banking overview

BALANCE SHEET

LIABILITIES

CAPITALAuthorized CapitalIssued CapitalSubscribed CapitalCalled up capitalPaid up capital

RESERVES AND SURPLUS

B.R.A. 1949 – Section 17 20% STATUTORY RESERVE II. CAPITAL RESERVE III.SHARE PREMIUM IV. REVENUE AND OTHER RESERVES V. BALANCE IN PROFIT AND LOSS ACCOUNT

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DEPOSITS

Represents 90% of bank’s fundIndividualsBUSINESS FirmsGovernment Bodies

Other Institutes

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DEPOSITS

I. DEMAND DEPOSITS

i) From Banks

ii) From others

II. SAVINGS BANK DEPOSITS

III. TERM DEPOSITS I. From Banks

II. From others

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BORROWINGS

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Innovative Perpetual Debt Instruments

I BORROWINGS IN INDIA Subordinated Debt

Other Institutions & Agencies

Banks (other than RBI)

BILLS FOR COLLECTIONS

Bills Held by Bank till maturity on behalf of customers

There will be contra entry

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ACCEPTANCE ENDORSEMENT

The practice of banks to accept or endorse bills of exchange on behalf of the customers.

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CASH AND BALANCES WITH RESERVE BANK OF INDIA

Cash in hand (including Foreign Currency Notes)

II. Balances with Reserve Bank of India -in Current Account

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INVESTMENTS IN INDIA

i) Government Securities ii) Other Approved Securities iii) Sharesiv) Debentures and Bonds v) Subsidiaries and/or Joint Venture (Units

of UTI/Mutual Funds, CP and CD etc) vi) Others

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ADVANCES (IN INDIA)A) Bills purchased and discounted Cash Credits, Overdrafts and Loans repayable on demand Term Loans

B) I. Secured by Tangible Assets II. Covered by Bank/Government guarantees III. Unsecured C) I. Priority Sector II. Public Sector III. Banks

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BALANCES WITH BANKS AND MONEY AT CALL AND SHORT NOTICE

(i) In Current Accounts

(a) Balances with Banks

(b) Money at Call and Short notice With Other Institutions:

(ii) In Other Deposit Accounts

I. IN INDIA

II. OUTSIDE INDIA -In Current Accounts

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CASH AND BALANCES WITH RESERVE BANK OF INDIA

I. Cash in hand (including Foreign Currency Notes)

II. Balances with Reserve Bank of India -in Current Account

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DEPOSITS

Features of Deposits

Bank deposits are safeBanks are under control of RBI Highly liquid-even fixed deposits can be

taken back on demand. Loans can be raised against bank deposits Interest rate differ from deposits to deposit Interest rate are subject to regulation by

RBI

Deposit accounts - categories of customers

Individual account Joint account Partnership account Sole proprietor CompanyGovt./Corporate/Society/Trusts/Trade

Unions

Deposit accounts of Indian residents

Saving deposits - motivate and attract savings from public. Interest on saving is now 4% on daily balance.

Current amount - opened by businessman and banks do not allow any interest on this deposit.

Fixed Deposit- Deposit for a fixed period. Interest depends upon period.

Recurring Deposit- Depositing small amount every month maturing after fixed period say 5 years.

Special deposit schemes For senior citizens For specified period say 555 days, 333

days, 444 days Tax saving schemes e.g. fixed deposits for 5

years

Deposits for Non-Resident-Indians

Non Resident Ordinary (NRO – Account to be open by NRI taking employment in a foreign country. Amount credited is not subject to tax deduction at source and covered under General/special regulation by RBI.

Non-Resident External (NRE) - Accounts for person employed in foreign countries in firms owned by NRI‟s at least 60%. Deposits are accepted in foreign currency and freely repatriable, interest is exempted from tax.

Foreign Currency Non-Resident (FCNR) - Accounts such account are like NRE account but they are maintained in designated foreign currency at approved dealer. These currencies are US Dollar, Pond Sterling, Euro and Japanese Yen. Accounts are in the form of term deposits only.

Resident Foreign Currency (RFC) Account - Can be opened by a NRI who was in a foreign country for at least a year. Account may be in the form of current, saving, term deposit. No loan against & deposit balance outstanding can be transferred to NRE/FCNR accounts.

Escrow Account - Account opened with the approval of RBI for adjustment of value of goods imported or exported. Account is opened in US Dollar in the name of overseas organization, no overdraft or loan is permitted.

Other accounts such as- a. Foreign currency accounts of Airline

Shipping companies.

b. Foreign currency accounts of overseas buyers.

c. Foreign currency accounts of foreign Embassies/Missions/Diplomats

After passing Government Savings Banks Act 1973, Post Office saving bank of India came in to existence.

National Small Saving Fund- All deposits are credited to NSSF- withdrawals are permitted-amount in credit is invested in government securities.

National Saving Certificates (NSC’s) - Certificates are issued by post offices maturing after 5 years with tax benefit. Loan can be taken from banks against pledging these NSC‟s

Post Office Monthly Income Account- Can be opened with a minimum of Rs.1000 and maximum of Rs. 3 lakh for single and 6 lakhs for Joint Account. Depositor gets monthly interest.

Public Provident Fund Account- Another saving plan with minimum of Rs.500 and maximum of Rs. 70,000 per month. Deposits qualify for deduction of income tax under section 80-C of Income Tax Act.

CREDIT POLICYThe measures through which Central Bank

of the country i.e. BRI controls the supply of money to attain general economic objectives such as:

Price stability Exchange rate stability Full employment Economic development

KEY OBJECTIVES

To encourage savings and mobilize savings for capital formation and development.

To encourage investment and create environment for investments in planned programmes.

Supply of adequate credit to meet increasing demand of activities so that overall economic development is encouraged.

To control inflationary pressure and maintain price stability.

To encourage economic development without financial hindrance

TOOLS AND TECHNIQUESQuantitative Techniques

Bank rate Open Market Operations Change in CRR/SLR

Quantitative Techniques Rationing of credit Changes in Margin requirements Regulation of consumer credit Direct action Moral suasion

THE CREDIT PROCESSBusiness Development and Credit Analysis

Credit Execution and Administration

Credit Review

Market research Advertising, public relations Officer call programs Obtain formal loan request Obtain financial statements,

borrowing resolution, credit reports

Financial statement and cash flow analysis

Evaluate collateral Line officer makes

recommendation on accepting/rejecting loan

Loan committee reviews proposal/recommendation

Accept/reject decision made, terms negotiated

Loan agreement prepared with collateral documentation

Borrower signs agreement, turns over collateral, receives loan proceeds

Perfect security interest File materials in credit file Process loan payments, obtain

periodic financial statements, call on borrower

Review loan documentation Monitor compliance with loan

agreement: Positive and negative loan covenants Delinquencies in loan payments Discuss nature of delinquency or other problems with borrower Institute corrective action: Modify credit terms Obtain additional capital, collateral, guarantees Call loan

The Credit Process

Loan PolicyFormalizes lending guidelines that employees

follow to conduct bank businessCredit Philosophy

Management’s philosophy that determines how much risk the bank will take and in what form

Credit CultureThe fundamental principles that drive lending

activity and how management analyzes risk

The Credit ProcessCredit Culture

The fundamental principles that drive lending activity and how management analyzes risk

Values DrivenFocus is on credit quality

Current-Profit DrivenFocus is on short-term earnings

Market-Share DrivenFocus is on having the highest market share

BUSINESS DEVELOPMENT AND CREDIT ANALYSIS

Business DevelopmentMarket researchTrain employees:

On what products are availableWhat products customers are likely to needHow they should communicate with customers

about those needsAdvertising and Public RelationsOfficer Call Programs

BUSINESS DEVELOPMENT AND CREDIT ANALYSIS

Credit AnalysisEvaluate a borrower’s ability and willingness

to repayQuestions to address

What risks are inherent in the operations of the business?

What have managers done or failed to do in mitigating those risks?

How can a lender structure and control its own risks in supplying funds?

BUSINESS DEVELOPMENT AND CREDIT ANALYSIS

Five C’s of Good CreditCharacterCapitalCapacityConditionsCollateral

BUSINESS DEVELOPMENT AND CREDIT ANALYSIS

Five C’s of Bad CreditComplacencyCarelessnessCommunicationContingenciesCompetition

CREDIT EXECUTION AND ADMINISTRATION

Loan DecisionIndividual officer decisionCommitteeCentralized underwriting

Loan AgreementFormalizes the purpose of the loanTerms of the loanRepayment scheduleCollateral requiredAny loan covenantsStates what conditions bring about a default

Credit Execution and Administration

Documentation: Perfecting the Security InterestPerfected

When the bank's claim is superior to that of other creditors and the borrower

Require the borrower to sign a security agreement that assigns the qualifying collateral to the bank

Bank obtains title to equipment or vehicles

Credit Execution and Administration

Position LimitsMaximum allowable credit exposures to any

single borrower, industry, or geographic localRisk Rating Loans

Evaluating characteristics of the borrower and loan to assess the likelihood of default and the amount of loss in the event of default

Credit Execution and Administration

Loan ReviewMonitoring the performance of existing loansHandling problem loans

Loan review should be kept separate from credit analysis, execution, and administrationThe loan review committee should act

independent of loan officers and report directly to the CEO of the bank

Credit Execution and Administration

Problem LoansOften require special treatment

Modify terms of the loan agreement to increases the probability of full repayment

Modifications might include:» Deferring interest and principal payments» Lengthening maturities» Liquidating unnecessary assets