notes on banking

8/9/2019 Notes on Banking

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PREPARATION FOR ALL INDIA SELECTION EXAMS

1. Important provisions of the RBI ACT- 1934

Section -22 : sole right to issue bank notes. Section- 31 : Prohibits issue of bearer bills of exchange, promissory notespayable to bearer.

Section – 42(1) : Cash reserve ratio (CRR)

2. Important provisions of the Banking Regulation Act- 1949

Section - 11 : paid up Capital and Reserves :

For domestic banks: 5 lacs and for foreign banks 15 lacs in case of

banking business at Mumbai/ Calcutt a or both

Section – 20 : Restriction on advance against own shares Section- 21 (A): Interest charged by the banks can not scrutinise by thecourt.

Section – 23 : Restriction on opening of new branch, extn. Counter etc.

except for one month.Section 24 : Maintenance of SLR

Section 26 : Return of unclaimed Deposit .

Section 45(Y) : Preservat ion of the bank records.Section 45 Z : Returns of paid instruments to customer

Section 45 ZA : Nomination in Deposit accountsSection 45 ZC : Nomination in safe custody accounts

Section 45 ZE : Nomination in lockersSection 47-A : Violation of KYC: RBI can impose penalty on banks forviolation of KYC norms.

3.Negotiable Instruments Act- 1881

Section -10 : Payment in Due courseSection -18: Diff.in word and figures for the amount mentioned, the

amount in words will be treated as the amount ordered by the drawer to

pay.

Section-22: Three days grace period for calculating maturity date ofusance bills.Section-26: Minor can draw, indorse, and accept the negotiable

instrument so as to binding for all except himself.

Section-85(A): Protection to the paying banker in case of bank’s draft . Section-85(1): Protection to the paying banker in case of an order

cheque which is properly endorsed by payee or agent.


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Section-85(2): Protection to paying banker in case of a bearer cheque.

Section-89: Protection to the paying banker in case of materially altered

cheque but does appears to have been altered.

Section -99 : Noting.

Section-100: Protesting.

Section-128: Protection against payment in due course of crossedcheque.

Section-131: Collecting banker’s protection in respect of crossed cheque.

Section-138: Dishonour of cheque for insufficiency etc. of funds in the

account.

Negotiable Instruments:-

1] Bills of Exchange 2] Promissory notes 3] Cheques.

Negotiable instruments by Customs and Usages:-

1] Pay Order/Banker’s Cheque 2] Govt. Promissory Notes 3] Certificate ofDeposit

4] Commercial Papers 5] Treasury Bills 6] Hundies

Following negotiable instruments are also treated as Documents to the title

to goods

1] Bill of Lading 2] Railway Receipts 3] Dock Warrants 4] WarehouseReceipts 5] Delivery orders 6] GRs issued by Transport Operators approved

by IBA.

Holder: - Consideration and Actual possession is not essential and

defective t itle will affect the instruments.

Holder in due course:- Consideration and actual possession is essentialand defective t itle will not effect the instruments.

Bank and Customer Relationship [important]


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NO TY PE OF TRANSACTION BANK CUSTOMER

1 Deposit a/c and Credit balance in

CC/OD

Debtor Creditor

2 Loan a/c and Debit balance in

CC/OD

Creditor Debtor

3 Collection of

cheques,TT,MT,StandingInstructions, sale/purchase of

securities,Maintenance of currency chest

Agent Principal

4 Safe custody art icles Bailee Bailor

5 Leasing of Lockers Lessor,Landlord,

Licensor

Lessee,Tenant,

Licensee.

6 Mortgage of immovable property Mortgagee Mortgagor

7 Pledge of securities/ Shares Pledge Pledgor8 Hypothecation of art icles Hypothicatee Hypothecator

Duties of banks

a. Duty of secrecy: Section 13 of Banking Companies Acquisitions &

Transfer of Property Act 1970.b.

Duty to honour the Cheque: Section 31 of N.I.Act.

c.

Duty to supply periodical Statement of accounts.

d.

Duty to collect payments.

Rights of the Banks.

a.

Right of General Lien, Set-Off, Appropriation

b. Right to act according to the mandate given by the customer.c.

Under Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act 2002 [SARFESI ACT -2002] banks

can exercise t he right of privat e sales.

Disclosure of payments

a. As per existing practice amongst the banks.

b.

To safeguard Bank’s own interest c.

Duty to disclose information under law

d.

Disclosure in public interest

e. Disclosing under instructions by the customersf. Disclosing to regulatory bodies


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Types of Endorsements:-

1)

Blank Endorsements: section 16(1) it means endorser only signs hisname with adding any words or directions this endorsement makes

the instrument payable to bearer.2)

Endorsement in Full: - The endorser added the name of endorseespecifically.

3) Conditional Endorsement: Here the endorser puts some condit ions

for endorsee Here the binding of conditions is between endorsee andendorser only.

3)

San recourse Endorsement: - Endorser added the words withoutrecourse to me.

4)

Facultative Endorsement: - Where an endorser waives the condition

of notice of dishonour.

5)

Endorsement on Bearer Cheque: - The endorsement on bearercheque is meaning less as the cheque once bearer is always bear.

Crossing:-

General Crossing (Sec.123): Two parallel transverse lines on the face of

instruments with or without word ‘Not negotiable’. It is direction to the

paying bank that do not pay the cheque across the counter.Special Crossing (Sec.124): In addition of general crossing the cheque

bears the name of collecting bank either with or without the words ‘Notnegotiable’.

Collection of cheques:-

Section 131: a banker who has in good faith and without negligencereceived payment for a customer of a cheque (not available for B/E and

P/N) crossed generally or specially. The present section gives protection

provided following conditions are fulfilled…

a) The bank must have acted in good faith and without negligence.

b)

Bank has received the payment as an agent for collection.

c)

Bank has collected the cheque in the duly introduced account ofcustomer only.

d)

The cheque collected must be crossed.

Payment of cheques:-

Liability of drawee (paying banker): It is obligation of the banker tohonour the cheques of a customer provided there is sufficient balance


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and the cheque is otherwise in order. Section 31 of NI act provides

that “The Drawee of a cheque:

a)

Must have sufficient funds in the account.b)

Properly applicable t o the payment of such cheque.

c)

Must pay the cheque when duly required to do so.d)

In default of such payment, must compensate the drawer for anyloss or damage.

Protection for paying banker in case of cheque:-

Regularity of endorsement Section 85(1): Paying banker’s liability is toensure the regularity of the endorsement and is not concerned with

genuineness of endorsement. The genuineness of endorsement is the

liability of collect ing banker. Therefore, protection is available to the

paying banker in case of forged endorsements.

Payment in due course (Section-10):-

a)

In accordance with the apparent tenor of the instrument.b)

In good faith and without negligence.

c) To the person in possession of the instrument.

d)

Under the circumstances which do not afford a reasonable groundfor believing that he is not entitled to receive the payment of the

amount mentioned therein.

When bank should not pay:-

a) The death of the drawer in case of individual’s account terminates

the contractual relat ionship.b) Insane customers: in case of insanity.

c)

Insolvent drawers: The bank should stop the operation of such

account as if drawer adjudged insolvent and balance in theaccount vested with official receiver/assignee.

d) Countermanded by drawer: on receipt of valid stop payment

instruction by the drawer.

e)

Others: when a cheque is post dated, with insufficient balance inthe account, cheque is of doubtful legality, or cheque is irregular,ambiguous, materially altered or stale etc.

Dishonour of cheques (Sec. 138-147):-

The payee or holder in due course should give notice to drawer within 30days of return of cheque with the reason “Insufficient balance” and


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demanding payment within 15 days of his receiving information of

dishonour. Drawee can make payment within 15 days of the receipt ofnotice and only if he fails to do so prosecution could take place. The

complaint is to be made with in one month of the cause of action arisingthat is expiry of the notice period.

Punishments:

a)

Summary proceedings: fine up to Rs. 5000/- and imprisonment

up to one year or both.b) Regular proceedings: fine up to the double the amount of

cheque or imprisonment up to 2 years or both.

Hindu undivided family (HUF):-

a)

Hindu undivided family or HUF is not based on any act but the sharein ancestral property is decided on the basis of Hindu successionAct- 1956.

b)

The HUF account is managed by the eldest member of the familycalled as KARTA. Other members are co-parceners by birth or

adoption including minor members. There are no restrictions on the

number of co-parceners. One co-parcener is not an agent of otherco-parcener.

c)

Power of Karta:- as per law, karta has powers to incur debt, execute

the documents, pledge the securities, on behalf of the familybusiness, for that, consent of the co-parceners is not required.Karta’s liability is un-limited but co-parcener is liable to the extent of

their share in HUF property. However, if the documents are signedby all the co-parceners, only then they are personally liable.

d) I f karta stays abroad most of the t ime, he continues to be karta andfor operating the account he can give mandate to any one, may

be the outsider or any member of the family. A co-parcener can

not countermand the cheque unless the karta has delegated the

authority to operate the account. Further HUF can not become thepartner in any other partnership firm.


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Some important points about Garnishee order and Attachment order:-

Particulars Garnishee order Attachment order

Legal provision Civil procedudre codesec.60Order xxi, rule 46

Related statutes such asITAct, Sales tax act etc .

Applicableamount

On clear balance availablein the account at the time

of order received

Applicable onsubsequent balance.

Limitation period 12 years 30 years

Joint account

order in single

name

Not applicable Equal share depending

upon the number of

share holders

Trust accounts:-

a)

In case of public trust, registration certificate of charity

commissioner is necessary and in case of private trust it is

optional.b) If any one trustee dies the provisions of trust deed will

operate. If the sole trustee dies, further operation in theaccount will be stopped and cheques already signed by him

should be paid.

c)

Any trustee can give stop payment instructions includingthose who is not authorised to operate the account.

d) Trustee can not delegate his powers unless it is provided in

trust deed.e)

Trustee can not borrow unless it is specifically mentioned in

the trust deed.f) In case of death/insolvency/ insanity of the trustee, the

Cheques issued by him will be paid if otherwise in order.

Partnership firms:-

a)

Partnership firms are governed by Indian partnership Act-1932.

b) Minor can be admitted to the benefits of partnership with the

consent of all the partners. He is not personally liable but his shareof property is liable.

c)

Registration of partnership firms is done with Registrar of firms.

Bank’s normally do not grant any type of credit facility to the non-


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registrar firms as unregistered firms can not enforce any suit against

the third/ third parties.d)

Number of partners: mini- 02 and maxi- 10 in case of banking business

and 20 in case of other business. Maximum number of partners hasbeen specified in section 11 of companies act.

e)

A partnership consisting of 20 partners plus two minors is a legalassociation.

f)

HUF cannot be a partner. However since the company has separate

legal entity, it can become the partner if permitted by Articles of

association.g) Under section 19(1), the acts of a partner to carry on business of the

firm in a usual way, binds the firm and a partner is an agent of the firmfor the purpose of business of the firm. In order to bind the firm by his

acts, a partner must sign for and on behalf of the firm.

h)

As per section 18 of Partnership act, every partner is the agent of firm

for the purpose of the business of the firm. Therefore, act of a partner isknown as the act of the firm. This is known as the implied authority ofthe partner. This rule has certain exceptions.

Joint stock companies:-

Partnership Pvt Ltd Public Ltd.

Mini.members Two Two Seven

Maxi. Members 10 banking

20 others

Fifty No limit

Directors Not applicable Mini. 2

Maxi. No limit

Mini. 3

Maxi. No limit

Some important features of a company:-

a) Memorandum of Association: is the constitution of the companyand it establishes the relationship of the company with the world.

b)

Articles of Association: are bye- laws and internal rules and

regulations of the company.c)

Certificate of incorporation: issued by the Registrar of Companies,

under section 35 of co’s act -1956. The legal existence of the

company begins from the date of issue of cert ificate.d) Certificate of commencement of business: A public limited

company having a share capital and issuing a prospectus can notcommence the business until the registrar issues the certificate of

commencement of business.

e) Borrowing powers of the company: The board of directors of privatelimited company has unlimited powers to borrow. However the


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Board of Public limited company can borrow up to paid up capital

plus free reserves of the company. If they intent to borrow morethan that, general body resolution under sec. 293(1)(D) is required

to be passed.f)

Death of director: As the company has a separate entity, the death

of any director does not effect the operations of the account. Evenif cheque signed by the authorised director who has died, ispresented after death, the banker cannot return the cheque for

that reason.

g) Conversion: A cheque payable to the company should never bedeposited in the personal account of directors, as it would amount

to conversion under section 131 of the N.I. Act.h) Section 125 of Companies Act: Provides that all charges created on

a company’s assets except pledge, lien, and set-off, appropriation,

trust receipt have to be registered with the Registrar of Companies

with in 30 days of creation of the charge. Otherwise, the charge isvoid.

Ombudsman:-

Provides independent, expeditious and inexpensive forum to

aggrieved bank customers. RBI has introduced this scheme under

powers granted under section 35-A of Banking Regulation Act.

a)

Scope: complaints relating to deficiency in service in deposit ,ancillary/ advances area including fair practice code, credit card

etc. In loans non observance of RBI directives, delay in sanction ordisbursement, time schedule are included.

b) Pre-requisite: Customer should have complained to the concerned

bank first and wait for one month, complaint to Ombudsman canbe in writ ing or in electronic form.

c)

Limitation and cause of action: before one year as from the reply

received from the concern bank or if no reply received from theconcern bank, then not later than one month and one year from

the date of representation to the bank.

d)

Award: Ombudsman can give maximum award up to Rs. 10 lacs.

Binding on the bank if customer gives acceptance within 30 daysfrom the receipt. Compliance by bank with in one month of receiptof acceptance.

e) Appeal: Any party can file appeal within 30 days on receiving

award or the Ombudsman rejecting his complaint to AppellateAuthority. If the appeal is by the bank, it should be made with

approval of CMD of ED only.


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Know your customer [KYC]:-

KYC guidelines issued by RBI under section 35-A of BR Act to check

money laundering that is using banking channel for conversion ofillegal funds into legal funds and financial frauds. It is recommended

by Financial Action Task Force (FATF) on Anti Money Laundering (AML)standards and Combating Financing of Terrorism.

a)

Banks are required to verify the identity and address of the

customers before opening of accounts to avoid

fictitious/benami transactions.b) Categorization of customers: Customers to be categorized in to

low, medium, and high risk keeping in view risk perception,volume/ turnover, social and financial stat us etc.

c)

Know your transactions: Banks to monitor and keep record of

high volume cash transactions of Rs. 10 lacs above and send

report of cash transactions of Rs. 10 lacs and above to FinancialIntelligence Unit (FIU) at Finance ministry. Cash transactionreport (CTR) for each month to be sent by 15 th of close of the

month.

d)

Suspicious transaction report: to be submitted with in 7 days ofclose of the month.

e) Maintenance of records: Banks to maintain records relating to

suspicious t ransactions for a period of 10 years.f) Documents for customer identity: Passport, PAN Card, voter

card, Driving license, Identity card to bank’s satisfaction, letterfrom recognized public authority.

g)

Documents for address: Telephone bill, Bank accountstatement, letter from recognized public authority, electricity bill,rat ion card, letter from employer.

h)

KYC for lower income group: Simplified criteria of identificationand introduction be followed in small deposit accounts where

the balance shall not exceed Rs. 50,000/- and transactions in a

year does not exceed Rs. 2 lacs. In these cases, account can beintroduced by person having satisfactory account for 6 months

and self certification of address along with photograph. In our

bank we call such account as CENT BACHAT KHATA.

Consumer Protection Act:-

Consumer protection act is three tiered quasi judicial mechanism

implemented w.e.f. 15th April 1987 and is applicable through out thecountry except Jammu and Kashmir.


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a) Remedy: Available to consumer for deficiency in service for

consideration.b)

Limitation: 2 years from the cause of action.

c)

Pecuniary Jurisdiction: Dist. Forum up to Rs.20 lacs. StateCommission more than 20 lacs and up to 100 lacs. National

Commission more than 100 lacs.d)

Relief: Removal of defect, replacement, refund, award ofcompensation.

e)

Penalty for frivolous (false) complaint:- Imprisonment 1 month to 3

years and fine Rs. 2000/- to Rs. 10,000/-.f) Appeal: period for appeal 30 days.

i)

Appeal against District forum to State commission deposit of50% of amount of Rs. 25,000/- which ever is less.

ii) Against State Commission to National Commission Rs. 35,000/-

I I I) Against National Commission to Supreme Court Rs. 50,000/-.

Banking cash transaction tax:-

Provision for deduction of tax at source is as per Finance Act 2005.

W.e.f. June 1 2005. Applicability through out the country exceptJammu and Kashmir. It is applicable to all types of account except

savings account . Amount of withdrawal for individual (single/joint) and

HUF above Rs.50, 000/- (from 1/06/07) and other than individual andHUF above Rs. 1 lac. Rate of Tax is 0.1% and no surcharge in case of

company and firm up to Rs. 1 crore. Withdrawals by the banks for theirown transactions are exempted. Withdrawals from the different

accounts at the same branch or different branches, not to beclubbed. Tax so deducted to be deposited within 15 days from closeof the month. Non deduction or Non-deposit of the tax will be

penalised for 100% of t he amount + 1% per month int erest.

Service Tax:-

Service tax applicable as per Finance Act 1995 w.e.f. 1st July 1994. and

not applicable in Jammu and Kashmir. Responsibility of payment of

tax is that of service provider. Tax can be passed on to the ult imateuser as such it is indirect t ax. Rate of tax is 12% + 3% education cess(total: 12.36%). Tax is to be deposited by 5 th of the next month. Half

yearly return on Form ST-3 to be sent by 25th of the next month after

close of half year.


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TDS Provisions:-

Legal provisions: Section 194 of Income tax act.

Type of interest: On term deposits excluding RD.Amount: Where interest paid/payable is above Rs. 10,000/-(w.e.f. 1st

June 2007) in financial year.Tax rates: Residents - 10% + Surcharge (10.26%) Corporate – 20%(no surcharge) NRO- 30% (no surcharge).

Minor’s account should be clubbed with guardian. In case of joint

account deduction will be in the name of 1st account holder.TDS Certificate – TDS certificate to be issued on Form No: 16-A within

one month from end of month during which deduction made, or within30 days from the date of close of financial year.

Exemption from Deduction:- Declaration on form No: 15-G for Senior

citizen (Age 65 years and above) and 15-H for other individuals.

Payment to contractors:- Where amount of single payment exceedsRs.20,000/- or t otal amount exceeds Rs. 50,000/- during financial year.Rent payments:- Where amount exceeds Rs. 1,20,000/- in a financial

year.

Professional fee:- Where amount exceeds Rs. 20,000/- in financial year.Penalty:- Interest @ 1% pm., penalty equal to amount of tax,

imprisonment – 3 months to 7 years.

Legal terminology for deceased customers:-

a)

Will:- When a person dies after living a will, he is said to have died

testate. Will is legal declaration by testator in respect of his estat e.b) Probate:- It is certified copy of will issued by district courts under

section 289 of Indian succession Act.

c)

Executor:- Person named in the will of the deceased.d) Letter of administration:- When a person dies intestate, court issues

letter of administrat ion.

e) Administrator:- Person appointed by court to administrate theestat e of the deceased.

f) Succession certificate:- When a person dies intestate, on the

application of the legal hirers, court issues succession certificate

which applies to debts due to the deceased. (i.e. Deposits andshares/ securities).


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Procedure for the claim settlement of deceased customer’s account: -

a)

In case of deceased accounts, the payment is to be made with in15 days from date of receipt of complete papers.

b)

Credit received after death (called pipe-line credit) can becredited with permission of surv ivor, legal heirs or nominee only.

c)

Pre-mature payment of term deposit can be allowed but no loan

can be allowed.

d) Interest in case of current account and savings account will bepaid as per savings bank rate from the date of death to the date of

payment after death.e) Interest in case of term deposit:

a)

if matured before death – contracted rate till maturity and

there after savings bank rate.

b)

If matured after death – contracted rate till maturity andthere after FDR rate (Simple) for the period the deposit waswith bank.

Senior citizen’s savings scheme – 2004:-

a)

Operated:-Through post offices and banks maintaining PPF accounts.

b)

Age: - 60 years and above. In case of VRS/Super Annuat ion 55 yearsand above.

c) Joint account: - Allowed only with spouse. In case of joint account

the age of the 1st depositor/ applicant will be the factor to decidethe eligibility. There is no age bar or limit for the second applicant or

joint holder.

d) Nomination: - Nomination is available. NRIs can be the nominee onlyof non- repatriation basis.

e) Investment: - Maximum Rs. 15 lacs. In multiples of Rs. 1000/-

f)

Tenor: - 5 years and can be extended by 3 years.

g)

Interest rate: - 9% p.a. on simple basis, but payment is on quarterlybasis.

h)

TDS: - TDS is applicable. No loan is allowed on collateral security of

this deposit.

i)

Premature closure: - With penalty after one year allowed. Penalty1.5% for closure before 2 years and 1% after 2 years. Inter deposit

office transfers are allowed.


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Deposit insurance:-

Extent of coverage: - Maximum 1 lac per depositor for principal andinterest held in same right and same capacity.

Premium: - 10 paisa per Rs.100/- p.a. payable on half yearly basis inadvance within 2 months of beginning of the half year. Premium payableon balance as on the last day of the previous half year.

Government business:-

Commission:- a)

Receipts: Rs.45/- per transaction.

b)

Pension payment: Rs. 60/- per transaction.c) Other payments: 9 paise per Rs. 100/-turnover (including PPF and sr.citizen scheme )

Time period:-a)

T +3 in case of local t ransactions.b)

T + 5 in case of outstat ion transactions.

Priority sector advances:-

1.

In 1985 Krishnaswamy committee recommended to achieve thetarget of priority sector lending at 40 % by 1985. Sub-targets werealso specified for lending to Agriculture and the weaker sections

with in t he Priority Sector.2. In 2007 C.S.Murthy committee has recommended new priority

sector guidelines with effect from 30th April 2007.

3. Linkage of Targets:- The Priority sector targets are now linked to 40%of ANBC or Credit equivalent of Off sheet balance exposure which

ever is higher.

4.

ANBC = Net Bank credit + investment made by banks in non – SLR

bonds held in HTM category.


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TARGETS AND SUB – TARGETS FOR PRIORITY SECTOR

DOMESTIC COMMERCIAL BANKS FOREIGN

BANKSTotal priority

sector

40% of adjusted net bank credit (ANBC)

orCredit eq. amount of Off-balance sheet

(CE-OBE)Exposure with ever is higher.

32% of ANBC

or (CE-OBE)which ever is

higher.

Total

agricultural

advances.

18% of ANBC or CE-OBE which ever is

higher. Indirect lending in excess of 4.5%

will not be reckoned as performanceunder 18% targets.

No target.

Small

enterprisesadvances

Advances to small enterprises sector will

be reckoned in computingperformance under the overall priority

sector target of 40%

10%

Micro

enterpriseswithin small

enterprises

sector.

a) 40% total advances to small

enterprises sector to mfg. enterpriseswith in investment in plant/machinery up

to Rs. 5 lacs and service ent. With

investment in equip. up to 2 lacs.

Same as for

domesticbanks.

Khadi and

villageindustries. (KVI)

All advances granted to units in the KVI

sector, irrespective of their size ofoperations, location and amount of

original investment in plant andmachinery are eligible for classification

under priority sector.

No target.

Export credit For domestic banks it is a “Preferred

sector” and not a part of priority sector.

12%

Weaker section 10% of ANBC or 25% of total priority

sector advances.

No target.

Diff. rate of intt. 1% of total advances outstanding as atthe end of previous year. Out of thatmini. 2/3rd of DRI should go to rural and

semi-urban areas and 40% should be for

SC/ST.

No target.


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Chart showing bifurcation in small enterprises advances:

Small enterprises advance.

Manufacturing enterprises service enterprises

Original investment in plant Original cost of equipments& machinery does not exceed does not exceeds Rs. 2 crores.

Rs. 5 crores.

( 40 % of total advances to small enterprises will goes to…..)

a) Original cost of investment in plant a) original cost of investment

And machinery is up to in equipments is up to Rs. 2

Rs. 5 Lacs. Lacs.

( 20 % of total advances to small enterprises will goes to…..)

b) Original cost of investment in b) original cost of investment

Plant and machinery is over in equipments is over Rs.Rs. 5 lac and up to Rs. 25 lacs. 2 Lacs and up to Rs.10 lacs

Categories of priority sector:

1] Direct finance to agriculture:

a) SHORT TERM LOANS:-Direct finance to farmers:- short term loansfor raising crops that is for crop loans [NEED BASED]

In addition to farmers against pledge/hypothecation of agriculturalproduce (including warehouse receipts) for a period not exceeding

12 months [ Rs.10 LACS]

b) MEDIUM TERM LOANS: For machinery and equipments, landdeveloping etc. [NEED BASED]

2] Indirect finance to agriculture:

a)Financing the distribut ion of fertilisers, pesticides, seeds etc.

[NEED BASED]b) Loan granted for financing for distribution of inputs for the allied

activit ies such as catt le feed, poultry feed etc [Rs. 40 LACS]c) Finance extended to dealers in drip irrigation, sprinkler irrigation,

agricultural machinery with a ceiling per dealer [Rs. 30 LACS]


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3] Small enterprises:

For all t ypes of small enterprises whether for manufacturing or for service

industries finance is granted [NEED BASED]

4] Retail traders:

a)

Retail t raders dealing in essential commodities (fair Price shops) and

consumer co-op. stores [ NEED BASED]

b) For private retail t raders [Rs. 20 LACS]

5] Housing:

Construction of house irrespective of location [ Rs. 20 LACS]

For repairs of house at rural/ semi urban area [Rs. 1 LAC]

For repairs of house at urban/metro area [Rs. 2 LACS]

6] Education loans:

In India : Rs. 10 Lacs

In foreign countries : Rs. 20 lacs

7] Micro credit:

Direct ly or indirectly through SHG/JLG Rs. 50,000/- per borrower.

Advances to the Weaker section:

The weaker sections under priority sector shall include the followinga) Small and marginal farmers with land holding of 5 acres and less,

and landless labourers, t enant farmers and share croppers.b) Artisans, village and cottage industries with individual credit limits

up to Rs. 50,000/-.

c) Beneficiaries of SGSY, SC/ST, DRI, SJSRY, SLRS, SHGs.d) Loans to distressed poor to prepay their debit to informal sector,

against appropriate collateral or group securities.

Penalties for non- achievement of priority sector lending targets.

a)

For Domestic banks having shortfall in lending to priority sector

target of 40% and / or agriculture target of 18% shall be allocated

amounts for contribution to RIDF with NABARD.b)

For Foreign banks having shortfall in lending to stipulated priority

sector advances targets to contribute SEDF of SIDBI.


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Collateral security norms:

A) Agriculture No margin & No collateral up to Rs.

50,000/-

B) Agri clinic & Agri business No margin & No collateral up to Rs. 5

lacs.c) Small enterprises (SSI)

i) Normal accounts.

ii) Good Track record units.

iii) A/cs covered underCGTMSE.

No collateralUp to Rs. 5 lacs.

Up to Rs. 25 lacs.

Up to Rs. 50 lacs.(fund based and nonfund based.

d) Education loan No collateral up to Rs.7.50 lacs.

Hi tech agriculture concepts:-

1.

Apiculture: Rearing of honey bees.2.

Aquaculture: Shrimp farming, fish production in artificial tanks/lakes.

3.

Apriculture: Cultivation of mushroom.4.

Blue revolution: Pisciculture.

5. Floriculture: Flower production.

6.

Green revolution: Targeted to increase agriculture production.7.

Operation flood (White revolution): Increase milk production.

8.

Olericulture: Vegetable cultivation.9.

Mulberry: Associated with sericulture.

10. Pisciculture: Rearing/breeding of fish and fish farming.

11. Rainbow revolution: Connected with flowers.12.

Sericulture: Silk production.

13.

Tissues culture: Aims at multiplication and improvement of plant

varieties.14. Vermiculture: Rearing of earth worms.

15. Yellow revolut ion: Associated with oil seeds and pluses.

Government sponsored schemes:

1] Differential rate of interest (DRI) – 1972.

a)

Main objective: To assist poorest poor and to bring them abovepoverty line.

b)

Applicable: All over India. c)

Eligibility norms: Individuals whose family income not to exceed

Rs. 18,000/- p.a. in rural areas and Rs. 24,000/- p.a. in urban and

semi urban areas.


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d) Purpose of loan: For productive activities, pursuing higher

education by indigent students, purchase of artificial limbs,hearing aids, wheel chair by physically handicapped.

e)

Quantum of loan: Maxi. Rs. 15,000/- as term loan or workingcapital or both for productive purpose. For housing Rs. 20,000/-

f)

Target: Mini. 40% to SC/ST and 2/3rd to be routed through ruraland semi urban branches.

g)

Classification: Weaker sect ion of advances under priority sector.

h)

Rate of interest: 4% p.a. simple rate of interest.

i) Security: Hypothecation of assets created out of bank loan. Nocollateral security.

j)

Repayment: Maxi. 5 years including grace period up to 2 years.

2] Prime minister Rozgar yojana (PMRY) - 2nd Oct. 1993.

a)

Main objective: To provide employment for setting up of microenterprises by educated unemployed youth. All activit ies exceptdirect agriculture operations like raising crops, purchase of manures

etc can be financed.

b)

Applicable: Both urban and rural areas all over the country.c)

Eligibility norms: Age: 18-35 years, for applicants in NE States, HP,

and Ut tarkhand, Jammu and Kashmir 18-40 years. For SC/ST, EX-

Serviceman physically handicapped and women in all states 18-45years.

d)

Educational qualification: Mini. 8th passed or ITI passed.e)

Income: Income of the beneficiary along with the spouse or the

income of parents of beneficiaries to exceed Rs. 1 lac p.a.f) Residence: Permanent resident of the area for at least 3 years.g) SHG under PMRY: SHG may consist of 5 -20 educated unemployed

youth undertaking common economic activit y. There would not beupper ceiling on the loan.

h)

Implementing agencies: The district industry centres and

Directorate of industries.i) Project cost: Business/Service sector Rs. 2 lacs and for industry sector

Rs. 5 lacs. Loan to be of composite nature. Rs. 10 lacs. If 2 of more

eligible persons join in a partnership. Assistance shall be limited to

individual admissibility. j)

Targets: SC/ST- 22.5%, OBC- 27%, Women entrepreneurs 30%.k)

Classification: Advances to SC/ST, Artisans village and cottage

industries up to Rs. 50,000/- only t o be classified as weaker sect ion.

l)

Subsidy: 15% of project cost with a ceiling of Rs. 12,500/- in statesother than NE. For NE, HP, J & K etc. 15% of project cost with a

ceiling of Rs. 15,000/- for NE, HP, J & k etc. Subsidy for SHG has been


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enhanced to Rs. 15,000/- to maxi. Rs. 1.25 lacs per SHG. Lock in

period is 3 years. m)

Repayment: 3 years to 7 years with moratorium of 6 to 18 months

where necessary.

3] Swarna Jayanti Gram Swarojgar Yojana – 1st April 1999

a)

Objective: To rise individuals/ groups of rural poor above poverty

line over a period of t ime. Scheme is funded by centre and states in

rat io 75: 25.b) Applicable: In rural areas.

c)

Eligibility norms: Rural poor identified through Below Poverty lineCensus duly approved by gram sabha.

d)

Implementing agencies: DRDA/Financial inst itutions/ PRI/ NGO.

e)

Purpose of loan: Economically viable and productive, farm sector

and non- sector activit ies identified for each block.f) Quantum of loan: Full amount as per unit cost prescribed byNABARD.

g)

Target: Women – 40%, SC/ST – 50% and Disabled – 3%.

h)

Classification: To be covered in weaker section under priority sectoradvances.

i) Subsidy: Uniform @ 30% of project cost. Maxi. Rs. 7500/- SC/STs @

50% maxi. Rs. 10,000/- for group of Swarojgaries/ SHGs @ 50% maxi.Rs. 1.25 lacs.

j)

Margin: The subsidy may be treated as margin money.k)

Repayment: Mini. 5 years Maxi. 9 years.

4] Swarnajayanti Shahari Rozgar Yojana – 01st Dec’1997

a)

Main objective: To provide gainful employment to the urban poorliving below the urban poverty line, unemployed or under

employed.

b) Applicable: All urban and semi urban towns.c)

Eligibility norms: Unemployed youth below urban poverty line. Maxi.

Education up to 9 standard. No Mini. Qualification. No age limit is

prescribed under the scheme.

d)

Quantum of loan: Project cost up to Rs. 50,000/- will be financed bythe bank. Amount of loan is 95% of project cost subject to ceiling ofRs. 47,500/-.

e)

Target: Women – 30%, Disabled – 3% , SC/ST proportionate to

strength.f)

Subsidy: Govt. will provide subsidy at 15% of the project cost subject

to maxi. Rs.7500/-. The subsidy is back ended and the lock in period


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is 2 years. The borrower has to bring 5% of the project cost as

margin.g)

Repayment: 3 to 7 years with moratorium of 6 to 18 months where

necessary.

Agri-Clinics and Agri-Business centres:

a)

Agri-Clinics and Agri- Business centres scheme has been formulated

by NABARD.

b) Graduates in agriculture or any subject allied to agriculture such asHorticulture, Sericulture, Veterinary Science, Forestry, Dairy, Poultry

farming, and Fisheries etc are eligible.c) An individual or a group of individuals (One of them can be a

management graduate out of five individuals) is eligible for availing

the loan.

d)

The outer ceiling for the project cost is Rs. 10 lacs and for joint/groupprojects, the ceiling is Rs. 50 lacs pro-rata.e) Repayment will be in 5 – 10 years with moratorium of 2 years.

f)

The NABARD provides 100% refinance. NABARD also provides

margin money up to 50% of margin required under soft loanscheme.

g) Collateral security and margin requirement has been waived for

loans upto Rs. 5 lacs.

Credit gurantee scheme for micro and small enterprises:

a)

CGTMSE introduced w.e.f. 1st June’ 2000 by Government of Indiaand SIDBI, with corpus of Rs. 2500 crores.

b) Eligible units: existing Micro Small Enterprises (Earlier SSI) including IT

units with credit facilit ies without any collateral security and or thirdparty guarantee.

c)

Credit facilities: Units sanctioned fund based and non-fund based

upto Rs. 50 lacs.d) Coverage: Not to exceed 75% of the amount of default, with

maximum of Rs. 37.50 lacs.

e)

Guarantee fee: One time guarantee fee 1.5% of the facility

sanctioned as up-front.f)

Annual service fee: @ 0.75% on the amount of credit facility as on31march each year with in 60 days.

g) Exceptions: For all units sanctioned credit facility upto Rs. 2 lacs,

Women entrepreneurs and units located in J & K, NE Statesguarantee fees will be charged to the borrower is 0.25% only. The

balance 0.50% will be borne by the bank.


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Education loan:

Based on the recommendation of R.J.Kamath committ ee. The scheme

aims at providing financial assistance to the poor, needy and meritoriousstudents to pursue higher/professional/technical education.

a) Course eligible: i) All kinds of education in India ii) studies abroad:graduation, post- graduation courses conducted by CIMA London, CPAin USA.

b) Quantum of studies: Studies in India – Maxi. Rs. 10 lacs and Studies

abroad – Rs. 20 lacs.c) Margin: Up to Rs. 4 lacs: Nil above 4 lacs, studies in India 5% and studies

abroad 15%.d) Security: No collateral security up to Rs. 7.50 lacs. Documents to be

executed by t he students and parents/ guardians.

e) Rate of interest: Upto Rs. 4 lacs PLR and above Rs. 4 lacs PLR+1

f) Repayment: Course period + 1 year or 6 months after getting job whichever is earlier. The loan to be repaid in 5 to 7 years after commencementof repayment.

Gramodyog Rojgar Scheme: (KVIC Margin money scheme)

a) Objectives: To generate employment in rural area ( population

20,000) b)

Margin money subsidy: for General 25% for the project cost upto

Rs. 10 lacs and 10% for project cost above Rs.10 lacs upto Rs. 25lacs. Maxi. Margin money is Rs. 4 lacs. For Weaker section 30% of

the project cost up to Rs. 10 lacs and above this amount upto Rs. 25lacs it will be 10% of remaining cost of the project. Maxi. Marginmoney will be granted is upto Rs. 4.50 lacs.

c)

Eligibility: Individual entrepreneurs, self help groups, institutions, Co-Op. societies, Trusts and public limited companies owned by state

and central government are eligible.

d) Contribution: 10% of the cost of project for general category and5% in respect of beneficiaries belonging to SC/ST/OBC and Women

entrepreneurs.

e)

Bank finance: 90% of the project cost for general category and

95% of the project cost for weaker section.

Kisan crdit card [KCC]:

KCC Scheme introduced in August 1998, to provide adequate andtimely credit for the comprehensive credit requirements of farmers

under single window. The credit facility extended will be in the nature


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of term loan and revolving cash credit for agriculture and allied

activities for consumption, production, and investment.Validity is for 5 years and amount is need based. Insurance is

automatic and in case of the accidental death or permanent disabilityRs. 50,000/- and for part ial disability Rs. 25,000/-.

Premium is of Rs. 15/- per year and out of which Rs.10/- will be borne bythe bank and Rs. 5/- borne by the beneficiary.

Laghu Udyami Credit Card [LUCC]:

SIDBI has structured a Laghu Udyami Credit Card for small business,

retail traders, artisans, professionals, self- employed persons and smallindustrial units.

Eligibility: existing customers will satisfactory track record with working

capital limits upto 10 lacs for last three years are eligible for the card.

Limit Rs. 10 lacs and validity 3 years.

Self help group [SHG]:

a)

Objectives: To evolve a supplementary credit strategy forreaching the rural poor and to encourage banking activities,

both t hrift as well as credit.

b)

Essential requirements: Group should have been in activeexistence at least for a period of 6 months. The group may

be informal or formal [registered]. The group should havesuccessfully undertaken savings and credit operations from its

own resources for a period of six months.c)

Size: Preferably between 10 to 20 members. d)

Revolving fund: SHG can be sanctioned revolving fund where

there is bank linkage of at least for 6 months in the ratio 1:1 or1:4.

e)

Subsidy: Minimum Rs. 5,000/- and Maxi. 10,000/-. Being equal

to group corpus. Additional subsidy of Rs. 10,000/- is availableas 2nd dose for SHG showing promise.

f)

Margin: Savings are considered as margin. No requirement of

collateral securities.

g)

Repayment: 3 t o 10 years. h)

Refinance: 100% refinance from NABARD.

Joint liability group [JLG]:

A Joint liability group [JLG] is an informal group for the purposes

of availing bank loan either singly or through the groupmechanism against a mutual guarantee.


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g)

Subsidy: Small and marginal farmers are eligible for 10% subsidy on

premium.

Types of mortgage (Section 58 of Transfer of property act):

a)

Equitable mortgage: under section 58F of Transfer of property act.Allowed in Mumbai, Kolkata, Madras or any notified towns. Thetowns are notified in state gazette. Method of creation is deposit of

t it le deeds. Witness and registrat ion is not required. Possession and

ownership is not transferred. Right to redemption is available tomortgagor. Limitation is 12 years.

b)

Simple mortgage: Under section 58B of Transfer of property act.Allowed in all over India. Method of creation is writ ing of Mortgage

deed. Two witness and registrat ion is required. Possession and

ownership is not transferred. Right to redemption is available to

mortgagor. Limitation is 12 years.c)

Mortgage with conditional sale: Under section 58C of Transfer ofproperty act. Allowed in all over India. Possession and ownership is

not transferred but conditional sale to be re-transferred if debt is

paid back. Method of creation is writ ing of Mortgage deed. Twowitness and registration is required. Limitat ion is 12 years.

d) English mortgage: Under section 58E of Transfer of property act.

Method of creation is writing of Mortgage deed. Allowed inMumbai, Kolkata, Madras or any notified towns. The towns are

notified in state gazette Two witness and registrat ion is required. Thet itle is transferable but not t he possession. Limitation is 12 years.

Different types of charges:

Type ofcharges

Type of security Example of security

Mortgage Immovable securit ies Land, building, machinery

embedded in to the earth.

Pledge Movable assets Raw material, shares &

Stocks, gold, jewellery.

Hypothecation Movable assets Raw material, motor

vehicles, standing crops.Lien Securities which are

already in possession ofthe creditor.

Goods and securities

except actionable claimsand money.

Assignment Actionable claims LIC policies, book-debts,FDRs.


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Limitation act:

Description Period Period begins to run from:

Money deposited payable on

demand

3years When the demand is made.

Demand loan 3years When the loan is made.Term loan 3years From the due date of each

instalment.

Demand Bill 3years From the date of bill.

Usance bill 3years From the due date.

Cash credit[ hypothecation] 3years From the date of documents.

Cash credit[ pledge] N.A. N.A.

By a mortgage for foreclosure 30

years

When the money secured by

the mortgagee becomes

due.

By a mortgage for possession ofimmovable property mortgaged.

12years

When the mortgageebecomes entitled topossession.

Important notes about balance-sheet:

a)

Liabilities have credit balance and Assets are debit balance.b)

Current Liabilities are those liabilities, which have either become

due for payment or shall fall due for payment within 12 months from

the date of balance-sheet.c) Current Assets are those assets, which undergo change in their

shape/form within 12 months. These are also called working capital

or gross working capital.d)

Net worth and Long-term liabilities are also called Long term

sources of funds.e)

Current liabilit ies are also known as Short -term sources of the funds.

f)

Long term liabilities and short term liabilities are also called as

Outside liabilities.g)

Current assets are Short-term use of funds.

h)

Assets other than Current Assets are long-term use of funds.

i)

Instalments of term loan payable in 12 months are to be taken ascurrent liability only for calculation of current ratio and quick ratio

only. j)

If there is profit, it shall become part of net worth under the head

reserves and if there is loss it will become part of intangible assets.

k) Investment in govt . securit ies to be treated current only if these aremarketable and due. Investments in other securit ies are to be


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t reated as current if they are quoted. Investment in

allied/associated/sister units or firms to be treated as Non-current.l)

Bonus shares are issued by capitalisation of general reserves and as

such do not effect the net worth. With rights issue, change takesplace in net worth and current ratio.

Ratio analysis:

Financial Ratios can be classified in four broad heads.

a) Liquidity: These ratios reflect the ability to meet current dues out of

short term assets.b) Solvency: Extent of dependence on outside liabilities and feasibility

of meeting them if need arises.

c)

Activit y: Efficiency of the unit in ut ilizing present available resources.

d)

Profitability: Capacity of the unit to generate profits and its rate ofreturn.e) Tangible Net Worth = Net Worth – Intangible assets.

1] Liquidity ratio:

a) Current Rat io — Current assets/ Current liabilities.

b) Quick Ratio — Quick assets/ Quick liabilities.

2] Solvency Ratio:

a) Debit Equity Ratio — Long Term Liabilities/Tangible Net Worth.b) Total Outside Liabilities/ Tangible Net Worth

= Term Liabilities + Current Liabilities/ Tangible Net Worth.

c)

Proprietary Ratio — Tangible Net Worth/Tangible Assets *100d) Debit Service Coverage Ratio —

Profit after tax + Depreciation Annual Intt . On Term Loans

Annual intt . On long term loans and liabilities + Annual instalmentOn loans.

Break even point analysis:

Break – even point is that level of production or sales at which unit incursno profit and no loss.

Break even point in term of sales = Fixed Costs/Contribut ion *sales.Break even point in terms of volume = Fixed Costs/ Contribut ion.


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Variable expenses. Fixed and semi-fixed expensesRaw materials. Rent and insurances.

Packing materials. Wages and salaries.

Consumable stores and spares. Repairs and maintenance.

Any other expenses for production. Depreciation.

Admn. And financial expenses.

Format of balance-sheet for ratio analysis:Liabilities Assets

Net worth/equityShare capital/eq. capital, paid up

Capital/owners funds, all types ofReserves.

Fixed assetsSuch as land and building, plant

and machinery, etc.Original value – depreciation.

(These are purchased for long term

use

And depreciated every year)Long term liabilities.Term loan, debentures and bonds,

Unsecured loans, fixed deposits,other

Long term liabilities.

[Those liabilities which are not duefor

Payment within 12 months from theDate of balance-sheet

Non current assets.Investment in non quoted shares

andSecurities, investment in long term

nature associate or sister concerns.

Old or disputedStock or book debts. Long term

security deposits and other misc.assets which are not

Current and fixed assets.Current liabilities.

Working capital limits sanctioned by

Banks such as CC,OD,Bills, exportcredit. Sundry creditors, Bills

payable. Short duration loans ordeposits, Expenses payable,

Provision against various items.

[Those liabilities which are due forthe payment within 12 months from

the date of balance-sheet.]

Current assets.

Cash/bank balance including FDRS.

Marketable/quoted govt and othersecurities. Book debts, Sundry

creditors, Bills receivables. Stockand inventories such as raw

material, stock in process, and

finished goods. Stores and spares forregular consumption. Advance

payment of taxes and other

prepaid expenses. Loans andadvances recoverable within 12

months.

Intangible assets.

Patents, good will, debit balance ofP/L account, preliminary or pre-

operat ive expenses.


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Working capital management:

Methods of assessing working capital limits

a) Nayak committee b) Tandon Committee C) Cash Budget Method.

a)

Nayak Committee: Annual Projected Turn over Method.Eligibility: Small enterprises having aggregate sanctioned working

capital fund based limits upto Rs. 5 crores and Non-SSi upto 2 crores.

Method of computation:

Working capital requirement : 25% of annual projected turnover.Sanction of Working capital

Limit : 20% of the projected turnover.

Margin (Borrowers contribut ion) : 5% of their annual turnover.

b)

Tandon committee:

1st method of lending. 2nd method of lending

Total Current Assets. 370 Total current assets. 370

Less: Current liabilities

other than short term bank

borrowings.

150 Less: Current liabilit ies other

than short term bank

borrowings.

150

Working capital gap 220 Working capital gap 220

Less: 25% of Working

capital gap.

55 Less: 25% of Total Current

Assets.

92

Maxi. Permissible bank

borrowings.

165 Maxi. Permissible bank

borrowings.

128

Excess borrowings. 35 Excess borrowings 72

Current Ratio 1.17:1 Current ratio 1.33:1

NPA Guidelines:

A)

Term loans: Interest or installments overdue for a period of 90

days.

B)

Cash Credit/ Over draft: Account remains out of order for a

period of 90 days.C)

Bills Account: Bills payable or Bills Discounting accountremains overdue or unpaid for a period of 90 days.

D) Agriculture:

1)

Short duration crop: If installment or interest overduefor two crop seasons.


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2) Long duration crop: If installment or interest overdue

for one crop season.E)

NPA on account of erosion in the value of security.

If realizable value of security is less than 50% the account willbe shifted to Doubtful category direct ly.

If realizable value oaf security is less than 10% then theaccount will be shifted to loss asset directly.

Asset classification:Group Definition

Standard. Accounts which are in order

Sub-standard.

Accounts which have been classified as NPAs for a periodnot exceeding 12 months.

Doubtful Sub standard accounts, which have remained NPAs forperiod exceeding 12 months.

Loss assets. Accounts which have become unrealizable, where losseshave been identified by the bank/internal or external

auditors/ RBI inspectors.

Special

mentionaccounts.

RBI has instructed banks to identify the accounts which are

over due/out of order but not yet completed the 90 daysand require maintaining a special watch. Banks are free to

fix the number of days for identifying. For provisioning

purpose SMAs are clubbed with Standard Assets only.

CATEGORY PROVISION REQUIREMENTS

Standard

assets.

Direct Agri.

SME sector

Resi.

HousingLoans.

Select.

sectors

All other loans

and advances

0.25% 1.00% 2.00% 0.40%

Sub-

standardassets.

Secured Sub-

standard

Un Secured Sub-Standard

10% of outstanding

20% of out standing

Doubtfulassets.

First 12 months Next 24 months Over 36 months

Secured: 20% Secured: 30% 100%

Uniformly.Unsecured:

100%

Unsecured:100%

Loss assets. The entire assets should be writ ten off. I f permitt ed to remain

in the books for any reason, 100% of the outstanding shouldbe provided for.

Select Sector: Personal loans, Credit Card receivables, capital market,

commercial real estate exposure, and loans and advances to

systematically important NBFCs.


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Foreign Exchange

Type of transactions:

a)

Inter-bank Transactions : Forex transactions between twobanks/institutions

b)

Merchant Transactions: Sale or Purchase transactions with thecustomers.

Types of accounts:

a) Nostro Accounts: “OUR ACCOUNT WITH YOU” It is foreign currency

account maintained by a bank in domestic country with the bank

in foreign country.

b) Vostro Accounts: “YOUR ACCOUNT WITH US” Rupee account of aforeign bank in India.

c)

Loro Accounts: “Their account with you” Account of third bank inforeign count ry.

d)

Mirror accounts: Dummy account maintained by the banks to knowactual position of Nostro accounts for reconciliation purposes with

the foreign correspondent banks. We may call it a pass-book forour accounts maintained with foreign banks.

Foreign Exchange Management Act [FEMA]

FEMA was implemented in India with effect from 1st June 2000. It definescertain terms as…..

a) Capital Account Transactions: The Transaction which alters theassets and liabilities outside India of a person resident in India or

assets or liability in India of a person resident outside of India.

b)

Current Account Transactions: Other than a capital accounttransaction and include payments due in connection with foreigntrade, other current business services and short term banking and

credit facilities in ordinary course of business.

c)

Resident as per FEMA: Any person residing in India for more than 182

days during the course of preceding financial year will be taken asresident in India.


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Method of delivery of forex:

Ready/cash The transaction settled on same day. Also known as ‘valuetoday’

TOM The delivery of foreign exchange/ currency to be made onthe day next to the date of transaction.

SPOT Exchange of currencies takes place two days after the dateof contract – SPOT RATE.

FORWARD When the delivery has to take place at a date farther than

the spot date, then it is a forward transaction – FORWARD

RATE.

Letter of credit:

Letter of credit is an undertaking given by the issuing bank on behalf of

importer in favour of the exporter, undertaking to make payment on

presentation of documents as per the terms and conditions of LC. LCs aregoverned by Uniform Customs And Practices For Documentary Credit.

Important types of letter of credits:

a) Irrevocable LC: An LC in which issuing bank gives a definite,absolute and irrevocable undertaking to honor its obligations

provided the beneficiary complies with all the terms and conditions

of LC. Once irrevocable LC is issued, it can not berevoked/amended, without the consent of beneficiary.

b) Transferable LC: An LC containing a specific clause that it is

t ransferable. This gives the beneficiary the right t o request the bank

to make the credit available in whole or in parts to one or morebeneficiaries. The t ransferable LC can be transferred in part or in full

but it can be transferred only once.

c)

Red-clause LC: An LC in which a provision exists for allowing pre-shipment credit to the beneficiary for procurement/manufacturing

of goods to be exported.


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d) Green clause LC: An LC in which apart from provision of allowing

pre-shipment credit the issuing bank also has to arrange forstorage/warehouse facility.

e)

Back to back LC: An LC involves two irrevocable credits. Firstly, the

inward credit (Original LC) and the second called as outward credit(back-to-back), which is opened on the basis and security of theoriginal LC.

f) Stand-By LC: An LC similar to bank guarantee by issuing bank,guaranteeing payment and/or performance.

g) Revolving LC: Under these LCs. The part amount, which has been

utilized, is automatically restored and is available for further use.

These are meant for more than one dealing. In such LC, roll-over of

transactions take place.

Type of bill of lading:

a)

On board bill of lading: It acknowledges that the goods have beenput on board of the shipment. This is considered safe for negation

purpose.

b)

Clean bill of lading: This bears no super imposed clause or notationthat expressly declares the defective condition of goods or

packaging. Best bill for negotiation purpose.c)

Claused bill of lading: This bears super imposed clause or notation

that expressly declares that defective condition of goods andpackaging. Ship owner can disclaim his liability on loss of goods incase of such bill of lading. Hence it is not considered as safe.

Forex facilities for residents:

As per FEMA resident Indians are permitted to buy or sell foreign

exchange from Authorized Dealers (AD) s and full – fledged money-changer (FFMC) for permitt ed current account t ransactions. ADS canaccept payment in cash upto Rs.50,000/- against sale of foreign

exchange. Releases of forex beyond the limits mentioned below require

RBI’s approval.


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Sr.No. Purpose Amount Details

1 Tourism/private visit

Out side of India.

$

10,000/-

Per financial year per family

member for one or more visitsabroad. Visit to all countries except

Nepal and Bhutan are eligible for

this facility.2 Gift/donation out

side of India.As perLRS.

Per financial year. This facility issubsumed under LRS scheme.

3 Employment,Immigration,

Education,medical

treatment,

maintenance ofclose relative.

$ 1 lac. To Indian resident going abroad forgainful employment/ to meet

incidental expenses in the countryof migration on production of

evidence/per academic year of

institute where admission has beenobtained./on basis of declaration

by the patient./ per year basis.4 Business t rip $

25,000/-

Available per trip except Nepal

and Bhutan. It covers visits forinternational trade conferences,

seminars, training etc.

5 Small value

remittances.

$ 5000/- For any permissible transaction on

the basis of simple letter from the

applicant without insisting onsubmission of Form A-2.

Liberalized remittances scheme (LRS):a)

Resident Indian individuals are permitted to freely remit upto USD 2lac per financial year for any current or capital account

transactions or a combination of both.

b)

LRS facility is in addition to the other remittances allowed.c)

Gifts/Donations are now included in LRS facility within the overall

limit of USD 2 lac. There is no sub-limit .

Fuller capital account convertibility- 2006:

Second committ ee chaired by S.S.Tarapore. Earlier committee on CAC in

1997 had put out a road map for full convertibility. The second committeeon FCAC submitted its report to RBI on 31st July’2006. They have

recommended a Road map for fuller convertibility within a broad frame

work for five years in three phases. 2006-07 (Phase-1) 2007-08 and 2008-09(Phase-2) and 2009-10 and 2010-11 (Phase-3).


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Forex accounts for resident Indians.

Particulars RFC account RFC (D) EEFC

Who canopen

Anaccount

For returning Indiansi.e. those who were

NRI/PIO

Residentindividuals

A person resident inIndia, which

includes individuals,fir ms, co’s.

Sources offunds

By foreign inwardremittances,

transfer of funds ofFCNR (B), deposits,

NRE Deposits.

Foreignexchange

acquired whileon visit to any

place outside of

India.

Status holder,Exporter individual,

professional, canretain upto 100%

Type ofaccounts

SB., CA, TD. Currentaccounts

Current accountsand Time Deposits.

Currencyof

accounts

USD, GBP, EURO &YEN.

USD, GBP, EURO& YEN.

USD, GBP, EURO &YEN.

Loans and

overdrafts

Not permitt ed Not permitt ed Not permitt ed

Interest Bank can decided No interest Only for term

deposit and canmaxi. Upto $ 1 mio.

With maturity upto

31.10.2008.

Non resident Indian (NRI) accounts:

1) Non resident Indian (NRI): An NRI is a person holding Indianpass-port. Gone abroad for a gainful employment or

business or vocation, or for any other purpose indicating an

indefinite period of stay outside of India. Working abroad onforeign assignments/employed by IMF, IBRD, UNO, UNESCO

etc. Employed in central or state government and public

sector under takings and deputed abroad on temporaryassignments or for temporary period.

2)

Person of Indian origin (PIO): PIO means a citizen of any

count ry other than Bangladesh, or Pakistan. If he held an

Indian pass-port at any point of time, or whose parent/s orgrand parent/s were citizens of India (Undivided India) or


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foreign national spouse of an either NRI or PIO is given the

status of PIO.

Power of Attorney in NRO Accounts:

1)

Local payments in rupees including eligible investments.2)

Remittance outside India of current income of the account holder

net of applicable taxes.

Power of Attorney holders in NRE Accounts:

Allowed all transactions except the following…

1)

Credit foreign currency notes and traveler cheques in NRE A/c can

not be accepted.

2)

Repatriation except in favour of the principal i.e. NRI Accountholder.

Bank accounts for Non-Resident Indians:

SR.NO. PARTICULARS NRO NRE FCNR[B]1. Who can

open.NRI/PIO NRI/PIO NRI/PIO

2. Currency ofthe a/c.

INR INR Foreign currencyUSD,GBP,YEN,EURO,CAD,AUD

3. Source ofthe funds.

Local orfunds from

abroad.

Funds fromabroad.

Funds from abroad.

4. Accounts SB/CA/RD,TD. SB/CA/RD/TD. Only Time Deposits.

5. Mini/maxi.

period

As per

domesticdeposit

Mini. 1 year

Maxi. 3 years

Mini. 1 year and Maxi. 5 yrs.

6. Jointaccount

with resident& Non-

resident.

Permittedwith both

Resident andNon resident.

With residentnot permitted

and with non-resident

permitted.

With resident not permittedand with non-resident

permitted

7. Nomination. permitt ed permitt ed Permitted

8. Repatriation Notpermitted

Freelyrepatriable

Freely repatriable

9. Tax benefits. No tax Exempted Exempted from all taxes


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exemptionTDS @ 30%

from all taxes.

10. Interestrates.

For SB-3.5%For T/D-

banks are

free to fix therate

For SB- 3.5%linked with

domestic

rate and forT/D- linked

withLIBOR/SWAP.

T/D- Fixed or floating withinceiling rat e of respective

LIBOR/SWAP rate less 75 basi

points.

Exchange control relating to exports:

Export import code Number [IEC]: Every person/ Firm/ Company engaged

in export business has to obtain an IEC Number issued by the Director

General of Foreign Trade.Export Declaration Forms: Any export of goods from India that full value ofexports will be realized within prescribed period in t he prescribed manner.

GR/SDF Exports made otherwise than by post.

PP FORM Exports made by Post Parcel.

SOFTEX FORM Exports of software in Non-Physical forms.

Time limits for exporters to receive export payments:

1)

Normal Exporters: 6 months.

2)

Status holders, 100% Export Oriented Units, EHTP, STP (Software

Technology Park) etc. are permitted to realize and repatriatewithin a period of 12 months from the date of export.

3) A unit in SEZ has no limit.

4)

Extension to be sought from AD in form ETX.

Reporting to RBI: Half-yearly statement in form XOS which gives details ofall exports bills outstanding beyond six months from the date of export as

at the end of June and December.

Prescribed method: The payment for export proceeds should be received

through the medium of the Authorized Dealers (Ads). However, inexceptional cases where the track record of the exporters is good, Ads

can accept the amount received by exporters direct by cheques, DD

etc.

Submission of Export Documents: The exporter has to submit duplicate

copy of GR form along with the shipping documents to the AD within 21


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days of shipment. The AD s will report the export bills accepted for

collection or negotiation to RBI every fortnight in a statement call ‘ENC’along with ‘R’ return.

Crystallization of Export bills: Crystallization is a process of conversion of

foreign currency liability of customer in to rupee liability. Authorizeddealers are now free to fix the period after which crystallization has totake place after taking in to consideration various risk factors such as the

Credit risk of Exporters, Operational risks etc.

a) TT selling rate on the date of crystallization or the original bill buyingrate, whichever is higher will be applied for crystallization .

b)

Swap cost/gain for the period from due date of the bill to t he dateof crystallization should be passed on to the exporter.

Application for exchange rates:

Selling

rates

Transactions.

TT selling

rates

a. Outward remittance in foreign currency

(TT.MT.PO.DD.)

b.

Cancellation of purchase bills/DD etc.c.

A forward purchase contract cancelled.

Bill selling

rate.

Transaction involving transfer of proceeds of import bills.

TC/FX

Currency

At the option of ADs.

Buying

rates

Transactions.

TT buying

rate

Clean inward remitt ances (PO, MT, TT, DD) where cover is

already credited to ADs Nostro a/c. cancellation of FSC.

Bill buyingrate

Purchase/Discounting of bills and other instruments. Wherebank has to claim cover after payment.

TC/FXCurrency

At the option of ADs.


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Asset liability management:

ALM: ALM is the management of Assets & Liabilit ies in the balance sheet in

such a way that the net earning from the interest is maximized andLiquidity Risk and Interest rate risk are minimized . It is mandatory now for

banks since 1st April 1999.RBI has issued guidelines on ALM to banks. Banks have to use the FlowApproach and construct maturity ladders to identify and manage the

mismatch and gaps.

Maturity Buckets: There are two different maturity ladders constructed for

the purpose of Liquidity and interest rate management.

Liquidity Buckets: 1) Next day 2) 2-7 days 3) 8-14 days 4) 15-28 days 5) 29-

90 days 6) 91-180 days 7) 181-365 days 8) 1-3 years 9) 3-5 years 10) above

5 years.Interest rate sensitivity: 8 time buckets 1) 1-28 days 2) 8-14 days 3) 29-90days 4) 91-180 days 5) 181-365 days 6) 1-3 years 7) 3-5 years 8) above 5

years and 9) Non-sensitive.

Mismatch Position: When a particular maturity bucket, the amount of

maturity liabilities or assets does not match, such position is called

mismatched position, which create surplus or liquidity crunch position anddepending upon the interest rate movement, such situat ion may turnout

to be risky for t he bank.Ceiling on Mismatch position (RBI Guidelines): For liquidity, mismatches for

cash flows for the first four buckets not to exceed 5%, 10%, 15% and 20%respectively of cash outflows for those buckets. For Interest Sensitivitymismatches for cash flows for 1-14 days and 15-28 days buckets to be

kept to minimum (not exceed 20% each of cash outflows for thosebuckets.

ADR, GDR and IDR:American and global depository receipts: American Depository Receipts

(ADR) and Global Depository Receipts (GDR) are instruments in the nature

of depository receipt or certificate. These are negot iable and issued by

non-US Company, representing publicly traded, local currency equityshares. For Indian corporates, it is preferred source of raising capital inforeign markets. Non-resident Indians (NRIs) prefer to invest in these

instruments. ADR are listed on American Stock Exchange whereas GDRs

are listed in a Stock Exchange other than American Stock Exchange sayLuxemburg or London.


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Indian Depository Receipts: Companies incorporated outside the country

raise resources from the Indian capital market with issue of IndianDepository receipts (IDRs). IDR means any instrument in the form of

depository receipt created by the domestic depository in India againstthe underlying equity shares of the issuing company.

Annual information returns: AIR is annual return to be furnished by Banks toCommissioner of income tax (Central Information Bureau) in form number

65 on before 31st August each year. Not furnishing AIR will attract penalty

at Rs. 100/- per day.

Financial transaction to be reported in AIR includes:a) Cash Deposits of Rs. 10 lacs or more in a year.

b)

Aggregate credit payments in excess of Rs. 2 lacs or more in year.

c)

Cash deposits aggregating to 10 lacs rupees or more in a year in SB

with the bank.d) Payments made by any person against bills raised in respect of acredit card issued to that person, aggregating to 2 lacs rupees or

more in the year.

e)

Receipt from any person of an amount of 5 lacs rupees or more foracquiring bonds or debentures issued by the bank. Receipt from

any person of an amount of 1 lac rupee or more for acquiring

shares issued by the bank.f) Receipt from any person of an amount aggregating to 5 lacs

rupees or more in a year for RBI’s saving bonds issued by authorizedbranches.

Summary of penalties:a) I f person fails to ensure payment of FDR of Rs. 20,000/- or above, not

in cash: penalty equals to sum of the payment (Sec. 271E of IT Act.)b) If a bank fails to furnish Annual Information Return: Penalty of Rs.

100/- for each day during which the failure continues (Sec. 271FA of

IT Act.)c) If a person fails to furnish return of income: Penalty of Rs. 5000/-

(Sec.271F, IT Act.)

d)

Penalty for Non-Deduction of tax at source on interest on deposit,

by a bank is simple interest at 12 % pa on amount of tax.Imprisonment under sect ion 276-B: 3 months to 7 years.

Benchmark PLR: To enhance transparency in banks pricing of the loan

product and also to ensure that the PLR truly reflects the actual costs, RBIhas advised banks to announce a benchmark PLR with the approval of

their boards, taking into consideration:


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a) Actual cost of funds, b) Operating Expenses c) A minimum

margin to cover regulatory requirements of provisioning and capitalcharge, and profit margin.

CAMELS Rating for Banks:

As per the recommendation of Shri S. Padmanabhan Committee, thatbank were placed in the following two categories for the purpose ofexamination, depending on the known and reported condition of the

banks in financial, operat ional, management and compliance terms. For

evaluation and ratings of Indian banks, the committee has suggestedCAMELS ratings model on lines of rating model (CAMEL) employed by the

supervisory authorities in the USA.

Six key parameters – rating criteria

C - Capital adequacy.A - Asset quality.M – Management.

E – Earning Performance.

L – Liquidity.S – Systems & Controls.

Capital Fund:

Tier I Capital:1)

Paid up capital

2)

Statutory reserves.3) Capital reserves represent ing surplus arising out of sale proceeds of

assets.

4)

Investment fluctuation reserve.5) Innovative perpetual debt instruments.

Less: equity investment in subsidiaries and intangible assets.

Tier II capital:

1) Un-disclosed reserves and cumulat ive perpetual preference shares.

2)

Revaluation Reserves ( at a discount of 55% while determining their

value for inclusion in Tier II Capital)3)

General Provisions & Loss Reserves (Up to maxi. 1.25% of weightedrisk assets)

4) Hybrid debt capital instruments.

5)

Subordinated Debt (Long term unsecured loans)6)

Redeemable Cumulative Preference Shares.


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Capital Adequacy Ratio (CAR):

Capital adequacy rat io reflects the adequacy of t he capital funds (that is

Share capital, free reserves and other capital funds) in relation to the risk-weighted assets. It is calculated as…

CAR = Capital funds / Risk Weighted Assets * 100 = 9%

Capital Funds: RBI Guidelines envisaged (decided in near future) a two

Tier capital structure namely Tier I and T ier I I .a) Tier I capital is also known as Core Capital. It provides the most

permanent and readily available support to a bank againstunexpected losses.

b)

Tier I I capital contains elements that are less permanent in nature or

are less readily available.

Important Risk weights:

Cash balance with RBI. 0%

Balance with other banks. 20%

Govt ./Approved Securities. 2.5%

Secured loans to staff members. 20%

Housing finance to individuals secured by mortgage upto 20 lacs. 50%

Housing finance to individuals secured by mortgage over 20 lacs. 75%

Mortgage deed securit ization of assets. 77.5%

Forex and gold open posit ion. 100%

Loans upto Rs. 1 lac against gold and sliver ornaments. 50%

Central / State Govt. guaranteed advances. 0%

Loans to public sector units. 100%

Other loans. 100%

Loans guaranteed by DICGC/ECGC. 50%

SSI Advances upto CGFT Guarantee. 0%

Advances against Term Deposits, LIC Policies, NSCs with adequatemargin.

0%

Consumer credit/ Credit cards. 125%

Venture capital funds, SEZ Developers, Commercial Real Estates,

and Capital market.

150%

Revised guidelines:Educational loans will be hence forth be classified as Non-consumer

credit for capital adequacy norms. The risk weight applicable toeducational loans would be as:


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a) Under Basel I: the risk weight would be 100% as against 125% at

present.b)

Under Basel II : the Educational loans, now no longer being a part of

Consumer Credit would be treated as a component of theregulatory retail portfolio and att ract a risk weight of 75% as against

125% at present.

CIBIL:CIBIL is the India’s first credit information bureau, which is a repository of

factual information on the credit history and repayment records ofcommercial and consumer borrowers. CIBIL will provide this specific

information to its members in the form of credit information reports. CIBILis promoted by several market players including SBI and has a corpus of

Rs. 25 crores. To start with, CIBIL is maintaining a database on suit -filed

accounts of Rs. 1 crore and above and suit -filed accounts [willful

defaulters] of Rs. 25 lacs and above. This information is based on aapplication developed to enable the users to access date through aparameterized search process across banks and companies at various

geographical locations. Suit -filed accounts of lower value are proposed

to be covered in a phased manner.

Capital market exposure:

1) Aggregate capital market exposure: Restricted to 40% (Both

direct and indirect) of net worth of the bank as on 31 st marchof previous year both on solo and consolidated basis. Within

the overall limit of 40%, direct exposure by investment inshares, debentures/ bonds not to exceed 20% of net worth.

2) Advance against shares: To individuals limited to Rs. 10 lacs

against shares held in physical for and Rs. 20 lacs in demataccounts from Banking Sector. Margin – 50% including cash

margin with at least 25% margin as cash margin (within 50%).

3) IPO finance: Restricted to Rs. 10 lacs/ individual from thebanking sector with 50% margin with at least 25% margin as

cash margin (With in 50%).

4)

Statutory Restriction: Banks cannot allow loan to their

employees/ others for purchase of their own shares. This is asper sec. 20 of banking regulation act.

5)

Statutory ceiling: As per sec. 19 of Banking regulation act, the

banks can not hold more than 30% of their own paid up

capital + reserves or 30% of paid up capital of the company(Which ever is lower), as pledge, mortgage or absolute

owner.


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Certificate of Deposit:

Certificate of Deposit (CDs) is a negotiable money market instrument and

issued in dematerialized form or as a Usance Promissory Note, for fundsdeposited at a bank or other eligible financial institution for a specified

time period.Eligibility: CDs can be issued by schedule commercial banks excludingregional rural banks and local area banks and selected all-India financial

institutions.

Aggregate Amount: For banks, depending on their requirements. Forother financial institutions, the overall limit fixed by RBI not to exceed 100%

of Net Owned Funds.Minimum Size of issue and Denominations: Mini. Rs.1 lac and in multiples

of Rs. 1 lac thereafter.

Who can subscribe: Individuals, Corporations, Companies, Funds, and

Associations etc. NRIs can also subscribe on non-repatriable basis.Maturity: Banks- Mini. 7 days and maxi. 1 year.Reserve requirements: CRR and SLR is applicable.

Date of Maturity: No grace period. If the maturity date is a holiday,

payment to be made on t he immediate preceding working day.

Core banking solutions: (CBS)

Core banking solution is the software package ‘customized’ and

tailor made for specific banks to support entire banking activitiesusing a central server. It covers Retail, corporate and trade

banking. CBS will enable bank to capture the personal data of the customer

at the point of contact, like his profession, income, dependents and

their income and occupation, occupation of spouse, assets ownedetc. this can be used later on for market survey, launching new

need based products etc.

CBS will facilitate the bank to build relationship with the customers’and structure customized financial products by identifying their

needs.

Commercial paper:

Commercial paper (CP) is an unsecured money market instrument issued

in the form of a promissory note. CP as privat ely placed instrument and

was introduced in India in 1990.The corporate, PDs financial institut ions can issue commercial paper.

Eligibility: A corporate would be eligible to issue CP provided:


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Tangible net worth, as per latest audited balance sheet is not less

than 4 crores. Company is sanctioned working capital limit by banks/ or financial

institutions.

Is classified as a standard Asset by the financing bank’s/ institutions.

Rating Requirement: Mini. Credit rating P2 of CRISIL/ equivalent from RBIapproved CRAs.Maturity: Mini. 7 days and a maxi. 1 year from the date of issue. Maturity

date of the CP should not go beyond the date of validity of the credit

rating.Denominations: Rs. 5 lacs or multiples thereof.

Limits and the amount of issue of CP: CP can be issued as a “stand alone” product.

Banks and FIs will have the flexibility to fix working capital limits duly

taking into account the resource pattern of companies financing

including CPs. Total amount should be raised within a period of two weeks from

the date of issue opening.

CP may be issued on a single date or in parts on different dates

provided that in the latter case, each CP including renewal shouldbe t reated as a fresh issue.

Official language:

Hindi Diwas: To be observed on 14th September every year. 14States and union territories are classified into 3 categories for the

purpose of official language policy. Region - A: H.P., Haryana, Rajasthan, MP, UP, Bihar, Uttarakhand,