses challenges to a bank to manage its spread Net Interest
Income or Net Interest Margin and preserve its economic value, which can be
addressed only through a robust Assets Liability Management System.
Asset Liability Management involves planning, directing and controlling the
flow, mix, cost and yield of the consolidated funds of banks. Alternatively, ALM
is defined as the process of strategic positioning of balance sheet which
involves ensuring the linkages between asset side with liability side and
enhancing the linkages through off-balance sheet activities. The goals of
ALM can be articulated as follows :
example, a bank financing a 10 year bond through 3 months deposit may face
the following risks :
1. Re-investment risk arising at the time of reinvestment of coupons from the
bond.
2. Interest rate risk, as the bank has to fund the investment by raising
deposits at the end of every three months. In case of rising interest rate
scenario, the funding cost will increase, affecting the margin adversely.
Similarly, when a bank funds floating rate assets like PLR linked cash credit
and demand loans through fixed rate liabilities like 3 years' deposits, it is
again exposed to interest rate risk. The margins are expected to decline in a
falling interest rate scenario.
The other risk faced by a bank in volatile interest rate scenarios is embedded
option risk. Embedded options are typically in built in both deposits and
advances. In a rising interest rate scenario, a customer can exercise, without
many penalties, the option of pre-mature withdrawal of his deposits. Similarly,
in a falling interest rate scenario pre-payment can take place in advance
accounts that are contracted on fixed rate basis. The options exercised by
customers-depositors and borrowers pose significant challenges to a bank in
managing its liquidity profile and Net Interest margin.
The other variants of interest rate risks are :
Basis risk risks that the interest rate of different assets, liabilities and
off-balance sheet items may change in different magnitude.
Price risk risk arising due to distress sale of assets and distress
pricing of liabilities.
Generally assets and liabilities in the Banking Book are held till maturity. The
price risk is the primary concern for a bank in its Trading Book. The likely
changes in Net Interest Income (NII) or changes in the market value of equity
are the primary focus for Banking Book.
The following methodologies are adopted by a bank for managing interest rate
risk :
CORPORATE GOVERNANCE
For long, the Corporate Sector in India has been dominated by certain
families who cannot hold together after the demise of the heads of the
families. The investors in the equity capital of such companies tend to lose
because they are not running on professional basis. Consequently, Corporate
Governance is now being insisted so that the change at the top does not
affect the working of an enterprise.
Today, global concerns are expressed towards increasing long-term
shareholders' value. Since the shareholders are residual claimants, in a wellperforming capital/financial markets, what maximises shareholders' value
must necessarily maximise corporate value and best satisfy suppliers,
creditors, customers and public-all stakeholders, governance practices.
Corporate Governance includes well-defined systems & processes to protect
shareholders' interest. In short, Corporate Governance refers to the joint
responsibility imposed on the Board of Directors and management to protect
the rights / interest of shareholders & inhance shareholders' value.
Good Corporate Governance has the potential to shape the economy and the
capital market of a country. Empirical studies corroborate the fact that markets
Role of Management
Board of Directors obviously must ensure Management, which can
perform. Perform well when market is good. Perform well when market is
bad. Perform when the market is good or bad.
Relevant provisions of clause 49
Board of Directors.
Board procedures.
Management.
What is Equity?
Equity transparency objective. No privileged investor. No privileged
shareholders. Accurate transparent information. Single large holder can
call the shots .Widely dispersed shareholders Management can call the
shots. Need is to protect small shareholders' interest.. Independent non
Executive Director. Audit Committee. Compensation. Curbs on inside
trading. Timely, accurate and sufficient price sensitivity information.
Accounting Standards. Small shareholder Director. Critical factor-truly
independent Directors.
Social responsibility objectives
Good Corporate citizens compliance of various laws. Interest of
secondary shareholders depositors creditors, etc. How independent are
Independent Directors appointment procedure. Role of Institutional
Directors. Firewall between Fund Managers and Nominee Directors.
How do we differentiate between accountability of non-executive and
executive director ?
- Adequate compensation of non-executive director.
(By K .K. Nohria CMD, Crompton Greaves Ltd.)
CORPORATE GOVERNANCE IN
PUBLIC SECTOR BANKS
The Government ownership of a bank has a potential to alter the strategies
and objectives of the bank as well as the internal structure of the governance.
Consequently, the general principle of sound corporate governance is also
beneficial to Government owned banks.
To enhance corporate governance, it is of importance that banks are able to
articulate their corporate values, code of conduct and standards of
appropriate behaviour. The issues that emerge in promoting corporate
governance in the Indian banking system will include role and composition of
the Board, disclosure requirements, integrity of the accounting practices and
the control systems.
I will examine areas for major initiatives under two categories one relating to
some basic issues to be addressed for promoting corporate governance in
public sector banks and the other on resetting of the Board of Directors.
The Basic issues are :
That said, I would now look into the issue of corporate governance through
restructuring the Board of Directors. The crucial issues in this area will be :
adjustment would render the task of opening up the capital account difficult
with accompanying dangers of slippages, rollbacks and reversals of capital
flows.
The Committee has warned that the practice of financing the amoritisation of
Government borrowings out of fresh borrowings is unsustainable and strongly
endorsed the Tenth Finance Commission recommendations for the institution
of a consolidated sinking fund for the public debt.
Diversification
While high level of NPA has come down volume still remains large.
Customer Service.
Housekeeping
productivity.
through
upgradation
of
technology
for
increasing
Diversification of Business.
UNIVERSAL BANKING
Globalisation, liberalisation and deregulation of financial markets in many
developed and developing countries have resulted in increased
disintermediation and has made commercial banks vulnerable to interest rate
risk. Relaxing exchange controls, adopting uniform accounting practices in
regard to income recognition, asset classification and provisioning norms and
prescribing capital adequacy norms has further aggravated the position. Now
the developments in information technology and telecommunications are
allowing international pooling of financial resources thereby spreading the risk
across more than one market. As a result, there is severe strain on interest
spread and bottom line of banks.
Amidst all the above said development banks in the developed countries
started emphasising on new sources for non-interest income to arrest the
pressure on their bottom lines. The efforts of many foreign banks have yielded
good results as their income from non-fund based business to total income
has increased manifold. However, this process has led to diversification in
their existing activities. In many developed countries, besides traditional
activities like accepting deposits and making advances, the banks are now
undertaking the following activities
Securitising debt;
ii.
Sometimes riding the enthusiasm the bank may start a new activity for
which expertise is not available with it. This may even result in failure of
the bank.
iii.
iv.
The system of providing all services under one roof may prevent the
universal banks from developing the highly specialised expertise
needed to compete in today's financial markets.
v.
The following financial services are already being offered by the commercial
banks through adopting the "Financial Conglomerate" route in India.
i.
ii.
iii.
iv.
v.
vi.
OFFSHORE BANKING
MERCHANT BANKING
Merchant Bankers are financial intermediaries. They act as intermediaries in
the process of transfer of capital from those who own it to those who use it.
Merchant Banking is an agency, retained by a company to advise and assist
in capital structuring/restructuring and its mobilisation within the prescribed,
regulatory framework. Thus, the merchant banker's role can be institutional
loan syndications, institutional placements, advisory services, including
mergers/.acquisitions/alliance and primary markets.
In primary markets a merchant banker is one of the many important agencies
retained by the company to assist it in mobilisation of funds. However, there is
a critical difference that a merchant banker helps, selects and co-ordinates
the work of other agencies. In the process the merchant banker has to
shoulder the high responsibility of an elder brother and be indirectly
responsible for the acts of other agencies.
In Indian conditions, Merchant Banking is understood ordinarily as related
mainly to issue house activities. Issue house activities include counselling,
corporate clients who are in need of capital, capital structure, form of capital to
be raised, terms and conditions, under-writing, timing and preparation of
prospectus, publicity for grooming the issue etc.
It includes following range of services :
TREASURY MANAGEMENT
The domestic treasury management have three main objectives:
a. To maintain Statutory Ratios, namely CRR and SLR as stipulated by the
RBI from time to time.
b. To maximize yield on the funds deployed.
c. To manage the funds in such a way that the short term liabilities are
matched with the corresponding assets without any strain on the funds
management. .
The prime objective is to ensure that the Bank at all times adheres to the
statutory obligations of the Central Bank stipulated and modified from time to
time. Any default, apart from attracting severe penalties would also attach a
stigma of non-compliance of Statutory obligations and hence the Treasury
Department has to constantly vigilant on this front.
Since the yield earned on deployment of funds for complying with statutory
obligations would necessarily be low, it is for Treasury Department to look for
other better and remunerative avenues for deployment of residual funds. In
this respect, the non-SLR investments such as investment in equity shares of
corporates, debentures, bonds of public sector, units of UTI, commercial
papers and floating interest rate bonds etc. assumes lot of importance.
The liability management has assumed importance these days which aspect
was not given due importance earlier. The liability management includes
matching of liabilities with assets of corresponding maturities, rate of return
and investment risk. The constant comparison of these three aspects is a
must if any treasury department is to make most of the opportunities which
exists in the treasury operations.
The SLR component of any bank consists of mainly the following :
a.
b.
c.
d.
INTEGRATED TREASURY
Foreign Exchange and Money Market Operations
As the names indicate Foreign-Exchange Market (FX-MKT) operations
involve conversion of one currency into another, whereas Money Market (MMKT) operations involve only transacting in any particular currency.
In a free and competitive market place, the forces of arbitrage opportunism
ensure that :
1. A currency with higher rate of interest is at discount for forward delivery;
2. A currency with lower rate of interest is at discount for forward delivery;
3. Discount/Premium (forward exchange differential) is equal to net
accessible interest rate differential between the two currencies involved.
Under perfect market conditions, equilibrium will be attained only and if
forward exchange differentials between currencies are equal to their interest
rate differentials. Forward exchange differentials are commonly referred to as
FX-SWAP differences or SWAP points.
In as much as Indian foreign exchange markets as yet are not fully free nor
completely competitive, forward exchange differentials of various foreign
currencies against Indian Rupee are not necessarily equal to interest rate
difference between the relative currency and Indian Rupee. As a result of
gradual liberalisation of Indian markets since 1993, some co-relationship
between Fx forward differentials (SWAP points) and relative interest at
differential has since come to play, albeit, occasionally and in a very limited
segment.
Consequently, Indian FX and Domestic Money Markets are still not free from
arbitrage. There are occasions when interest rate differentials and forward
swap difference are not equal and such imperfect market conditions offer
scope for arbitrageurs to exploit the situation by Swapping foreign currency
into Indian Rupees or vice versa. The regulators, with a view to moving
towards perfect market conditions, have been gradually permitting market
participants(Authorised Dealers) to freely borrow/invest foreign currencies/in
overseas centres. However, presently as the extent of this freedom is limited
(15% of unimparied tier a capital of ADS), market is yet not arbitrage free.
Authorised Dealers, having simultaneous access to both Forex and Money
Markets can quickly seize arbitrage opportunities by their SWIFT and coordinated actions. As such it is of paramount importance that both forex and
M-MKT activities are undertaken in an integrated manner preferably under
single roof and under command of same authority.
Our Bank, by establishing Treasury Branch, has put in place, required
systems under which various market opportunities, including those arising on
account of imperfect co-relationship between FX-MKT and M-MKT can be
fully exploited for augmenting Bank's profits. However, while undertaking
these activities, it has to be ensured that RBI guidelines in this regard are
strictly adhered to. Furthermore Risk Management parameters of the Bank
are to be meticulously followed.
BRIDGE LOANS
Banks are permitted to sanction Bridge Loans to the companies for a period
not exceeding one year against expected equity flows/issues. Such loans
should be accommodated within the ceiling of 5% of incremental deposits of
the previous year prescribed for the bank's investments in ordinary
shares/convertible debentures of corporates including PSU shares, loans to
corporates for meeting promoters contribution and units of mutual fund
schemes, the corpus of which is not exclusively invested in corporate debt
instruments. RBI has also advised banks to formulate their own internal
guidelines with the approval of their Board of Directors for grant of such loans
and to exercise adequate caution and attention to security for such loans.
These loans are normally tied up with the underwriting commitments by other
Banks/Financial Institutions and thus considered secured and self liquidating,
though no tangible security is available to the bank, the control mechanism
adopted in his regard interalia includes the following aspects :
1. Public issue should have the approval of relevant authorities including
SEBI.
2. The extent of Bridge Loan is related to the specified percentage of the
amount actually called up each time.
3. The period of Bridge Loan is related to the time taken for completion of
various formalities related to public issue.
4. Such Bridge Loans are normally considered in AAA/AA rated accounts
with the Bank preferably where the lending Bank is Banker to the issue.
Exceptions to this rule can be made only in the case possessing high
merits. In case of consortium accounts, NOC from the leader to be
obtained.
5. For ensuring proper end use of the Bridge Loan, the disbursements are
made through a special account so that the funds do not get mixed up.
6. The utilisation of Bridge Loan is allowed for the purpose for which the
public issue has been floated. This is ensured by obtaining written
statement from the company as to how the amount of Bridge Loan is going
to be spent. Supporting documentary evidence is obtained wherever
considered necessary. Additionally, the Company may be asked to submit
a certificate from a reputed Chartered Accountant about the end use of
funds.
Bridge Loans to Government
Banks should not extend bridge loans/interim finance for activities, which are
required to be legitimately met out of Government resources/budgetary
allocations.
Period of such bridge loan/interim finance should not exceed four months.
Under no circumstances, should banks allow extension of time for
repayment of bridge loan/interim finance,
HEDGE FUNDS
What are hedge funds?
Hedge funds can be defined as eclectic investment pools organised as private
partnerships for wealthy individuals and institutions, and very often, for
offshore residents, primarily for tax and regulatory purposes whose managers
are paid on a fee-for-performance basis. Approximately, 15-25 per cent of
post-tax profit accrues to the hedge fund manager apart from the
management fee of 1 per cent of the assets, annually. Hedge fund managers
as partners, have their own capital invested in the funds they manage. This is
in sharp contrast to the mutual fund industry, where managers typically do not
have their own fund, invested. This has important implications for hedge fund
managers, as they tend to be oriented towards achieving the highest absolute
return without taking excessive risk.
Types of hedge funds:
Hedge funds can be classified into following broad categories:
Funds of funds These are hedge funds that allocate their portfolio of
investments, sometimes with leverage, among a number of Hedge Funds.
LETTERS OF CREDIT
LETTERS OF CREDIT also called Documentary credits are generally used
for facilitating international trade. However, its use for the domestic (local)
trade is also not unknown.
Simply put, Letter of Credit is an instrument for settling trade payments. It is
an arrangement for making payment against documents. To elaborate, L/C is
an undertaking by a bank on behalf of its customer to pay the value of goods
or services to its supplier against submission of specified documents/meeting
terms and conditions set out in the L/C.
PARTIES TO A LETTER OF CREDIT
OPENER is the one at whose request L/C is issued by a bank. Opener of L/C
is importer or buyer of goods/services.
ISSUING BANK is the Bank which issues L/C.
BENEFICIARY is the one in whose favour L/C is established. Beneficiary of
the L/C is the exporter/seller.
ADVISING BANK is the bank which advises the issuance of L/C to the
beneficiary. Advising bank verifies the authenticity of the L/C before advising
the beneficiary.
NEGOTIATING BANK is the bank which negotiates documents stipulated in
the L/C and is authorised to pay the value (if terms/conditions and documents
as set out in the L/C are complied with) to the beneficiary.
In addition to above, some times CONFIRMING BANK is also found in the
chain of L/C transactions. Confirming Bank is the one which adds its own
confirmation to pay the value. Confirming bank comes into the picture when
beneficiary is not comfortable with the opening bank , its creditworthiness or
country risk. In such cases, opening bank will arrange to get the L/C
confirmed through an acceptable bank to the beneficiary.
When opening bank is not maintaining an account with negotiating bank, it
has to reimburse the payment made by the negotiating bank, In such cases,
opening bank authorises the negotiating bank to claim the amount of
reimbursement from the bank with which opening bank maintains an account.
Such a bank (where an account is maintained by the opening bank) is called
"REIMBURSING BANK".
TYPES OF L/C:
Revocable L/C is a credit which can be amended or cancelled by the L/C
issuing bank without notice to the beneficiary.
Irrevocable L/C is a credit which cannot be amended or cancelled without the
consent of the parties to L/C. In terms of Article 6 of UCPDC 500, all L/Cs are
irrevocable unless specifically mentioned as revocable.
EXPORT FINANCE
Packing credit being in the nature of working capital finance is for short period
only. These advances are granted for period not exceeding 180 days at
concessional rate. This period can be extended by another 90 days (total 270
days) without reference to RBI] for where delay is beyond the control of the
exporter. However, higher rate of interest will be charged for such extended
period.
Further, concession in rate of interests is available only if the export takes
place within reasonable time from availing of finance. Such period should not
exceed 360 days and in case it exceeds 360 days, banks should charge
commercial rate of interest from the date of granting finance. In case no
export takes place, banks are entitled to charge interest @ 2% above
commercial rate.
PCFC is packing credit denominated in foreign currency. This is done with a
view to avail of low rate of interest prevailing abroad which adds to the
competitiveness of an exporter, PCFC funds can be used for import of raw
material and processing and then reexporting or for usage in domestic
purposes. PCFC is liquidated by submitting export bills for collection or
negotiation.
POST-SHIPMENT FINANCE
Foreign Bills purchased or discounted : Increasingly, quite a lot of
international trade is taking place without the mechanism of L/C. Where
documents are tendered for purchase or discounting (not accompanied by
L/C), bank must ensure that the customer is of undoubted worth. Status
reports, both, on the exporter as well as the importers should be called for and
kept on record. Bank should also verify the kind of goods being exported while
purchasing/discounting the bills. If the goods are of special nature/made-toorder type, it becomes difficult to dispose of such goods in case the buyer
fails to pay for it.
Negotiation of Foreign Bills under L/C : is the most secured form of post
shipment finance. Bank negotiates bills complying with terms and conditions
of the L/C. Where it does so in pursuance of the mandate given by the issuing
bank, negotiating bank is assured of receiving reimbursement from issuing
bank. Bills should be realised within period, failing which it will attract
commercial rate of interest.
ECGC SERVICES
As exports involve cross border movement of goods and services, the
attendant risks are several. To mitigate these risks and to encourage bankers
to finance export trade on liberal terms, Government of India set up Export
Risk Insurance Corporation in July 1951. It was renamed as Export Credit &
Guarantee Corporation of India Ltd. (ECGC) in 1983.
ECGC provides Policies to exporters and Guarantees to banks covering
various risks involved.
Whole Turnover Packing Credit Guarantee (WTPCCG)
WTPCG is a contract between ECGC and Bank, whereby the Corporation
guarantees protection to Bank against losses sustained in the process of
granting pre-shipment finance to exporters.
The banks which undertake to obtain cover for packing credit advances
granted to its customers in all branches, ECGC issues Whole Turnover
Packing Credit Guarantee WTPCG).
Almost all the banks in India have taken the guarantee since then.
Salient features of WTPC
Risks covered
Insolvency of the exporter.
Protracted default of the exporter.
Guarantee coverage
Following is the extent of coverage :
Normal goods
75%
Hazardous goods
66.66%
SSE/SSI
90%
Small Scale Industries : Anticipated Annual Export Turnover not exceeding
Rs.25 lacs, irrespective of amount of local sales.
Small Scale Exporters : Anticipated Annual Turnover not exceeding Rs. 40
lacs w/w Export Turnover not to exceed Rs. 25 lacs.
Reporting of Limits
Whenever new limits are sanctioned or existing limits enhanced, reduced or
cancelled, they should be reported to the Corporation immediately but in any
case within 30 days.
Discretionary Limit
Every Guarantee mentions a limit (in terms of Rupees) upto which the bank
can allow packing credit advances to any of its exporter client without ECGC's
approval. This limit is called Discretionary Limit (DL). .
Monthly Declaration and payment of premium
All branches which have granted PC have to submit a monthly declaration to
ECGC along with the amount of premium payable on such declarations. The
amount of premium should be calculated at the rate of 7 paise per Rs. 100 per
month on the total average daily products.
Premium is recovered from the exporters immediately from CD/CC Account.
Filing of claim
The Bank should file a claim in respect of an advance within six months from
the date of Report of Default.
Renewal of Guarantee
The WTPCG issued to the bank expires on 30 th June every year and renewals
are made for a period of 12 months i.e. 1 st July to 30th June. IBD takes care of
the renewal.
WHOLETURNOVER POST SHIPMENT EXPORT CREDIT GUARANTEE
(WTPSG)
WTPSG was introduced in our Bank w.e.f. 1.4.1997. It covers post-shipment
finance granted to exporters by Banks in the form of purchase, discount and
negotiation of export bills. It also covers advance basis and covers entire
post-shipment advance granted by the Bank. In the case of our Bank,
WTPSG covers only purchase/discount of export bills and advance against
export bills sent on collection both drawn under contracts.
The salient features of the WTPSG are as under :
Risk covered:
- Insolvency of the exporter.
- Protracted default by the exporter to pay post shipment advance due to
the Bank.
- Buyers failure to pay/retire bill will not give rise to claim, unless our
exporter has failed to adjust the advance
Percentage of cover:
Exporter who is a Holder of Std. Policy
SSE/SSI
90%
SSE/SSI
65%
Others
85%
Others
60%
Premium
Claims
Claims should be filed by the branch within 6 months from the date of filing of
ROD with the nearest office of the ECGC which services the branch.
is permitted to be credited into NRE account. On the other hand, debits for
local disbursements are allowed. Wherever regulations permit, debits are
allowed for investment in shares/securities of an Indian company or for
purchase of immovable property in India.
Loans against the security of the funds held in the NRE account can be
granted to the account holder for personal purposes or for carrying on
business activity. Repayment of such loans will be made by means of either
appropriating the deposit or fresh inward remittance or out of the local rupee
resources in the NRO account of the borrower. Loans can also be granted for
direct investment on non-repatriation basis or for the purpose of acquisition of
flat/house for own residential use.
Banks can grant fund-based/non-fund based facility to resident
individuals/firms/companies against the collateral of FD held in NRE account.
however, for such loans, there should be no direct/indirect foreign exchange
consideration for the non-resident depositor agreeing to pledge his deposit.
Income from interest is exempt from Income Tax. Balances held in the NRE
accounts are exempt from Wealth Tax.
Foreign Currency (Non-Resident((B) Accounts: can be opened by all NRIs
and OCBs in currencies US Dollar, Pound Sterling and euro. These
accounts can be opened only as term deposit for maturities ranging from 12
months and up to 36 months. All debits and credits permitted in the NRE
accounts are permitted in FCNR (B) accounts also.
Since the deposit and interest thereon is denominated in foreign currency
only, the depositor is not exposed to exchange rate risk. However, Reserve
Bank of India does not provide exchange rate guarantee/cover to the banks.
Banks can lend resources mobilised under these accounts without any
interest rate stipulations made by Reserve Bank of India. That is to say, banks
can determine rates of interest on loans made out of FCNR (B) funds.
Resident Foreign Currency Accounts (RFC) can be opened by a person
resident in India out of foreign exchange received as pension/any other
superannuation benefits from his employer outside India or received as
gift/inheritance or acquired when he was resident outside India.
These accounts are maintained in foreign currencies only. These accounts are
free from all restrictions regarding utilisation or foreign currency balances
including restriction on investment in any form outside India.
Exchange Earners' Foreign Currency Accounts Scheme (EEFC): was
introduced in 1992 to enable exporters and other exchange earners to retain a
portion of their receipts in foreign exchange with an authorised dealer in India.
100% Export-Oriented Units or a unit in (a) Export Processing Zone or (b)
Software Technology Park or (c) Electronic Hardware Technology Park may
retain 70% and any other person resident in India may retain 50% of the
eligible inward remittances.
EEFC accounts can be held in the form of non interest bearing current
accounts only. No credit facility (funded or non-funded) can be made available
against the EEFC balances. EEFC funds can be used for payments outside
India in the nature of current account.
UNFIXED DEPOSIT SCHEME OF OUR BANK FOR NRIs
(ii)
(iii)
(iv)
Forfaiting
It refers to purchase of debt instruments, without recourse to the exporter. It
helps the exporters to concentrate on export front without bothering about the
collection of export bills.
EXIM bank has introduced a scheme of forfaiting from February 1992, under
which it arranges to get bills of exchange/promissory notes discounted by
overseas forfaiting agencies on without recourse basis.
Factoring Vs. Forfaiting
Factoring
Forfaiting
A Mutual Fund is one which pools resources from several investors and
manages the same with an objective to maximise returns for these
investor members.
Unit Trust of India started the first mutual fund scheme in India. From 1987
Commercial Bank/Financial Institutions are permitted to float Mutual Funds
through their subsidiaries.
Venture Capital
Parties to Securitisation-
Operating Lease:
Leveraged leave:
Hire Purchase
It means an agreement under which goods are let on hire and under which
the hirer has option to purchase the same.
Hire purchase involves delivery of possession of the goods to the hirer and on
payment of last installment. The property passes on the hirer.
Loan Syndication
This refers to a loan arranged by a Bank for a borrower who is likely to be a
large company, a local authority or Govt. Department.
Parties to a syndicated debts are :
1. Borrower 2. Lead Manager or Syndicator 3. Participating Bank
4. Agent Bank and 5.Guarantor.
Consortium financing
Where the entire credit needs of a borrowing unit is financed by a group of
banks by forming a consortium.
It is a concept to promote collective application of banking resources.
Syndication Vs. Consortium Lending
1. Both the systems provide for dispersal of risk amongst creditors.
2. In syndication the borrower can get a competitive price by asking for bid
from different banks.
3. Syndicated Credit is to be paid by during a fixed period which is not in
case of consortium lending.
on overnight basis
Notice Money
The IBPCs are issued by any commercial bank and subscribed by any
commercial bank.
Global Depositor Receipts
It is Dollar denominated instrument traded on a stock exchange in Europe or
U.S. or both.
It represent certain numbers of underlying shares.
The shares are issued by a company to an intermediary called depository,
who subsequently issues GDRs. The physical possession of such shares is
with another intermediary called custodian who is the agent of the depository.
Money Market Mutual Funds
Eligibility
: It can be set-up by scheduled commercial banks,
public sector financial institutions and mutual funds.
Eligibility for Subscription :
Individuals, Corporate, NRIs on nonrepatriation basis and others.
Lock-in-Period
:
15 days
Reserve requirement
:
Nil
for Banks
Stamp duty
:
Exempted
Regulatory Authority
:
RBI for Private Sector RBI & SEBI.
Certificate of Deposit (CD)
It is a document of title to a term deposit. All Commercial Banks excluding
RRB are authorised to issue CDs in form of usance promissory notes which
are transferable by endorsement and delivery. CDs can be issued to
individuals ,corporations, companies, trusts, associations & can be issued to
NRIs also but on non-repatriable basis.
Period
:
Minimum 15 Days, maximum 1 year.
Amount
:
Minimum Rs. 5 lacs and in multiple of
Rs. 1 lacs.
Ceiling on Issue
:
Banks can now issue any amount of CD.
Lock-in Period
:
14 days from the date of issue.
Reserve Requirement
:
Like other deposits
Stamping
:
As applicable to usance PN.
m) No loan can be granted against CD.
n) DFHI provides secondary market for CD.
o) On due date pay order should be prepared an exchanged with the
certificate when presented for payment of maturity value.
Commercial Paper (CP)
CPs are unsecured, usance promissory Notes transferable by endorsement
and delivery.
Eligibility : Companies satisfying following eligibility criteria can alone
issue CPs
Tangible Net worth - Minimum Rs. 4 Crores.
CREDIT RATING
Credit rating indicating, in a summarized form, through symbol or letter the
relative safety of timely payment of interest and principal of the debt
instrument of a borrowing company.
Credit Rating Agencies in India:
Presently there are five rating agencies in India i.e. CRISIL, ICRA, CARE, UTI
Credit Rating and DCR India Ltd.
CRISIL (Credit Rating Information Services of India Ltd.) :
Promoted by ICICI, UTI and other financial institutions and banks.
CRISII's Rating Symbols and their meanings :
Debentures : AAA Highest safety, AA-High safety, A-Adequate safety, BBBModerate safety, BB-Inadequate safety, B-High Risk, C-Default
Fixed
Deposits
:
FAAAHighest
Safety;
FA-Adequate safety, FC-High Risk; FD-Default.
FAA-High
Safety;
BANKER'S RATIOS
Solvency Ratio
Current Ratio
Quick Ratio
Capital Gearing
Ratio
Debit-Equity
Ratio
Gross Profit
Ratio
Operating Profit
Ratio
Return on Net
Worth
Inventory
Turnover Ratio
Debtors Turnover
Ratio
= Sales
Trade Debtors
It is measured in number, days of month and also
known as Debtors Velocity.
Higher period indicates inefficiency in receivable
management
Creditors
Turnover Ratio
= Purchases
Total Creditors
It is also expressed in number or days or month.
It is also known as creditors velocity.
It is calculated for determining the ability of the firm to
obtain market credit.
Debt-Service
Coverage Ratio
- BEP in Rs.
- BEP in Terms
Capacity Utilisation
Contribution
MARGIN OF SAFETY:
Margin of Safety = Actual Sale BEP (Sales)
-
It is the point of Sale at which the unit does not incur cash loss or cash
profit. While calculating costs (for calculating this DEP) non cash
expenses like Depreciation are not taken into account.
The S.L. Kapur Committee on the working of credit delivery system for small
scale industries (SSI) has recommended that SSIs should be granted no
objection of collateral securities for loans up to Rs. 2 lakh, the setting up of a
collateral reserve fund to provide support to first generation of entrepreneurs
who find it difficult to furnish collateral securities or third party guarantees and
the setting up of Small Industries Infrastructure Development Fund for
developing industrial areas in and around metropolitan areas and a change in
the definition of sick SSIs.
The committee has also suggested special treatment to smaller among small
industries, the removal of procedural difficulties in the path of SSI advances,
sorting out of issues relating to mortgage of land, including removal of stamp
duty and permitting equitable mortgages, and special access to low-cost
funds to Small Industries Development Bank of India (SIDBI) for refinancing
SSI loans.
The committee has also called for statutory powers to state-level interinstitutional committees, setting up of a separate guarantee organisation and
opening of additional 1,000 specialised branches.
The committee has called for 20 per cent additional ad hoc limits to SSIs from
banks and setting up of a reconstruction fund with initiative and initial corpus
from the government and the RBI to enable branch managers to provide, if
necessary, initial corpus money for such additional facilities, earmarking at
least 40, per cent of SIDBI resources of the tiny sector, close cooperation
between SFCs and public sector banks for jointly providing term loans and
working capital limits to SSIs. It has also called on NABARD to set up a fund
similar to the National Equity Fund.
The panel has also suggested that SIDBI should set up a few software
venture capital funds immediately.
The group has also suggested that some recommendation made by the Khan
Committee regarding restructuring of weaker SFCs may be taken up for
prompt decisions by the government. SIDBI should be helped through
provision of funds to take up a plan for financial restructuring of these bodies.
State governments, because of their poor financial position, may not be able
to fund the restructuring of SFCs. State governments share should either be
substituted and provided by SIDBI or by the government.
Characteristics
of a SHG
to
be
bank.
Organising
SHG
Selection
Criteria
linkage
LINKAGE
Programme
Extent of Loan
Security
Repayment
members etc.
Loans from SHGs to members, could be repaid
inappropriate instalements which may be daily, weekly or
market days fortnightly, monthly etc.
b.
c.
d.
APPEALS:
The order passed by the Tribunal will be appealable to the Appellate Tribunal
but no appeal shall be entertained by the Appellate Tribunal unless the
appellant deposits 75% of the amount of debt due from him as determined by
the Tribunal. The Appellate Authority may, for reasons to be recorded in
writing, waive or reduce the amount of such deposit.
Provision has been made for appointing a receiver after taking possession
of the securities pending their sale.
Since the bill seeks to give drastic powers to the banks and financial
institutions, it also provides for the rights of the borrowers. It provides that
the borrowers should get a copy of the security agreement and periodical
statements of accounts with rates of interest charged.
A provision has also been made for the purpose of registration of existing
security interests under the proposed law within a period of six months.
The bill has suggested that the new computerised central registry system
should be operated concurrently with existing registration systems under
The BFC has been set up by RBI. The Governor RBI is the Chairman and one
the Dy. Governors of the RBI is full-time Vice-Chairman. The Board is assisted
by the Department of Supervision (DOS) of RBI.
The main function of the Board is to strengthen, supervision and surveillance
over the financial system which includes banks, FIs, NBFIs and Para Banking
Financial Institutions. The supervision will be both on site (ie. inspection) and
off-site (i.e. calling for reports and returns) to supervise and monitor the
financial system. For off site supervision, RBI has introduced 7 types of DSB
(Department of Supervision for Banks) return i.e.:
DSB Return NO 1 on Assets, Liabilities, Capital & Reserves and off Balance
Sheet exposures DSB II: Regarding "Capital Adequacy". DSB III: Quarterly
operating Result Statement; DSB-IV: Return on Asset Quality; DSB-V: Report
of Large Credits of the bank and top ten credit exposures; DSB- VI: Report on
Connected Lending and DSB Return- VII: Report on " Ownership and control".
20.
21.
22.
23.
24.
Recommended :
Single window concept under consortium lending.
Nine model documents as now suggested by RBI including Joint Deed of
Hypothecation & Inter se Agreement.
J.V. Setty Committee
Recommended that, Banks in India may be allowed to provide loan on
SYNDICATION BASIS as an alternate to consortium lending.
R. Tiwari Committee (1984)
Recommended
Measures to deal with the sickness of the Industrial Companies.
Formation of SICA 1985
Formation of BIFR & AAIFR
Definition of SICK Industrial Units
G. Sunderam Committee
Committee on structure of Export Credit.
Sodhani Committee (1995)
Recommended
Liberlisation of Foreign Exchange Business.
Exports be allowed to retain 100% of Forex earning.
Foreign Exchange clearing house to be set up.
Banks be allowed to lend & borrow Short Term Nostro funds.
Companies be allowed to book forward contract without formal document
etc.
First Narsimhan Committee (1991)
Recommended
Restructuring of the banking and financial system.
Prudential Accounting Norms.
Setting up of Debt Recovery Tribunal.
Reduction in Reserve Requirements.
Deregulation of interest rates.
Capital Adequacy Norms.
Re-defining the priority sector and reduction of target.
Setting up of SEBI.
Closure of CCI office.
Opening up of Capital Market for foreign portfolio investment.
Computerisation.
4)
5)
6)
7)
8)
9)
10)
To be implemented from the current financial year ending March 31, 1999.
A minimum target of 9 per cent CRAR to be achieved in the year 2000
and 10 per cent by 2002:
Banks should achieve a minimum CRAR of 9 per cent as on March 31, 2000.
Decision about further enhancement of CRAR will be announced later.
An asset be classified as doubtful if it is in the sub standard category
for 18 months in the first instance and eventually for 12 months and
loss if it has been so identified but not written off:
An asset will be treated as doubtful, if it has remained in sub standard
category for 18 months instead of 24 months, by march 31, 2001.
Banks may make provisions therefore, in two phases as under:
As on March 31, 2001: provisioning of not less than 50 per cent on the assets
which have become doubtful on account of the new norms, i.e., reduction of
the period from 24 months to 18 months.
As on March 31, 2002: Balance 50 per cent of the provisions should be made
in addition to the provisions needed as on March 31, 2002. The proposal to
introduce the norm of 12 months will be announced later.
The Government guaranteed advances which have turned sticky to be
classified as NPAs:
The Government guaranteed advances which have turned sticky are to be
classified as NPAs as per the existing prudential norms with effect from April
1, 2000.
Income recognition, asset classification and provisioning norms should
apply to Government guaranteed advances in the same manner as for
any other advances.
Provisions on these advances should be made over a period of 4 years as
detailed below:
Existing/old Government guaranteed advances which would become NPA on
account of asset classification norms are to be fully provided for during the
next four years from the year ending March 1999 to march 2002 minimum of
25 per cent, each year.
A general provision of 1 per cent on standard assets be introduced:
To start with, banks should make a general provision to a minimum of 0.25
per cent for the year ending March 31,2000. The decision to raise further the
provisioning requirement on standard assets would be announced in due
course.
Banks and Financial Institutions should avoid the practice of evergreening:
The Reserve Bank reiterates that banks and Financial institutions should
adhere to the prudential norms on asset classification, provisioning, etc., and
avoid the practice of ever-greening.
Any effort at financial restructuring must go in hand with operational
restructuring. With the cleaning up of the balance sheet, simultaneous
steps to be taken to prevent/limit reemergence of new NPAs:
The banks are advised to take effective steps for reduction of NPAs and also
put in place risk management systems and practices to prevent reemergence
of fresh NPAs.
To enable banks in difficulties to issue bonds for Tier II capital,
Government will need to guarantee these instruments which would then
11)
12)
13)
14)
Weak banks.
Banks under strong distress.
Banks with non compliance of three or four Parameters.
Banks with non compliance of one or two parameters.
Banks which have met all parameters.
Three banks were classified under the category of weak banks, viz., UCO
Bank, Indian Bank and United Bank of India. Bank of India is under
category 3 on the basis of its performance during 1998-99.
Causes of Weakness: The weaknesses relate to three areas: Operational
failures mainly relate to high level and fresh generation of NPAs, slow
decision making with regard to fresh sanction of advances and compromise
proposals resulting in loss of fund-based income and fee income, declining
market share in key areas of operations, limited product line and revenue
stream, absence of cost control and effective MIS and costing exercise, weak
internal control and housekeeping, inadequate risk management systems,
poor customer service, low level of technology and non competitive rates.
Human Resources issues mainly relate to overstaffing, low productivity and
age profile, low levels of motivation. Management issues relate to lack of