Utmost good faith (Uberrimae Fidei)
In all legal contracts, it is essential that the parties to the contract exercise good faith. However, in insurance the emphasis is on utmost good faith which should be exercised by the insured. As the insured alone has complete information about the subject of insurance, he should reveal all the facts to the insurer. In case of breach of this condition the contract becomes void abinitio
Wednesday, 30 January 2013
Third Party Administrators (TPA) - Health Insurance
Third Party Administrators (TPA) - Health Insurance
TPAs are licensed by IRDA and are engaged for a fee or remuneration for the provision of health services. Health services means all the services rendered by a TPA as per the terms of agreement entered into with an insurance company in connection with health insurance business, however the services rendered will not include either insurance business or soliciting of insurance business either directly or through an intermediary. They are normally contracted by a health insurer to administer services, including claims administration, premium collection, enrollment and other administrative activities.
The license to act as TPA is granted by IRDA only to companies which have a share capital and are registered under Companies Act, 1956. As per the memorandum of the company, the primary objective should be to carry on business in India as TPA in the health services and they are not permitted to transact any other business. The minimum capital prescribed is Rs. 1,00,00,000 .
As per the act at least one of the directors should be a qualified medical doctor registered with Medical Council of India. The Chief Executive Officer (CEO) of the company has to under go training as prescribed by the IRDA.
The TPA can enter into agreement with more than one insurance company and the insurance companies can also deal with more than one TPA.
TPAs are licensed by IRDA and are engaged for a fee or remuneration for the provision of health services. Health services means all the services rendered by a TPA as per the terms of agreement entered into with an insurance company in connection with health insurance business, however the services rendered will not include either insurance business or soliciting of insurance business either directly or through an intermediary. They are normally contracted by a health insurer to administer services, including claims administration, premium collection, enrollment and other administrative activities.
The license to act as TPA is granted by IRDA only to companies which have a share capital and are registered under Companies Act, 1956. As per the memorandum of the company, the primary objective should be to carry on business in India as TPA in the health services and they are not permitted to transact any other business. The minimum capital prescribed is Rs. 1,00,00,000 .
As per the act at least one of the directors should be a qualified medical doctor registered with Medical Council of India. The Chief Executive Officer (CEO) of the company has to under go training as prescribed by the IRDA.
The TPA can enter into agreement with more than one insurance company and the insurance companies can also deal with more than one TPA.
Insurance Regulatory and Development Authority (IRDA)
Insurance Regulatory and Development Authority (IRDA)
IRDA is the regulator of the insurance industry in India and was constituted by an Act of Parliament in 1997. It has the following mission:
To protect the interests of the policy holders. To regulate, promote and ensure orderly growth of the insurance industry.
It is constituted by a 10 member team consisting of :
Chairman
Five whole time members
Four part time members
Duties, Powers and Functions of IRDA
Section 14 of the IRDA Act, 1999 lays down the duties, powers and functions of IRDA which are :
1. issuance of certificate of registration, renewal, modification, withdraw, suspend or
cancel such registration;
2. Protection of the policyholders interest;
3. Laying down qualifications, training and code of conduct for intermediaries;
4. Laying down code of conduct for Surveyors;
5. Promote efficiency in the conduct of insurance business;
6. Promoting and regulating professional organisations connected with the insurance
and re-insurance business;
7. Levying fees and other charges for carrying out the purposes of this Act;
8. Calling for information, conduct of inspection, audit of all organizations associated
with the insurance business;
9. Control of the rates, terms etc. offered by general insurers in respect of business not
controlled by Tariff Advisory Committee (TAC);
10. Specifying the manner in which accounts should be maintained by insurers and
intermediaries;
11. Regulation of investment of funds by insurers ;
12. Regulation of maintenance of solvency margins;
13. Act as a dispute settlement authority between insurers and intermediaries;
14. Supervise TAC;
15. Specify the percentage of premium income to be utilised for promoting organizations mentioned in clause 6 ;
16. Specify the rural sector obligation of insurers;
17. Exercise any other powers as prescribed.
IRDA is the regulator of the insurance industry in India and was constituted by an Act of Parliament in 1997. It has the following mission:
To protect the interests of the policy holders. To regulate, promote and ensure orderly growth of the insurance industry.
It is constituted by a 10 member team consisting of :
Chairman
Five whole time members
Four part time members
Duties, Powers and Functions of IRDA
Section 14 of the IRDA Act, 1999 lays down the duties, powers and functions of IRDA which are :
1. issuance of certificate of registration, renewal, modification, withdraw, suspend or
cancel such registration;
2. Protection of the policyholders interest;
3. Laying down qualifications, training and code of conduct for intermediaries;
4. Laying down code of conduct for Surveyors;
5. Promote efficiency in the conduct of insurance business;
6. Promoting and regulating professional organisations connected with the insurance
and re-insurance business;
7. Levying fees and other charges for carrying out the purposes of this Act;
8. Calling for information, conduct of inspection, audit of all organizations associated
with the insurance business;
9. Control of the rates, terms etc. offered by general insurers in respect of business not
controlled by Tariff Advisory Committee (TAC);
10. Specifying the manner in which accounts should be maintained by insurers and
intermediaries;
11. Regulation of investment of funds by insurers ;
12. Regulation of maintenance of solvency margins;
13. Act as a dispute settlement authority between insurers and intermediaries;
14. Supervise TAC;
15. Specify the percentage of premium income to be utilised for promoting organizations mentioned in clause 6 ;
16. Specify the rural sector obligation of insurers;
17. Exercise any other powers as prescribed.
Insurance Act, 1938
Insurance Act, 1938
This Act came into force on 1st July 1939 and is applicable to the whole of India, except Jammu and Kashmir. This law is applicable to all the insurance companies and other entities participating in the insurance industry in India .
The purpose of enactment of this law is:
1. To supervise all the organisations operating in insurance business in India. This is
ensured by making registration compulsory.
2. To increase deposit of insurance companies to ensure that they are adequately
financed and conform to minimum capital requirements.
3. Full disclosure of information is enforced to ensure soundness and transparency in
management.
4. Submission of accounts and inspection of insurance companies by authorities.
5. Guidelines are laid for investment of funds by insurance companies.
6. Regulations to govern the assignment and transfer of life insurance policies besides
including the possibility of making nominations.
The Insurance Act, 1938 was amended in 1950, again in 1956 when life insurance business
was nationalized and again in 1972 when general insurance was nationalised.
This Act came into force on 1st July 1939 and is applicable to the whole of India, except Jammu and Kashmir. This law is applicable to all the insurance companies and other entities participating in the insurance industry in India .
The purpose of enactment of this law is:
1. To supervise all the organisations operating in insurance business in India. This is
ensured by making registration compulsory.
2. To increase deposit of insurance companies to ensure that they are adequately
financed and conform to minimum capital requirements.
3. Full disclosure of information is enforced to ensure soundness and transparency in
management.
4. Submission of accounts and inspection of insurance companies by authorities.
5. Guidelines are laid for investment of funds by insurance companies.
6. Regulations to govern the assignment and transfer of life insurance policies besides
including the possibility of making nominations.
The Insurance Act, 1938 was amended in 1950, again in 1956 when life insurance business
was nationalized and again in 1972 when general insurance was nationalised.
Time value of Money
Time value of Money
The concept of time value of money arises from the relative importance of an asset now vs.in future. Assets provide returns and ownership of assets provides access to these returns.
For example, Rs. 100 of today’s money invested for one year and earning 5% interest willbe worth Rs. 105 after one year. Hence, Rs. 100 now ought to be worth more than Rs. 100 a year from now. Therefore, any wise person would chose to own Rs. 100 now than Rs. 100 in future. In the first option he can earn interest on on Rs. 100 while in the second option he loses interest. This explains the ‘time value’ of money. Also, Rs. 100 paid now or Rs. 105 paid exactly one year from now both have the same value to the recipient who assumes 5% as the rate of interest. Using time value of money terminology, Rs. 100 invested for one year at 5% interest has a future value of Rs. 105. The method also allows the valuation of a likely stream of income in the future, in such a way that the annual incomes are discounted and then added together, thus providing a lump-sum “present value” of the entire income stream.
For eg. If you earn Rs. 5 each for the next two years (at 5% p.a. simple interest) on Rs. 100, you would receive Rs. 110 after two years. The Rs. 110 you earn, can be discounted at 5% for two years to arrive at the present value of Rs. 110, i.e. Rs. 100.
Valuing future cash flows, that may arise from an asset such as stocks, is one of the cornerstones of fundamental analysis. Cash flows from assets make them more valuable now than in the future and to understand the relative difference we use the concepts of interest and discount rates. Interest rates provide the rate of return of an asset over a period of time, i.e., in future and discount rates help us determine what a future value of asset, value that would come to us in future, is currently worth.
The present value of an asset could be shown to be:
Where
PV = Present Value
FV = Future Value
r = Discount Rate
t = Time
The concept of time value of money arises from the relative importance of an asset now vs.in future. Assets provide returns and ownership of assets provides access to these returns.
For example, Rs. 100 of today’s money invested for one year and earning 5% interest willbe worth Rs. 105 after one year. Hence, Rs. 100 now ought to be worth more than Rs. 100 a year from now. Therefore, any wise person would chose to own Rs. 100 now than Rs. 100 in future. In the first option he can earn interest on on Rs. 100 while in the second option he loses interest. This explains the ‘time value’ of money. Also, Rs. 100 paid now or Rs. 105 paid exactly one year from now both have the same value to the recipient who assumes 5% as the rate of interest. Using time value of money terminology, Rs. 100 invested for one year at 5% interest has a future value of Rs. 105. The method also allows the valuation of a likely stream of income in the future, in such a way that the annual incomes are discounted and then added together, thus providing a lump-sum “present value” of the entire income stream.
For eg. If you earn Rs. 5 each for the next two years (at 5% p.a. simple interest) on Rs. 100, you would receive Rs. 110 after two years. The Rs. 110 you earn, can be discounted at 5% for two years to arrive at the present value of Rs. 110, i.e. Rs. 100.
Valuing future cash flows, that may arise from an asset such as stocks, is one of the cornerstones of fundamental analysis. Cash flows from assets make them more valuable now than in the future and to understand the relative difference we use the concepts of interest and discount rates. Interest rates provide the rate of return of an asset over a period of time, i.e., in future and discount rates help us determine what a future value of asset, value that would come to us in future, is currently worth.
The present value of an asset could be shown to be:
Where
PV = Present Value
FV = Future Value
r = Discount Rate
t = Time
Point of Sale (PoS) Terminals
Point of Sale (PoS) Terminals
To use smart cards/debit cards/credit cards for the purchase of an item or for payment of a service at a merchant's store, the card has to be swiped in a terminal (known as Point of Sale or POS terminal) kept at the merchant's store. As soon as the card is put on the terminal, the details of the card are transmitted through dial-up or leased lines to a host computer. On verification of the genuineness of the card, the transaction is authorised and concluded. It is thus a means to 'check out' whether the cardholder is authorized to make a transaction using the card. POS terminal is a relatively new concept.
A Point of Sale (PoS) terminal is an integrated PC-based device, with a monitor (CRT), PoS keyboard, PoS printer, Customer Display, Magnetic Swipe Reader and an electronic cash drawer all rolled into one. More generally, the POS terminal refers to the hardware and software used for checkouts.
In recent years, banks are making efforts to acquire Point of Sale (PoS) terminals at the premises of merchants across the country as a relatively new source of income. 'Acquiring' a POS terminal means installing a POS terminal at the merchant premises. The installer of thePoS terminals is the acquirer of the terminal and the merchants are required to hold an account (merchant account) with the acquirer bank. The acquirer bank levies each transaction with a charge, say 1% of the transaction value. This amount is payable by the merchant. Most merchants do not mind absorbing this cost, because such facilities expand their sales. Some
merchants, however, pass on the cost to the customer. This business is known as merchant acquisition business.
Banks are vying with one another for PoS machine acquisition, since it offers a huge opportunity to generate additional income by increasing the card base and encouraging card holders to use them for their merchant transactions. Leading banks--both in the public and private sectors are planning to install hundreds of thousands of these terminals across the country. Some banks are planning joint ventures with global companies who have experience and expertise in
this area.
PoS terminals are predominantly used for sale and purchase transactions. The PoS terminals have proved to be very effective in combating fraudulent transaction by on-line verification of cards. Also, the RBI is expected to permit cash withdrawal transactions to cardholders from PoS terminals installed with shopkeepers, mall stores, etc.
PoS terminals, having gained significant acceptance in metros, need to become more popular in tier-2 and tier-3 cities. Public sector banks appear to be more interested in targeting the smaller towns and cities where they have strong branch presence. The challenges of setting up a widespread PoS network will be primarily (a) operational costs and (b) viability in smaller towns and cities. Experts feel that once the technology stabilises and costs per unit comes down, PoS terminals will become popular all over India.
To use smart cards/debit cards/credit cards for the purchase of an item or for payment of a service at a merchant's store, the card has to be swiped in a terminal (known as Point of Sale or POS terminal) kept at the merchant's store. As soon as the card is put on the terminal, the details of the card are transmitted through dial-up or leased lines to a host computer. On verification of the genuineness of the card, the transaction is authorised and concluded. It is thus a means to 'check out' whether the cardholder is authorized to make a transaction using the card. POS terminal is a relatively new concept.
A Point of Sale (PoS) terminal is an integrated PC-based device, with a monitor (CRT), PoS keyboard, PoS printer, Customer Display, Magnetic Swipe Reader and an electronic cash drawer all rolled into one. More generally, the POS terminal refers to the hardware and software used for checkouts.
In recent years, banks are making efforts to acquire Point of Sale (PoS) terminals at the premises of merchants across the country as a relatively new source of income. 'Acquiring' a POS terminal means installing a POS terminal at the merchant premises. The installer of thePoS terminals is the acquirer of the terminal and the merchants are required to hold an account (merchant account) with the acquirer bank. The acquirer bank levies each transaction with a charge, say 1% of the transaction value. This amount is payable by the merchant. Most merchants do not mind absorbing this cost, because such facilities expand their sales. Some
merchants, however, pass on the cost to the customer. This business is known as merchant acquisition business.
Banks are vying with one another for PoS machine acquisition, since it offers a huge opportunity to generate additional income by increasing the card base and encouraging card holders to use them for their merchant transactions. Leading banks--both in the public and private sectors are planning to install hundreds of thousands of these terminals across the country. Some banks are planning joint ventures with global companies who have experience and expertise in
this area.
PoS terminals are predominantly used for sale and purchase transactions. The PoS terminals have proved to be very effective in combating fraudulent transaction by on-line verification of cards. Also, the RBI is expected to permit cash withdrawal transactions to cardholders from PoS terminals installed with shopkeepers, mall stores, etc.
PoS terminals, having gained significant acceptance in metros, need to become more popular in tier-2 and tier-3 cities. Public sector banks appear to be more interested in targeting the smaller towns and cities where they have strong branch presence. The challenges of setting up a widespread PoS network will be primarily (a) operational costs and (b) viability in smaller towns and cities. Experts feel that once the technology stabilises and costs per unit comes down, PoS terminals will become popular all over India.
Mobile Banking Transactions
Mobile Banking Transactions
Some banks have started offering mobile banking and telebanking to customers. The expansion in the use and geographical reach of mobile phones has created new opportunities for banks to use this mode for banking transactions and also provide an opportunity to extend banking facilities to the hitherto excluded sections of the society.
The RBI has adopted Bank Led Model in which mobile phone banking is promoted through business correspondents of banks.45 The operative guidelines for banks on Mobile Banking Transactions in India were issued on October 8, 2008. Only banks who have received one-time approval from the RBI are permitted to provide this facility to customers.
Mobile Banking in India
Till June 30, 2009, 32 banks had been granted permission to operate Mobile Banking in India, of which 7 belonged to the State Bank Group, 12 to nationalised banks and 13 to private/ foreign banks.
Source: Report on Trends and Progress of Banking in India 2008-09, RBI.
Some banks have started offering mobile banking and telebanking to customers. The expansion in the use and geographical reach of mobile phones has created new opportunities for banks to use this mode for banking transactions and also provide an opportunity to extend banking facilities to the hitherto excluded sections of the society.
The RBI has adopted Bank Led Model in which mobile phone banking is promoted through business correspondents of banks.45 The operative guidelines for banks on Mobile Banking Transactions in India were issued on October 8, 2008. Only banks who have received one-time approval from the RBI are permitted to provide this facility to customers.
Mobile Banking in India
Till June 30, 2009, 32 banks had been granted permission to operate Mobile Banking in India, of which 7 belonged to the State Bank Group, 12 to nationalised banks and 13 to private/ foreign banks.
Source: Report on Trends and Progress of Banking in India 2008-09, RBI.
Internet Banking
Internet Banking
Through its website, a bank may offer its customers online access to account information and payment and fund transfer facilities. The range of services offered differs from bank to bank depending mainly on the type and size of the bank. Internet banking is changing the banking industry and affecting banking relationships in a major way
Examples of Online Payment Services offered by some banks
Shopping Online: One can shop securely online with the existing debit/credit card. This can also be done without revealing the customer's card number.
Prepaid Mobile Refill: A bank's account holder can recharge his prepaid mobile phone with this service.
Bill Pay: A customer can pay his telephone, electricity and mobile phone bills through the Internet, ATMs, mobile phone and telephone.
Register & Pay: One can view and pay various mobile, telephone, electricity bills and insurance premiums on-line. After registering, customers can get sms and e-mail alerts every time a bill is received.
RTGS Fund Transfer: RTGS is an inter-bank funds transfer system, where funds are transferred as and when the transactions are triggered (i.e. real time).
Online Payment of Taxes: A customer can pay various taxes online including Excise and Service Tax, Direct Tax etc.
Through its website, a bank may offer its customers online access to account information and payment and fund transfer facilities. The range of services offered differs from bank to bank depending mainly on the type and size of the bank. Internet banking is changing the banking industry and affecting banking relationships in a major way
Examples of Online Payment Services offered by some banks
Shopping Online: One can shop securely online with the existing debit/credit card. This can also be done without revealing the customer's card number.
Prepaid Mobile Refill: A bank's account holder can recharge his prepaid mobile phone with this service.
Bill Pay: A customer can pay his telephone, electricity and mobile phone bills through the Internet, ATMs, mobile phone and telephone.
Register & Pay: One can view and pay various mobile, telephone, electricity bills and insurance premiums on-line. After registering, customers can get sms and e-mail alerts every time a bill is received.
RTGS Fund Transfer: RTGS is an inter-bank funds transfer system, where funds are transferred as and when the transactions are triggered (i.e. real time).
Online Payment of Taxes: A customer can pay various taxes online including Excise and Service Tax, Direct Tax etc.
Prevention of Money Laundering Act (PMLA), 2002
Prevention of Money Laundering Act (PMLA), 2002
The PMLA, 2002 casts certain obligations on the banking companies in regard to maintenanceand reporting of the following types of transactions:
a) all cash transactions of the value of more than Rs 10 lakh or its equivalent in foreign
currency;
b) all series of cash transactions integrally connected to each other which have been
valued below Rs 10 Lakh or its equivalent in foreign currency where such series of
transactions have taken place within a month and the aggregate value of such
transactions exceeds Rs 10 Lakh;
c) all cash transactions where forged or counterfeit currency notes or bank notes have
been used as genuine and where any forgery of a valuable security or a document has
taken place facilitating the transaction; and
d) all suspicious transactions whether or not made in cash
Know Your Customer (KYC) norms
Know Your Customer (KYC) norms
Banks are required to follow Know Your Customer (KYC) guidelines. These guidelines are meant to weed out and to protect the good ones and the banks. With the growth in organized crime, KYC has assumed great significance for banks. The RBI guidelines on KYC aim at preventing banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. They also enable banks to have better knowledge and understanding of their customers and their financial dealings. This in turn helps banks to manage their risks better. The RBI expects all banks to have comprehensive KYC policies, which need to be approved by their respective boards.
Banks should frame their KYC policies incorporating the following four key elements:
a) Customer Acceptance Policy;
b) Customer Identification Procedures;
c) Monitoring of Transactions; and
d) Risk Management.
b) Customer Identification Procedures;
c) Monitoring of Transactions; and
d) Risk Management.
Customer Acceptance Policy
Every bank should develop a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers. The usual elements of this policy should include the following. Banks, for example, should not open an account in anonymous or fictitious/ benami name(s). Nor should any account be opened where the bank's due diligence exercises relating to identity has not been carried out. Banks have to ensure that the identity of the new or existing customers does not match with any person with known criminal background. If a customer wants to act on behalf of another, the reasons for the same must be looked into.
However, the adoption of customer acceptance policy and its implementation should not become too restrictive and should not result in denial of banking services to general public, especially to those who are financially or socially disadvantaged.
Customer Identification Procedures
Customer identification means identifying the customer and verifying his/her identity by using reliable, independent source documents, data or information. For individual customers, banks should obtain sufficient identification data to verify the identity of the customer, his address and a recent photograph. The usual documents required for opening deposit accounts are given in Box 7.3. For customers who are legal persons, banks should scrutinize their legal status through relevant documents, examine the ownership structures and determine the natural persons who control the entity.
Documents for opening deposit accounts under KYC guidelines
The Customer identification will be done on the basis of documents provided by the prospective customer as under:
a) Passport or Voter ID card or Pension Payment Orders (Govt./PSUs) alone, whereon the address is the same as mentioned in account opening form.
b) Any one document for proof of identity and proof of address, from each of the under noted items:
Proof of Identity
i) Passport, if the address differs from the one mentioned in the account opening form
ii) Voter ID card, if the address differs from the one mentioned in the account opening form
iii) PAN Card
iv) Govt./ Defence ID card
v) ID cards of reputed employers
vi) Driving License
vii) Pension Payment Orders (Govt./PSUs), if the address differs from the one mentioned in the account opening form
viii) Photo ID card issued by Post Offices
viii) Photo ID card issued to bonafide students of Universities/ Institutes approved by UGC/AICTE
Proof of address
i) Credit card statement
ii) Salary slip
iii) Income tax/ wealth tax assessment
iv) Electricity bill
v) Telephone bill
vi) Bank account statement
vii) Letter from a reputed employer
viii) Letter from any recognized public authority
ix) Ration card
x) Copies of registered leave & license agreement/ Sale Deed/ Lease Agreement may be accepted as proof of address
xi) Certificate issued by hostel and also, proof of residence incorporating local address, as well as permanent address issued by respective hostel warden of aforesaid University/institute where the student resides, duly countersigned by the Registrar/ Principal/Dean of Student Welfare. Such accounts should be closed on completion of education/leaving the University/ Institute.
xii) For students residing with relatives, address proof of relatives along with their identity proof, can also be accepted provided declaration is given by the relative that the student is related to him and is staying with him.
Source: State Bank of India website
v) Telephone bill
vi) Bank account statement
vii) Letter from a reputed employer
viii) Letter from any recognized public authority
ix) Ration card
x) Copies of registered leave & license agreement/ Sale Deed/ Lease Agreement may be accepted as proof of address
xi) Certificate issued by hostel and also, proof of residence incorporating local address, as well as permanent address issued by respective hostel warden of aforesaid University/institute where the student resides, duly countersigned by the Registrar/ Principal/Dean of Student Welfare. Such accounts should be closed on completion of education/leaving the University/ Institute.
xii) For students residing with relatives, address proof of relatives along with their identity proof, can also be accepted provided declaration is given by the relative that the student is related to him and is staying with him.
Source: State Bank of India website
Monitoring of Transactions
Ongoing monitoring is an essential element of effective KYC procedures. Banks can effectively control and reduce their risk only if they have an understanding of the normal and reasonable activity of the customer so that they have the means of identifying the transactions that fall outside the regular pattern of activity. Banks should pay special attention to all complex, unusually large transactions and all unusual patterns which have no apparent economic or visible lawful purpose. Banks may prescribe threshold limits for a particular category of accounts and pay particular attention to the transactions which exceed these limits.
Banks should ensure that any remittance of funds by way of demand draft/ mail/ telegraphictransfer or any other mode and issue of travellers' cheques for value of Rs 50,000 and above is effected by debit to the customer's account or against cheques and not against cash payment.
Banks should further ensure that the provisions of Foreign Contribution (Regulation) Act, 1976 as amended from time to time, wherever applicable, are strictly adhered to.
Risk Management
Banks should, in consultation with their boards, devise procedures for creating risk profiles of their existing and new customers and apply various anti-money laundering measures keeping in view the risks involved in a transaction, account or banking/ business relationship.Banks should prepare a profile for each new customer based on risk categorisation. The customer profile may contain information relating to customer's identity, social/ financial status, nature of business activity, information about his clients' business and their location etc. Customers may be categorised into low, medium and high risk. For example, individuals (other than high net worth individuals) and entities whose identities and sources of wealth can be easily identified and transactions in whose accounts by and large conform to the known transaction profile of that kind of customers may be categorised as low risk. Salaried employees, government owned companies, regulators etc fall in this category. For this category of customers, it is sufficient to meet just the basic requirements of verifying identity.
There are other customers who belong to medium to high risk category. Banks need to apply intensive due diligence for higher risk customers, especially those for whom the sources of funds are not clear.
Examples of customers requiring higher due diligence include
(a) nonresident customers;
(b) high net worth individuals;
(c) trusts, charities, NGOs and organizations receiving donations;
(d) companies having close family shareholding or beneficial ownership;
(e) firms with 'sleeping partners';
(f) politically exposed persons (PEPs) of foreign origin;
(g) non-face-to-face customers and
(h) those with dubious reputation as per public information available etc.
Banks' internal audit and compliance functions have an important role in evaluating and ensuringadherence to the KYC policies and procedures. Concurrent/ Internal Auditors should specifically check and verify the application of KYC procedures at the branches and comment on the lapses observed in this regard.
Directed Lending
Directed Lending
The RBI requires banks to deploy a certain minimum amount of their credit in certain identified sectors of the economy. This is called directed lending. Such directed lending comprises priority sector lending and export credit Priority sector lending
Priority sector lending
The objective of priority sector lending program is to ensure that adequate credit flows into some of the vulnerable sectors of the economy, which may not be attractive for the banks from the point of view of profitability. These sectors include agriculture, small scale enterprises, retail trade, etc. Small housing loans, loans to individuals for pursuing education, loans to weaker sections of the society etc also qualify as priority sector loans. To ensure banks channelize a part of their credit to these sectors, the RBI has set guidelines defining targets for lending to priority sector as whole and in certain cases, sub-targets for lending to individual priority sectorsThe RBI guidelines require banks to lend at least 40% of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure (CEOBSE), whichever is higher. In case of foreign banks, the target for priority sector advances is 32% of ANBC or CEOBSE,whichever is higher.
In addition to these limits for overall priority sector lending, the RBI sets sub-limits for certain sub-sectors within the priority sector such as agriculture. Banks are required to comply with the priority sector lending requirements at the end of each financial year. A bank having shortfall in lending to priority sector lending target or sub-target shall be required to make contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD or funds with other financial institutions as specified by the RBI.
Export Credit
As part of directed lending, RBI requires banks to make loans to exporters at concessional rates of interest. Export credit is provided for pre-shipment and post-shipment requirements of exporter borrowers in rupees and foreign currencies. At the end of any fiscal year, 12.0% of a bank's credit is required to be in the form of export credit. This requirement is in addition to the priority sector lending requirement but credits extended to exporters that are small scale industries or small businesses may also meet part of the priority sector lending requirement
The RBI requires banks to deploy a certain minimum amount of their credit in certain identified sectors of the economy. This is called directed lending. Such directed lending comprises priority sector lending and export credit Priority sector lending
Priority sector lending
The objective of priority sector lending program is to ensure that adequate credit flows into some of the vulnerable sectors of the economy, which may not be attractive for the banks from the point of view of profitability. These sectors include agriculture, small scale enterprises, retail trade, etc. Small housing loans, loans to individuals for pursuing education, loans to weaker sections of the society etc also qualify as priority sector loans. To ensure banks channelize a part of their credit to these sectors, the RBI has set guidelines defining targets for lending to priority sector as whole and in certain cases, sub-targets for lending to individual priority sectorsThe RBI guidelines require banks to lend at least 40% of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure (CEOBSE), whichever is higher. In case of foreign banks, the target for priority sector advances is 32% of ANBC or CEOBSE,whichever is higher.
In addition to these limits for overall priority sector lending, the RBI sets sub-limits for certain sub-sectors within the priority sector such as agriculture. Banks are required to comply with the priority sector lending requirements at the end of each financial year. A bank having shortfall in lending to priority sector lending target or sub-target shall be required to make contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD or funds with other financial institutions as specified by the RBI.
Export Credit
As part of directed lending, RBI requires banks to make loans to exporters at concessional rates of interest. Export credit is provided for pre-shipment and post-shipment requirements of exporter borrowers in rupees and foreign currencies. At the end of any fiscal year, 12.0% of a bank's credit is required to be in the form of export credit. This requirement is in addition to the priority sector lending requirement but credits extended to exporters that are small scale industries or small businesses may also meet part of the priority sector lending requirement
Rural and Agricultural Loans
Rural and Agricultural Loans
The rural and agricultural loan portfolio of banks comprises loans to farmers, small and medium enterprises in rural areas, dealers and vendors linked to these entities and even corporates.For farmers, banks extend term loans for equipments used in farming, including tractors,pump sets, etc. Banks also extend crop loan facility to farmers. In agricultural financing, banks prefer an 'area based' approach; for example, by financing farmers in an adopted village. The regional rural banks (RRBs) have a special place in ensuring adequate credit flow to agriculture
and the rural sector. The concept of 'Lead Bank Scheme (LBS)' was first mooted by the Gadgil Study Group, which submitted its report in October 1969. Pursuant to the recommendations of the Gadgil Study Group and those of the Nariman Committee, which suggested the adoption of 'area approach' in evolving credit plans and programmes for development of banking and the credit structure,
the LBS was introduced by the RBI in December, 1969. The scheme envisages allotment of districts to individual banks to enable them to assume leadership in bringing about banking developments in their respective districts. More recently, a High Level Committee was constituted by the RBI in November 2007, to review the LBS and improve its effectiveness, with a focus on financial inclusion and recent developments in the banking sector. The Committee has recommended several steps to further improve the working of LBS. The importance of the role of State Governments for supporting banks in increasing banking business in rural areas has
been emphasized by the Committee.
The rural and agricultural loan portfolio of banks comprises loans to farmers, small and medium enterprises in rural areas, dealers and vendors linked to these entities and even corporates.For farmers, banks extend term loans for equipments used in farming, including tractors,pump sets, etc. Banks also extend crop loan facility to farmers. In agricultural financing, banks prefer an 'area based' approach; for example, by financing farmers in an adopted village. The regional rural banks (RRBs) have a special place in ensuring adequate credit flow to agriculture
and the rural sector. The concept of 'Lead Bank Scheme (LBS)' was first mooted by the Gadgil Study Group, which submitted its report in October 1969. Pursuant to the recommendations of the Gadgil Study Group and those of the Nariman Committee, which suggested the adoption of 'area approach' in evolving credit plans and programmes for development of banking and the credit structure,
the LBS was introduced by the RBI in December, 1969. The scheme envisages allotment of districts to individual banks to enable them to assume leadership in bringing about banking developments in their respective districts. More recently, a High Level Committee was constituted by the RBI in November 2007, to review the LBS and improve its effectiveness, with a focus on financial inclusion and recent developments in the banking sector. The Committee has recommended several steps to further improve the working of LBS. The importance of the role of State Governments for supporting banks in increasing banking business in rural areas has
been emphasized by the Committee.
Project Finance
Project Finance
Project finance business consists mainly of extending medium-term and long-term rupee and foreign currency loans to the manufacturing and infrastructure sectors. Banks also provide financing by way of investment in marketable instruments such as fixed rate and floating rate debentures. Lending banks usually insist on having a first charge on the fixed assets of the borrower.
During the recent years, the larger banks are increasingly becoming involved in financinglarge projects, including infrastructure projects. Given the large amounts of financing involved,banks need to have a strong framework for project appraisal. The adopted framework will need to emphasize proper identification of projects, optimal allocation and mitigation of risks.
The project finance approval process entails a detailed evaluation of technical, commercial, financial and management factors and the project sponsor's financial strength and experience.
As part of the appraisal process, a risk matrix is generated, which identifies each of the project risks, mitigating factors and risk allocation.
Project finance extended by banks is generally fully secured and has full recourse to the borrower company. In most project finance cases, banks have a first lien on all the fixed assets and a second lien on all the current assets of the borrower company. In addition, guarantees may be taken from sponsors/ promoters of the company. Should the borrower company fail to repay on time, the lending bank can have full recourse to the sponsors/ promoters of the company. (Full recourse means that the lender can claim the entire unpaid amount from the sponsors / promoters of the company.) However, while financing very large projects, only partial recourse to the sponsors/ promoters may be available to the lending banks.
Project finance business consists mainly of extending medium-term and long-term rupee and foreign currency loans to the manufacturing and infrastructure sectors. Banks also provide financing by way of investment in marketable instruments such as fixed rate and floating rate debentures. Lending banks usually insist on having a first charge on the fixed assets of the borrower.
During the recent years, the larger banks are increasingly becoming involved in financinglarge projects, including infrastructure projects. Given the large amounts of financing involved,banks need to have a strong framework for project appraisal. The adopted framework will need to emphasize proper identification of projects, optimal allocation and mitigation of risks.
The project finance approval process entails a detailed evaluation of technical, commercial, financial and management factors and the project sponsor's financial strength and experience.
As part of the appraisal process, a risk matrix is generated, which identifies each of the project risks, mitigating factors and risk allocation.
Project finance extended by banks is generally fully secured and has full recourse to the borrower company. In most project finance cases, banks have a first lien on all the fixed assets and a second lien on all the current assets of the borrower company. In addition, guarantees may be taken from sponsors/ promoters of the company. Should the borrower company fail to repay on time, the lending bank can have full recourse to the sponsors/ promoters of the company. (Full recourse means that the lender can claim the entire unpaid amount from the sponsors / promoters of the company.) However, while financing very large projects, only partial recourse to the sponsors/ promoters may be available to the lending banks.
Working Capital Finance
Working Capital Finance
Working capital finance is utilized for operating purposes, resulting in creation of current assets (such as inventories and receivables). This is in contrast to term loans which are utilized for establishing or expanding a manufacturing unit by the acquisition of fixed assets.Banks carry out a detailed analysis of borrowers' working capital requirements. Credit limits are established in accordance with the process approved by the board of directors. The limits on Working capital facilities are primarily secured by inventories and receivables (chargeable current assets).
Working capital finance consists mainly of cash credit facilities, short term loan and bill discounting. Under the cash credit facility, a line of credit is provided up to a pre-established amount based on the borrower's projected level of sales inventories, receivables and cash deficits. Up to this pre-established amount, disbursements are made based on the actual level of inventories and receivables. Here the borrower is expected to buy inventory on payments and, thereafter, seek reimbursement from the Bank. In reality, this may not happen. The facility is generally given for a period of up to 12 months and is extended after a review of the credit limit. For clients facing difficulties, the review may be made after a shorter period.
One problem faced by banks while extending cash credit facilities, is that customers can draw up to a maximum level or the approved credit limit, but may decide not to. Because of this, liquidity management becomes difficult for a bank in the case of cash credit facility. RBI has been trying to mitigate this problem by encouraging the Indian corporate sector to avail of working capital finance in two ways: a short-term loan component and a cash credit component.
The loan component would be fully drawn, while the cash credit component would vary depending upon the borrower's requirements.
According to RBI guidelines, in the case of borrowers enjoying working capital credit limits of Rs. 10 crores and above from the banking system, the loan component should normally be 80% and cash credit component 20 %. Banks, however, have the freedom to change the composition of working capital finance by increasing the cash credit component beyond 20% or reducing it below 20 %, as the case may be, if they so desire.Bill discounting facility involves the financing of short-term trade receivables through negotiable instruments. These negotiable instruments can then be discounted with other banks, if required, providing financing banks with liquidity.
Working capital finance is utilized for operating purposes, resulting in creation of current assets (such as inventories and receivables). This is in contrast to term loans which are utilized for establishing or expanding a manufacturing unit by the acquisition of fixed assets.Banks carry out a detailed analysis of borrowers' working capital requirements. Credit limits are established in accordance with the process approved by the board of directors. The limits on Working capital facilities are primarily secured by inventories and receivables (chargeable current assets).
Working capital finance consists mainly of cash credit facilities, short term loan and bill discounting. Under the cash credit facility, a line of credit is provided up to a pre-established amount based on the borrower's projected level of sales inventories, receivables and cash deficits. Up to this pre-established amount, disbursements are made based on the actual level of inventories and receivables. Here the borrower is expected to buy inventory on payments and, thereafter, seek reimbursement from the Bank. In reality, this may not happen. The facility is generally given for a period of up to 12 months and is extended after a review of the credit limit. For clients facing difficulties, the review may be made after a shorter period.
One problem faced by banks while extending cash credit facilities, is that customers can draw up to a maximum level or the approved credit limit, but may decide not to. Because of this, liquidity management becomes difficult for a bank in the case of cash credit facility. RBI has been trying to mitigate this problem by encouraging the Indian corporate sector to avail of working capital finance in two ways: a short-term loan component and a cash credit component.
The loan component would be fully drawn, while the cash credit component would vary depending upon the borrower's requirements.
According to RBI guidelines, in the case of borrowers enjoying working capital credit limits of Rs. 10 crores and above from the banking system, the loan component should normally be 80% and cash credit component 20 %. Banks, however, have the freedom to change the composition of working capital finance by increasing the cash credit component beyond 20% or reducing it below 20 %, as the case may be, if they so desire.Bill discounting facility involves the financing of short-term trade receivables through negotiable instruments. These negotiable instruments can then be discounted with other banks, if required, providing financing banks with liquidity.
Pledge
Pledge
As per the Contract Act, 1872, pledge means bailment of goods for the purpose of providing security for payment of a debt or performance of a promise.
Bailment is nothing but delivery of goods to the financier. The person offering the goods as security is the bailer, pawner or pledger. The person to whom the goods are given is the bailee, pawnee or pledgee.
At times, the delivery of goods may not be actual, but constructive. For instance, goods in a warehouse may be pledged by handing over the warehouse receipt. This constructively implies delivery of goods of the pledgee.
There is no legal necessity for a pledge agreement; pledge can be implied. However, it is always preferable for the banker to insist on a pledge agreement.
The pledger is bound to inform the pledgee about any defects in the goods pledged, or any risks that go with possession of the goods. He is also bound to bear any incidental expenses that arise on account of such possession.
Pledge becomes onerous for the pledger, because he has to part with possession. For the same reason, the pledgee is generally comfortable with a pledge arrangement. He does not need to take any extra effort or incur any cost for realizing the security. He is however bound to take reasonable care of the goods.
The pledgee has a general lien on the goods i.e. he is not bound to release the goods unless his dues are fully repaid. A point to note is that the banker’s lien is limited to the recovery of the debt for which the pledge is created – not to other amounts that maybe due from the borrower. This is the reason that banks often provide a protective clause in their pledge agreement that the pledge extends to all dues from the borrower. In the event of default by the borrower, the pledgee can sell the assets to recover his dues.The dues may be towards the original principal lent, or interest thereon or expenses incurred in maintaining the goods during the pledge.
As per the Contract Act, 1872, pledge means bailment of goods for the purpose of providing security for payment of a debt or performance of a promise.
Bailment is nothing but delivery of goods to the financier. The person offering the goods as security is the bailer, pawner or pledger. The person to whom the goods are given is the bailee, pawnee or pledgee.
At times, the delivery of goods may not be actual, but constructive. For instance, goods in a warehouse may be pledged by handing over the warehouse receipt. This constructively implies delivery of goods of the pledgee.
There is no legal necessity for a pledge agreement; pledge can be implied. However, it is always preferable for the banker to insist on a pledge agreement.
The pledger is bound to inform the pledgee about any defects in the goods pledged, or any risks that go with possession of the goods. He is also bound to bear any incidental expenses that arise on account of such possession.
Pledge becomes onerous for the pledger, because he has to part with possession. For the same reason, the pledgee is generally comfortable with a pledge arrangement. He does not need to take any extra effort or incur any cost for realizing the security. He is however bound to take reasonable care of the goods.
The pledgee has a general lien on the goods i.e. he is not bound to release the goods unless his dues are fully repaid. A point to note is that the banker’s lien is limited to the recovery of the debt for which the pledge is created – not to other amounts that maybe due from the borrower. This is the reason that banks often provide a protective clause in their pledge agreement that the pledge extends to all dues from the borrower. In the event of default by the borrower, the pledgee can sell the assets to recover his dues.The dues may be towards the original principal lent, or interest thereon or expenses incurred in maintaining the goods during the pledge.
Saturday, 26 January 2013
Opportunity Cost
Opportunity Cost
Opportunity cost is the cost of any activity measured in terms of the value of the other alternative that is not chosen (that is foregone). Put another way, it is the benefit you could have received by taking an alternative action; the difference in return between a chosen investment and one that is not taken. Say you invest in a stock and it returns 6% over a year.
In placing your money in the stock, you gave up the opportunity of another investment - say, a fixed deposit yielding 8%. In this situation, your opportunity costs are 2% (8% - 6%).
Opportunity cost is the cost of any activity measured in terms of the value of the other alternative that is not chosen (that is foregone). Put another way, it is the benefit you could have received by taking an alternative action; the difference in return between a chosen investment and one that is not taken. Say you invest in a stock and it returns 6% over a year.
In placing your money in the stock, you gave up the opportunity of another investment - say, a fixed deposit yielding 8%. In this situation, your opportunity costs are 2% (8% - 6%).
Micro Credit
Micro Credit
Micro Credit is defined as provision of credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels. Micro Credit Institutions (MCIs) are those which provide these facilities. Banks are allowed to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc. Such credit covers not only consumption and production loans for various farm and nonfarm activities of the poor but also includes their other credit needs such as housing and
shelter improvements.
Micro Credit is defined as provision of credit and other financial services and products of very small amount to the poor in rural, semi-urban and urban areas for enabling them to raise their income levels. Micro Credit Institutions (MCIs) are those which provide these facilities. Banks are allowed to devise appropriate loan and savings products and the related terms and conditions including size of the loan, unit cost, unit size, maturity period, grace period, margins, etc. Such credit covers not only consumption and production loans for various farm and nonfarm activities of the poor but also includes their other credit needs such as housing and
shelter improvements.
No-frills account
'No-frills' account
To achieve the objective of greater financial inclusion, all banks have been advised by the RBI to make available a basic banking 'no-frills' account either with 'nil' or very low minimum balances. They have also been advised to keep the transaction charges low, which would make such accounts accessible to vast sections of population. The nature and number of transactions in such accounts could be restricted by the banks, but such restrictions must be made known to the customer in advance in a transparent manner. The growth of such deposits should be encouraged with affordable infrastructure and low operational costs through the use
of appropriate technology.
To achieve the objective of greater financial inclusion, all banks have been advised by the RBI to make available a basic banking 'no-frills' account either with 'nil' or very low minimum balances. They have also been advised to keep the transaction charges low, which would make such accounts accessible to vast sections of population. The nature and number of transactions in such accounts could be restricted by the banks, but such restrictions must be made known to the customer in advance in a transparent manner. The growth of such deposits should be encouraged with affordable infrastructure and low operational costs through the use
of appropriate technology.
Financial Inclusion
Financial Inclusion
Despite the expansion of the banking network in India since independence, a sizeable proportion of the households, especially in rural areas, still do not have a bank account. Considerable efforts have to be made to reach these unbanked regions and population. Financial Inclusion implies providing financial services viz., access to payments and remittance facilities, savings,loans and insurance services at affordable cost to those who are excluded from the formal financial system. Box 8.3 gives indications of the low access to banking services in India
Despite the expansion of the banking network in India since independence, a sizeable proportion of the households, especially in rural areas, still do not have a bank account. Considerable efforts have to be made to reach these unbanked regions and population. Financial Inclusion implies providing financial services viz., access to payments and remittance facilities, savings,loans and insurance services at affordable cost to those who are excluded from the formal financial system. Box 8.3 gives indications of the low access to banking services in India
Terrorist Financing
Terrorist Financing
Terrorists adopt the same approach as money launderers, to manage their finances. Since the contributions to terrorist financing may come from normal legal sources – and often the contributions are of small value – terrorist financing is a lot more difficult to track.
Terrorists adopt the same approach as money launderers, to manage their finances. Since the contributions to terrorist financing may come from normal legal sources – and often the contributions are of small value – terrorist financing is a lot more difficult to track.
Money Laundering
Money Laundering
Money laundering is the approach that criminals take to camouflage their money flows from criminal activities (like drug trafficking, child pornography etc.) and pass it off as regular legal money flows.
According to PMLA, whosoever, directly or indirectly attempts to indulge, or knowingly assists,or knowingly is a party or is actually involved in any process or activity, connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of moneylaundering.
"Proceeds of crime" means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property.
Money laundering is the approach that criminals take to camouflage their money flows from criminal activities (like drug trafficking, child pornography etc.) and pass it off as regular legal money flows.
According to PMLA, whosoever, directly or indirectly attempts to indulge, or knowingly assists,or knowingly is a party or is actually involved in any process or activity, connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of moneylaundering.
"Proceeds of crime" means any property derived or obtained, directly or indirectly, by any person as a result of criminal activity relating to a scheduled offence or the value of any such property.
Non-Performing Assets
In the normal course, borrowers repay their dues to the bank by their respective due dates. Some debts, however, turn sticky. The borrower is unable or unwilling to pay. If such debt is shown as a regular debt, and interest is accrued on such debt as a regular income, then the financial statements would give an incorrect picture of the financial status of the bank. Therefore, RBI has laid down strict requirements regarding recognition of Non-Performing Assets (NPA).
An NPA is a loan or advance where:
• Term Loan – interest and / or instalment of principal remains overdue for
more than 90 days.
• Overdraft / Cash credit - account is out of order i.e.
o Outstanding balance remains continuously in excess of the sanctioned limit /
drawing power; or
o Outstanding balance is within the sanctioned limit / drawing power, but there are
no credits continuously for 90 days as on the date of balance sheet, or the credits are not enough to cover the interest debited during the same period.
• Bills purchased and discounted – bill remains overdue for more than 90 days.
• Short duration crops (crop season is upto a year) – instalment of principal or the interest thereon remains overdue for two crop seasons.
• Long duration crops - instalment of principal or the interest thereon remains overdue for one crop season.
A few more relevant points –
• Banks are supposed to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.
• If an advance is covered by term deposits, National Savings Certificates eligible for
surrender, Indira Vikas Patras, Kisan Vikas Patras and Life policies, then it need not be treated as NPA. This exemption however does not extend to government securities and gold ornaments.
• Drawing power should be determined based on stocks statements that are not older than 3 months. Else, it would be treated as irregular.
• If irregular drawings are permitted in the working capital account for a continuous period of ninety days, it will become an NPA (even if the financial status of the borrower is stable).
• Regular and ad hoc credit limits are to be reviewed / regularized within 3 months from the due date / date of ad hoc sanction. If this is not done within 180 days of the due date / date of ad hoc sanction, the asset would be treated as NPA.
• Once arrears of interest and principal are paid by the borrower, the NPA becomes a
standard asset.
• If even one facility to a borrower or investment in securities issued by a borrower becomes NPA, all the facilities granted by the bank to the borrower and investment in all the securities issued by the borrower will have to be treated as NPA.
An NPA is a loan or advance where:
• Term Loan – interest and / or instalment of principal remains overdue for
more than 90 days.
• Overdraft / Cash credit - account is out of order i.e.
o Outstanding balance remains continuously in excess of the sanctioned limit /
drawing power; or
o Outstanding balance is within the sanctioned limit / drawing power, but there are
no credits continuously for 90 days as on the date of balance sheet, or the credits are not enough to cover the interest debited during the same period.
• Bills purchased and discounted – bill remains overdue for more than 90 days.
• Short duration crops (crop season is upto a year) – instalment of principal or the interest thereon remains overdue for two crop seasons.
• Long duration crops - instalment of principal or the interest thereon remains overdue for one crop season.
A few more relevant points –
• Banks are supposed to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.
• If an advance is covered by term deposits, National Savings Certificates eligible for
surrender, Indira Vikas Patras, Kisan Vikas Patras and Life policies, then it need not be treated as NPA. This exemption however does not extend to government securities and gold ornaments.
• Drawing power should be determined based on stocks statements that are not older than 3 months. Else, it would be treated as irregular.
• If irregular drawings are permitted in the working capital account for a continuous period of ninety days, it will become an NPA (even if the financial status of the borrower is stable).
• Regular and ad hoc credit limits are to be reviewed / regularized within 3 months from the due date / date of ad hoc sanction. If this is not done within 180 days of the due date / date of ad hoc sanction, the asset would be treated as NPA.
• Once arrears of interest and principal are paid by the borrower, the NPA becomes a
standard asset.
• If even one facility to a borrower or investment in securities issued by a borrower becomes NPA, all the facilities granted by the bank to the borrower and investment in all the securities issued by the borrower will have to be treated as NPA.
CAMELS Framework
CAMELS Framework
‘CAMELS’ is a framework for composite evaluation of banks (and financial intermediaries, in general). The acronym stands for:
• Capital Adequacy
This is a measure of financial strength, in particular its ability to cushion operational and abnormal losses. It is calculated based on the asset structure of the bank, and the risk weights that have been assigned by the regulater for each asset class.
•Asset Quality
This depends on factors such as concentration of loans in the portfolio, related party
exposure and provisions made for loan loss.
• Management
Management of the bank obviously influences the other parameters. Operating cost per unit of money lent and earnings per employee are parameters used.
• Earnings
This can be measured through ratios like return on assets, return on equity and interest spread.
• Liquidity
In order to meet obligations as they come, the bank needs an effective asset-liability
management system that balances gaps in the maturity profile of assets and liabilities. However, if the bank provides too much liquidity, then it will suffer in terms of profitability.
This can be measured by the Loans to Deposit ratio, separately for short term, mediumterm and long term.
• Sensitivity to Market Risk
Longer the maturity of debt investments, more prone it is to valuation losses, if interest rates go up. More sensitive the portfolio is to market risk, the more risky the bank is.
The CAMELS framework was first used by the regulaters in the United States. Based on this, they rated the banks on a scale of 5 – the strongest was rated as 1; the weakest was rated as 5.
‘CAMELS’ is a framework for composite evaluation of banks (and financial intermediaries, in general). The acronym stands for:
• Capital Adequacy
This is a measure of financial strength, in particular its ability to cushion operational and abnormal losses. It is calculated based on the asset structure of the bank, and the risk weights that have been assigned by the regulater for each asset class.
•Asset Quality
This depends on factors such as concentration of loans in the portfolio, related party
exposure and provisions made for loan loss.
• Management
Management of the bank obviously influences the other parameters. Operating cost per unit of money lent and earnings per employee are parameters used.
• Earnings
This can be measured through ratios like return on assets, return on equity and interest spread.
• Liquidity
In order to meet obligations as they come, the bank needs an effective asset-liability
management system that balances gaps in the maturity profile of assets and liabilities. However, if the bank provides too much liquidity, then it will suffer in terms of profitability.
This can be measured by the Loans to Deposit ratio, separately for short term, mediumterm and long term.
• Sensitivity to Market Risk
Longer the maturity of debt investments, more prone it is to valuation losses, if interest rates go up. More sensitive the portfolio is to market risk, the more risky the bank is.
The CAMELS framework was first used by the regulaters in the United States. Based on this, they rated the banks on a scale of 5 – the strongest was rated as 1; the weakest was rated as 5.
Mortgage
The term mortgage is defined in the Transfer of Property Act, 1882 as follows:
A mortgage is the transfer of interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, on existing or future debt or the performance of an engagement which may give rise to a pecuniary liability. The person transferring the property is the mortgager; the transferee is the mortgagee. The mortgage is generally created through a mortgage deed. However, there are exceptions as will clear from the following discussion on different kinds of mortgages. These kinds of mortgages are again defined in the Transfer of Property Act, 1882.
1. Simple Mortgage
The mortgage is simple because possession of the mortgaged property is not handed over tothe mortgagee. However, the mortgager accepts personal liability to pay the mortgage money(principal plus interest).
If the mortgager does not pay the dues, the mortgagee has the right to approach court fora decree to sell the mortgage property. This right of the mortgagee may be expressed in the mortgage deed or implied.
As is logical, the mortgagee does not have the right to receive rent or any other proceeds fromthe property. These would belong to the mortgager.
Registration is mandatory if the principal amount secured is Rs100 or above.
2. Mortgage through Conditional Sale
Here, the mortgager “sells” the mortgage property, but subject to conditions:
• The sale becomes absolute only if the mortgager defaults on paying the dues by a
specified date; or
• The sale becomes void if the mortgager pays the dues by the specified dates. In that
case, the mortgagee will transfer the property back to the mortgager.
A legal technicality is that the mortgagee cannot sue to sell the property, but he can sue to forclose the mortgage deed. Once court grants the foreclosure, the mortgager loses the right to claim the property. Thereafter, the mortgagee can sell the property to recover his dues.
In a standard form of such a mortgage, there is no personal liability on the mortgager to paythe dues [he only (presumably) has an interest in paying it, so that he will get the property back]. If he does not pay, and the asset sale does not fully cover the mortgagee’s dues, he cannot claim the balance from the mortgager. Therefore, bankers typically are not comfortable with such a mortgage
3.Usufructuary Mortgage
This is a mortgage where the mortgagee has the right to recover rent and other incomes from the mortgaged property, until the dues are cleared. Thus, repayments come from the property rather than from the mortgager.
The transfer of possession from the mortgager to the mortgagee may be express or implied.Thus, legal possession is more important than physical possession. For example, physical possession may be with a tenant who pays the rent.
As with Conditional Sale, there is no personal obligation on the mortgager to pay. The banker has to keep holding the property for an indeterminate period of time, until the dues are cleared. Therefore, bankers are not comfortable with such mortgages.
4.English Mortgage
In this form of mortgage, the mortgager transfers the property to the mortgagee absolutely.However, the mortgagee will have to re-transfer the mortgaged property to the mortgager, if the dues are paid off.
Since the mortgager assumes personal liability to repay, the mortgagee can sue the mortgagerfor recovery of dues or seek a court decree to sell the property. This gives comfort to the banker.
5.Equitable Mortgage / Mortgage by Deposit of Title Deeds
As is clear from the name, the mortgager merely deposits the title deeds to immoveable property with the mortgagee, with the intention of creating a security.
Such mortgages can only be created in Mumbai, Chennai or Kolkatta. The mortgaged property may be located anywhere, but the mortgage creation has to be in any of these three cities. Benefit of this kind of mortgage is that stamp duty is saved. Further, it is less time consuming to create.
The risk is that a fraudulent mortgager may obtain multiple title deeds, and create multiple mortgages, thus adding to the complexity of the banker when it comes to recovering money.
6.Anomalous Mortgage
A mortgage which does not fall strictly into any of the above mortgages is an anomalous mortgage. For instance, in a usufructuary mortgage, the mortgager may take personal obligation to pay the dues.
The mortgage creation format is one of the key conditions in the sanction letter of the lender/ term sheet that the lender and borrower sign to freeze the terms of their arrangement
A mortgage is the transfer of interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, on existing or future debt or the performance of an engagement which may give rise to a pecuniary liability. The person transferring the property is the mortgager; the transferee is the mortgagee. The mortgage is generally created through a mortgage deed. However, there are exceptions as will clear from the following discussion on different kinds of mortgages. These kinds of mortgages are again defined in the Transfer of Property Act, 1882.
1. Simple Mortgage
The mortgage is simple because possession of the mortgaged property is not handed over tothe mortgagee. However, the mortgager accepts personal liability to pay the mortgage money(principal plus interest).
If the mortgager does not pay the dues, the mortgagee has the right to approach court fora decree to sell the mortgage property. This right of the mortgagee may be expressed in the mortgage deed or implied.
As is logical, the mortgagee does not have the right to receive rent or any other proceeds fromthe property. These would belong to the mortgager.
Registration is mandatory if the principal amount secured is Rs100 or above.
2. Mortgage through Conditional Sale
Here, the mortgager “sells” the mortgage property, but subject to conditions:
• The sale becomes absolute only if the mortgager defaults on paying the dues by a
specified date; or
• The sale becomes void if the mortgager pays the dues by the specified dates. In that
case, the mortgagee will transfer the property back to the mortgager.
A legal technicality is that the mortgagee cannot sue to sell the property, but he can sue to forclose the mortgage deed. Once court grants the foreclosure, the mortgager loses the right to claim the property. Thereafter, the mortgagee can sell the property to recover his dues.
In a standard form of such a mortgage, there is no personal liability on the mortgager to paythe dues [he only (presumably) has an interest in paying it, so that he will get the property back]. If he does not pay, and the asset sale does not fully cover the mortgagee’s dues, he cannot claim the balance from the mortgager. Therefore, bankers typically are not comfortable with such a mortgage
3.Usufructuary Mortgage
This is a mortgage where the mortgagee has the right to recover rent and other incomes from the mortgaged property, until the dues are cleared. Thus, repayments come from the property rather than from the mortgager.
The transfer of possession from the mortgager to the mortgagee may be express or implied.Thus, legal possession is more important than physical possession. For example, physical possession may be with a tenant who pays the rent.
As with Conditional Sale, there is no personal obligation on the mortgager to pay. The banker has to keep holding the property for an indeterminate period of time, until the dues are cleared. Therefore, bankers are not comfortable with such mortgages.
4.English Mortgage
In this form of mortgage, the mortgager transfers the property to the mortgagee absolutely.However, the mortgagee will have to re-transfer the mortgaged property to the mortgager, if the dues are paid off.
Since the mortgager assumes personal liability to repay, the mortgagee can sue the mortgagerfor recovery of dues or seek a court decree to sell the property. This gives comfort to the banker.
5.Equitable Mortgage / Mortgage by Deposit of Title Deeds
As is clear from the name, the mortgager merely deposits the title deeds to immoveable property with the mortgagee, with the intention of creating a security.
Such mortgages can only be created in Mumbai, Chennai or Kolkatta. The mortgaged property may be located anywhere, but the mortgage creation has to be in any of these three cities. Benefit of this kind of mortgage is that stamp duty is saved. Further, it is less time consuming to create.
The risk is that a fraudulent mortgager may obtain multiple title deeds, and create multiple mortgages, thus adding to the complexity of the banker when it comes to recovering money.
6.Anomalous Mortgage
A mortgage which does not fall strictly into any of the above mortgages is an anomalous mortgage. For instance, in a usufructuary mortgage, the mortgager may take personal obligation to pay the dues.
The mortgage creation format is one of the key conditions in the sanction letter of the lender/ term sheet that the lender and borrower sign to freeze the terms of their arrangement
Society for Worldwide Interbank Financial Telecommunications (SWIFT)
Society for Worldwide Interbank Financial Telecommunications (SWIFT)
SWIFT is solely a carrier of messages. It does not hold funds nor does it manage accounts on behalf of customers, nor does it store financial information on an on-going basis.As a data carrier, SWIFT transports messages between two financial institutions. This activity involves the secure exchange of proprietary data while ensuring its confidentiality and integrity.
SWIFT, which has its headquarters in Belgium, has developed an 8-alphabet Bank Identifier Code (BIC).
For instance HDFCINBB stands for:
• HDFC = HDFC Bank
• IN = India
• BB = Mumbai
Thus, the BIC helps identify the bank. A typical SWIFT instruction would read as follows:
Please remit [amount in US$] by wire transfer To HDFC Bank Mumbai Account Number V801-890-0330-937
with Bank of New York, New York [Swift code IRVTUS3N]
for further credit to account number XXXXXXXXXXXXXX of Advantage-India Consulting Pvt.Ltd with HDFC Bank, Ghatkopar East Branch, Mumbai 400077, India HDFC Bank’s Swift code is HDFCINBBXXX
Internationally, funds are remitted through such SWIFT instructions.
SWIFT is solely a carrier of messages. It does not hold funds nor does it manage accounts on behalf of customers, nor does it store financial information on an on-going basis.As a data carrier, SWIFT transports messages between two financial institutions. This activity involves the secure exchange of proprietary data while ensuring its confidentiality and integrity.
SWIFT, which has its headquarters in Belgium, has developed an 8-alphabet Bank Identifier Code (BIC).
For instance HDFCINBB stands for:
• HDFC = HDFC Bank
• IN = India
• BB = Mumbai
Thus, the BIC helps identify the bank. A typical SWIFT instruction would read as follows:
Please remit [amount in US$] by wire transfer To HDFC Bank Mumbai Account Number V801-890-0330-937
with Bank of New York, New York [Swift code IRVTUS3N]
for further credit to account number XXXXXXXXXXXXXX of Advantage-India Consulting Pvt.Ltd with HDFC Bank, Ghatkopar East Branch, Mumbai 400077, India HDFC Bank’s Swift code is HDFCINBBXXX
Internationally, funds are remitted through such SWIFT instructions.
Non-Fund-based Banking Services
For Business
provide for a Letter of Credit.
In such a case, Party B (buyer, or opener of L/C) will approach his bank (L/C Issuing
Bank) to pay the beneficiary (seller) the value of the goods, by a specified date, against presentment of specified documents. The bank will charge the buyer a commission, for opening the L/C.
The L/C thus allows the Part A to supply goods to Party B, without having to worry about Party B’s credit-worthiness. It only needs to trust the bank that has issued the L/C. It is for the L/C issuing bank to assess the credit-worthiness of Party B. Normally, the L/C opener has a finance facility with the L/C issuing bank.
The L/C may be inland (for domestic trade) or cross border (for international trade).
commitment be sure that the party making the commitment (obliger) will live up to the commitment? This comfort is given by a guarantor, whom the beneficiary trusts.
Banks issue various guarantees in this manner, and recover a guarantee commission
from the obliger. The guarantees can be of different kinds, such as Financial Guarantee, Deferred Payment Guarantee and Performance Guarantee, depending on how they are structured.
service offered by universal banks.
• Financial Planning and Wealth Management, again, are offered by universal banks.
• Executors and Trustees – a department within banks – help customers in managing
succession of assets to the survivors or the next generation.
• Lockers – a facility that most Indian households seek to store ornaments and other
valuables
Letter of Credit -
When Party A supplies goods to Party B, the payment terms mayprovide for a Letter of Credit.
In such a case, Party B (buyer, or opener of L/C) will approach his bank (L/C Issuing
Bank) to pay the beneficiary (seller) the value of the goods, by a specified date, against presentment of specified documents. The bank will charge the buyer a commission, for opening the L/C.
The L/C thus allows the Part A to supply goods to Party B, without having to worry about Party B’s credit-worthiness. It only needs to trust the bank that has issued the L/C. It is for the L/C issuing bank to assess the credit-worthiness of Party B. Normally, the L/C opener has a finance facility with the L/C issuing bank.
The L/C may be inland (for domestic trade) or cross border (for international trade).
Guarantee –
In business, parties make commitments. How can the beneficiary of thecommitment be sure that the party making the commitment (obliger) will live up to the commitment? This comfort is given by a guarantor, whom the beneficiary trusts.
Banks issue various guarantees in this manner, and recover a guarantee commission
from the obliger. The guarantees can be of different kinds, such as Financial Guarantee, Deferred Payment Guarantee and Performance Guarantee, depending on how they are structured.
Loan Syndication –
This investment banking role is performed by a number of universal banksFor Individuals
• Sale of Financial Products such as mutual funds and insurance is another majorservice offered by universal banks.
• Financial Planning and Wealth Management, again, are offered by universal banks.
• Executors and Trustees – a department within banks – help customers in managing
succession of assets to the survivors or the next generation.
• Lockers – a facility that most Indian households seek to store ornaments and other
valuables
Fund based Banking Services
For Business
Bank Overdraft –
a facility where the account holder is permitted to draw more funds that
the amount in his current account
Cash Credit –
an arrangement where the working capital requirements of a business are
assessed based on financial projections of the company, and various norms regarding
debtors, inventory and creditors. Accordingly, a total limit is sanctioned. At regular
intervals, the actual drawing power of the business is assessed based on its holding of
debtors and inventory. Accordingly, funds are made available, subject to adherence to
specified limits of Current Ratio, Liquid Ratio etc.
Funding could come from a consortium of bankers, where one bank performs the role of lead banker. Alternatively, the company may make multiple banking arrangements
Bill Purchase / Discount –
When Party A supplies goods to Party B, the payment terms
may provide for a Bill of Exchange (traditionally called hundi).
A bill of exchange is an unconditional written order from one person
(the supplier of the goods) to another (the buyer of the goods), signed by the person giving it (supplier),requiring the person to whom it is addressed (buyer) to pay on demand or at some fixed future date, a certain sum of money, to either the person identified as payee in the bill of exchange, or to any person presenting the bill of exchange.
o When payable on demand, it is a Demand Bill
o When payable at some fixed future date, it is a Usance Bill.
The supplier of the goods can receive his money even before the buyer makes the
payment, through a Bill Purchase / Discount facility with his banker. It would
operate as follows:
o The supplier will submit the Bill of Exchange, along with Transportation Receipt
to his bank.
o The supplier’s bank will purchase the bill (if it is a demand bill) or discount the bill
(if it is a usance bill) and pay the supplier.
o The supplier’s bank will send the Bill of Exchange along with Transportation
Receipt to the buyer’s bank, who is expected to present it to the buyer:
For payment, if it is a demand bill
For acceptance, if it is a usance bill.
o The buyer will receive the Transportation Receipt only on payment or acceptance,
as the case may be.
Term Loan / Project Finance –
Banks largely perform the role of working capital financing.
With the onset of universal banking, some banks are also active in funding projects. Thiswould entail assessing the viability of the project, arriving at a viable capital structure,and working out suitable debt financing facilities. At times, the main banker for the business syndicates part of the financing requirement with other banks
Credit Card –
The customer swipes the credit card to make his purchase. His seller will then submit the details to the card issuing bank to collect the payment. The bank will deduct its margin and pay the seller. The bank will recover the full amount from thecustomer (buyer). The margin deducted from the seller’s payment thus becomes a profit
for the card issuer. So long as the customer pays the entire amount on the due date, he does not bear anyfinancing cost. He may choose to pay only the minimum amount specified by the bank. Inthat case, the balance is like a credit availed of by him. The bank will charge him interest on the credit.
Such a mechanism of availing of credit from the credit card is called revolving credit.
It is one of the costliest sources of finance – upwards of 3% p.m. Besides, even for a few days of delay in payment, the bank charges penalties. Similarly, penalties are charged if the credit card outstanding crosses the limit specified by the bank.
Owners of many unorganized businesses (who find it difficult to avail of normal bank
credit) end up using the credit card to fund their business in this manner undesirable,
but at times, inevitable.
Personal Loan –
This is a form of unsecured finance given by a bank to its customer based
on past relationship. The finance is given for 1 to 3 years. Cheaper than credit card, but costly. It is not uncommon to come across interest rates of 1.5% p.m. plus 2-3% upfront for making the facility available plus 3-5% foreclosure charges for amounts pre-paid on the loan.
At times, banks convert the revolving credit in a credit card account to personal loan.
Such a conversion helps the customer reduce his interest cost and repay the money
faster. This is however a double edged sword. Once the credit card limit is released,
customers tend to spend more on the card and get on to a new revolving credit cycle.
Vehicle Finance –
This is finance which is made available for the specific purpose of buying
a car or a two-wheeler or other automobile. The finance is secured through hypothecation (discussed in next Chapter) of the vehicle financed. The interest rate for used cards can go close to the personal loan rates. However, often automobile manufacturers work out special arrangements with the financiers to promote the sale of the automobile. This makes it possible for vehicle-buyers to get attractive financing terms for buying new vehicles.
Home Finance –
This is finance which is made available against the security of real estate. The purpose may be to buy a new house or to repair an existing house or some other purpose. The finance is secured through a mortgage of the property.
The finance is cheaper than vehicle finance. As with vehicle finance, real estate developers do work out special arrangements with financiers, based on which purchasers of new property can get attractive financing terms
Bank Overdraft –
a facility where the account holder is permitted to draw more funds that
the amount in his current account
Cash Credit –
an arrangement where the working capital requirements of a business are
assessed based on financial projections of the company, and various norms regarding
debtors, inventory and creditors. Accordingly, a total limit is sanctioned. At regular
intervals, the actual drawing power of the business is assessed based on its holding of
debtors and inventory. Accordingly, funds are made available, subject to adherence to
specified limits of Current Ratio, Liquid Ratio etc.
Funding could come from a consortium of bankers, where one bank performs the role of lead banker. Alternatively, the company may make multiple banking arrangements
Bill Purchase / Discount –
When Party A supplies goods to Party B, the payment terms
may provide for a Bill of Exchange (traditionally called hundi).
A bill of exchange is an unconditional written order from one person
(the supplier of the goods) to another (the buyer of the goods), signed by the person giving it (supplier),requiring the person to whom it is addressed (buyer) to pay on demand or at some fixed future date, a certain sum of money, to either the person identified as payee in the bill of exchange, or to any person presenting the bill of exchange.
o When payable on demand, it is a Demand Bill
o When payable at some fixed future date, it is a Usance Bill.
The supplier of the goods can receive his money even before the buyer makes the
payment, through a Bill Purchase / Discount facility with his banker. It would
operate as follows:
o The supplier will submit the Bill of Exchange, along with Transportation Receipt
to his bank.
o The supplier’s bank will purchase the bill (if it is a demand bill) or discount the bill
(if it is a usance bill) and pay the supplier.
o The supplier’s bank will send the Bill of Exchange along with Transportation
Receipt to the buyer’s bank, who is expected to present it to the buyer:
For payment, if it is a demand bill
For acceptance, if it is a usance bill.
o The buyer will receive the Transportation Receipt only on payment or acceptance,
as the case may be.
Term Loan / Project Finance –
Banks largely perform the role of working capital financing.
With the onset of universal banking, some banks are also active in funding projects. Thiswould entail assessing the viability of the project, arriving at a viable capital structure,and working out suitable debt financing facilities. At times, the main banker for the business syndicates part of the financing requirement with other banks
For Individuals
Credit Card –
The customer swipes the credit card to make his purchase. His seller will then submit the details to the card issuing bank to collect the payment. The bank will deduct its margin and pay the seller. The bank will recover the full amount from thecustomer (buyer). The margin deducted from the seller’s payment thus becomes a profit
for the card issuer. So long as the customer pays the entire amount on the due date, he does not bear anyfinancing cost. He may choose to pay only the minimum amount specified by the bank. Inthat case, the balance is like a credit availed of by him. The bank will charge him interest on the credit.
Such a mechanism of availing of credit from the credit card is called revolving credit.
It is one of the costliest sources of finance – upwards of 3% p.m. Besides, even for a few days of delay in payment, the bank charges penalties. Similarly, penalties are charged if the credit card outstanding crosses the limit specified by the bank.
Owners of many unorganized businesses (who find it difficult to avail of normal bank
credit) end up using the credit card to fund their business in this manner undesirable,
but at times, inevitable.
Personal Loan –
This is a form of unsecured finance given by a bank to its customer based
on past relationship. The finance is given for 1 to 3 years. Cheaper than credit card, but costly. It is not uncommon to come across interest rates of 1.5% p.m. plus 2-3% upfront for making the facility available plus 3-5% foreclosure charges for amounts pre-paid on the loan.
At times, banks convert the revolving credit in a credit card account to personal loan.
Such a conversion helps the customer reduce his interest cost and repay the money
faster. This is however a double edged sword. Once the credit card limit is released,
customers tend to spend more on the card and get on to a new revolving credit cycle.
Vehicle Finance –
This is finance which is made available for the specific purpose of buying
a car or a two-wheeler or other automobile. The finance is secured through hypothecation (discussed in next Chapter) of the vehicle financed. The interest rate for used cards can go close to the personal loan rates. However, often automobile manufacturers work out special arrangements with the financiers to promote the sale of the automobile. This makes it possible for vehicle-buyers to get attractive financing terms for buying new vehicles.
Home Finance –
This is finance which is made available against the security of real estate. The purpose may be to buy a new house or to repair an existing house or some other purpose. The finance is secured through a mortgage of the property.
The finance is cheaper than vehicle finance. As with vehicle finance, real estate developers do work out special arrangements with financiers, based on which purchasers of new property can get attractive financing terms
Deposit Insurance
Deposit Insurance
Deposit Insurance and Credit Guarantee Corporation (DICGC) was set up by RBI with the intention of insuring the deposits of individuals. The deposit insurance scheme covers:
• All commercial banks, including branches of foreign banks operating in India, and Regional Rural Banks
• Eligible co-operative banks.
The insurance scheme covers savings account, current account, term deposits and
recurring accounts. However, the following deposits are not covered by the scheme:
• Deposit of Central / State Government
• Deposit of foreign governments
• Inter-bank deposits
• Deposits received outside India
In order for depositers in a bank to benefit from the insurance scheme, the bank should have paid DICGC the specified insurance premium (10 paise per annum per Rs. 100 ofdeposit).
Under the Scheme, in the event of liquidation, reconstruction or amalgamation of an
insured bank, every depositor of that bank is entitled to repayment of the deposits
held by him in the same right and same capacity in all branches of that bank upto an
aggregate monetary ceiling of Rs. 1,00,000/- (Rupees one lakh). Both principal and
interest are covered, upto the prescribed ceiling.
A few points to note:
• Suppose Mr. X has one account in his individual capacity, another account jointly with wife, a third account jointly with wife and son/daughter, and a fourth account as partner of a firm. Each of these would be treated as being in a different right and capacity.
Therefore, for each of these accounts, insurance cover of Rs. 1,00,000 is available i.e.
the insurance cover could go upto Rs. 4,00,000
• Since the monetary ceiling is applicable for all branches of a bank put together, splitting the deposit between different branches of the same bank does not help.
• If Mr. X maintains an account in his individual capacity in different banks (not different branches of the same bank), then insurance cover of Rs. 1,00,000 will be available in each such bank.
Deposit Insurance and Credit Guarantee Corporation (DICGC) was set up by RBI with the intention of insuring the deposits of individuals. The deposit insurance scheme covers:
• All commercial banks, including branches of foreign banks operating in India, and Regional Rural Banks
• Eligible co-operative banks.
The insurance scheme covers savings account, current account, term deposits and
recurring accounts. However, the following deposits are not covered by the scheme:
• Deposit of Central / State Government
• Deposit of foreign governments
• Inter-bank deposits
• Deposits received outside India
In order for depositers in a bank to benefit from the insurance scheme, the bank should have paid DICGC the specified insurance premium (10 paise per annum per Rs. 100 ofdeposit).
Under the Scheme, in the event of liquidation, reconstruction or amalgamation of an
insured bank, every depositor of that bank is entitled to repayment of the deposits
held by him in the same right and same capacity in all branches of that bank upto an
aggregate monetary ceiling of Rs. 1,00,000/- (Rupees one lakh). Both principal and
interest are covered, upto the prescribed ceiling.
A few points to note:
• Suppose Mr. X has one account in his individual capacity, another account jointly with wife, a third account jointly with wife and son/daughter, and a fourth account as partner of a firm. Each of these would be treated as being in a different right and capacity.
Therefore, for each of these accounts, insurance cover of Rs. 1,00,000 is available i.e.
the insurance cover could go upto Rs. 4,00,000
• Since the monetary ceiling is applicable for all branches of a bank put together, splitting the deposit between different branches of the same bank does not help.
• If Mr. X maintains an account in his individual capacity in different banks (not different branches of the same bank), then insurance cover of Rs. 1,00,000 will be available in each such bank.
Joint Accounts
Joint Accounts
Two or more individuals may open a joint account. Various options exist for operating the
account:
• Jointly by A and B – Both A and B will have to sign for withdrawals and other operations.
For example, high value transactions in a partnership firm may require the joint signature
of two or more partners.
• Either or Survivor – Either of them can operate the account individually. After the demise of
one, the other can operate it as survivor. This is the normal option selected by families.
• Former or Survivor – The first person mentioned as account-holder will operate it during
his / her lifetime. Thereafter, the other can operate. This option is often selected by a
parent while opening an account with the son / daughter.
• Latter or Survivor - The second person mentioned as account-holder will operate it during
his / her lifetime. Thereafter, the other can operate.
While opening the account, the operating option needs to be clearly specified.
Two or more individuals may open a joint account. Various options exist for operating the
account:
• Jointly by A and B – Both A and B will have to sign for withdrawals and other operations.
For example, high value transactions in a partnership firm may require the joint signature
of two or more partners.
• Either or Survivor – Either of them can operate the account individually. After the demise of
one, the other can operate it as survivor. This is the normal option selected by families.
• Former or Survivor – The first person mentioned as account-holder will operate it during
his / her lifetime. Thereafter, the other can operate. This option is often selected by a
parent while opening an account with the son / daughter.
• Latter or Survivor - The second person mentioned as account-holder will operate it during
his / her lifetime. Thereafter, the other can operate.
While opening the account, the operating option needs to be clearly specified.
Non-Resident Accounts
Non-Resident Accounts
These can be opened by Non-Resident Indians and Overseas Corporate Bodies with any bank in India that has an Authorised Dealer license.
Foreign Currency Non-Resident Account (FCNR)
These are maintained in the form of fixed deposits for 1 year to 3 years. Since the
account is designated in foreign currency (Pounds, Sterling, US Dollars, Japanese Yen
and Euro), the account holder does not incur exchange losses in first converting foreign
currency into rupees (while depositing the money) – and then re-converting the rupees
into foreign currency (when he wants to take the money back).
The depositer will have to bring in money into the account through a remittance from
abroad or through a transfer from another FCNR / NRE account. If the money is not in
the designated foreign currency, then he will have to bear the cost of conversion into
the designated currency. On maturity, he can freely repatriate the principal and interest
(which he will receive in the designated currency that he can convert into any other
currency, at his cost). Interest earned on these deposits is exempt from tax in India.
Non-Resident External Rupee Account (NRE)
As in the case of FCNR,
o The money has to come through a remittance from abroad, or a transfer from another
FCNR / NRE account.
o The principal and interest are freely repatriable.
o Interest earned is exempt from tax in India.
The differences are:
o It can be operated with a cheque, as in the case of any savings bank account.
o It is maintained in rupees. Therefore, a depositer bringing money in another currency
will have to first convert them into rupees; and then re-convert them to the currency
in which he wants to take the money out.
If during the deposit period, the rupee becomes weaker, then that loss is to the
account of the depositer.
Non-Resident Ordinary Account (NRO)
As with a NRE account,
o It can be operated with a cheque, as in the case of any savings bank account.
o It is maintained in rupees with the resulting implications in terms of currency
conversion losses for the depositer.
The differences from NRE are:
o The money can come from local sources – not necessarily a foreign remittance or
FCNR / NRE account.
o The principal amount is not repatriable, though the interest can be repatriated.
o The bank will deduct tax at source, on the interest earned in the deposit.
o A non-resident can open an NRO account jointly with a resident.
These can be opened by Non-Resident Indians and Overseas Corporate Bodies with any bank in India that has an Authorised Dealer license.
Foreign Currency Non-Resident Account (FCNR)
These are maintained in the form of fixed deposits for 1 year to 3 years. Since the
account is designated in foreign currency (Pounds, Sterling, US Dollars, Japanese Yen
and Euro), the account holder does not incur exchange losses in first converting foreign
currency into rupees (while depositing the money) – and then re-converting the rupees
into foreign currency (when he wants to take the money back).
The depositer will have to bring in money into the account through a remittance from
abroad or through a transfer from another FCNR / NRE account. If the money is not in
the designated foreign currency, then he will have to bear the cost of conversion into
the designated currency. On maturity, he can freely repatriate the principal and interest
(which he will receive in the designated currency that he can convert into any other
currency, at his cost). Interest earned on these deposits is exempt from tax in India.
Non-Resident External Rupee Account (NRE)
As in the case of FCNR,
o The money has to come through a remittance from abroad, or a transfer from another
FCNR / NRE account.
o The principal and interest are freely repatriable.
o Interest earned is exempt from tax in India.
The differences are:
o It can be operated with a cheque, as in the case of any savings bank account.
o It is maintained in rupees. Therefore, a depositer bringing money in another currency
will have to first convert them into rupees; and then re-convert them to the currency
in which he wants to take the money out.
If during the deposit period, the rupee becomes weaker, then that loss is to the
account of the depositer.
Non-Resident Ordinary Account (NRO)
As with a NRE account,
o It can be operated with a cheque, as in the case of any savings bank account.
o It is maintained in rupees with the resulting implications in terms of currency
conversion losses for the depositer.
The differences from NRE are:
o The money can come from local sources – not necessarily a foreign remittance or
FCNR / NRE account.
o The principal amount is not repatriable, though the interest can be repatriated.
o The bank will deduct tax at source, on the interest earned in the deposit.
o A non-resident can open an NRO account jointly with a resident.
Friday, 25 January 2013
Bank Deposits,
1.1 Demand Deposits
These are deposits which the customer can get back on demand or which are placed for very
short time periods. For example:
• Savings account deposits
This is the normal bank account that individuals and Hindu Undivided Families (HUFs)maintain. The account can be opened by individuals who are majors (above 18 years of age), parents / guardians on behalf of minors and Karta of HUFs. Clubs, associations and trusts too can open savings accounts as provided for in their charter.
Banks insist on a minimum balance, which may be higher if the account holder wants
cheque book facility. The minimum balance requirement tends to be lowest in the case of co-operative banks, followed by public sector banks, private sector Indian banks and foreign banks, in that order.
Banks do impose limits on the number of withdrawals every month / quarter. Further,
overdraft facility is not offered on savings account.
Traditionally, banks paid an interest on the lowest balance in the bank account between the 10th and the end of the month. Suppose the balance in the depositer’s account in a particular month was as follows:
1st to 10th Rs. 50,000
11th Rs. 10,000
12th to 31st Rs. 50,000
Although Rs. 50,000 was maintained for all but one day in the month, the depositer
would receive interest as if only Rs. 10,000 (the lowest balance between 10th and the end of the month) was maintained in the account during the month. The bank thus got “free money” of Rs. 50,000 less Rs. 10,000 i.e. Rs. 40,000 for all but one day in the month.
Since April 1, 2010, scheduled commercial banks have been directed to pay interest on the daily balances. Thus, banks have lost on the free money, and their cost of funds has gone up.
Interest is paid on a half-yearly basis, every September and March.
Current account deposits
This is maintained by businesses for their banking needs. It can be opened by anyone,
including sole-proprietorships, partnership firms, private limited companies and public limited companies.
The current account comes with a cheque book facility. Normally, there are no restrictions on the number of withdrawals. Subject to credit-worthiness, the bank may provide an overdraft facility i.e. the account holder can withdraw more than the amount available in the current account.
Current accounts do not earn an interest. Therefore, it is prudent to leave enough funds in current account to meet the day-to-day business needs, and transfer the rest to a term deposit.
CASA is a term that is often used to denote Current Account and Savings Account. Thus, a bank or a branch may have a CASA promotion week. This means that during the week, the bank would take extra efforts to open new Current Accounts and Savings Accounts
Term Deposits
These are deposits that are maintained for a fixed term. The time period can be anything from 7 days to 10 years. This is not like a normal operating bank account. Therefore, cheque book facility is not offered.
Benefit of term deposits is that the interest rate would be higher. Weakness is that if the investor needs the money earlier, he bears a penalty. He will earn 1% less than what the deposit would otherwise have earned, if it had been placed for the time period for which the money was left with the bank.
Suppose the bank offers 6% for deposits of 1 year, and 7% for deposits of 2 years. The
depositer placed money in a 2-year deposit (at 7%), but did a premature withdrawal after 1year. The interest earning would be limited to 6% (the rate applicable for the time period for which the money was placed with the bank) less 1% i.e. 5%.
Banks may also offer the facility of loan against fixed deposit. Under this arrangement, a certain percentage of the fixed deposit amount may be made available as a loan, at an interest rate, which would be higher than the term deposit rate. This is an alternative to premature withdrawal.
Unlike interest rate on savings account, the interest in term deposits is de-regulated. Therefore, every bank decides its own interest rate structure. Further, it is normal to offer 0.50% extra interest to senior citizens.
For large deposits of above Rs. 1 crore, the bank may be prepared to work out special
terms. The term deposits may also be structured as recurring i.e. the depositer would invest a constant amount every month / quarter, for anything from 12 months to 10 years. Benefit of such an account is that the interest rate on the future deposits is frozen at the time the recurring account is opened. Thus, even if interest rates on fixed deposits, in general, were to go down, the recurring deposits would continue to earn the committed rate of interest.
Interest rate in a recurring deposit may be marginally lower than the rate in a non-recurring term deposit for the same time period.
Hybrid Deposits / Flexi Deposits
These are value added facilities offered by some banks. For instance, a sweep facility may be offered in their CASA accounts. Under the facility, at the end of every day, surplus funds beyond the minimum balance required, is automatically swept into an interest earning term deposit account. When more money is required for the regular operations, it is automatically swept from the interest earning term deposit account. Benefit for depositers are:
• Superior interest earnings, as compared to normal CASA
• Less paperwork – no need to sign papers etc. for each sweep in or sweep out.
• Sweep out of money from the interest earning term deposit account does not attract
premature withdrawal charges.
However, unlike in a normal term deposit, interest rate is liable to be changed by the bank at
any time.
These are deposits which the customer can get back on demand or which are placed for very
short time periods. For example:
• Savings account deposits
This is the normal bank account that individuals and Hindu Undivided Families (HUFs)maintain. The account can be opened by individuals who are majors (above 18 years of age), parents / guardians on behalf of minors and Karta of HUFs. Clubs, associations and trusts too can open savings accounts as provided for in their charter.
Banks insist on a minimum balance, which may be higher if the account holder wants
cheque book facility. The minimum balance requirement tends to be lowest in the case of co-operative banks, followed by public sector banks, private sector Indian banks and foreign banks, in that order.
Banks do impose limits on the number of withdrawals every month / quarter. Further,
overdraft facility is not offered on savings account.
Traditionally, banks paid an interest on the lowest balance in the bank account between the 10th and the end of the month. Suppose the balance in the depositer’s account in a particular month was as follows:
1st to 10th Rs. 50,000
11th Rs. 10,000
12th to 31st Rs. 50,000
Although Rs. 50,000 was maintained for all but one day in the month, the depositer
would receive interest as if only Rs. 10,000 (the lowest balance between 10th and the end of the month) was maintained in the account during the month. The bank thus got “free money” of Rs. 50,000 less Rs. 10,000 i.e. Rs. 40,000 for all but one day in the month.
Since April 1, 2010, scheduled commercial banks have been directed to pay interest on the daily balances. Thus, banks have lost on the free money, and their cost of funds has gone up.
Interest is paid on a half-yearly basis, every September and March.
Current account deposits
This is maintained by businesses for their banking needs. It can be opened by anyone,
including sole-proprietorships, partnership firms, private limited companies and public limited companies.
The current account comes with a cheque book facility. Normally, there are no restrictions on the number of withdrawals. Subject to credit-worthiness, the bank may provide an overdraft facility i.e. the account holder can withdraw more than the amount available in the current account.
Current accounts do not earn an interest. Therefore, it is prudent to leave enough funds in current account to meet the day-to-day business needs, and transfer the rest to a term deposit.
CASA is a term that is often used to denote Current Account and Savings Account. Thus, a bank or a branch may have a CASA promotion week. This means that during the week, the bank would take extra efforts to open new Current Accounts and Savings Accounts
Term Deposits
These are deposits that are maintained for a fixed term. The time period can be anything from 7 days to 10 years. This is not like a normal operating bank account. Therefore, cheque book facility is not offered.
Benefit of term deposits is that the interest rate would be higher. Weakness is that if the investor needs the money earlier, he bears a penalty. He will earn 1% less than what the deposit would otherwise have earned, if it had been placed for the time period for which the money was left with the bank.
Suppose the bank offers 6% for deposits of 1 year, and 7% for deposits of 2 years. The
depositer placed money in a 2-year deposit (at 7%), but did a premature withdrawal after 1year. The interest earning would be limited to 6% (the rate applicable for the time period for which the money was placed with the bank) less 1% i.e. 5%.
Banks may also offer the facility of loan against fixed deposit. Under this arrangement, a certain percentage of the fixed deposit amount may be made available as a loan, at an interest rate, which would be higher than the term deposit rate. This is an alternative to premature withdrawal.
Unlike interest rate on savings account, the interest in term deposits is de-regulated. Therefore, every bank decides its own interest rate structure. Further, it is normal to offer 0.50% extra interest to senior citizens.
For large deposits of above Rs. 1 crore, the bank may be prepared to work out special
terms. The term deposits may also be structured as recurring i.e. the depositer would invest a constant amount every month / quarter, for anything from 12 months to 10 years. Benefit of such an account is that the interest rate on the future deposits is frozen at the time the recurring account is opened. Thus, even if interest rates on fixed deposits, in general, were to go down, the recurring deposits would continue to earn the committed rate of interest.
Interest rate in a recurring deposit may be marginally lower than the rate in a non-recurring term deposit for the same time period.
Hybrid Deposits / Flexi Deposits
These are value added facilities offered by some banks. For instance, a sweep facility may be offered in their CASA accounts. Under the facility, at the end of every day, surplus funds beyond the minimum balance required, is automatically swept into an interest earning term deposit account. When more money is required for the regular operations, it is automatically swept from the interest earning term deposit account. Benefit for depositers are:
• Superior interest earnings, as compared to normal CASA
• Less paperwork – no need to sign papers etc. for each sweep in or sweep out.
• Sweep out of money from the interest earning term deposit account does not attract
premature withdrawal charges.
However, unlike in a normal term deposit, interest rate is liable to be changed by the bank at
any time.
Thursday, 24 January 2013
Mutual Fund - Concept, Organisational Structure, Advantages and Types
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Tuesday, 22 January 2013
What is Reverse Mortgage Loan?
What is
Reverse Mortgage Loan?
Reverse Mortgage Loan (RML) enables a Senior
Citizen above 60 years age in India.
The idea is to avail of periodical payments/
lump sum amount from a lender against
the mortgage of his/her house. Such a loan
allows the borrower to continue to occupy
his house as long as he lives. Unlike other
loans, reverse mortgage need not be repaid
by the borrower. The maximum period of the
loan (over which the payments can be
made to the reverse mortgage borrower) is 20
years. The lender on the other hand
has to value the property periodically at
least once in five years and the quantum of
loan may be revised based on such
re-valuation of property at the discretion of the
lender. On the borrower’s death or on the
borrower leaving the house property
permanently, the loan is repaid along with
accumulated interest, through sale of the
house property. The borrowers or their heirs
also have the option of prepaying the
loan at any time during the loan tenor or
later, without any prepayment levy. In the
usual mortgage, as the regular mortgage
payments are made the outstanding loan
decreases and the house equity increases.
Reverse is the case in reverse mortgage,
the loan amount increases with time and the
home equity decreases with time.
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