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Sunday, January 13, 2008

Banking for CS

SECTION 5(i)(b) of The BANKING REGULATION ACT, 1949: “Banking”:
1.Acceptance of deposit from public;
2.for the purpose of lending/investment;
3.repayable on demand/otherwise; &
4.withdrawable by means of any instrument whether cheque/otherwise.

1.The objective is to promote diversified, efficient & competitive financial system;
2.Thrust on improving the operation & allocates efficiency by focus;
3.Monetary control reforms & restructuring the financial condition;
4.Building infrastructure & reviewing HR policies;
5.Reduce intermediate cost & promote competition;
6.Create an environment & infrastructure for Government securities;
1.Mergers & closure of banks: introduce Narrow Banking;
2.Create three tier banking structure AS TO International, Large & Medium and Cluster of districts;
3.Separate regulatory role of RBI & supervisory role of GOI;
4.Revamp bank functioning by inducting professionals, depoliticising, right sizing, VRS, review HR policies, etc…
5.Strengthen Bank Balance Sheet – revamp bank laws.

NARROW BANKING: Invest deposits in safe & liquid assets, thereby reduction of risk of failure. It is for weak banks. The advantages include,
1. Stable returns; 2. Easy monitoring by RBI; 3. Immune to runs.
The disadvantages include,
1.Divide banking sector into specialised Deposit & Loan making institutions;
2.Split depositors into Risk averse/loving or a combination;
3.Limited area of operations.

RELATIONSHIP BANKING: “Transaction oriented”, hence each transaction is weighted against profit & cost and decisions are taken. Thus focus on value based relations & mutual growth.

SOCIAL CONTROL – “additional control & restrictions” as to,
1.Whole time chairman & Board of directors should have special knowledge & practical experience.
2.Restriction on loans/advances to its directors or to interested firm/individuals (S-20) & also loans not against its own shares.
3.Punishment for obstructing any one from entering/leaving bank or holding demonstration within bank or acting to undermine depositors confidence in banks.Report of RBI & Central 4.Government to acquire undertakings of banking company.

Must Know Terms...
1. SECTION 17 – Reserve Fund >=20% (Profit as per S-29) before declaring dividend. The Central Government on recommendation of RBI, declare by order in writing to exempt from this provision only if Reserve Fund+Share Premium >=Paid up capital. The appropriation from Reserve Fund/Share Premium, then report to RBI within 21 days.
2. SECTION 18 – Cash Reserve >=3% of total demand & time liability as on last Friday of II-preceding fortnight with itself or balance in current a/c. with RBI or Net balance in current a/c. & submit return within 20th of every month.
3. SECTION 24 – Statutory Liquidity Ratio (SLR) ranging between 25-40% of demand & time liabilities as on last Friday of II-preceding fortnight by way of cash/gold/unencumbered securities.
4. For sections 18 & 24, the liability does not include, Paid up capital or Reserves or P/L credit, advance from RBI/Development/EXIM/Nationalised bank and if Regional Rural Bank, the loan from its sponsor bank; RBI may specify the liability & its decision is final; “Fortnight” means Saturday to II-following Friday (both inclusive). SECTION 19 – Bank can hold shares as pledgee or absolute owner or mortgagee <= 30% if PC+FR of its own or PC of that other company, whichever is lower; PC=Paid Up capital; FR=Free Reserves. It also permits to form subsidiary company. RETURNS TO RBI:
S-24: Monthly return of liquid assets & liabilities;
S-25: Quarterly return of assets & liabilities in India; Annual statement of all Inoperative accounts for 10years within 30 days of Calendar Year to RBI;
S-26: Unclaimed deposits >= 10years; S-27: Monthly return of assets & liabilities.

Simulating, Assets into Securities & Securities into Liquidity on an on-going basis, increasing turnover of business & profits
Under SARFAESI (Securitisation And Reconstruction of Financial Assets & Enforcement of Security Interest) Act, “securitisation” means acquisition of financial assets by an securitisation/reconstruction company from any originator, WHETHER by raising funds by such securitisation/reconstruction company FROM QIB by issue of Security Receipt (SR) REPRESENTING undivided interest in such financial asset or otherwise.
Thus, it is a process of conversion of illiquid non-negotiable & high valued financial assets into securities of small value which are tradeable & transferable.
STEP1: Company sells receivables to SPV (Special Purpose Vehicle) & takes cash;
STEP2: SPV converts assets into securities & sells in marketable lots;
STEP3: Repayment directed by company to SPV A/C.
STEP4: SPV pays by way of returns.
STEP5: Shortfall in non-recovery borne by company in a separate a/c.
TYPES include,
1. Mortgaged Backed Securitisation – by NHB through SBI Caps to LIC HFC.
2. Debenture Securitisation – ICICI close ended scheme.
1. Matched funding as to asset maturity;
2. Raise additional resources;
3. Trims Balance Sheet of company;
4. New opportunity to investors.

ALM – Asset Liability Management or Balance Sheet Management is the process that helps the management to protect & preserve business providing damage control, enhance returns & strengthen the institution; It means, (managing business after assessing the risk involved)
1. Identifying the “asset-liability mismatch” risk;
2. “Quantify” the risk;
3. Deciding the “Acceptable” level of risk;Monitoring & “controlling” such risk.

When there is only one a/c., current a/c. payments are presumed to have been appropriated to the debit items in the order of date. The presumption of law being “the first item on debit site is discharged/reduced by the first item on the credit side; the credit entries in the a/c. adjust/set-off the debit entries in chronological order”. As a safeguard (to escape from Clayton’s rule),
1. The banker should break the a/c. & open fresh a/c. on death/retirement/insolvency of a partner;
2. If the guarantor/surety of debt becomes insolvent/dies, the Claytons rule would prevail.

PROCESS1: Debtor making payment has the right to appropriate;
PROCESS2: Otherwise: Creditor has the right to appropriate;
PROCESS3: Otherwise: Appropriation by presumption of law.

FIRST, adjust/set off towards interest & then to Principal.
If both trust & personal monies deposited, the money first drawn treated as personal money & then trust money.

Also read The Negotiable Instruments Act from

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