BANK CREDIT AND WORKING CAPITAL FINANCE and MANAGEMENT OF BANK FUNDS

BANK CREDIT ANDWORKING CAPITAL FINANCE

and

MANAGEMENT OF BANK FUNDS

INDIAN FINANCIAL SYSTEM

BANK CREDIT ANDWORKING CAPITAL FINANCE

BANK: Meaning & Definition

• Bank is a financial intermediary between Money Savers and Money Seekers.

• Bank is engaged in the business of purchasing and selling of MONEY.

• Bank is a financial intermediary which accepts/takes deposits from public at large and make loans to different entities.

Modern Outlook of BANKS:Para Banking Services

1. Merchant Banking2. ATMs/Credit Cards3. Venture Capital Funds4. Factoring5. Bancassurance6. Internet/Mobile Banking7. Mutual Funds8. FOREX Services/Money Transfer9. Bill Payment Services10. D – Mat. Accounts

Banking in India

MPBF :(MAX. PERMISSIBLE BANK FINANCE)

THREE BASIC APPROACH:

A. 0.75 (CA – CL)B. 0.75 CA – CLC. 0.75 (CA – CCA) – CL

FORMS OF CREDIT (FINANCE)

• CASH CREDIT Banks lend money against the security of commodities and debt.

overdrawing from a Bank account.

Interest is charged only on RUNNING BALANCE and not on Entire Amt.

• OVERDRAFTS The word overdraft means the act of overdrawing from a Bank

account. In other words, the account holder withdraws more money from a Bank Account than has been deposited in it.

Interest is charged only on RUNNING BALANCE and not on Entire Amt.

FORMS OF CREDIT (FINANCE)

• TERM LOANS Longer term finance to acquire fixed assets generally 2 to 10 years

Repayment is made in installments and interest is charged on entire balance.

• BILLS DISCOUNTING/PURCHASE

• LETTER OF CREDIT/BANK GAURANTEE

MODE OF SECURITY

• HYPOTHECATION

• PLEDGE

• MORTGAGE

Credit Appraisal: FIVE C Framework:

• Character

• Capital

• Capacity

• Collateral

• Condition

MANAGEMENT OF BANK FUNDS

Reserve Bank of India

RBI IS THE CENTRAL BANK OF INDIA ESTABLISHED ON 1st APRIL 1935 UNDER THE RBI ACT HEAD QUARTER IS LOCATED IN MUMBAI PRESENT GOVERNER IS MR. SUBBARAO RBI HAS 22 REGIONAL OFFICES IN INDIA BASIC OBJECTIVE:

“TO REGULATE THE ISSUE OF BANK NOTES AND KEEPING OF RESERVES WITH A VIEW TO SECURING MONETARY STABILITY IN INDIA AND GENERALLY TO OPERATE THE CURRENCY AND CREDIT SYSTEM OF THE COUNTRY TO ITS ADVANTAGE”

Functions of RBI (APEX Bank)

RESERVE BANK OF INDIA:MAJOR FUNCTIONS

A. CENTRAL BANKING FUNCTIONS: Issuance of currency notes

Issue Currency Notes of different denominations Issues and exchanges or destroys currency and

coins not fit for circulation. Banker to BANKS

RBI Control the volume of reserves of the banks. RBI offer short term advances to banks.

RESERVE BANK OF INDIA:MAJOR FUNCTIONS…

Banker to GOVERNMENT Govt. Accounts are managed by RBI RBI Offer Secured and Unsecured Advances to Govt.

Exchange Control & Forex Management Manages the Foreign Exchange Management Act,

1999. Decide Exchange Rates of various foreign currencies.

RESERVE BANK OF INDIA:MAJOR FUNCTIONS…

B. SUPERVISORY FUNCTIONS:

ISSUE LICENSE FOR NEW BANKS ISSUE LICENSE FOR SETTING NEW BRANCHES/ATMs PRESCRIBE MINIMUM REQUIREMENTS REGARDING CAPITAL

AND RESOURCES (CRR AND SLR) TO INSPECT THE WORKINGS OF THE BANKS TO INVESTIGATE THE COMPLAINTS AND FRAUDS IN RESPECT OF

BANKS CONTROL APPOINTMENT/REAPPOINTMENT OF CEOs OF

PRIVATE SECTOR BANKS TO APPROVE MERGER /ACQUISITION /RECONSTRUCTION /

LIQUIDATION OF BANKS

RESERVE BANK OF INDIA:MAJOR FUNCTIONS…

C. PROMOTIONAL FUNCTIONS:

• RBI HAS PROMOTED VARIOUS DFI/PFIs LIKE,• IDBI, IFCI, ICICI, SFC, SIDBI, EXIM BANK, SIDC,

SIIC, NIDC, ECGC, DICGC NABARD, ETC…

RESERVE BANK OF INDIA:MAJOR FUNCTIONS…

D. REGULATOR OF MONEY & CREDIT:

› CRR› SLR

› Key Objectives:› To restrict expansion of bank credit› To ensure solvency of the banks.› To divert the bank funds to govt. (in case of SLR)

› BANK RATE› OPEN MARKET OPERATIONS› DIRECTED CREDIT AND CREDIT RATIONING› CAS/CMA› FIXATION OF INVENTORY/CREDIT NORMS

RBI PRUDENTIAL NORMS

• INCOME RECOGNISITION:

• INCOME OF NPA ACCOUNTS SHUOLD BE RECORDED ON CASH BASIS.

• CRITERIAS FOR “PAST DUE” • DIVIDEND INCOME – CASH BASIS• INTEREST FROM GOVT. SEC. – ACCURAL BASIS• NPA CRITERIAS FOR TERM LOAN, CC AND OD, AND

BILLS DISCOUNTED

RBI PRUDENTIAL NORMS…

• ASSET CLASSIFICATION:

1. STANDARD ASSET DISCLOSE NO PROBLEMS AND CONTAIN NORMAL RISK.

2. SUB-STANDARD ASSET CLASSIFIED AS NPA FOR A PERIOD NOT EXCEEDING 24 MONTHS.

3. DOUBTFUL ASSET CLASSIFIED AS NPA FOR A PERIOD EXCEEDING 24 MONTHS.

4. LOSS ASSET WHERE THE LOSS HAS BEEN IDENTIFIED OR BORROWER

HAS MADE DEFAULT OR BECOMES INSOLVENT.

RBI PRUDENTIAL NORMS…

• PROVISIONING FOR LOAN AND ADVANCES:

1. LOSS ASSETS: 100% PROVISIONING 2. DOUBTFUL ASSETS:

3. SUB STANDARD ASSETS: A GENERAL PROVISION OF 10% OF TOTAL OUTSTANDING AMOUNT4. STANDARD ASSETS: A GENERAL PROVISION OF 0.25%

PERIOD FOR WHICH THE ASSET HAS BEEN CONSIDERED DOUBTFUL

PERCENTAGE OF PROVISION

UP TO 1 YEAR 20 %

1 TO 3 YEAR 30%

MORE THAN 3 YEARS 50%

RBI PRUDENTIAL NORMS…

• CAPITAL FUNDS:

• TIRE – I CAPITAL INCLUDES THE NET OWNED FUNDS OF THE BANKS• TIRE – I CAPITAL SHOULD NOT BE LESS THAN 50% OF TOTAL CAPITAL. • CAPITAL ADEQUACY FOR INDIAN BANKS STANDS AT 8% OF O/S DEPOSITS.

• TIRE – II CAPITAL- TIRE – II CAPITAL MAINLY INCLUDES PREFERENCE SHARE, REVALUATION RESERVES, GENERAL PROVISIONS AND LOSS RESERVES, HYBRID DEBT ETC.

ASSET LIABILITY MANAGEMENT (ALM)

(A) ASSET MANAGEMNT:1. CASH AND LIQUIDITY MANAGEMENT

– FACTORS AFFECTING LIQUIDITY:

A. EXTERNAL FACTORS:– GENERAL ECO. CONDITION– MONETARY POLICY– TAXATION POLICY– POLITICAL CONDITION

B. INTERNAL FACTORS:– BANKING HABITS– NUMBER AND SIZE OF DEPOSIT ACCOUNTS– MATURITY PATTERNS OF INVESTMENT– NATURE OF BANK LOAN– ACCESS TO MONEY MARKET

ASSET LIABILITY MANAGEMENT (ALM)…

• MEASURING LIQUIDITY:– CASH ASSET TO TOTAL ASSET RATIO– CASH ASSET TO TOTAL DEPOSITE RATIO– LOAN TO DEPOSIT RATIO– CURRENT RATIO

2. RESERVE POSTION MANAGEMENT– PRIMARY RESERVE (CRR)– SECONDARY RESERVE (SLR)

3. INVESTMENT (SECURITY) MANAGEMENT4. LOAN/ADVANCES MANAGEMENT

ASSET LIABILITY MANAGEMENT (ALM)…

(B) LIABILITY MANAGEMENT:

1. DEPOSIT MANAGEMENT2. MANAGEMENT OF CAPITAL

– SOME IMPORTANT MEASURES:1. CAPITAL TO DEPOSIT RATIO2. CAPITAL TO ASSET RATIO

ASSET LIABILITY MANAGEMENT (ALM)…

• RISK MANAGEMENT PRACTISES:

• LIQUIDITY RISK

• CURRENCY RISK

• INTEREST RATE RISK