Introduction of Indian Financial

System

And

Indian Banking System

Indian Financial System -
Components

Financial Financial Financial

Services
Institutions Markets Instruments

• The banking system is, by far, the most dominant segment of

the financial sector, accounting for
• over 80 per cent of the funds flowing through the financial sector.
Major players in Financial sector in
India
• Regulator of banking system
• Debt Manager for GOI • Regulator of
• Exchange Rate Management Capital Market
• Formulating Monetary Policy
• Credit Supply, credit
allocation, cost of credit
• Currency Management
….. and more RBI SEBI

REGULATORS
PFRDA IRDA

• Regulator of • Regulator of
Pension funds Insurance Sector
• Refinance for • Refinance for
Housing Finance agricultural and rural
Sector development

NHB NABARD

APEX Institutions
ECGC /
SIDBI
DICGC

• Export Credit • Refinance for small

insurance industries development
• Deposit & credit
guarantee
Public Sector Banks

Foreign Banks
Scheduled Commercial
Banking Sector Banks
Cooperative banks

RRBs
Stock Exchanges – NSE,
BSE, regional stock
exchanges

Mutual Fund Companies

Capital Market
participants
Clearing Corporation of
India Ltd. (CCIL)

Public Listed Companies

Others
FIIs
IFCI

IDFC
Development Financial
Institutions – Direct
Finance
IL&FS

Others FDIs – direct investment for

setting up enterprises
State Financial
National
Corporations
Development Financial
Institutions – Indirect
Finance World Bank

International

Asian Development Bank

LIC

Life
Private insurance
companies
Insurance Sector

GIC

General
Private insurance
companies
Post-office
Govt. sector
Govt. of India & State Govts.

NBFCs

Non-banking Companies Leasing Companies

Credit Card companies

Investment Banks

Exchange Houses

Registrar for Cooperatives

Credit Rating Agencies Unorganized sector

Indian Financial Sector
Ministry of Finance is at helm of the policy making body, with
three regulators RBI, SEBI and IRDA consists of three principal
segments:

Financial Institutions Banking Institutions Financial Markets

The Financial System
Financial system, implies a set of complex and closely
connected or inter-linked:
Financial Institutions

Financial Agents

Financial Practices

Financial Markets

Financial Transactions Financial Claims, and Liabilities in the economy

The Financial System
The financial system is concerned about money, credit and finance--the
three terms are intimately related yet are somewhat different from
each other.

Money Credit / Loans Finance

is monetary resources
refers to the current a sum of money to be comprising debt and
it refers to a debt of an
medium of exchange or returned, normally with ownership funds of the
economic unit
means of payment interest state, company or
person
Meaning of Banks & its features
In simple words bank is an institution, which deals in money and
credit. The features of a bank may be listed as follows:
• Acceptance of deposits of money from the public.
• Obligation to refund deposits on demand.
• Lending or investing money for promotion and development of
business.
• Profitable employment of funds received as deposits from the
public.
• Money is with-drawable by cheque or draft.
Need for Banking
Savings and capital Bank plays a vital role in mobilizing the savings of the people and promoting
formation the capital formation for the economic development of the country

Channelization of The mobilized savings are allocated by the banks for the development of
savings various fields such as agriculture, industry, communication, transport etc

Implementation of A well-developed banking system can easily implement the monetary policy
Monetary Policy because development of the economy depends upon the control of credit
given by the banks. So, banks are necessary for the effective implementation
of monetary policy
Encouragement of Banks provide various types of financial services such as granting cash credit
Industries loans, issuing letter of credit, and bill discounting etc., which encourages the
development of various industries in the country
Regional by transferring surplus money from the developed regions to the less
development Banks developed regions reduces regional imbalances
Development of Banks are necessary for the farmers. It also encourages the development of
Agriculture and small-scale and cottage industries in rural areas
other neglected
sectors
Types of Banks
Banks are classified on the basis of:

Functions Ownership Schedule of RBI Act

Commercial Banks Schedule
Public Sector Banks
Commercial Banks
Industrial Banks
Private Sector Banks Non-scheduled
Banks
Regional Rural Banks
Co-operative banks
Exchange Banks

Central Bank
Types of Banks
Functions
Banks, which help for the development of trade and commerce, are called Commercial Banks. The
Commercial commercial banks may be owned by government or owned by private sector. For eg: Canara Bank,
Banks Punjab National Bank, Lakshmi Vilas Bank, Karur Visya Bank etc., are called as commercial banks

These banks assist to promote industrial development by providing medium and long-term loans,
underwrites the shares and debentures, assisting in the preparation of project reports, providing technical
Industrial Banks advice and managerial service to the industries. For eg: Industrial Development Bank of India (IDBI),
Industrial Credit and Investment Corporation of India (ICICI), are known as industrial banks

These banks are established in rural areas. Its object is to develop the rural economy by providing
Regional Rural credit and other facilities for agriculture, trade, commerce, industry and other productive activities
Banks in the rural areas
Exchange banks deal in foreign exchange and specialize in foreign trade. It plays an important
role in promoting international trade. It encourages flow of foreign investments into India and
Exchange Banks helps in capturing international capital markets

Every country has a central bank of its own which is called as central bank. It is the apex bank
Central Bank and the statutory institution in the money market of a country. The central bank occupies a
central position in the monetary and banking system of the country and is the superior financial
authority. In India, the Reserve Bank of India is the central bank of our country
Types of Banks

Ownership
Public Sector Banks These types of banks are owned and controlled by the government. The
nationalized banks and regional rural banks come under this category

Private Sector Banks These Banks are owned by private individuals and corporations

These banks are operated on co- operative principles. It is a voluntary

Co-operative banks
association of members for self-help and caters to their financial needs on a
mutual basis. These banks are also subject to control and inspection by
Reserve Bank of India.
Types of Banks
Schedule of RBI
Act

Schedule
Commercial Banks These types of banks are included in the second schedule of the Reserve bank
of India Act 1934. The banks, which fulfill the following conditions, are
classified into scheduled banks.
✔ Its paid up capital and reserves are at least Rs.5 Lakhs.
✔ Its operations are not detrimental to the interest of the depositors.
✔ It is a corporation or co-operative society and not a partnership or a single
owner firm.

Non-scheduled The banks, which are not covered by the second schedule of
Commercial Banks Reserve Bank of India, are called as non-scheduled banks
Function of Commercial Banks
Schedule of RBI Act - Accepting Deposits
Primary Functions
- Making loans and advances
- Loans
- Cash credits / overdrafts
- Purchasing and discounting bills

- Agency Functions
- Collection of cheques, bills, interest, etc.
- Executing standing instructions
- Purchase and sale of securities and transfer of funds
Secondary - Utility Functions or Services
- Safe custody of valuables, Safety Locker Facility
Functions
- Accepts bills
- Underwrites Capital issues
- Provides information about customers and trade
- Helps in foreign trade
- Issues Travellers Cheque, Gift cards
- Issues Stock Invest
- Provides Credit Card and ATM services
Execute
the
monetary
Policy Foreign
Publication
Exchange
of Data
Regulation

Issue
Functions Banker to
currency
of RBI the Govt.
notes

Control
Banker’s
banking
Bank
system
Control of
Credit
Credit Control Measures by RBI

Quantitative Credit Control Method Qualitative Credit Control Method

Bank Rates Fixation of Margins

Open Market Operations Regulation of Consumer Credit

Variable Statutory Reserve Ratio Direct Action

Rationing of Credit

Moral Suasion
THANK YOU
Sources of Bank
Funds
Factors Impacting sourcing of Funds by a
Bank
• Regulatory restriction if any
• Quantum of funds – requirement vis-à-vis availability
• Cost of funds for the Bank
• Pre-emption rules applicability
• Tenor of the funds vis-à-vis tenor required by the bank
• Purpose for which funds are required
• Maintenance of ratios – CRR, SLR, ALM, Treasury Management,
Liquidity ratios under Basel
• Alternate availability of resources
• Seasonality requirements
• Limit fixed by the counter-party for providing funds to the Bank
Summary of Sources
Type Savings Deposit Account
Tenor On demand

ROI 2.5% - 4% - deregulated

Source Public

Transferability Not transferable

Remarks CRR / SLR applicable

Summary of Sources
Type Current Deposit Account
Tenor On demand

ROI Nil- regulated

Source Public

Transferability Not transferable

Remarks CRR / SLR applicable

Summary of Sources
Type Term Deposit Account (FDR,Recurring)
Tenor 7 days – 10 years

ROI 3% - 5.50% - deregulated

Source Public

Transferability Not transferable

Remarks CRR / SLR applicable

Summary of Sources
Type Certificate of Deposit
Tenor Minimum 7 days, Maximum 1 year

ROI Higher than term deposit rate, market-driven, de-regulated

Source Individuals, Corporations, Companies, Trust, Funds, Associations etc.

Transferability By endorsement and delivery

CRR / SLR applicable on issue price, issued only in Demat form, no

Remarks
buy-back and loans against CDs
Summary of Sources
Type Refinance

Tenor Co-terminus with the loan refinanced

Different for different schemes, Usually 1% -2% less than charged to

ROI
borrower

Source RBI, SIDBI, EXIM Bank, NABARD

Transferability Not transferable

Remarks Provided for lending to agriculture, exports and SME sectors

Summary of Sources
Type Borrowing from RBI

Tenor Medium-term period

ROI Bank rate which is higher than repo rate borrowings

Source RBI

Transferability Not transferable

Remarks Provided only to banks

Summary of Sources
Type Repo Borrowing

Tenor Very short period, up to one week

ROI Lower than bank rate as prescribed by RBI from time to time

Source RBI

Transferability Not transferable

Remarks Borrowing permitted only against approved government securities

Summary of Sources
Type Inter-bank Call Money Borrowing

Tenor Overnight or few days

ROI Deregulated and market driven by supply and demand

Source Various banks who operate in call money market

Transferability Not transferable

Remarks Inter-bank exposure ceilings are fixed

Summary of Sources
Type Euro Dollar Borrowings

Tenor 1 year – 3 years

Market driven and per rates in International market depending on

ROI
rating of borrowing Bank

Source Foreign Investors

Transferability Not transferable

Amount is raised in foreign currency and bank bears the exchange

Remarks
rate risk
Summary of Sources
Type Tier-I & Tier-II bonds

Tenor 10 years – 15 years

ROI 4.50% - 6.00% depending upon market conditions

Source Long-term Investors (like Insurance Companies and Pension Funds)

Transferability Transferable by endorsement and delivery

Raised by banks for CRAR and Basel requirements, banks have to

Remarks
discount the amount for CRAR purpose
Summary of Sources
Type Preference shares

Tenor Unlimited tenor

ROI Market driven

Source Long-term Investors

Transferability Transferable by endorsement and delivery

Remarks Not very popular in Indian market

Summary of Sources
Type Equity shares

Tenor Unlimited tenor

Cost varies depending on investor demands and expectations and

ROI
companies’ future growth prospects

Source Public, FII, GOI, DFI

Transferability Transferable by endorsement and delivery

Not repayable till company goes into liquidation, issued through

Remarks
IPOs, QIPs, FPOs or Rights issue
Bank sources of Funds
Long-term sources
Deposit accounts Borrowed Funds of funds

Transaction Deposits Funds purchased or Bonds issued

borrowed from RBI by banks

Savings Deposits Repurchase

agreements Bank Capital

Time Deposits Euro-Dollar

Borrowings
Money Market
Deposit accounts
Deposit accounts
• The demand deposit account, or cheque account, is offered to
customers who desire to write cheques against their account
• From the bank’s perspective, demand deposit accounts are classified
as transaction accounts that provide a source of funds that can be
used until withdrawn by customers
• Another type of Transaction account is SB and Current with Interest
above certain level. It provides cheque services as well as interest. It
requires large minimum balance
• Electronic Transactions: Customers now use electronic banking to pay
utility bills, check account balances, add deposits, Credit card
payments, funds transfer, cash withdrawals (ATM). Debit cards allow
customers to make purchases and their accounts are debited by the
amount
Borrowed Funds
• The RBI funds market allows to accommodate the short-term liquidity
needs of other financial institutions
• RBI funds purchased represent a liability to the borrowing bank and
an asset to the lending bank that sells them
• Loans are made from one day to seven days
• The interest rate charged in the RBI funds market is called the RBI
repo funds rate which changes according to demand and supply of
funds
• If many banks have excess funds and few banks are short of funds, the
RBI funds rate would be low
• RBI funds rate is generally related to T-Bill rate
Repurchase Agreements
• represents the sale of securities by one party to another with an
agreement to repurchase the securities at a specified date and price
RBI funds purchased represent a liability to the borrowing bank and
an asset to the lending bank that sells them
• The government securities involved in the repo transaction serve as
collateral for the corporation providing funds to the bank
• Repurchase agreements transactions occur through a
telecommunications network connecting large banks, other
corporations, government securities dealers, and RBI funds brokers
• The yield on repurchase agreements is slightly less than the RBI funds
rate at any given point in time, since the funds loaned out are backed
by collateral and are therefore less risky
Bank Capital
• It generally represents funds obtained through the issuance of stock
or through retaining earnings.
• Primary capital results from issuing common or preferred stock or
retaining earnings, while secondary capital results from issuing
subordinated notes and debentures
• A bank’s capital provides a cushion to absorb losses, therefore, a bank
must maintain a specific minimum capital required by law
• When banks issue new stock, they dilute the ownership of the bank,
since the proportion of the bank owned by existing shareholders
decreases
THANK YOU
Uses of Bank Funds
Factors Impacting uses of Funds by a Bank
• Regulatory restriction if any including Credit Exposure limits
• Yield on funds and safety of funds including credit rating of
borrowers
• Capital requirements on lending and non-fund based business
• Maintenance of ratios – ALM, Leverage etc.
• Availability of funds, refinance, Credit Insurance
• Tenor of funds to be deployed and opportunities available
• Seasonality requirements, Treasury Management and Balance
Sheet management
• Inter-bank exposure limits and counter-party limits
• Government directed lending to specific sectors
Summary of Uses
Type Cash

Tenor Most liquid

ROI Nil

Transferability Bearer instrument

Remarks Bearer is the owner

Summary of Uses
Type Balance with RBI

Tenor Highly liquid

ROI Nil

Transferability No

Remarks CRR requirements and for settlement purposes

Summary of Uses
Type Term Deposits with other Banks

Tenor 7 days – 1 year

ROI Market rates

Transferability No

Remarks Generally invested by cooperative banks

Summary of Uses
Type Call Money

Tenor Overnight to 7 days

ROI Market rates

Transferability No

For Treasury Management purposes daily subject to Inter-bank

Remarks
exposure limits
Summary of Uses
Type Commercial Paper issued by Corporates

Tenor 90 days maximum

ROI Market rates

Transferability Yes

Remarks Short term deployment of money by banks in rated CPs

Summary of Uses
Type Bonds issued by corporates

Tenor 3 years – 10 years

ROI Market rates

Transferability Yes

Remarks Generally, in de-mat form and based on rating of corporate

Summary of Uses
Type Bonds floated by other banks

Tenor 5 years – 15 years

ROI 5.5% - 7%

Transferability Yes

Generally, Tier 1 and Tier 2 bonds for CRAR purposes. Restricted by

Remarks
ceiling fixed by RBI
Summary of Uses
Type Govt. approved securities (SLR)

Tenor 3 years – 25 years

ROI 4% - 6% (market driven)

Transferability Yes

Remarks To meet CRR requirements and deploy excess funds safely

Summary of Uses
Type Govt. approved securities (Non-SLR)

Tenor 1 year – 10 years

ROI Market prices

Transferability Yes

Remarks Part of Treasury Management of the Bank

Summary of Uses
Type
Loans and advances – (Retail, Corporate, Agri, Forex
loans; CC, Bill discounting, Term loans
Tenor Term loans – up to 25-30 years; Working Capital – up to 1 year

ROI Borrower rating based yields

Transferability No

Main business of the Bank is to lend short-term and long-term

Remarks
depending on its ALM and objectives
Provisions

Write-off for bad Appropriation of

Accounting
debts, frauds profits
entry
etc. generated
Cash
Bank Loans
Investment securities
Uses of funds by Banks RBI borrowings
Repurchase agreements
Eurodollar loans
Fixed assets
Use of Cash
Banks are required to hold some cash as reserves, since they must abide by CRR
requirement stated by RBI

Banks also hold cash to retain some liquidity and accommodate any withdrawal requests by
depositors
Type of Bank loans
A common type of business loan designed to support on-going business
Working
operations. It supports to generate sufficient cash inflows. Are short-term
Capital Loan
and frequently needed by businesses
To finance the purchase of fixed assets such as machinery. It
Term loans
involves specified period of time, for a specified purpose
Loan principal to be paid off in one lump sum at a specified date in
Bullet loans future. Bank can periodically request interest payments

Direct lease Is an alternative to Term loan. Bank purchase the asset and then
loan lease it to the firm in need.

Informal Line More flexible financing agreement. Allows to borrow up to some

of Credit specified maximum amount over a specified period. Interest is
charged only on the borrowed amount in line with market rates.
Banks are not legally obligated to provide funds
Type of Bank loans …
cont

Revolving Obligates the bank to offer up to some specified maximum amount

Credit Loan of fund over a specified period typically up to 1 year – Cash Credit.
Bank is committed to provide funds when requested, it charges a
commitment fee on unused funds

Consumer
Loans It is installment loans to individuals to finance purchase of cars and
household products. These loans require the borrower to make
periodic payments over time

Real Estate
Loans Banks provide real estate loans to both commercial and residential
properties
The interest rate charged by banks on loans to their most creditworthy customers is
known as the Prime Rate

Several banks may be willing to pool any available funds to accommodate a corporation is
known as Loan Participation

The main role of other banks is to supply funds to Lead bank, and then the funds are
channeled to the borrower
Investment Securities
Bank purchase treasury securities as well as securities issued by the agencies of the
Central Government

Government agency securities can be sold in the secondary market

RBI funds Banks lend funds in the money market. The funds are sold, or lent out, will
sold be returned as specified in the loan agreement with interest

Repurchase Recall from the borrowers’ perspective, it involves repurchasing the

agreements securities that it had previously sold

Banks must maintain some fixed assets, such as office buildings and
Fixed Assets land to conduct their business operations
Off-Balance sheet activities

Loan It is an obligation by a bank to provide a specified loan amount to a

Commitments particular firm upon the firm’s request
The interest rate and purpose of the loan may be specified.
The bank charges a fee for offering the commitment

Standby Letter It backs the customer’s obligation to a third party. If the customer
of Credit does not meet its obligation, the bank will.
Also, the third party may require that the customer obtain an SLC to
complete a business transaction
Off-Balance sheet activities …cont

Forward Banks agree to exchange one currency for another on a particular

Contracts future date at a specified exchange rate

Swap Banks serve as intermediary for interest rate swaps where two
Contracts parties agree to periodically exchange interest rate payments on a
specified notional amount of principal
Some banks facilitates currency swaps by finding parties with
optimistic future currency needs and executing a swap agreement

Currency swaps are similar to forward contracts, except that they are usually for
more distant future dates
THANK YOU
Understanding & Analyzing Fin St
of Bank & Mfg Co.

1
ABC Bk: Audited Financial Results for the FY ended
(Rs. In lakhs)
31.03.2021 31.03.2020
• 1. Interest earned (a)+(b)+(c)+(d) 741,946 694,608
(a) Interest/discount on advances/bills 544,683 501,108
(b) Income on Investments 183,592 177,683
(c) Interest on balances with RBI & other inter bank funds 6,236 5,236
(d) Others 7,435 10,581
• 2. Other Income 87,831 69,385
• 3. TOTAL INCOME (1+2) 829,777 763,993
• 4. Interest expended 503,905 471,747
• 5. Operating Expenses (i)+(ii) 163,093 144,207
(i) Employees Cost 89,196 77,154
(ii) Other operating expenses 73,897 67,053
• 6. TOTAL EXPENDITURE(excl. Prov. & Contingencies) (4 + 5) 666,998 615,954

2
ABC Bk: Audited Financial Results for the FY ended
• (Rs. In lakhs)
31.03.21 31.03.20
• 7. Operating Profit (3 – 6) 162,779 148,039
• 8. Provision (other than tax) & Contingencies 10,675
26,840
• 9. Exceptional Items ---- ---
• 10. Profit from Ordinary Activities before tax (7-8-9)152,104
121,199
• 11. Tax expense 51,529
37,310
• 12. Net Profit from Ord. Activities after tax (10-11) 100,575
83,889
• 13. Extraordinary items (net of tax expense) ---- ---
• 14. Net Profit for the period (12-13) 100,575
83,889

3
ABC Bk: Statement of Assets and Liabilities of
the bank
• CAPITAL AND LIABILITIES (Rs. In lakhs)
31.03.2021 31.03.2020
• Capital 17,133 17,106
• Reserves and Surplus 756,680 677,953
• Deposits 7,082,499 5,973,128
• Borrowings 230,825 568,796
• Other Liabilities and Provisions 197,911 222,432
• Total 8,285,048 7,459,415

4
Statement of Assets and Liabilities of ABC
Bank
• ASSETS (Rs. In lakhs)
31.03.2021 31.03.2020
• Cash and Balances with Reserve Bank
of India 3 37,954 310,429
• Balance with Banks and Money at Call
and Short Notice 1 40,045 142,509
• Investments 2,440,920 2,411,785
• Advances 5,128,499 4,343,610
• Fixed Assets 46,663 42,496
• Other Assets 190,967 208,586
• Total 8,285,048 7,459,415
5
Dr. MANUFACTURING ACCOUNT of Mfg. Co. for FY endedNDED Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening Stock (?) x x x By Sales xxx
To Purchases x x x Less : Returns
Less: Returns Inward xxx xxx
outward xxx xxx By Closing stock(?) xxx
To Wages xxx By Gross Loss c/d xxx
(transferred to P & L A/c)
To Carriage inward xxx
To Clearing Charges x x x
To Packing charges xxx
To Dock dues xxx
To Power (factory) xxx
To Octroi Duty xxx
To Gross Profit c/d xxx
(transferred to
P&L A/c)
xxx xxx

6
(Rs. In lakhs)
Dr. P & L A/c of Mfg Co. For the FY ended ….. Cr.
Particulars Rs. Particulars Rs.
To Trading A/c xxx By Trading A/c xxx
(Gross Loss) (Gross profit)
To Salaries xxx By Commission earned x x x
To Rent xxx By Rent received xxx
To Stationery xxx By Interest received x x x
To Postage expenses x x x By Discount received x x x
To Insurance xxx By Net Loss
To Carriage outward x x x (Transferred to
To Travelling expenses x x x Capital A/c) xxx
To Office expenses xxx
To Interest paid xxx
To Bank charges xxx
To Sundry expenses x x x
To Depreciation xxx
To Commission paid x x x
To Advertisement xxx
To Net Profit (transferred
to Capital A/c) xxx
xxx xxx
7
Balance Sheet of Mfg. Co. as on …..
(Rs. In lakhs)
Liabilities Rs. Rs. Assets Rs. Rs.
• Sundry creditors xxx Cash in hand xxx
• Bank Cash Credit xxx FD with bank xxx
• Outstanding expenses x x x Sundry debtors xxx
• Term loans xxx Investments xxx
• Share Capital xxx Closing stock (?) xxx
• Reserves & Surplus xxx Prepaid expenses xxx
• Add: Net profit (or) Furniture & fittings x x x
• Less: Net loss x x x Plant & machinery xxx
• xxx Land & buildings xxx
• Less: Dividend x x x Patents & Trade marks x x x
• xxx
• Less: Income tax x x x
• xxx
•
• xxx xxx
8
Difference between Fin. St. of Bank & a Mfg Co.
• Sources of funds – primarily short term in nature, payable on
demand or with short term maturities
• Financial leverage is very high, i.e. equity base is very low
• Proportion of Fixed Assets is very low and, so is the operating
leverage(ratio of fixed costs to total costs)
• A high proportion of bank funds are invested in loans/
advances or investments, all of which are subject to interest
rate volatility
• When intt. rates change, consequent impact on cost of funds
could create problems with the pricing or portfolio of assets
• Each of the above characteristics give rise to significant risks
in bk mgt
• Bulk of revenue is generated from intt. on advances & inv.
(However, there is gradual shift of modern banking to fee
based services)

9
Some Performance Parameters For
Banks
NII: Net interest income
Difference between revenues generated by interest bearing
assets and the cost of servicing liabilities.
NIM(Net Interest Margin):
NII/ Average interest earning assets
Spread:
Difference between the average rate earned on assets and
average rate paid on liabilities.
Burden Ratio:
Non interest income / Non interest expenses
Efficiency Ratio: Non interest income/ Net total income

10
11
⚫ BANKS’ FINANCIAL
STATEMENTS

1
Why are banks’ financial statements
different?
⚫ A bank’s financial statements are quite
different from those of a firm in any other
industry.
⚫ Sources of Funds- Short term
⚫ Financial Leverage is high vis-à-vis Equity Base
⚫ Proportion of fixed assets is low
⚫ Higher amount of funds are invested in loans &
advances
⚫ Significant fee based income
⚫ In their roles as financial intermediaries,
banks have to take considerable financial
risks, and their financial statements merely 2
reflect these risks.
BANKS’ BALANCE SHEET
⚫ ASSETS
⚫ LIABILITIES
⚫ Cash and balances
⚫ Capital
with central bank
⚫ Reserves
⚫ Balances with
⚫ Deposits
banks and money
⚫ Borrowings at call
⚫ Other liabilities ⚫ Investments
and provisions
⚫ Loans and
advances
⚫ Fixed assets
⚫ Other assets 3
ASSET CHARACTERISTICS: LOANS
and ADVANCES
⚫ Major asset in banks’ balance sheets
⚫ Major source of revenue for banks
⚫ Operational features - different loan
covenants, maturities, interest rates,
repayments amounts and modes,
currencies,industries, purposes etc

4
ASSET CHARACTERISTICS:
INVESTMENTS

⚫ Help to earn interest.

⚫ Help to meet liquidity needs.
⚫ Low transaction costs.
⚫ Speculate on interest rate movements and
profit on price changes [trading].
⚫ Part of banks’ dealer functions - at
purchase, objective to be designated -
held-to-maturity, trading or available for
sale.
5
ASSET CHARACTERISTICS- CASH AND
DUE FROM BANKS
⚫ Vault cash
⚫ Deposits with Central bank [reserve
requirements]
⚫ Deposits with other banks
⚫ Cash items in the process of collection [float
funds]

6
ASSET CHARATERISTICS: FIXED
AND OTHER ASSETS
⚫ Depreciated value of banks’ premises and
equipment.
⚫ Interest accrued [receivable].
⚫ Prepaid expenses.
⚫ Non-banking assets acquired in satisfaction of
claims.

7
LIABILITY CHARACTERISTICS:
DEPOSITS
Savings and demand (current) deposits
⚫ No set maturity.
⚫ Low/no cost.
Time deposits
⚫ Set maturity (short term/long term).
⚫ Deregulated interest rates.

8
LIABILITY CHARACTERISTICS:
BORROWINGS
⚫ From the central bank.
⚫ Other banks/FIs.
⚫ Commercial papers.
⚫ Bonds
⚫ Other long term borrowings.
⚫ Borrowings from abroad.

9
CONTINGENT LIABILITIES
⚫ It is an off the balance sheet item.
⚫ It signifies a ‘possible’ obligation that
depends on the occurrence of some
uncertain event.
⚫ In good times, contingent liabilities can
generate substantial income for banks.
⚫ To ascertain banks’ financial condition,
contingent liabilities will have to be
analysed.
10
BANKS’ INCOME STATEMENTS
(India)
INCOME EXPENSES
⚫ Interest earned ⚫ Interest paid
[advances, investments, [deposits,
balances with RBI and RBI/inter bank
other banks] borrowings]
⚫ Other income ⚫ Operating
[commission, exchange, expenses
profit on exchange, etc.] ⚫ Provisions
⚫ Taxes

11
ANALYSIS OF NET INCOME
⚫ NI [Net Income]=Net Interest Income-
Burden- Provisions+/- Gains from
investments-Taxes
⚫ The bank’s strategy can be inferred from
the contributory factors to net income

12
BANKS’ PROFITABILITY
ANALYSIS
Some commonly used profitability measures:
⚫ NIM= NII/AVERAGE EARNING ASSETS
⚫ Spread= Percent yield on interest earning
assets less percent cost on interest bearing
funds
⚫ Burden ratio= non interest income/non
interest expense
⚫ Efficiency ratio= non interest income/ net
total income

13
TYPICAL BANKS’ BALANCE SHEET IN INDIA
Schedule Schedule Assets
06 Cash and bank
01 Capital balances with RBI

07 Balances with
02 Reserves and banks and money
Surplus at call

03 Deposits 08 Investment

04 Borrowings 09 Advances

05 Other Liabilities & 10 Fixed assets

provisions
12 Contingent 11 Other assets
Liabilities
14
TYPICAL BANKS’ FINANCIAL
STATEMENTS IN INDIA –P&L
Schedule Income Schedule Expenses

13 Interest earned 15 Interest

expended

14 Other income 16 Operating

expenses
17 Provisions and
contingencies

15
DISCLOSURES IN FINANCIAL
STATEMENTS
⚫ To ensure transparency in operations and
financial condition, banks have to disclose
substantial information to stakeholders in
‘Notes to accounts’.
⚫ RBI specifies the list of such disclosures from
time to time.

16
Assessing Banks’ Performance
⚫ Traditional models of bank performance are
based on the Return on Assets [ROA]
approach.
⚫ Some others such as CAMELS rating models
follow a rating approach based on various
parameters.
⚫ There are also more sophisticated models
based on risk rating criteria

17
OSMOS
⚫ Besides CAMELS rating , the risk
profile of the Banks are being
monitored through-
⚫ OSMOS (off-site surveillance and
monitoring)
⚫ Market intelligence reports
⚫ Adhoc data from internal & external
auditors
⚫ Information from domestic and
overseas supervisors 18
Any Question?

19
Reserve
Requirements of
Banks
Money

It is defined by its functions as

“anything that is widely used for making payments and accounting.”

If GDP (goods & services) grows and

money supply remains constant, the
prices are likely to fall as the total value of Increase in velocity of circulation has the
goods & services must adjust to the same effect as increase in quantity of
money available for facilitating their money supply, as the same amount of
trade. Conversely, if GDP remains money can settle more transactions
constant and money supply grows, prices
will increase.
Functions and Characteristics of Money
Functions
• Store of value or wealth
• Common measure of value
• Medium of exchange
• Unit of account and deferred payment
Characteristics
• Durability
• Portability
• Divisibility
• Uniformity
• Acceptability
• Limited supply
Velocity of money
Velocity of money is a measurement of rate at which money is
exchanged in an economy.
High velocity: Healthy and expanding economy
Low velocity: Recessions and contractions
Factors affecting velocity of money supply
• Credit facilities
• Volume of trade
• Business conditions
• Payment system
• Regularity of income
• Income distribution
Factors affecting Money Supply

Nov to Apr: Crops harvest, industries buy their raw material = money
Season supply rise

Boom: money supply increases

Trade cycle
Depression: money supply falls
Money supply will decrease if: higher tax or sale of G-sec. But, when
Fiscal Policy Govt spends the same money => money supply will increase =>
inflation (e.g. MNREGA)
Public’s Public deposits higher portion of their income in banks => banks can
choice expand loans => money supply will rise
Monetary RBI’s dear money policy (or Tight money policy) => supply down
Policy RBI’s cheap money policy =>supply rise
Money supply
One of the factors that influence price level and is under the control of the RBI is
MONEY SUPPLY
The measures of money supply are M0, M1, M2, M3 in conformity with
progressive liquidity
M0 (Reserve Money) components:

Currency in circulation

Bankers’ Deposits with RBI

‘Other’ Deposits with RBI

M1 (Narrow Money) components:

Currency with public

CA with banks

Demand liability portion of

savings deposit in banks

Other deposits with RBI (CA

of foreign central banks)

M1 excludes
India’s deposits with IMF, World Bank, Foreign Govt. etc.

Interbank deposits
M2 components:

M1

savings deposits of Post office saving banks

M3 (Broad Money) components:

M1

Time deposits {excl. FCNR(B)} with maturity of < 1 year

Interpretation of numbers
• Numbers not important but interpretation is:
• Banks receive more money in TIME deposits than in Demand
Deposits
• If Banks received more money in Demand Deposits (CASA),
they have to pay less interest (0% and 3%) compared to Time
Deposits {e.g., FDs (5-6%)} = cheaper raw material (money)
for loaning to others @ 8-9% and earning big margin
• Banks have more money >> than currency with public
Velocity of money circulation
• It is the average number of times money passes from one
hand to another, during given time period
• For e.g., you bought pen worth Rs. 20 from shopkeeper, he
uses same 20 rupee note to buy Coke => then same currency
note performed function for 40 rupees.

THIS IS CALLED VELOCITY OF MONEY

• If velocity of money increases, the money supply will increase

and vice versa
Velocity of money
Velocity of money is a measurement of rate at which money is
exchanged in an economy.
High velocity: Healthy and expanding economy
Low velocity: Recessions and contractions
Factors affecting velocity of money supply
• Credit facilities
• Volume of trade
• Business conditions
• Payment system
• Regularity of income
• Income distribution
Other Factors affecting Velocity of
Money Circulation

Income Higher Velocity => poor people immediately use their money. So,
distribution money in the hands of poor

Booming Higher Velocity => if more people use EMI loans for purchase
period

Low financial Less velocity => people tend to save more in physical assets because
inclusion of low bank penetration, and hence money doesn’t change hands
much
Developed Higher velocity => people save less and spend more because of
countries lifestyle and confidence in Govt social-security (USA)
Establishment of RBI
• The Reserve Bank of India was established on April 1, 1935 in
accordance of the Reserve Bank of India Act, 1934
• The Central Office of the RBI was initially established in
Calcutta but was permanently moved to Mumbai in 1937
• The Central Office is where the Governor sits and where
policies are formulated
• Though originally privately owned, since nationalization in
1949, the RBI is fully owned by GOI
Preamble of the RBI Act
The preamble describes the basic functions of RBI as:

“… 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.”
Main functions of RBI

• Formulates, implements and monitors the monetary policy

Monetary
Authority • Maintain price stability and ensuring adequate flow of credit to
productive sectors

• Prescribes broad parameters of banking operations within which

Regulator the country’s banking and financial system functions
and
supervisor • Maintain public confidence in the system, protect depositors’
interest and provide cost-effective banking services to the public
Main functions of RBI

• Manages the Foreign Exchange Management Act, 1999

Manager of
Foreign • To facilitate external trade and payment and promote orderly
Exchange development and maintenance of foreign exchange market in
India

• Issues and exchanges or destroys currency and coins not fit for
Issuer of circulation
currency • To give the public adequate quantity of supplies of currency notes
and coins and in good quality
Main functions of RBI

• Performs a wide range of promotional functions to support

Development national objectives.
role
• (IDBI, NHB, DICGC)

• Banker to the Govt: performs merchant banking function for the

Related central and the state govts.; also act as their banker
functions • Banker to banks: maintains banking accounts of all scheduled
banks
Cash Reserve Ratio (CRR)
• Banks in India are required to hold a certain proportion of their
deposits in the form of cash
• To control liquidity in financial market and ensure solvency of
individual commercial banks
• Banks do not hold these as cash with themselves
• CRR is to be maintained only as:
• Deposit with RBI
• Cash balances in the currency chests – which is considered as
equivalent to holding cash with RBI
CRR FAQs
Q. Who prescribes the CRR and for whom?

A. RBI- having regard to the needs of securing the monetary stability in the country

Q. Which section confers the authority to prescribe CRR?

A. Section 42(1) of the RBI Act, 1934

Q. What is the floor rate and ceiling rate for CRR?

A. No floor or ceiling rate

Demand Liabilities – are payable on demand and include
Current Deposits

Demand Liabilities portion of SB Accounts

Margins held against LCs/BGs

Balance in overdue FDs, Cash Cert. & Cumulative RDs

Outstanding TTs, MTs, DDs

Unclaimed deposits

Credit balance in CC accounts

Deposits held as security for advances which are payable on demand

Time Liabilities – are payable otherwise than on demand
FDs, Cash Cert. Cumulative and RDs, time liabilities as a portion of SB
deposits
Staff security deposits

Margins held against LCs/BGs, if not payable on demand

Deposits held as securities for advances which are not payable on demand
Other Demand and Time Liabilities (ODTL)
Interest accrued on deposits

Bills payable

Unpaid dividends, suspense a/c balances representing amounts to other banks

or public

Net credit balances in branch adjustment account

Any amounts due to the banking system which are not in the nature of
deposits or borrowing. Such as liabilities may arise due to items like collection
of bills on behalf of other banks, interest due to other banks and so on

Loans and borrowing from abroad by banks in India will be considered

as ‘liabilities to others’ and will be subject to reserve requirements
Liabilities not to be included for DTL / NDTL
computation for CRR and SLR
PUC, reserves, any credit balance in the P&L A/c of the bank

Any loan taken from RBI

Amount of refinance taken from Exim Bank, NHB, NABARD, SIDBI

Net income tax provisions

Amount received from DICGC towards claims and held by banks
pending adjustments
Amount received from ECGC by invoking the guarantee
Amount received from insurance company on ad-hoc settlement
of claims pending judgement of the court
Amount received from the Court Receiver
Liabilities not to be included for DTL / NDTL
computation for CRR and SLR

DRDA subsidy kept in Subsidy Reserve Fund account in the name of SHGs

Subsidy released by NABARD under investment Subsidy Scheme for

construction/renovation/expansion of rural godowns
Net unrealized gain/loss arising from derivatives transaction under trading
portfolio
Income flows received in advance such as annual fees and other charges which
are not refundable

Bill rediscounted by a bank with eligible FIs as approved by RBI

Procedure for computation of CRR
• To improve cash management by banks and as a measure of
simplification
• A lag of one fortnight in the maintenance of stipulated CRR by banks
• Last Friday of second preceding fortnight

• This means that the maintenance period is: a fortnight

beginning one fortnight after the reporting Friday

• This enables large banks having far-flung branches to obtain

and consolidate BS data with actual NDTL
Maintenance of CRR on Daily Basis
• To provide flexibility to banks in choosing an optimum strategy
of holding reserves depending upon the intra fortnight cash
flows, all SCBs are required to maintain minimum CRR
balances up to 90% (95%) of the average daily required
reserves for reporting fortnight on all days of the fortnight wef
the fortnight beginning April 16, 2016.

• RBI does not pay any interest on the CRR balances

maintained by SCBs wef March 31, 2007
Penalties for default in maintenance of CRR
• Penal interest recovered for that day @ Bank Rate + 3% p.a.
on the amount by which the amount actually maintained falls
short of the prescribed minimum (90% of total CRR) on that
day

• And if the shortfall continues on the succeeding day/s, penal

interest @ Bank Rate + 5% p.a.

• In case of default on the average basis, penal interest will be

as stipulated u/s 42 of the RBI Act
Present bank rate is 4.25%
Penalties for default in maintenance of CRR
Also
SCBs are required to furnish the particulars such as

• Date, amount, percentage, reason

For default in maintenance of requisite CRR and also action

taken to avoid recurrence of such default
Statutory Liquidity Ratio(SLR)
• It is a requirement peculiar to India

• In addition to ensuring that banks can fall back on readily saleable

Govt. securities in the event of a run on the bank

• It was a prescription to divert bank deposits to meet Govt.

investment expenditure

• Govt. is considering to reduce the SLR requirements gradually and

may eliminate it ultimately to make the regulatory regime on par
with international practices
Basic objectives of(SLR)
• Control money supply for credit purposes
Very effective tool for enhancing or curbing credit flow, highest level of 38.50% in
1990
• Channel bank investments into Govt. securities
As these securities carry interest at lower rates as compared to interest rate on
advances, banks’ profitability is also affectded adversely
• Ensure solvency of banks
Helps banks to face difficult times and ensure depositors safety of money
SLR FAQs
Q. Who prescribes the SLR and for whom?

A. RBI prescribes for Scheduled Commercial Banks

Q. Which section confers the authority to prescribe SLR?

A. Section 24(1) of the Banking Regulation Act, 1949 as amended in Jan 2007

Q. What is the floor rate and ceiling rate for SLR?

A. No floor rate. Though the ceiling rate is 40% of the bank’s total DTL in India
SLR can be maintained as
Cash, or

In gold valued at a price not exceeding the current market price, or

Investment in unencumbered SLR securities

Of its total DTL in India

As on the last Friday of the second preceding fortnight

Present SLR rate is 18.00%

Penalties for default in maintenance of SLR
• Penal interest recovered for that day @ Bank Rate + 3% p.a.
on the shortfall

• And if the default continues on the next succeeding day, penal

interest may be increased to Bank Rate + 5% p.a. for the
concerned days of default on the shortfall

Present bank rate is 4.25%

DTL computation to be certified by Statutory
Auditors
Also
The statutory auditors should verify and certify that all items
outside liabilities, as per the bank’s books has been duly
compiled by the bank and correctly reflected under DTL/NDTL
in the fortnight/monthly statutory returns submitted to RBI for the
financial year
THANK YOU
Relationship between
Bankers and
Customers - I
Relationships
Social relationship

Emotional Relationship

Financial Relationship

All these relationships are important but since we are dealing in finance,
so this relationship becomes most important. It is long-lasting and risk
based therefore we should go into the depth before engaging in this
relationship
Banker Customer
The relationship between the banker and customer is very important as both serve the
society to grow and the economy to expand

A customer is one who has an account

The person who is disposing the with the bank and to whom the banks
assignments of banking is called ‘BANKER’ undertakes to extend business of banking
There is no statutory definition of
The term ‘Banking’ has been defined ‘Customer’. A person/company/entity
under Banking Reg. Act, 1949 u/s 5(b) as who have an account with a bank is a
“accepting for the purpose of lending or customer. There is no unanimity as
investment of deposits of money received regards to the time period of the
from the public, repayable on demand or dealings.
otherwise and withdrawable by cheque, A casual transaction like encashment of a
draft, order or otherwise.” cheque does not entail a person to be
customer.
Major function of banks
Essential functions of the bank are mentioned in sec 5(b) of RBI
Act and sec 6 of Banking Reg. Act as:
• Acceptance of deposit of money for the purpose of lending or
investments
• Discounting of Bills
• Collection of cheque and bills
• Remittances
• Safe custody of articles
• Hiring of safe deposit lockers
• Conducting foreign exchange transactions
Major function of banks …. cont
• Conducting Govt. transactions
• Issuing Letters of Credit and Guarantees

But now, as new institutions have diversified their businesses

and entered into banking, likewise banks were diversified to
other line of businesses directly or, otherwise, so, few more
functions have been added over the years like selling of Gold
Coins or Bonds, Credit Card business, third party products
selling etc.
Various Relationships between Banker
and Customer
Creditor - Debtor

Relationships between the customer having a deposit account, depositor is the creditor,
and the banker is debtor.

Debtor - Creditor

When the customer avails a loan or an advance, then his relationship with the banker
undergoes a change to what it is, when he is deposit holder. Since, the funds are lent to the
customer, he becomes the borrower, and the banker becomes the lender. The relation is
the debtor – creditor relation, the customer being debtor and the banker a creditor
Beneficiary - Trustee
If a customer keeps certain valuables or securities with the bank for safe-keeping or
deposits a certain amount of money for a specific purpose, the banker, besides becoming a
bailee, is also a trustee.
The money or the securities so kept are not at the disposal of the bank
The banker cannot utilize those moneys or securities as he desires since the money does
not belong to him
Principal - Agent
Banks provide ancillary services such as collection of cheques, bills etc. They also undertake
to pay regularly the electricity bills, phone bills etc.
The relationship arising out of these ancillary services is of principal-agent between the
customer and the bank. The proceeds of the cheques sent for collection, which are in
transit, not credited to the customer account are not the moneys of the banker till such
time as they are credited into the customer account
Indemnifier - Indemnified
The customer is indemnifier, and the bank is indemnified. A contract by which one party
promises to save the other from loss caused to him by the conduct of the promisor himself
or the conduct of any other person is called the contract of indemnity (u/s 124, Indian
Contract Act, 1872)

In banking, this relationship happens in transactions of issue of LC , BG, duplicate demand

draft, fixed deposit receipt etc. the underlying point in these cases is that either party will
compensate the other of any loss arising from the wrong/excess payment.
Bailor - Bailee

The bailment is the delivery of goods in trust. A bank may accept the valuables of his
customer such as jewellary, documents, securities for safe custody. In such cases the
customer is the Bailer, and the bank is Bailee.
As per section 148 of Indian Contracts Act, 1872, the delivery of goods from one person to
the other for some purpose upon the contract that the goods will be returned when the
purpose is accomplished
Pledger – Pledgee & Mortgagor - Mortgagee
When a customer pledges goods and documents as security for an advance, he then
becomes Pledger(Pawner), and the bank becomes the Pledgee(Pawnee). The pledged
goods are to be returned intact to the Pledger after the debt is repaid by him

Mortgage is the transfer of an interest in specific immovable property for the purpose of
securing the payment of money advanced or to be advanced by way of loan. When a
customer places a specific immovable property with the bank as security for advance, the
customer becomes Mortgagor, and the bank is the Mortgagee.
Different types of relationships - Exercise Bank Customer

Deposit a/c with bank Debtor Creditor

Loan from bank Creditor Debtor

Locker Lessor Lessee

Safe custody of articles Bailee Bailor

Collection of Bills/Cheques Agent Principal

Purchase of DD/MT/TT Debtors Creditors

Payment of Draft Trustee Beneficiary

Different types of relationships - Exercise Bank Customer

Pledge of goods Pledgee Pledgor

Mortgage Mortgagee Mortgagor

Standing Instruction Agent Principal

Hypothecation of goods Hypothecatee Hypothecator

Assignments of securities Assignee Assignor

Indemnity Indemnified Indemnifier

Termination of Banker – Customer
Relationship
• If customer wants to close the accounts
• If customer dies
• If customer becomes insane
• If customer becomes insolvent
• Banker may close the a/c by serving notice to a/c holder
Obligation of bank
About customer’s account, but under following circumstances Bank is under
Duty of obligation to disclose the customer information
Secrecy
a) Under compulsion of law
b) To protect the national interest
c) In the interest of the bank
d) With the implied consent of the customer
e) As per banking practices
f) Information demanded by guarantor

Duty to honor If the balance in the account permits debit of the cheque and
cheque
cheque is properly drawn
Duty to issue
pass-book Statements, information about a/c etc.

Duty to collect
cheques Bills, TTs etc.
Rights of bank

Right of Right of the creditor to retain the possessions of the goods and securities
general lien owned by the debtor until the debt due by the customer is paid.

Right of Right of the banker to adjust a debit balance in a customer’s

set-off account, with any balance o/s to his credit in the bank’s books

Right of It means the duty of the customer to specify the nature of the
appropriation transactions

Right to act as
per the If customer fails to mention the purpose, the banker has the right to
customer adjust the credit against any debit dues
mandate
Garnishee Order It is an attachment order issued by a competent court at
the request of a creditor to attach his debtor’s funds in
the hands of a Banker. Banker is Garnishee here.
It is issued in two stages:

This order requires the banker to explain as to why funds of the

Order depositors should not be attached, and bank is bound to stop
Nisi operation in the depositor's a/c, and immediately inform customer
about the receipt of the order

Court issues this order after the receipt of the explanation from the
Order bank and the bank should pay the amount to the court.
Absolute If no amount is mentioned, then the entire balance to be attached
Accounts to be attached

Accounts which are held in the same capacity in which the

order is issued

If the order is in the name of ‘A’, a joint account of A,B,C

cannot be attached

But if order is issued in the names of A,B,C; it will attach

both joint account and their individual accounts

Order in the name of A and the account of partnership firm

of A is a partner, then the firm account cannot be attached
Accounts to be attached

if the order is in the name of partnership firm, both firm

account and individual partner’s account can be attached

If the order is in the name of individual, it would extend any

account maintained by him in the of a firm as sole proprietor

Accounts held by a person as a trustee (Trust accounts) are

not attached issued in individual name
Types of assets not attached

Deceased person’s account

Insolvent person’s account
Funds held in safe custody, safe custody locker
Undrawn balance of cash – credit account
Unclear balance in SB/CD account

Credits/deposits given after receipt of the order

Bank is entitled to exercise its right of set off for all debt from the
customer before complying with the order
Income Tax Attachment Order
• As per 226(3) of IT Act, 1961, it can attach SB, CD term
deposit (payable on maturity), proceeds of collection items to
be credited to account
• Even though the order is received in a single name, it attaches
balance (pro-rata) in any joint account maintained by such
person
• Even the amount deposited after the receipt of order, it is
attachable
• No need to insist upon presentation of Deposit Receipt to
make payment
Procedure for attaching Joint Account
• IT attachment order attaches the funds held on account of a
deceased or insolvent depositor
• The order attaches the money held or that may be subsequently
held
• The bank is entitled to first exercise its right of set off before acting
on the order
• On receipt of the order the customer must be given notice
• Permission from higher office is to be obtained before remitting the
funds to ITO
• If bank fails to attach the amount it would be deemed to be an
ItAssessee
should beinmentioned
default that the order is sent to other joint account
holders.
Garnishee & IT Attachment Order
• Acknowledge receipt of the order by writing the exact time and
date
• Verify the order and ensure that it is against your customer
• Ascertain the attachable funds
• Mark caution
• Report the court within a period of time
• Inform the customer

If garnishee order and IT attachment order are received at the same

time, IT order should be given preference
Garnishee Order vs IT Attachment Order
Order issued by Court at request of creditor Order issued by the competent authority to attach
attaching the funds belonging to the debtor the balance lying in the account of defaulter

The credit balance available at the time of The credit balance in the account as well as
order is attached, not subsequent credits subsequent credits can also be attached
Before remitting money, bank can exercise Once the order is acted upon, bank can not exercise
their right of set-off right of ser off
The fund which is lying with the bank as It is attached to present fund and any fund which are
debtor of the customer is to be only attached to be credited to the customer’s account

If the order in single name, no joint account It is applicable proportionately to joint account
balance can be attached balance also

Fund lying in the account of deceased Funds lying in the account of deceased customer can
customer is not attachable be attached
THANK YOU
Relationship between
Bankers and
Customers - II
Types of Customers
Savings A/c Current A/c
Individuals and Individual Joint Accounts
HUF

Clubs, Associations & Societies

Trust

Govt., Quasi-govt., Boards, Development Authorities & Deptt

Minor’s Account Sole Proprietorship

Illiterate Person Partnership
Women Pvt. Ltd. Co., SFCs
Individuals
• Account generally opened with cash
• This is to protect bank’s interest under section 131 of the NI
Act
• “KYC” norms need to be followed
• Account can be opened as:
• Single holder with nominee (now compulsory until stated by
customer)
• Jointly
• Either or survivor
• Former or survivor
• All of them jointly or survivors/survivor
Minor
As per Indian Contract Act, a minor is not capable to execute a
contract and such contract is void. Thus, conditions are:
• A minor above 10 years can open SB account with ceiling of
maximum balance in the account
• Operations in the account by minor or by natural guardian
• Legal guardian cannot open a joint a/c
• Overdraft is not allowed in the account
• Date of majority to be recorded in the a/c
• Two minors cannot open a joint a/c
Illiterate persons
Though illiterate persons are competent to enter into a contract,
accounts are opened with following precautions:
• No cheque book to be issued
• No current a/c should be opened
• Joint a/c of two illiterates can be opened with operating
instructions as “jointly or survivor” but not “either or survivor”
• Joint a/c of illiterate with literate close relative can be opened
but no cheque book should be issued
Blind persons
Blind persons are competent to enter into a contract and can
maintain any type of bank a/c but with following precautions:
• Various risk in operations of the a/c should be explained to the
a/c holder
• Joint a/c with close relative can be opened
• Cash receipts and payments should be made in presence of
witness preferably another bank customer
• A/c opening form etc. should be stamped as “blind person”
• For withdrawal of the amount the a/c holder should come
personally.
Proprietorship firms
Its oldest and most common form of business where a single
individual owns, manages and controls business. It has following
features:
• Easy of formation
• No elaborate legal formalities
• Registration of the firm is not essential
• May need license specific to the line of business
• Owner is responsible for financing as well as profits of the business
• Complete control of business
• Firm has no legal existence separate from its owner
• Unlimited owner liability and extends beyond the capital invested
• Lack of continuity
Partnership firms
Group of individual partners bonded by Partnership Deed, who have agreed to
share profits of business carried by all or any of them, and thus, is not a legal
entity on its own. It requires:
• Association of two or more persons
• An agreement
• A business
• With sharing of profits and losses
• Under a mutual agency
• Max 50 partners
• A/c should be in the name of the firm and a/c opening form to be signed by all
partners
• A letter of partnership to be duly signed by all partners. if a minor is admitted
as partner, a letter of restrictive operations should be obtained
• Operating instructions for the bank a/c should be duly signed by all the
partners
• Stop payment of the cheque can be done by any partner, even if it is signed by
another partner
• Operations in the a/c are stopped in case of death, insolvency or lunacy of any
partner
Limited Liability Partnerships (LLP)
It’s a body corporate having separate legal existence with
characteristics of both partnership and private limited. Its features:
• Separate entity from partners, can own assets in its name, sue and
be sued
• Has perpetual succession
• Every partner is agent of the LLP
• It needs to be registered with ROC. The incorporation doc contains:
• Name of LLP with “LLP” as suffix and its proposed business
• Registered office address and details of each partner
• Name of the state incorporated is not required, and thus the
registered office can be changed to any place in India by informing
ROC subject to prescribed conditions
• These features are making it preferred for incorporation by SMEs
Limited Liability Partnerships (LLP) … cont
• Minimum of 2 and unlimited maximum no. partners
• Has separate legal entity from partners
• No minimum capital requirement (authorized or PUC)
• Has limited liability protection thus, protects personal assets of
promotors and partners
• Improves credibility as it is registered as corp. entity
• Lower incorporation fee and incorporation documents
fomalities
• Lesser compliance – no audit requirement unless annual sales
turnover > Rs. 40 lakhs or capital contribution > Rs. 25 lakhs
Limited Companies
Joint stock companies are incorporated and governed under Companies
Act 2013 (1956). Its features are:
• Separate legal entity different from its members
• Has perpetual existence
• Members liability limited to unpaid shares held
• There are three types of companies:
• Public Limited Company
• Private Limited Company
• Government Company
• For private unlisted company: max no. of members is 200 with max. 15
directors, unless specified in special resolution in AGM
• For listed company: additionally, they should have 1/3rd as Independent
Directors with minimum of 1 women director
• There is specific code of conduct for independent directors
Limited Companies …..cont
Also:
• Auditor to be appointed for min. of 5 years; and ratified in each
AGM
• No GOI permission for related party transactions; requires
prior consent from Board
• Borrowing > PUC + free reserves (subject to special resolution
of shareholders
• 2% of the average Net Profit of last 3 years should be spent
on CSR for companies with Net Worth >=Rs 500 cr. or
turnover >= Rs 1,000 cr. or Net Profit >= Rs 5 cr.
Limited Companies …..documents required
Certified true copy of the following documents for a/c opening:
• Certificate of incorporation
• Certificate of commencement of business in case of public limited
co.
• MOA – charter containing the name, registered office, main objects
of the company, liability of members and auth. capital
• AOA – bye-laws or rules and regulations for directors and other
officers will function, for management of internal affairs and conduct
of business, accounts and audit details
• Board resolution to open an a/c with the bank with operating
instructions
• List of present directors
Limited Companies …..precautions
• The a/c opening form should be signed as per the resolution
passed by the Board
• No introduction required as Certificate of Incorporation by
ROC serves the purpose
• Death of director does not affect the operation of the account
• A cheque payable to company should not be deposited in the
personal a/c of director
• Purpose clause of MOA must be verified while granting any
credit facility
Trust Accounts
A trust is an obligation annexed to the ownership of asset,
arising out of confidence reposed in a person/group of persons;
and accepted by him/them for the benefit of another or the
owner

The persons who accepts the confidence is called Trustee.

The instrument/document by which the trust is created is called

the ‘Trust Deed’
Trust Accounts …..documents

• Copy of the Trust Deed

• Copy of the certificate issued by the Charity Commissioner
• List of present trustees
• Resolution passed by the Trust to open and maintain an
account with the bank
• Operational instruction to operate the account
Executor & Administrator
A person to whom the execution of a will is entrusted by the
deceased (testator) is called Executor of the will

The executor is supposed to obtain a probate from the court

For a person who dies without leaving a will (intestate), the

court appoints a person to look after the property is called
administrator
Executor & Administrator …… precautions
• Copy of probate or letter of administration should be obtained
and verified with original
• An account in the name of executor/administrator is opened in
the style “XYZ executor/administrator of the estate of
…….deceased”
• No credit other than meant for the account of the estate of the
deceased be made to the accounts of executor/administrator
Hindu Undivided Family
This is legally recognized concept, where the affairs and
property of the joint Hindu family is managed by the eldest male
member (adult) known as ‘Karta’

The members (male as well as female except widow) of the

family are called ‘Coparceners’

HUF cannot be admitted as a partner in the partnership firm

Hindu Undivided Family …… precautions
• HUF letter should be signed by the Karta and all the major
coparceners
• The account is to be operated by the ‘Karta’ only
• Name of the minor coparceners should be kept on record and
on attaining the majority a fresh letter of HUF duly signed by
all to be obtained
• Death, lunacy, insolvency of the members does not affect the
operations in the account
Clubs & Associations
Clubs, Associations, Committees and Chit Funds etc. are not a
legal entity with no contractual powers unless incorporated
under the Companies Act. Documents required:
• Copy of Certificate of Registration
• Copy of bye-laws, rules and regulations
• Copy of resolution of the managing committee/governing body
etc.
• List of members of the managing committee
• No advance including TOD should be permitted
Cooperative Societies
A society is registered under the Society Registration Act, 1960.
Documents required:
• Copy of Certificate of Registration
• Copy of bye-laws, rules and regulations
• Copy of resolution of the managing committee/governing body
etc.
• List of members of the managing committee
• No advance including TOD should be permitted
Local Authorities
Such as Municipal Corporations, Zilla Boards etc. Documents
required:
• Copy of statute and provisions as to person authorized to open
the account
• These authorities have managing committee where President,
Vice President or Treasurer is given powers to open and
operate the bank a/c
• No overdraft is to be given in the account
Govt. Departments
• Copy of govt. notification should be obtained with details of
authorized person to open and operate the account

• Certified copy of rules and regulations framed by the

department for opening and operations of such accounts
should be obtained and compliance must be as per rules
without any deviation/s
THANK YOU
Housing and
Fiscal Incentives
Who can claim

on home loans?
Who can claim tax benefits on home loans?
Owner Borrower
Who can claim tax benefits on home loans?

Co-owner
Who can claim tax benefits on home loans?
Company

Partnership

Firm

Body Corporate
Tax deduction on principal repayment
Maximum of Rs
1,50,000 under Sectio
80C
Conditions
to claim HL
deduction
Conditions to claim HL deduction

Entirely completed

Completion Certificate
Conditions to claim HL deduction

Purchase / Construction Alteration / Repair

Conditions to claim HL deduction

APPROVED
Conditions to claim HL deduction

Actual principal repayment in a

Financial year
Conditions to claim HL deduction
Tax deduction on interest payment

Pre-construction Post-construction
Tax deduction on interest payment

Self-occupied
property
Tax deduction on interest payment

Loss from house

property
For claiming tax benefit
on interest of home
loan
Conditions to claim interest deduction
Conditions to claim interest deduction

Due basis

Actual
Payment basis
Conditions to claim interest deduction

Additional interest
deduction under section
80EE (01.04.2016)
Smart
tax-saving tips
Smart Tax saving tips

Joint holder of
loan
Smart Tax saving tips

Reinvesting
capital gains in
house property
Smart Tax saving tips

Reinvesting
capital gains
in specific
bonds
Smart Tax saving tips

Service charges and

Infrastructure status
to
Provisions declared in 2019 Budget

Allowed to have two self-owned house property

Provisions declared in 2019 Budget

LTCG exemption to invest in two separate residential

houses
Provisions declared in 2019 Budget

Spur demand for

residential houses
Housing Loan
• Case Study
• Appraisal of a Home Loan Proposal of Rs. 8.00 Lakhs
• Case Details
• Mrs. V (39 years) who is currently working as an
assistant teacher in a Govt. Primary School earning a
monthly salary of Rs.13825, approached to AXIS Bank,
Pune branch for availing a Home Loan. She is going to
purchase a new flat for her 3 members’ family & for
that reason bank assistance is required. As she is
maintaining a savings account with AXIS Bank, Pune
for last 4 years, she decided to approach this branch
first.
• The original cost of the flat is Rs. 15.30 lacs of
which Rs.50,000/- have already been paid by
the applicant as advance. She applied to the
bank for rest of the amount (i.e. Rs. 14.80
lacs). She proposed the name of her husband
Mr K, employed with a private trader’s shop,
as the co-applicant of the loan to enhance the
eligibility.
• Credit Assessment & Appraisal by the bank
• Quantum of a loan depends on various factors, like
applicant’s age, income, type of employment, cost of
the project etc.
• As per bank’s policy, (i) Maximum 90% of the cost of
the house / flat excluding Registration and Stamp duty
charges can be financed by the bank.
• The margin money is to be provided by the borrower.
Here the Margin requirement is 10% which is (15.30
lacs X 10%) = Rs. 1.53 lacs. So the remaining amount is
(15.30 lacs – 1.53 lacs) = Rs.13.77 lacs.
• (ii) Valuation of the property is done by bank’s
empanelled valuer / engineer. From the valuation
report, bank finds Fair Market Value, Open Market
Value, Forced Sale Value and Comparable Sale Value
of the property.
• Forced Sale Value is the amount that may reasonably
be received from the sale of a property under forced
sale conditions that do not meet all the criteria of a
normal market transaction. It is a price which arises
from disposition under extraordinary or atypical
circumstances.
• Here the FSV of the property is Rs. 13.26 lacs.
• Bank will finance that amount which is lower
between (i) & (ii), i.e. 90% of the total cost or
the Forced Sale Value whichever is lower will
be financed by the bank. In this case, 90% of
the cost of the flat is Rs. 13.77 lacs but the FSV
of the same is Rs. 13.26 lacs.
• So the applicant can get maximum Rs. 13.26
lacs as loan.
• In case of salaried individual, if the applicant is not a
permanent employee he/she will not be eligible for a home
loan & if the co-applicant is not a permanent employee
his/her income will not be taken into consideration while
calculating the eligible loan amount by the bank.
• In this case, Mr. K’s (Co-applicant) income can not be
considered by the bank for the computation of total income
because there is no deduction (like PF, Professional tax etc.)
in his salary statement & bank presumes that he is not a
permanent employee rather working on a contractual basis.
• So the bank appraises the loan only with the income of
Mrs. V. (i.e. Rs. 13825.00)
• The loan must be liquidated before 70 years of
age or age of retirement, whichever is earlier.
Bank fixes the maximum number of EMIs that
a borrower can avail by considering this
criterion. In this case, Mrs. V’s present age is
above 39 years & she has less than 21 years
left of her service. So she is eligible for 240
EMIs repayment schedule.
• Final calculation of eligible loan amount depends on the
income of the applicant.
• According to 40% income norms, one needs around 40% of
his/her income for personal expenses, all fixed obligations
including the home loan applied for, should be restricted to
a maximum of 60% of his/her gross monthly income.
• EMI of a home loan should not exceed 60% of an
individual’s gross salary (Average annual gross salary is
calculated from last 3 or 4 years Income Tax return).
• In this case, gross salary of the applicant is Rs.13,825/- per
month. So maximum EMI that can be deducted is (60% of
13,825) = Rs. 8295/-.
• From EMI chart EMI for Rs. 100 at 10% rate of
interest for 240 installments is 0.98164.
• On the basis of repaying capacity of applicant
of Rs. 8295 the maximum loan amount eligible
works out to:
100/0.98 X 8295 = 8,45,048
• The applicant may be sanctioned a loan of
Rs.8,45,000/-
• Concept of EMI/NMI ratio
Taking into consideration consumption needs
at low income is high and disposable income
improves with increase in income levels some
banks consider EMI/NMI ratio as a critical
factor.
• Housing loan
Annual income EMI/NMI
i) Up to Rs. 1.20 lac 20%
ii) Rs.1.20 to Rs.3.00 lacs 30%
iii) Rs.3.00 to Rs.5.00 lacs 55%
iv) Rs.5.00 to Rs.8.00 lacs 60%
v) Rs.8.00 to Rs.10 lacs 65%
vi) Above Rs.10 lacs 70%
• For purchase of Plot
Annual income EMI/NMI
i) Above Rs.3.00 to Rs.5.00 lacs 40%
ii) Above Rs.5 lacs to Rs.8 lacs 50%
iii) Above Rs.8 lacs to Rs.10 lacs 55%
iv) Above Rs.10 lacs 60%
• Case Study for home work
Name: Ms Yasmin Khanam Age : 35 years
Employed with CPWD as Asstt. Engineer.
Net monthly income: Rs. 60,000/-
Cost of House : Rs.65,00,000/-
Market Value : Rs. 62,00,000/-
Forced sale value: Rs.55,00,000/-
EMI for Rs 100 for 20 years at 10%: 0.98164
Margin : 20%
Requests a house loan of Rs 40,00,000/- repayable in 20
years.
Retail Banking Assets,
eligibility &
documentation
Characteristics of Retail Credit
• Small size loans
• Large number of customers (well diversified portfolio)
• Target customers are normally individuals or small enterprises
• Standard product offerings to simplify processes & delivery
• Decentralized and quick credit decisions to improve customer
satisfaction
• Centralized operations to reduce costs
• Risk management at portfolio level to reduce cost and manage
risk more effectively
Types of facilities
Loans Overdrafts
Enable customer to meet emergency
Entire amount of credit is disbursed requirement

Banks permit to withdraw more than the

Periodicity of instalments balance available in account

It is a one time facility It is need based

Types of facilities
Secured facilities Unsecured facilties
Do not have underlying security and are
Always secured by an underlying asset extended on the basis of credit worthiness of
against which funding is extended the applicant
Facility is appraised on the basis of
Also called as Asset Based Lending repayment capacity and character of
applicant

Guarantee: to increase recoverability of loans

A specific charge is created on the asset
it is customary to take guarantee from a third
against which credit is extended
party having sufficient worth

Ex. Mortgage loans, vehicle loans, equipment

Ex. Personal loans, credit cards
loans, loan against securities
Important terms

Interest
Fixed rate: interest is charged at a fix rate though-out of the tenure of the loan
Floating rate: interest is charged varies from time to time according to the changes of
interest rare.

Tenure

The period over which the loan has to be repaid

Important terms

Loan to value ratio

It is maximum percentage of the value of asset that will be given as loan

Loan eligibility
It is determined on the basis of :
Capacity to repay, and
Liquidity to repay
Important terms

Capacity to repay
Customer should have adequate income to repay loan comfortably.
For salaried employees net of al fixed outflows including repayment of past loans is
considered as disposable income

Income stream of the customer should be consistent and stable

The income is validated by income tax returns, salary slip, Form 16 from employer and
repayment track record by statement of account of previous loan and statement of account
of Saving Bank account
Important terms

Liquidity to repay
The customer should have liquidity and cash flow at point of time when repayment
becomes due

Surplus income cushion is also taken into consideration for assessing liquidity

It is validated by checking bank statements, nature of business/profession, repayment track

record etc.
Important terms

Credit scoring

It is a statistical method of predicting creditworthiness of applicant

Results in minimizing of subjectivity, with the objective of converting available information

into meaningful and interpretable number of the applicant

Scoring helps in managing risk better, standardizing decision making and bringing down TAT
Advantages of credit scoring
• Minimizes subjectivity in credit approval
• Ranks application according to risk involved
• Organization can specify its desired risk level
• Can be used as a basis for portfolio rating
• Facilitates quicker decision making
Important terms
List of certain profile of customer segments which
have exhibited higher tendency to default in the
Negative / Caution List past. It is classified as:

Profile/occupation of customer: persons in certain profession or occupation having higher

default rates based on past experiences and analysis

Location of customer: customers of a particular area having higher default based on

historical experience and such area may be classified under negative area

Past repayment history of customer: credit information bureau provide credit history of
people who have defaulted in their repayments with various banks and financial
institutions. RBI and Credit Bureau circulate the list of customers. RBI also circulate list of
terrorist individuals/entities to whom no kind of credit facility is to be extended
Important terms

Equated Monthly Installments (EMI)

Borrowers with salaried payment finds equated installments as convenient

EMI is calculated by first calculating the total interest payable during tenure of loan
assuming it to be repaid over regular installments

The total interest on principal is then divided by number of months the loan is to be repaid
Retail Credit Process
Account Account
acquisition management

Collecting Cheque Delinquency

Lead Document deposits or mgmt.
sourcing documents as
generation storage repayment (collection or
specified
mgmt recovery)

Credit
Conducting Preparing
evaluation &
verification customer files
decision Portfolio Customer
monitoring service

Completing
Disbursement & collecting
pre-disbursem
post-disbursement docs
ent formalities
Important terms

Account acquisition, lead generation & sourcing

Sourcing or lead generation is a process of identifying the prospective customer for selling
the loan products. It can be direct or indirect

Some of the means for direct sourcing are – tele-calling, selling to walk-in prospects in
branch, contacting through car dealer or consumer durables dealer through direct sales
agents etc.

Some of the means for indirect sourcing are – marketing campaigns, seminars, investment
awareness etc.
Basic documents required for
loan processing
Application form
Identity proof
Address proof
Photograph
Income documents – salary slip, form 16, IT return,
Audited financials etc
Proof of qualification

Proof of ownership of assets offered as security

Verifications

Field verification

Confirming the identity and address of the applicant

Authenticating and validating other applicant related information

Obtaining qualitative information on applicant’s credit profile by observing his lifestyle as

revealed by the status of his dwelling
Verifications

Tele-verification
Tele-calling the applicant’s residence and/or office with objective of establishing
contactability of the applicant

Verifying database of telephone company to check existence of telephone number at

address specified in application form and is the same as in the name of the applicant

Reference Check: is also done to check credentials of applicant through employer, principal
suppliers, associates, neighbors etc.
Verifications

Document verification

All the submitted documents are checked for authenticity and correctness at various stages

Initial screening is done by the field executive who collects the document

After the submission of file for processing, documents are again screened by credit
processing officer
Verifications

Check against negative list

Before extending any credit facility the details of the applicant are checked against
negative/caution list

In case of second-hand vehicles/equipment's and house property, valuation certificate is

obtained from govt. certified valuers approved by bank

In case of housing loans, the title deeds are examined by lawyer approved by bank. Lawyer
checks the details of property in registrar office for genuineness and non-encumbrance
Preparation of customer file and credit
memorandum

After verification the customer file is prepared along with the

necessary documentation. A credit memorandum is prepared
containing all the information about the applicant and
transaction
Credit evaluation and decision

A specialized credit appraisal team does the credit evaluation

Credit decisions taken by the credit team are governed by

detailed credit policies and operating notes issued regularly for
various products
Points considered for credit team are

Whether details provided by the applicant Whether applicant has the capacity to repay the
can relied upon? (authenticity) loan?

Whether the applicant has required liquidity Whether the applicant’s income would be stable and
to pay instalments on due dates? sustainable over the period of loan?
Whether the applicant’s employment history Whether the applicant can comfortably pay off his
and status of employer is ok? obligation even in unforeseen difficulties?
Whether the applicant has other sources of Whether the applicant has the desired intention to
income? repay the loan?

Whether the applicant has acceptable past Whether the asset taken as collateral serves as good
payment and cheque return record etc.? cover?

Whether the asset for secured loan has ease Whether the asset taken has value after
of taking possession and saleability? obsolescence and depreciation?
Credit evaluation methodology for retail loans
Target customers are individual or small enterprises

Small loans Large customer base

The customer base is large & well

The ticker size of retail loans is not very diversified. Well diversified portfolio takes
large and ranges around Rs. 50k to Rs. care of concentration risk of exposure to
1cr. The ticket size may go up for certain customer segment, industry or
mortgage or home loans geographies
Components of retail credit appraisal
Appraisal of retail loans involves analyzing proposal in terms of two primary risks

Customer risk Asset risk

It pertains to establishing the It pertains to underlying security against

creditworthiness of the customer which loan is extended
Components of retail credit appraisal

Customer risk
Capacity to repay customer has adequate income to repay the loan, disposable income is
considered to ascertain capacity, income stream should be consistent and stable. It is
validated by salary slip, form 16, track record etc.

Liquidity to repay at the point of time if repayment due. It is ascertained from conduct in
his bank account. Surplus income cushion is considered to assess the ability to take care of
exigencies. It is validated through bank statement, nature of profession/business,
repayment track record

Intention to repay is very subjective and difficult to ascertain. Past repayment track record,
conduct in bank a/c, good average balance, no cheque return, credit card payment record
and reference check are methods to ascertain intention to repay
Components of retail credit appraisal

Asset risk
Obsolescence risk arises due to rapid advancement in technology with high risk of security
being obsolete in shorter span of time. It also increases the tendency of customer to
default. Newer models and substitute results in poor demand for existing assets and less
resale value resulting to losses for the bank

Drop in value of asset depending on the type of asset, manufacturer, usage and
deployment and differs for each asset. It results in higher losses for bank in case of defaults

Deterioration in condition of asset may arise due to certain application of asset leading to
faster deterioration and poor resale value
Controlling asset risk
• Asset: careful selection of asset depending on type,
manufacturer, past performance report, current resale value,
market feedback and proposed usage of asset
• Loan amount: restrict loan amount for poor assets and niche
market assets
• Usage: loan amount should be structured keeping in view
proposed usage. For e.g. lower LTV for Taxi vehicles
• Tenor of loan: higher the tenor, higher the risk
• Loan to value ratio: higher the LTV higher the risk
Completion of pre-disbursement formalities
Once the loan is sanctioned the customer is informed about
sanction terms and conditions and the formalities to be
completed before disbursement namely:

• Signing of documents
• Submission of post dated cheques/ECS mandate
THANK YOU
CORPORATE CREDIT

∞ Need for Corporate Credit,

∞ Various Cs of Credit,
∞ Concepts of Lien, Pledge,
Hypothecation,Mortgage etc.
∞ Concepts of Multiple Banking Arrangements,
∞ Loan Consortium,
∞ Loan Syndication etc.
∞ Selection of Clients,
∞ Due Diligence
NEED FOR CORPORATE CREDIT
Type of Loan Purpose
/ Credit
Working A firm's working capital is the money it has available to meet current
Capital obligations (those due in less than a year) and to acquire earning assets
Finance ∙ To meet their operating expenses, purchasing inventory, receivables
financing, either by direct funding or by issuing letter of credit. Funded
facilities, i.e. the bank provides funding and assistance to actually
purchase business assets or to meet business expenses.
∙ Non-Funded facilities, i.e. the bank can issue letters of credit or can
give a guarantee on behalf of the customer to the suppliers,
Government Departments for the procurement of goods and services
on credit.
∙ Available in both Indian as well as Foreign currency
Line of ∞ Line of Credit to enable the clients to switch over
Credit between the various working capital facilities
sanctioned with relative ease as per their needs
compared to the prevalent system of restricting the
usage of funds within the maximum limits available
within a particular facility only
∞ Under the Line of Credit, instead of considering/
sanctioning separate limits for Cash Credit
(Stocks/Book Debts) and DA LC facilities, a
combined limit for Cash Credit (Stocks & Book
Debts)-cum-DA LC limit is sanctioned, with a
sub-limit for DA-LC facility.
Export Pre-Shipment Finance:
Finance ∙ Packing Credit / Running in Rupees or in Foreign Currency
∙ Letters of credit/Guarantees for procurement of materials for
export.
Post-Shipment Finance:
∙ Purchase of Export Documents under confirmed order.
∙ Discounting of Export documents under L/C or confirmed
order.
∙ Negotiation of documents under L/C.
∙ Post shipment demand Loans against Export Bills sent for
collection.
∙ Export Bills purchase / discounting in Foreign Currency.
∙ Advance against export incentive receivables.
Bill Finance 1. Purchase of bills drawn under L/C or confirmed order.
2. Discounting of usance bills drawn under L/C or confirmed
order.
3. Negotiation of documents under L/C.
4. Purchase of cheques.

Term ◉ Fund Based Finance for capital expenditure / acquisition of

Finance / fixed assets towards starting / expanding a business or
Loans industrial unit or to swap with high cost existing debt from
other bank / financial institution.

◉ Non-Fund Based Finance in the form of Deferred Payment

Guarantee for acquisition of fixed assets towards starting /
expanding a business or industrial unit.
Infrastructure This product enables funding for infrastructure projects, such
Finance as, Power Generation, Road Constructions, Construction of
Bridges on the Road / Railway Lines, Air/ Sea
Port-Development Activities, Telecom, Water Supply System,
Urban Development etc.
LC and Bank★ Letter of Credit: Import as well as domestic Letter of Credit
Guarantee facility to our clients for procurement of goods on DA/DP
basis as per their needs at very competitive rates.
Considering our international network of branches / offices
coupled with worldwide correspondent relationship
arrangements, our clients enjoy market acceptability and
comfort in business deals.
★ Bank Guarantee: Bank Guarantee facility to clients
guaranteeing their performance / financial obligations in the
domestic as well as international market.
Loan The owners approach banks for loans against securitisation of
against future rent receivables from such properties.
future rent
receivables

Bridge Bridge Loans for top rated corporate clients against expected
Loans equity flows/issues. Bank can also extend bridge loans
against the expected proceeds of Non-Convertible
Debentures, External Commercial Borrowings, Global
Depository Receipts and/or funds in the nature of Foreign
Direct Investments, provided the borrowing company has
already made firm arrangements for raising the aforesaid
resources/funds. This facility would be available for a period
not exceeding 12 months.
THE 5Cs of Credit
The 2 main Cs:
• Character - the person and the family
• Capacity/Cash-flow - technical, economic and financial feasibility and past
history of the activity

The 3 secondary Cs:

• Capital - funds invested in the business plan
• Collateral/Guarantees
• Conditions – Economic & Business environment
MEANING OF THE 5 Cs
• CHARACTER: does the borrower WANT to repay?

• CAPACITY: CAN the borrower repay?

• “COLLATERAL” or GUARANTEE: are there SUFFICIENT secondary repayment sources?

• CAPITAL: up to what level does the borrower PARTICIPATE in the risk of the business

• CONDITIONS: what is the company’s ENVIRONMENT?

CHARACTER
1. Honesty and integrity
2. Family situation
3. Skills for managing an economic activity
4. Family assets (net worth)
5. Reputation in the community
6. Openness and conformity with the market and the
community
7. Ability and habit of repaying previous credits
CAPACITY
• What does the business plan indicate about the revenue generation and the
profitability of the industrial and commercial activity?
• Can the individual/business produce enough money to honor the loan
repayments with interest, including a safety margin?
• When will the loan be repaid?
• What are the family needs?
• What are the consequences of seasonal fluctuations and production variations?
• How does the entrepreneur/farmer fare compared with others in the same
sector or the same activity?
• Is there a successor?
LOAN HISTORY
Has the client had loans in the past?
• How were they repaid?
• How were they managed?
• Were they late in repayment and, if so, what were the reasons?
• What is the evaluation of their previous credit managers?

Does the client have savings?

• What is the level of savings compared with the loan?
• What is the savings history?
COLLATERAL
The secondary sources for repayment of the loan:

• Are they personal guarantees from trustworthy individuals?

• Are the business’ assets and the personal guarantees enough to cover the
repayment of the loan if necessary?

But PLEASE NOTE – the guarantee is not a primary source of repayment

CONDITIONS
• Is there an adequate and stable market to support the business?

• Are the terms of the loan (duration, interest rate, etc.) well defined in relation to
the capacity for repayment?

• What are the price and production risks?

• What are the general trends of the sector market?

• Additional risks such as illness, etc.

CONCLUSION
The 5Cs = 5 factors for analyzing the loan risk

• “The art” is much more than knowing how to calculate! It’s the sense
of smell, the intuition and the emotional intelligence!

• Proper risk management depends on knowing what, when and how to

apply the analysis indicators and also how to analyze the borrower’s
social and personal factors.
PLEDGE, HYPOTHECATION, LIEN & MORTGAGE
Pledge ★ Example - Gold loans, Jewellry loans, advances against NSC
(National Saving Certificates) / Fixed Deposits
★ Bank keeps the securities with itself, and provide loan to you.
★ Bank will return the securities (possession of goods) to you
(borrower, known as pledgor), after you repay all the debts (i.e.,
loan) to the bank
★ It is used when the bank (or, lender, known as pledgee) keeps
actual possession of the securities, such as goods, certificates,
golds, etc, (you provide it to bank to avail loan) which are
generally movable in nature.. In case you are unable to pay
back, then the bank has the right to sell the assets, and recover
the loan amount (with interest).
PLEDGE, HYPOTHECATION, LIEN & MORTGAGE
Lien • It is almost similar to Pledge, except that in case of lien, the lender can
only detain the asset/goods until the borrower repays the loan, but have no
right to sell the asset, unless explicitly declared in the lien contract.
• (For a pledge, the lender can sell the asset, if the borrower is unable to
pay the loan)
Hypothec • Example - Car loans, other Vehicle loans, Working Capital Loans against
ation inventory,
• The assets (bus, car, etc.) remain with borrower, and goods / security is
hypothecated to the bank as security for the loan granted.
• In case borrower is unable to repay the loan amount, then the bank has
the right to sell the asset (bus, car, etc.), (which is under possession by
borrower) and recover the total amount (with interest).
Mortgage
• A mortgage is the transfer of an interest in some immovable
property. It is given by way of security for a loan. A person who
takes a loan and gives some security for repayment of the loan
in the form of transfer of some interest in any immovable
property, it is called a mortgage of property. The ownership of
the property remains in the debtor but some of his interests in
the property are transferred to the creditor who has given loan.
• In case of default the lender has right to recover his dues from
proceeds of mortgaged property.
CONCEPTS OF
MULTIPLE BANKING ARRANGEMENTS, LOAN CONSORTIUM & LOAN SYNDICATION

Credit needs of large borrowers may be met by banks in any of

the following ways:
•By sole
•By multiple banks
•On consortium basis
•On syndication basis
CONCEPTS OF
MULTIPLE BANKING ARRANGEMENTS, LOAN CONSORTIUM & LOAN
SYNDICATION

Sole This is lending by a single bank to a large borrower, subject

banking to the resources available with it and limited to the
exposure limits imposed by the Reserve Bank of India.
Multiple 1. When the credit requirements of a borrower are beyond
Banking the capacity of a single bank, the borrower may resort to
multiple banking i.e borrowing from a number of banks
simultaneously and independent of each other, under
separate loan agreements with each of them.
2. Securities are charged to them separately
Consortium
lending • In consortium lending system, two or more lenders join together to finance a
single borrower.
• The lending banks formally join together, by way of an inter-se agreement to meet
the credit needs of a borrower.
• Here, the sanction of limits to a borrower is completed with common appraisal,
common documentation and monitoring the advance with joint supervision and
follow-up exercises.
• The borrower company gives a mandate to a bank to lead the consortium, which is
commonly referred as a consortium lead (leader) bank.
• The consortium leader will be responsible for holding common loan/advance
documents executed by the borrower company on behalf of consortium. The
“Pari-Passu” Charge will be created on securities offered by the borrower company
against the total credit extend to the company by all the lending institutions of
consortium.
Loan ≠ It is an agreement between two or more banks to provide a borrower a credit facility using
Syndica common loan documentation.
tion ≠ The prospective borrower gives a mandate to a bank, commonly referred to a
‘Lead Manager, to arrange credit on his behalf. The mandate gives the commercial terms of
the credit and the prerogatives of the mandated bank in resolving contentious issues in the
course of the transaction.
≠ The mandated bank prepares an Information Memorandum about the borrower in consultation
with the latter and distributes the same amongst the prospective lenders, inviting them to
participate in the credit.
≠ On the basis of the Information Memorandum each bank makes its own independent
economic and financial evaluation of the borrower. It may collect additional information from
other sources also.
≠ Thereafter, a meeting of the participating banks is convened by the mandated bank to discuss
the syndication strategy relating to coordination, communication and control within the
syndication process and to finalise the deal timings, charges for management, cost of credit,
share of each participating bank in the credit etc.
≠ A loan agreement is signed by all the participating banks
≠ The borrower is required to give prior notice to the Lead Manager or his agent for drawing the
loan amount so that the latter may tie up disbursement with the other lending banks.
≠ Under the system, the borrower has the freedom in terms of competitive pricing
WHAT IS DUE DILIGENCE?

Establishing and verifying the genuineness of:

1. Identity of the persons in the business / Borrower (KYC)

2. Identity of the legal entity floated for undertaking the business and availing
the credit facilities (KYC)
3. Address of the persons and business (KYC)
4. Quality of the documents submitted to the Bank. (Verification)
5. Assessing ability to pay and willingness to pay (Credit Appraisal)
6. Whether transactions of the borrower are in line with the Business.
( Monitoring) 23
WHY DUE DILIGENCE?
To address the risk of :

1. Credit Default

2. Fraud

3. Money Laundering

4. Terrorist Financing

24
WHEN IS DUE DILIGENCE UNDERTAKEN?

Due diligence is an ongoing process and is undertaken:

1. At entry level – when new borrower avails credit for first time
2. At the time of appraisal
3. At the time of documentation
4. Prior to disbursement
5. Post Disbursement
6. Annually while renewing limits
7. On an ongoing basis of transactions in the business (to check diversion
/ money laundering / terrorist financing / fraud )
25
SCREENING OF NEGATIVE DATABASES
1. Credit Information Bureau such as CIBIL
2. Special Approval List (SPL) of ECGC
3. CERSAI Check
4. Caution list of RBI
5. Fraud list of IBA
6. Suit filed accounts in RBI website
7. Settled accounts
8. Declined proposals by the Bank
9. NGO Black list circulated by GOI
0. Negative list of Professional Service providers:
a. Chartered Accountant
b. Architect
c. Property Valuers
d. Lawyers for title clearance / Vetting
e. Gold appraisers
1. Terrorist list circulated by RBI / FIU / FATF / UNSCR 26
HOW TO UNDERTAKE DUE DILIGENCE?
1. CIBIL Check
2. CERSAI Check
3. CR from existing bankers
4. Independent Market information from competitors in the same line
5. Personal Interview with the applicant
6. Screening of negative database
7. Obtaining different Documents for identify, address, income and verification thereof.
8. PAN verification through NSDL website
9. Website of MCA for checking charge registration with ROC
10. Relying on third party service providers – CA, Lawyers, Architect, Valuers, Gold
appraisers etc
11. Physical verification of the person and the business place and assets financed
12. Pre-sanction and Post-Sanction visit
13. Checking authenticity of Machinery / Vehicle suppliers
14. Transaction monitoring on ongoing basis and Risk categorisation – High, Medium,
Low
15. Independent Securities verification with issuer of the security 27
CIBIL REPORT ANALYSIS
What does a CIBIL Report reveal?
1. Score of borrower
2. Asset Classification of the borrower
3. Suit filed status
4. Whether Wilful defaulter
5. Credit limits from other Banks including unsecured credit
6. Credit Card defaults
7. Delays and defaults in repayment
8. Whether the borrower has guaranteed any loans
9. BG invoked / LCs devolved
10. Accessing of the CIBIL database by Banks
11. Whether borrower has approached other banks for credit
12. Rejection of proposal by other banks
Limitations of Credit Information Bureau:
∙ Database is incomplete to the extent it is not updated with data from all banks
∙ Information relating to loans availed by borrower from financial institutions / finance
companies etc who are not members of CIBIL. 28
GENERAL CHECKPOINTS FOR DUE DILIGENCE OF BORROWERS
1. If something is too good to be true – be alert
2. Tax payments by borrower is a good indication of ability and willingness to pay
3. Due diligence is ongoing – Be alert and don’t lose guard - for a borrower even if
has dealt with bank satisfactorily for say 25 years
4. Is the business line of the borrower applicant relevant to your geographical
area?
5. Head should rule over Heart
6. Read all fraud circulars issued by the Bank / IBA
7. Have basic knowledge of the local laws applicable to the State where your are
located
8. Network with your peers in other Banks
9. Be careful of perfect documentation
0. Study the pattern of frauds in your geographical area
1. Don’t be pressurised to compromise
2. Complete all formalities before disbursement.
29
Q1 Balance sheet of a company:

Liabilities Assets

Capital(Net worth) 5.00 L Fixed Assets 16 L

Term Liabilities 10.00 L Current Assets 25 L

Current Liabilities ????

Q2

Liabilities Assets

Capital ??? Fixed assets + Non current assets 70 L

Term Loan ??? Current assets ???

Current liabilities ???

Total liabilities 100 L

If current ratio is 1.5:1 and Debt Equity is 3:1 work out current assets, current liabilities, long term
liabilities, capital and term loan
Q3

Liabilities Assets

Long Term liabilities ---- Fixed assets and Non current assets 10 L

Current liabilities ??? Current assets ???

__________________________________________________________________________________

Total liabilities 22 L Total assets 22 L

If current ratio is 1.2:1 what is level of current assets and current liabilities

Q4

Total sales: 500 L

Cost elements : Material : 70% and carriage 20%

Cost of material: ???

Cost of inventory: ???

Average inventory: 10 L

Average creditors: 14.6 L

Average debtors: 25 L

Calculate holding period for inventory, creditors and debtors

Working Capital Calculations
• Stock holding period
• (Average Inventory/Cost of goods Sold) x 365
for days
• Debtors holding period
• (Average Debtors/ Net sales ) x 365 for days
• Creditors holding period
• (Average Creditors/Purchases)x365 for days
Operating period
• Business information about M/S Megaplus, a
trading firm is as below:
• Total sales: Rs 500 lakhs
• Cost elements:
i) Material 70%ii) Overheads 20%
• Average stock of inventory: Rs10 Lakhs
• Average debtors: Rs 25 Lakhs
• Average creditors: Rs 14.6 Lakhs
• Total cost of Inventory: 500 x 90/100= 450
• Total cost of material purchased:
500 x 70/100= 350
• Inventory holding period:(10/450)x360 8d
• Debtors holding period: (25/500)x360 18d
• Creditors holding pd: 14.6/350x360 15d
Operating cycle and holding period
• Business information of M/S Wealth Creators
• Average inventories : 13 lakhs
• Average debtors : 22.5 Lakhs
• Average creditors : 14 Lakhs
• Purchase : 240 Lakhs
• Cost of goods sold : 260 Lakhs
• Sales : 300 Lakhs
Solution
• Inventory holding period:
(13/260)x 360 = 18 days
• Debtors holding period:
(22.5/300)x 360 = 27 days
• Creditors holding period:
(14/240)x 360 = 21 days
THANK YOU
RATIO ANALYSIS

Ratio-analysis is a concept or technique

which is as old as accounting concept.
Financial analysis is a scientific tool. It has
assumed important role as a tool for
appraising the real worth of an enterprise, its
performance during a period of time and its
pit falls. Financial analysis is a vital apparatus
for the interpretation of financial statements. It
also helps to find out any cross-sectional and
time series linkages between various ratios.
RATIO ANALYSIS

Unlike in the past when security was considered to

be sufficient consideration for banks and financial
institutions to grant loans and advances, nowadays
the entire lending is need-based and the emphasis is
on the financial viability of a proposal and not only on
security alone. Further all business decision contains
an element of risk. The risk is more in the case of
decisions relating to credits. Ratio analysis and other
quantitative techniques facilitate assessment of this
risk.
RATIO ANALYSIS

Ratio-analysis means the process of

computing, determining and presenting the
relationship of related items and groups of
items of the financial statements. They
provide in a summarized and concise form
of fairly good idea about the financial
position of a unit. They are important tools
for financial analysis.
Ratio Analysis
It’s a tool which enables the banker or lender
to arrive at the following factors :
Liquidity position
Profitability
Solvency
Financial Stability
Quality of the Management
Safety & Security of the loans & advances
to be or already been provided
Before looking at the ratios there are a number of cautionary
points concerning their use that need to be identified :

a.The dates and duration of the financial statements being

compared should be the same. If not, the effects of
seasonality may cause erroneous conclusions to be drawn.

b.The accounts to be compared should have been prepared on

the same bases. Different treatment of stocks or
depreciations or asset valuations will distort the results.

c.In order to judge the overall performance of the firm a group

of ratios, as opposed to just one or two should be used. In
order to identify trends at least three years of ratios are
normally required.
The utility of ratio analysis will get further
enhanced if following comparison is
possible.

1. Between the borrower and its competitor

2. Between the borrower and the best
enterprise in the industry
3. Between the borrower and the average
performance in the industry
4. Between the borrower and the global
average
How a Ratio is expressed?
⚫ As Percentage - such as 25% or 50% . For
example if net profit is Rs.25,000/- and
the sales is Rs.1,00,000/- then the net
profit can be said to be 25% of the sales.
⚫ As Proportion - The above figures
may be expressed in terms of the
relationship between net profit to sales
as 1 : 4.
⚫ As Pure Number /Times - The same
can also be expressed in an alternatively
way such as the sale is 4 times of the net
profit or profit is 1/4th of the sales.
Classification of Ratios
Balance Sheet P&L Ratio or Balance Sheet
Ratio Income/Revenu and Profit &
e Statement Loss Ratio
Ratio
Financial Ratio Operating Ratio Composite Ratio
Current Ratio Gross Profit Ratio Fixed Asset
Quick Asset Operating Ratio Turnover Ratio,
Ratio Expense Ratio Return on Total
Proprietary Net profit Ratio Resources Ratio,
Ratio Stock Turnover Return on Own
Debt Equity Ratio Funds Ratio,
Ratio Earning per
Share Ratio,
Debtors’
Turnover Ratio,
FormatLIABILITIES
of balance sheet for ratio analysis
ASSETS
NET WORTH/EQUITY/OWNED FIXED ASSETS : LAND & BUILDING,
FUNDS PLANT & MACHINERIES
Share Capital/Partner’s Capital/Paid up Original Value Less Depreciation
Capital/ Owners Funds Net Value or Book Value or Written down
Reserves ( General, Capital, Revaluation value
& Other Reserves)
Credit Balance in P&L A/c
LONG TERM NON CURRENT ASSETS
LIABILITIES/BORROWED FUNDS : Investments in quoted shares &
Term Loans (Banks & Institutions) securities
Debentures/Bonds, Unsecured Loans, Old stocks or old/disputed book debts
Fixed Deposits, Other Long Term Long Term Security Deposits
Liabilities Other Misc. assets which are not current
or fixed in nature
CURRENT LIABILTIES CURRENT ASSETS : Cash & Bank
Bank Working Capital Limits such as Balance, Marketable/quoted Govt. or
CC/OD/Bills/Export Credit other securities, Book Debts/Sundry
Sundry /Trade Creditors/Creditors/Bills Debtors, Bills Receivables, Stocks &
Payable, Short duration loans or deposits inventory (RM,SIP,FG) Stores & Spares,
Expenses payable & provisions against Advance Payment of Taxes, Prepaid
various items expenses, Loans and Advances
recoverable within 12 months
INTANGIBLE ASSETS
Some important notes
⚫ Liabilities have Credit balance and Assets have Debit
balance
⚫ Current Liabilities are those which have either become
due for payment or shall fall due for payment within 12
months from the date of Balance Sheet
⚫ Current Assets are those which undergo change in their
shape/form within 12 months. These are also called
Working Capital or Gross Working Capital
⚫ Net Worth & Long Term Liabilities are also called Long
Term Sources of Funds
⚫ Current Liabilities are known as Short Term Sources of
Funds
⚫ Long Term Liabilities & Short Term Liabilities are also
called Outside Liabilities
⚫ Current Assets are Short Term Use of Funds
1. Current Ratio : It is the relationship between the
current assets and current liabilities of a concern.
Current Ratio = Current Assets/Current
Liabilities
If the Current Assets and Current Liabilities of a
concern are Rs.4,00,000 and Rs.2,00,000
respectively, then the Current Ratio will be :
Rs.4,00,000/Rs.2,00,000 = 2 : 1
The ideal Current Ratio preferred by Banks is
1.33 : 1

2. Net Working Capital : This is worked out as

surplus of Long Term Sources over Long Tern
Uses, alternatively it is the difference of Current
Assets and Current Liabilities.
NWC = Current Assets – Current Liabilities
Current Assets : Raw Material, Stores, Spares, Work-in Progress. Finished
Goods, Debtors, Bills Receivables, Cash.

Current Liabilities : Sundry Creditors, Installments of Term Loan, DPG etc.

payable within one year and other liabilities payable within one year.

This ratio must be at least 1.33 : 1 to ensure minimum margin of 25% of current
assets as margin from long term sources.

❑ Current Ratio measures short term liquidity of the concern and its ability to meet
its short term obligations within a time span of a year.
❑ It shows the liquidity position of the enterprise and its ability to meet current
obligations in time.
❑Higher ratio may be good from the point of view of creditors. In the long run very
high current ratio may affect profitability ( e.g. high inventory carrying cost)
❑ Shows the liquidity at a particular point of time. The position can change
immediately after that date. So trend of the current ratio over the years to be
analyzed.
❑ Current Ratio is to be studied with the changes of NWC. It is also necessary to
look at this ratio along with the Debt-Equity ratio.
3. ACID TEST or QUICK RATIO : It is the ratio between Quick Current
Assets and Current Liabilities. The should be at least equal to 1.

Quick Current Assets : Cash/Bank Balances + Receivables upto 6 months +

Quickly realizable securities such as Govt. Securities or quickly marketable/quoted
shares and Bank Fixed Deposits

Acid Test or Quick Ratio = Quick Current Assets/Current Liabilities

Example :
Cash 50,000
Debtors 1,00,000
Inventories 1,50,000 Current Liabilities 1,00,000
Total Current Assets 3,00,000

Current Ratio = > 3,00,000/1,00,000 = 3:1

Quick Ratio => 1,50,000/1,00,000 = 1.5 : 1
4. DEBT EQUITY RATIO : It is the relationship between
borrower’s fund (Debt) and Owner’s Capital (Equity).

Long Term Outside Liabilities / Tangible Net Worth

Liabilities of Long Term Nature

Total of Capital and Reserves & Surplus Less Intangible Assets

For instance, if the Firm is having the following :

Capital = Rs. 200 Lacs

Free Reserves & Surplus = Rs. 300 Lacs
Long Term Loans/Liabilities = Rs. 800 Lacs

Debt Equity Ratio will be => 800/500 i.e. 1.6 : 1

5. PROPRIETARY RATIO : This ratio indicates the extent to which
Tangible Assets are financed by Owner’s Fund.
Proprietary Ratio = (Tangible Net Worth/Total Tangible
Assets) x 100
The ratio will be 100% when there is no Borrowing for purchasing
of Assets.

6. GROSS PROFIT RATIO : By comparing Gross Profit percentage to

Net Sales we can arrive at the Gross Profit Ratio which indicates the
manufacturing efficiency as well as the pricing policy of the concern.

Gross Profit Ratio = (Gross Profit / Net Sales ) x 100

Alternatively , since Gross Profit is equal to Sales minus Cost of

Goods Sold, it can also be interpreted as below :

Gross Profit Ratio = [ (Sales – Cost of goods sold)/ Net Sales]

x 100
A higher Gross Profit Ratio indicates efficiency in production of the unit.
7. OPERATING PROFIT RATIO :

It is expressed as => (Operating Profit / Net Sales ) x 100

Higher the ratio indicates operational efficiency

8. NET PROFIT RATIO :

It is expressed as => ( Net Profit / Net Sales ) x 100

It measures overall profitability.

EXERCISE 1

LIABILITES ASSETS
Capital 180 Net Fixed Assets 400
Reserves 20 Inventories 150
Term Loan 300 Cash 50
Bank C/C 200 Receivables 150
Trade Creditors 50 Goodwill 50
Provisions 50
800 800

a. What is the Net Worth : Capital + Reserve = 200

b. Tangible Net Worth is : Net Worth - Goodwill = 150
c. Outside Liabilities : TL + CC + Creditors + Provisions = 600
d. Net Working Capital : C A - C L = 350 - 300 = 50
e. Current Ratio : C A / C L = 350 / 300 = 1.17 : 1
f. Quick Ratio : Quick Assets / C L = 200/300 = 0.66 : 1
Exercise 2.

LIABIITIES ASSETS
Equity Capital 200 Net Fixed Assets 800
Preference Capital 100 Inventory 300
Term Loan 600 Receivables 150
Bank CC (Hyp) 400 Investment In Govt. 50
Secu.
Sundry Creditors 100 Preliminary Expenses 100
Total 1400 1400

1. Debt Equity Ratio will be : 600 / (200+100) = 2:1

2. Tangible Net Worth : 200+100-100 = 200

3. Total Outside Liabilities / Total Tangible Net Worth : (600+400+100) / 200

= 11 : 2

4. Current Ratio will be : (300 + 150 + 50 ) / (400 + 100 ) = 1 : 1

Exercise 3.
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550

Q. What is the Current Ratio ? Ans : (1+125 +128) / (38+26+9+15)

: 254/88 = 2.89 : 1

Q What is the Quick Ratio ? Ans : (125+1)/ 88 = 1.43 : 11

Q. What is the Debt Equity Ratio ? Ans : LTL / Tangible NW

= 100 / ( 362 – 30)
= 100 / 332 = 0.30 : 1
Exercise 3. contd…
LIABILITIES ASSETS
Capital + Reserves 355 Net Fixed Assets 265
P & L Credit Balance 7 Cash 1
Loan From S F C 100 Receivables 125
Bank Overdraft 38 Stocks 128
Creditors 26 Prepaid Expenses 1
Provision of Tax 9 Intangible Assets 30
Proposed Dividend 15
550 550

Q . What is the Proprietary Ratio ? Ans : (T NW / Tangible Assets) x 100

[ (362 - 30 ) / (550 – 30)] x 100
(332 / 520) x 100 = 64%
Q . What is the Net Working Capital ?
Ans : C. A - C L. = 255 - 88 = 167
Exercise 4. : Profit to sales is 2% and amount of profit is say
Rs.5 Lac. Then What is the amount of Sales ?

Answer : Net Profit Ratio = (Net Profit / Sales ) x 100

2 = (5 x100) /Sales
Therefore Sales = 500/2 = Rs.250 Lac
Exercise 5. A Company has Net Worth of Rs.5 Lac, Term
Liabilities of Rs.10 Lac. Fixed Assets worth RS.16 Lac and
Current Assets are Rs.25 Lac. There is no intangible Assets
or other Non Current Assets. Calculate its Net Working
Capital.
Answer
Total Assets = 16 + 25 = Rs. 41 Lac
Total Liabilities = NW + LTL + CL = 5 + 10+ CL = 41 Lac
Current Liabilities = 41 – 15 = 26 Lac

Therefore Net Working Capital = C. A – C.L

= 25 – 26 = (- )1 Lac
Exercise 6 : Current Ratio of a concern is 1 : 1. What will be the Net
Working Capital ?

Answer : It suggest that the Current Assets is equal to Current Liabilities

hence the NWC would be NIL ( since NWC = C.A - C.L )

Exercise 7 : Suppose Current Ratio is 4 : 1. NWC is Rs.30,000/-. What

is the amount of Current Assets ?

Answer : 4a - 1a = 30,000
Therefore a = 10,000 i.e. Current Liabilities is Rs.10,000
Hence Current Assets would be 4a = 4 x 10,000 = Rs.40,000/-
Exercise 8: Total Liabilities of a firm is Rs.100 Lac and Current Ratio is
1.5 : 1. If Fixed Assets and Other Non Current Assets are to the tune of
Rs. 70 Lac and Debt Equity Ratio being 3 : 1. What would be the Long
Term Liabilities?

Ans : We can easily arrive at the amount of Current Asset being Rs. 30 Lac
i.e. ( Rs. 100 L - Rs. 70 L ). If the Current Ratio is 1.5 : 1, then Current
Liabilities works out to be Rs. 20 Lac. That means the aggregate of Net
Worth and Long Term Liabilities would be Rs. 80 Lacs. If the Debt Equity
Ratio is 3 : 1 then Debt works out to be Rs. 60 Lacs and equity Rs. 20 Lacs.
Therefore the Long Term Liabilities would be Rs.60 Lac.

Exercise 9 : Current Ratio is say 1.2 : 1 . Total of balance sheet being

Rs.22 Lac. The amount of Fixed Assets + Non Current Assets is Rs. 10
Lac. What would be the Current Liabilities?

Ans : When Total Assets is Rs.22 Lac then Current Assets would be 22 – 10
i.e Rs. 12 Lac. Thus we can easily arrive at the Current Liabilities figure
which should be Rs. 10 Lac
THANKS
WORKING

CAPITAL

FINANCING
OPERATING CYCLE/ WORKING CAPITAL CYCLE

Raw Material

Cash/Creditors Stock-in-Process

Debtors Finished Goods

State Bank of India

OPERATING CYCLE

30 Cash
Days 60
Days
Bills Raw
Receivable Material
OPERATING
CYCLE

20 Finished Stock in
Goods Process 10
Days
Days

Length of Operating Cycle = 60+10+20+30 = 120 days

i.e. 3 Cycles in a year (365 / 120)
WORKING CAPITAL

WC Assessment is outcome of two variables:

• The volume of activity – Production & Sales

• Required level of current assets
(Inventory & Receivables) to enable the unit
to carry on operations without interruptions
WHAT ARE WORKING CAPITAL SOURCES?

❖Own funds
❖Bank borrowings
❖Sundry Creditors
❖Advances from customers
❖Deposits due in a year
❖Other current liabilities
WORKING CAPITAL LIMIT

• Generally for 12 months,

or
• Seasonal industry – short duration / Peak & Non-peak
level,
or
• Subject to specific repayment schedule, viz EPC

Renewal necessary (within a year to avoid its becoming NPA)

WORKING CAPITAL ASSESSMENT
Working Capital Assessment Methods:
? Operating Cycle Method
? Projected Annual Turnover method (Nayak
Committee)
? Traditional method
? Projected Balance Sheet method
? Cash Budget method
OPERATING CYCLE
Time taken between cash outlay and cash realisation through sale of
finished goods & realisation of receivables is known as length of operating
cycle. Consists of:

• Time taken to acquire and average storage period of raw material

• Conversion process time

• Average period for which finished goods are in store

• Average collection period of receivables (Sundry Debtors)

Operating Cycle Method

Working capital requirement

Operating expenses
---------------------------------------
No. of operating cycles in a year
Operating Cycle Method
A. Length of operating Cycle

a. Procurment of Raw Material 30 days

b. Conversion / Process time 15 days
c. Average time of holding of FG 15 days
d. Average Collection Period 30 days
e.Operating Cycle (a+b+c+d) 90 days
f. Operating Cycle in a year (365days/e) 4 cycle
…..Operating Cycle Method
• B. Total Operating Expenses per Rs 60.00 lakhs
Annum
C. Total Turnover per Annum Rs 70.00 lakhs
D. Working Capital Requirement Rs 15 lakhs
= Total Operating Expenses (B)/ No.
of operating Cycle ( as said earlier)
OPERATING CYCLE: PERMISSIBLE BANK FINANCE (another example)
Operating cycle is 120 day (4 months) or 3 cycles in a year

Sales (P.A.) Rs. 200000/-

Operating expenses Rs.180000/-
What is Working Capital requirement?
Operating Expenses 180000
--------------------------- = ---------- = Rs 60000/-
No of cycles per annum 3

Thus, Working Capital requirement is influenced by:

a) Level of operating expenses or Level of Operations.
b) Length of operating cycle.
Reduction in either will bring down WC requirement.
Reduction also indicates improved efficiency in WC Mgt.
PROJECTED TURNOVER METHOD (NAYAK COMMITTEE)
• Up to FBWC Limit of Rs. 5 crores - SME

• WC Requirement = 25% of realistic Projected Annual Turnover

(min. 5% of turnover to be brought by borrowers as their
contribution)
TURNOVER METHOD
COMPUTATION
A. Annual Turnover as projected by Borrower
B. Turnover as accepted by Bank
C. Working Capital Requirement (25% of B)
D. Minimum margin required (5% of B)
E. Actual Margin available (CA - CL)
F. Item C - item D
G. Item C - item E
H. Min. WC Finance - F or G, whichever is less
PROJECTED ANNUAL TURNOVER METHOD
COMPUTATION
A. Annual Turnover as projected by Borrower 1200
B. Turnover as accepted by Bank 1200
C. Working Capital Requirement (25% of B) 300
D. Minimum margin required (5% of B) 60
E. Actual Margin available (CA - CL) 20
F. Item C - item D 240
G. Item C - item E 280
H. Min. WC Finance - F or G, whichever is less 240
TRADITIONAL METHOD
Name of the Unit: ABC Ltd Credit on purchases 80 (Rs. In 000’s)
Anticipated monthly sales = 200 Cost of Production per month =190
Cost of Raw Material per month = 150 Advance Payments from Customers 30
Item Stocking / WC Margin Amt Permissible
Payment required (%) Limit
period
Raw Material 1m 25
Work in process 2w 25
Finished Goods 2w 25
Receivable 1m 33
Expenses 1m 100
Total
Less: Advance Payment
Credit on purchase
Working Capital Required
Liquid surplus in BS at the end of last year = 50 Net Deficit
Pl work out Cash Credit Limit from Bank
TRADITIONAL METHOD
Name of the Unit: ABC Ltd Credit on purchases 80 (Rs. In 000’s)
Anticipated monthly sales = 200 Cost of Production per month = 190
Cost of Raw Material per month = 150 Advance Payments from Customers 30
Item Stocking / WC Margin Amt Permissible
Payment required (%) Limit
period
Raw Material 1m 150 25 37 113
Work in process 2w 95 25 24 71
Finished Goods 2w 95 25 24 71
Receivable 1m 190 33 66 134
Expenses 1m 40 100 40 00
Total 570 389
Less: Advance Payment 30
Credit on purchase 80
Liquid surplus in BS at the end of last year = 50 Net Deficit 460 - 50 = 410
Working Capital Required
Cash Credit Limit from Bank = 390
460
RATIOS ASSOCIATED WITH WORKING CAPITAL MANAGEMENT

Stock Turnover Ratio COGS

(Times) AVERAGE STOCK
Stock Turnover Ratio (Days) Average Stock x 365
COGS
Receivables Turnover Ratio Net Credit Sales
(Times) Average Accounts Receivable
Average Receivables Period Avg A/C Receivable x 365
(Days) Net Credit Sales
Payables Turnover Ratio Net Credit Purchases
(Times) Average Accounts Receivable
Average Payables Period Avg A/C Payable x 365
(Days) Net Credit Payables
Current Ratio Current Assets
Current Liabilities
Quick Ratio CA – Stock(RM)
Current Liabilities
Working Capital Turnover Net Sales
Ratio Net Working Capital
THANK YOU
Risk Management
Concept of Risk

Rischaire

It is an Italian word which means “to run into danger”

According to Basel Committee

“risk is the probability of the unexpected happening – the probability of

suffering a loss”
R– Rare

I– Incident

S– Selection

K– Knocking
Uncertainty Vs Risk
Nature of risk

Predictable Unpredictable
Sources of risk for banks

Retail

Commercial

Investment Banking

Treasury
Risk Management

Risk management eliminates the adverse effects

of banking activities
Importance of risk management in banks
• Globalized banking environment
• Only quantitative approach for handling risk is not sufficient
• Increase in competition, removal of barriers for new business
• New and innovative financial products
• Technology revolution
• To follow the “Risk Return Discipline”
• Is part of the Three Pillars principle of BASEL norms
Risk Management Objectives
Internal External
To ensure compliance with regulatory
To safeguard business assets and reputation requirements

To help improve the business’s operating To deliver competitive advantage

performance and shareholders value

To improve efficiency by reducing risk To reassure stakeholders and interest groups

exposure inherent in the business processes that the business is actively managing risk

To support the achievement of strategic

goals
Risk Management process

Risk Risk Risk Risk Risk

identification assessment mitigation monitoring reporting
Need of risk management system in banks
• Give weightage appropriate to each risk
• Methodology and models of risk evaluation built into the
system
• Separate policy for each segment of risk
• To do appropriate MIS
• Clearly defined functional powers and responsibilities
• Clear back testing process
Quantification of risk exposure

Value at risk (VaR) Credit Exposures

Loss of Systems and Controls

Business risk in banks
The Audit Commission in its 2001 paper “Worth the Risk,
Improving Risk Management in Local Government, defines
business risk as:

“the threat that an event or action will adversely affect an

organization’s ability to achieve its business and strategic
objectives.”
Types of business risk in
banks
Market risk It arises from the fluctuation in the values, or income from assets

Credit risk It occurs whenever a firm is exposed to loss if another party fails to
perform its obligations
Operationa It is the risk of loss, resulting from inadequate or failed internal
l risk processes, people, or systems, or from external events
Liquidity It arises when a bank does not maintain sufficient financial
risk resources to meet its liabilities as they fall due
Interest
rate risk It arises when NIM is affected due to changes in the interest rates
Benefits of effective risk management system
• Increased risk awareness
• Prioritization of business risks to those that matter
• Fewer unexpected and unwelcome surprises
• A better focus internally on doing the right things properly
• Reduced losses through process improvements developed by
the business
• Providing a better basis for making key strategic decisions
• Increasing the chance of change initiatives being achieved
• Creating a greater likelihood of achieving business goals and
objectives
C– Capital Adequacy

A– Asset Quality

Approach to M– Management Competence

Risk Management

E– Earnings

L– Liquidity

S– Systems
THANK YOU
Basel Accord
Basel Committee
• BCBS framework on capital adequacy
• RBI decided to introduce this in India in 1992 to introduce
assessment ratio system for banks – as capital adequacy
measure
• Capital adequacy – balance sheet assets and off-balance sheet
exposures are assigned prescribed risk weights, and
• Banks must maintain minimum capital funds equivalent in the
prescribed ratio
• On the aggregate of the risk weighted assets and other exposure on
ongoing basis
Basel I
• Introduced in 1988
• Developed standardized risk-based capital requirement
(known as standardized approach)
• It was 8% of the total assets base
• Faced criticism for one-size fits all policy
• Not suitable for bigger banks with huge asset base in retail segment
Basel II
• Replaced Basel I with New Capital Adequacy Framework
(known as Basel II) introduced in June 2004
• Introduced 3 pillars
• Minimum capital requirement
• Supervisory review – of institution’s capital adequacy and internal
assessment process
• Market discipline – through effective disclosure to encourage safe
and sound banking practices
• Allow banks and banking regulators to evaluate various risks
Basel guidelines
• These accords deal with risk management aspects for the
banking sector
• Basel I and II are earlier version of Basel Accord
• Basel I only dealt with Credit Risk (that too, in a very simple
manner), Market Risk was lightly touched as afterthought, and
operational risk was not dealt with at all
• The final accord of Basel guidelines (Basel III) addressed the
regulatory arbitrage issue, there are still areas where
regulatory capital requirement will diverge from the economic
capital
Basel III
• Third in the series of Basel accord was introduced in
December, 2010
• It introduced global regulatory standards on –
• Bank capital adequacy – quality of capital augmented
• Stress testing – modification of provisioning norms
• Market liquidity risk – introduction of liquidity standards
• Better and more comprehensive disclosures
Three Pillars of Basel guidelines
Pillar 1 – Minimum Capital Requirement
• Maintenance of regulatory capital calculated for three major risk – credit,
operational, and market
• Credit risk is calculated in three ways
• Standardized approach
• Foundation IRB approach
• Advanced IRB approach with General restrictions
• Operational risk calculated in three ways
• Basic Indicator approach
• Standardized approach
• Internal or Advanced measurement Approach
• Market risk is measured as –
• VaR (Value at Risk)
Pillar 1 – Minimum Capital Requirement
•

Total Capital must be at least 9% of RWAs in India (8% as per Basel guidelines)
Pillar 1 – Minimum Capital Requirement
Tier 1 capital - is Core Capital – absorbs losses without ceasing normal
banking business

Tier 1 capital = paid-up share capital

+ reserves (statutory, general, capital)
+ retained earning
+ share premiums
- intangible assets

Common equity in tier 1 capital must be at least 5.5% of RWAs

Total tier 1 capital must be at least 7% of RWAs

Pillar 1 – Minimum Capital Requirement
Tier 2 capital - is Supplementary Capital – measure of bank’s financial
strength, absorbs losses, provides lesser degree of protection to
depositors

Tier 2 capital = undisclosed reserves

+ general debt provision
+ revaluation reserves
+ subordinate debt
- redeemable preference shares

Tier 3 capital = subordinate debt with a maturity of at least 2 years

Pillar 1 – Minimum Capital Requirement
Risk Weighted Assets (RWAs) = capital charge on -
+ credit risk
+ operational risk
+ market risk

Credit Risk = investor risk of loss arising out of non-payment of interest from borrowers

Operational risk = loss from inadequate or failed internal process, people, system, or
external events
Market risk = decrease in value of portfolio or investment or trading portfolio due to change
in value of market risk factors
Pillar 2 – Supervisory Review
• It is a risk management and regulatory response to Pillar 1
• Provides framework for managing all residual risks as defined
in Basel accord. Residual risks are – systemic risk, pension
risk, concentration risk, strategic risk, reputational risk, liquidity
risk, and legal risk.
• This framework gave the Internal Capital Adequacy
Assessment Process (ICAAP)
Pillar 2 – Supervisory Review
• The regulator supervises the bank’s risk management
processes to assess the maintenance of minimum capital vis-
à-vis risk taken
• Regulator assess following things in bank’s
• Process for assessing overall capital adequacy
• Strategy for maintaining capital levels
• Periodic reviews done by regulator
• Operate above minimum capital ratios
• Hold capital in excess of the minimum stipulated

Regulator can intervene at early stages to prevent capital falling below minimum levels
Pillar 3 – Market discipline
• Banks have to disclose the details of at least twice a year
• Scope of application of disclosures
• Capital risk exposures
• Risk assessment processes
• Capital adequacy of banks
• Assessment and management of risk by senior management and
board member of the bank (to be disclosed annually)
Pillar 3 – Market discipline
• It ensures disclosures and transparency in operation of banks
• Disclosure requirements allow market participants to gauge
the capital adequacy of banks
• Supplements regulator as sharing of information facilitates
assessment of banks by others – such as investors,
customers, other banks, and rating agencies – which leads to
good corporate governance
THANK YOU
Basel III
Basel III
In addition to three pillars, this accord introduced three
concepts to enhance regulatory standards

Capital Buffers Leverage Ratios Liquidity Ratios

Also, enhanced

Provisioning Norms Disclosure Requirements

Basel III - introduced
Capital Conservation Buffer 2.5% of RWAs

Raised the total capital requirement to 11.5%

Done to absorb losses without breaching min. capital req.
Capital Buffers and to carry out business in downturn without leveraging
Level of buffer determine the dividend distributed and
bonus paid to staff

Countercyclical Capital Buffer 0 - 2.5% of RWAs

Imposed on banks by regulator during periods of excess
credit growth
Regulator can also impose a higher capital surcharge on
systematically important banks
Regulatory Capital
(i) Minimum common equity Tier 1 capital 5.5%
(ii) Capital conservation buffer (common equity) 2.5%
(iii) Minimum common equity Tier 1+CCB 8.0%
(iv) Additional Tier 1 capital 1.5%
(v) Minimum Tier 1 capital 7.0%
(vi) Tier 2 capital 2.0%
(vii) Minimum total capital (MTC) 9.0%
(viii) MTC+CCB 11.5%
Basel III - introduced
Leverage ratios 3% of Tier 1 capital

It is 4% for D-SIBs & 3% for other banks wef 01/10/19

Strengthen the counterparty credit risk framework in
Leverage calculation market risk instruments
Protects banks against the risk of decline in the credit
quality of the counterparty

Credit Value Adjustments For OTC derivatives

In addition to capital charge for counterparty default risk

Banks will have to compute credit value adjusted (CVA) risk

against capital charge
• Leverage Ratio = Capital Measure/ Exposure Measure
OR
Tier 1 capital/ Consolidated assets
• Credit Value Adjustment:

i) is change to market value of derivative instruments to account for

counterparty risk.
ii) CVA is amount subtracted from mark to market value of derivative
positions to account for expected loss due to counterparty defaults
iii) DVA is opposite of CVA
Basel III - introduced
Liquidity Coverage Ratio
Stock of high quality liquidity assets > 100% total net cash outflows over the next 30 calendar
days

Liquidity ratios

Net stable Funding Ratio

Available amount of available stable funding > 100% of required stable funding
• Liquidity Coverage ratio (LCR)
High quality liquid assets > 30 days cash out flows
(Stress lasting for one month)
Features of High quality liquid assets
i) Low credit & market risk
ii) Ease and certainty of valuation
iii) Low correlation with risky assets
iv) Listing on a developed and recognised exchange market
v) Presence of committed market makers
vi) Low market concentration
• HQLAs Level 1
i) Cash including cash reserves in excess of CRR
ii) Govt. securities in excess of SLR
iii) Within SLR Govt. securities as allowed under MSF
iv) Marketable securities issued or guaranteed by foreign sovereigns
a) 0% risk weight
b) Traded in deep large active repo or cash markets
c) Not issued by a Bank/FI/ NBFC
• HQLAs Level 2: Not more than 40% of HQLAs
• Level 2 A: minimum 15% haircut should applied
i) Marketable securities guaranteed by sovereigns, PSE with 20% risk
weight not issued by Bank/FI/NBFC
ii) Corporate bonds (commercial paper) rated AA-4 & above
• Level 2 B: minimum 50% haircut should be applied
i) Marketable securities guaranteed by sovereigns, PSE with 20%- 50%
risk weight not issued by Bank/FI/NBFC rated BBB- & above
ii) Common equity shares (a) not issued by Bank/FI/NBFC (b) included in
NSE CNX Nifty index and/or S&P BSE Sensex index
• NET STABLE FUNDING RATIO (NSFR)
• NSFR = Available Stable Funding (ASF) >100%
Required Stable Funding (RSF)
• ASF elements
(i) Regulatory capital (Excl.Tier 2 with residual maturity < 1 year), other
capital instruments, other liabilities with effective residual maturity of >
1 year 100%
(ii) Stable non maturity (demand) dep. & Term dep. with effective residual
maturity of > 1 year 95%
(iii) Operational deposits 50%
• RSF elements
i) Coins and bank notes, CRR claims of RBI 0%
ii) Unencumbered level 1 assets, unencumbered SLR 5%
iii) Unencumbered loans to FI with resi.maturity < 6 m 10%
iv) Unencumbered level 2 assets , dep with other banks 50%
v) Unencumbered residential mortgages 65%
vi) Unencumbered performing loans 85%
vii) All other loans 100%
Basel III - introduced

Adoption of ‘expected loss’ based measure of provisioning

to transparently capture actual losses
This approach is less pro-cyclical than the previous
Provisioning Norms ‘incurred loss’ approach
This makes financial reporting more useful for
stakeholders as well as regulators
• Provisioning norms
i) Loss assets 100%
ii) Doubtful assets 100% of unsecured portion
up to 1 year 20%
above 1 up to 3 year 30%
more than 3 years 100%
iii) Sub standard assets 10%
iv) Standard assets a) Agri & SME 0.25%
b) other loans 0.40%
Basel III - introduced

Banks are required to disclose all relevant details

Also includes, any regulatory adjustments of composition

Disclosure Requirements of the regulatory capital of the bank
Earlier disclosures were not sufficiently transparent to
make comparative analysis
• Disclosure requirements
1) Capital i) CRAR %
ii) CRAR tier 1 capital %
iii) CRAR tier 2 capital %
iv) Percentage of shareholding of GOI in Public sect banks
v) Amount of subordinated debt
2) Investments i) Gross value of investment in India and outside
ii) Provisions for depreciation
iii) Net value of investment
2) Investment contd.
Movement of Provisions
i) Opening balance
ii) Add- provisions made during year
iii) Less- write off/ write back of excess provision
iv) Closing balance
3) Repo transactions Min O/S Max O/S Daily avge 31 March i)
Securities sold-Repo
ii) Securities purchased
Reverse Repo
4) Non SLR investment portfolio
5) Derivative
6) Asset Quality
7) Restructured assets
8)Business ratios
9) Asset liability management
10) Lending to sensitive sectors- Real Estate, capital market, country
exposures
11) Provision for I. Tax
12) Penalties by regulators
13) Related party transactions
There are 43 items for disclosures
• What is level 1 asset?
• Level 1 assets include listed stocks, bonds, funds or any assets that have a
regular mark to market mechanism for setting a fair market value.
These assets are considered to have a readily observable, transparent
prices and therefore a reliable, fair market value.
• What is level 2 asset?
• Level 2 assets are financial assets that do not have regular market pricing,
but whose fair value can be determined based on other data values or
market prices. ... Level 2 assets are commonly held by private equity
firms, insurance companies, and other financial institutions with
investment arms.
• Examples of level 1 investments would include publicly
traded mutual funds and common stock.
• Level 2 – based on other observable inputs (not quoted in the
market). An example of a level 2 investments would be common
collective trust funds, mortgage-backed securities, and most
interest rate swaps.
THANK YOU
Important features to Operational
Risk Management
Risk Management approach to
Operational Risk
• The Basel Committee defines the operational risk as the "risk of loss resulting
from inadequate or failed internal processes, people and systems or from
external events".
• This definition includes human error, fraud and malice, failures of information
systems, problems related to personnel management, commercial disputes,
accidents, fires, floods... In other words, its scope seems so wide you do not
immediately perceive the practical application.
• an actual operational risk:
• any event that disrupts the normal flow of business processes
• and which generates financial loss or damage to the image of the bank
(although the latter outcome has been explicitly excluded from the definition of
the Basel Committee, it still remains a major concern).
Risk approaches – Operational Risk

Also,
Basic enhanced
Indicator Approach Standardized approach Advanced Measurement Approach
Risk approaches – Operational Risk

Capital charge is linked to single parameter of gross annual

revenue
Capital charge is calculated as an average of the previous
Basic Indicator Approach three years of positive gross annual income

It ignores the years of zero or negative income

The percentage for capital charges (alpha) is fixed; set as

15% by Basel
Risk approaches – Operational Risk
Bank activities are divided in 8 business lines with a fixed
percentage of ‘beta’ multiplier to calculate risk
Beta ranges between 12 % (retail brokerage) – 18%
(corporate finance)
Capital charge is calculated by multiplying the beta of each
Standardized Approach
business line with its gross annual income
Total capital charge is the three-year average of the
summation of the capital charge of each business line
Negative capital charge from another business line can
offset a positive capital charge of another business line
It can only be adjusted within a year, but not across the
years
Risk approaches – Operational Risk
Capital charge will be the risk measure generated by the
bank’s internal operational risk management system
This system uses both qualitative as well as quantitative
criteria

Advance Measurement It can be applied only after the approval from the regulator
Approach by proving following
Active involvement of Board and Senior management in
operational risk management framework
The framework is robust and is implemented with
integrity
The bank has sufficient resources for each business line to
implement control and audit functions
Important features of operational risk
management
Parameters defining the risk level of branches
• Size of branch
• Loan losses and overdue debt
• Safety and security
• Regulatory compliance status
• Service issues
• Cash shortage & operational error
• Compliance with KYC & AML guidelines
• Expense violations
• Deposit / lending rate infraction & income leakage
• Attrition rate of customers
• Prior audit rating
• Fraud occurrence & losses
Operational risk management ensures
• Books & records are maintained as per bank’s instruction
• Records of branch assets & liabilities are shown accurately
• Physical assets are identifiable & their realizability is
satisfactory
• System of compliance & internal control are satisfactory
Internal Risk Rating System
• Based on the compliance level, the branches are rated as
follows:
Description Rating

Well controlled 850 & above

Adequately controlled 700 – 799

Moderately controlled 500 -699

Unsatisfactory 499 & below

Internal Risk Rating System
• Deviations are quantified

Frequency of Deviation Description

0 – 4% Very few

5 – 9% Few

10 – 20% Some

Above 20% Many

Internal Risk Rating System
• Score awarded for assessment of risk

Risk Level Score

Very low 90 – 100%

Low 70%

Medium 60%

High 0 – 50%
Details of high risk areas
• BGL and vouchers are checked regularly & records are kept
• Password secrecy and change of passwords
• Custody of pre-printed account opening kits
• No adverse remarks in cash balance or currency chest
verification reports
• Account opening formalities of high risk a/cs are complied
Details of high risk areas
• Account opening formalities of high risk a/cs are complied –
High risk areas are:
• Credit or debit summations of Rs. 1cr. & above (private, public or
individuals
• Customer domicile of certain countries
• Trust, charities, NGOs receiving donations from India and abroad
• Politically exposed person of foreign origin
• People with dubious reputation
• Borrower accounts which are NPA
Preparation for operations risk controls
• For deposit accounts
• Checking of account opening documents
• KYC guidelines and collecting relevant documents
• Establishing identity of customer
• Introducer’s details (if any)
• Acknowledgement for passbook and cheque book
• Nomination in the account
• Special attention to NRE accounts
• High value cash transactions
Preparation for operations risk controls
• For loan accounts
• Sanctioned as per delegated authority
• Maintenance of inspection registers
• Checking of all loan documents
• Maintenance of suit-filed register, insurance register, subsidy register,
written-off register etc.
• Verify the purpose and monitor the accounts
• Proper review while renewal of loan accounts
Preparation for operations risk controls
• For cash department
• Maintenance of cash-jotting, branch cash balance, cash received and
delivery book, and cash remittance register
• CGL and BGL tallies and verified by joint custodian
• Cash verification register / currency chest verification register
• Petty cash book
Preparation for operations risk controls
• Review and have current records of:
• Emergency arrangement in place of BM
• Disaster recovery plan and necessary approval
• Cash retention limit
• Local police assistance
• Branch lease agreement
• Strong room fitness certificate
• Insurance
Preparation for operations risk controls
• Premise maintenance
• Valid lease deed
• Neat and clean
• Mandatory boards and top executives’ contact numbers are displayed
• Seating arrangement for customers
• Necessary vouchers for customers
• Complaint box
Preparation for operations risk controls
• Security
• All staff should wear ID cards
• All front desk counters (for cash) have self-locking facility
• Alarm bell
• Cash is kept in locked box
• Documents (loans request / account opening) are kept in safe
custody
Preparation for operations risk controls
• Other requirements
• All previous audit reports are kept on record
• Attend to all the memos
• Monitor office accounts on daily basis &reverse the entry on daily
basis
• Record for pest control, alarm testing, time lock, smoke detector etc.
• Record of delayed payment of interest
Preparation for operations risk controls
• Also, should have all information about branch and its
surrounding area
• Business figures
• Advances under various heads
• Business potential of area
• Competition figures
• NPA
• Recovery efforts
• Record of duplicate keys withdrawal from nearby branch
• Take notes and rectify the irregularities daily
Preparation for operations risk controls
• For centralized banking system
• Software deployment in all systems
• Procurement of only approved hardware
• Application security
• Input control
• File uploads
• locker
• Process control
• EOD on time
• Nil balance in suspense accounts
Preparation for operations risk controls
• Control for ATMs
• Maintenance of ATM cash replenishment register
• Closure of account or lost card
• ATM pin & card should be with different custodians
• System account
• Regular change of password
• User ID creation / deletion
• Maintenance of log-in reports
• Back-up & disaster recovery
• Proper destruction of records
THANK YOU
Basel III

&

Important features to Credit Risk

Management
Risk approaches – Credit Risk

Standardized Approach Foundation IRB approach Advanced IRB Approach

Risk approaches – Credit Risk

Includes both on and off balance-sheet items

Standardized Approach Grades the credit risk by assigning different risk weights

Risk weights are decided on the basis of credit rating given

by external rating agencies
Risk approaches – Credit Risk
Banks uses its internal ratings, instead of external ratings

Measures unexpected loss (UL) and expected loss (EL) from

the exposure and assign risk weights accordingly
IRB Approach
UL and EL are derived from bank’s own empirical model to
estimate key variables -
Probability of default (PD)

Loss given default (LGD)

Exposure at Default (EAD)

Effective Maturity (M)

Risk approaches – Credit Risk

Banks will estimate the PD; the regulator will provide the
other three variables, viz., LGD, EAD, M
Foundation IRB Approach
Grades the credit risk by assigning different risk weights
Risk approaches – Credit Risk
Bank will provide all the four variables

Can apply this method of risk calculation only after

approval of the regulator
Advanced IRB Approach
Approval is granted after satisfying the adequacy and
robustness of the bank’s :
Risk Management System

Internal rating process

Competency in estimating key variables

Categorization of Risk exposure – IRB approach to credit risk

Corporate Sovereign Banks Retail Equity

Direct
ownership
Central banks
Project Loans to interests in
of various Other banks
Finance individuals assets &
countries
income of fin.
Inst
Certain Public
Indirect
Commodities Sector Securities
Credit cards interest such
Finance Enterprises firm
as derivatives
(PSEs)

Multilateral PSEs & MDBs

Income Any investment
Development who do not
producing meet criteria for Overdraft where return
Banks can only be
real estate 0% risk weight
(MDBs) realized
through sale of
asset or
High volatility Retail liquidation of
commercial mortgages issuer
real estate etc.
Criteria to be met for approval to
implement IRB
Estimates of risk parameters must reflect borrowers and transactions
Composition characteristics, with meaningful differentiation of risk, and accurate &
consistent estimation of risk

Compliance To all the minimum requirements

Rating system The mathematical and technological infrastructure must be logical

design
and well documented
Rating system All borrowers and guarantors must be assigned a rating as part of
operations loan approval process, and be reviewed periodically
Corporate
governance and Rating system should be approved by bank’s board of directors
oversight

Prior use of Banks must use the risk parameters for at least three years prior to
internal ratings
obtaining approval to implement IRB Approach
Risk approaches – Market Risk
Market risk is inherent in securities market where investment
risk is affected by the performance of the stock market or the
economy, and the risk can’t be diversified

It is measured by

Value at Risk (VaR)

Risk approaches – Market Risk

It is the maximum loss not exceeded in the given

probability

Value at Risk (VaR) Probability is defined by confidence level over a period of

time

Risk weights are decided on the basis of credit rating given

by external rating agencies
THANK YOU
CASE STUDY ON CALCULATION OF MINIMUM CAPITAL REQUIREMENTS

FOR CREDIT RISK IN THE BALANCE SHEET – CAPITAL RISK

TITLE : Calculating Risk Weighted Assets, Minimum Capital

requirements for Credit Risk and CRAR

SITUATION : Sabka Bank Limited has a credit portfolio of fund based and

non-fund based credit exposure with break up as follows:

1. Break-up into fund based and non-fund based exposure is as follows:

Type of exposure Rs. In Crores

Fund based Exposure 65000

Non-fund based exposure 20000

TOTAL 85000

2. The break-up of fund based exposure under Large Corporate,

Mid-Corporate, SME & Retail (Exposure upto Rs. 5 crore per account) and

Loan against term deposits is as follows:

Category of fund based exposure Rs. In Crores

Advances against Term Deposits 5000

SME & Retail Advances with exposure upto Rs.5 Crore per 20000

account

Large Corporate Advances 10000

Mid-Corporate Advances 30000

TOTAL 65000

Page 1 of 5
3. The break-up of non-fund based exposure under BG and LC (all under

external credit risk rating category of BBB assumed for simplicity sake) is as

follows:

Type of non-fund based exposure Rs. In Crores

Bank Guarantees 10000

Letters of Credit 10000

TOTAL 20000

4. Out of the Large Corporate and Mid-Corporate advances the sub-break up

for Real Estate and Govt Guaranteed fund based advances is as follows:

Sub-Category of Large Corporate Rs. In

and Mid-Corporate exposure Crores

Government Guaranteed advances 10000

Real Estate Advances 10000

TOTAL 20000

5. The external credit risk rating wise fund based advances under Large

Corporate and Mid-Corporate is as follows(for purpose of convenience it is

assumed that there are no NPAs):

External Government Real Estate Others Total

Credit Risk guaranteed advances In Rs.

advances Crores

Page 2 of 5
rating

category

AAA 0 0 5000 5000

AA 2000 0 3000 5000

A 1000 4000 2000 7000

BBB 3000 3000 4000 10000

BB, B & C 2000 2000 4000 8000

Unrated 2000 1000 2000 5000

TOTAL 10000 10000 20000 40000

6. The prevailing risk weights prescribed by the Regulator for different

categories is as follows:

Category of exposure Risk weight

prescribed

Advance against Term Deposits 0%

Government guaranteed advances 20%

SME & Retail advances with exposure per advance upto Rs. 5 75%

Crore

Real estate advances 200%

AAA 20%

Page 3 of 5
AA 30%

A 50%

BBB 100%

BB, B & C 150%

Unrated 100%

7. The break-up of Bank Guarantee exposure is as follows:

CASH MARGIN -🡪 0% 20% 50% 100% Total

Financial BG 0 1000 2000 1000 4000

Performance BG 2000 1000 2000 1000 6000

Total 2000 2000 4000 2000 10000

8. The Break-up of Bank’s Exposure under LC is as follows:

CASH MARGIN -🡪 0% 20% 50% 100% Total

DA LC 0 1000 3000 2000 6000

DP LC 1000 2000 1000 0 4000

Total 1000 3000 4000 2000 10000

9. The Credit Conversion factor for BG and LC is as follows:

Type of Exposure Credit Conversion factor

Financial BG 50%

Performance BG 20%

DA LC 50%

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DP LC 20%

10. The regulator has prescribed minimum capital requirements for Credit risk at

10% of the Credit risk weighted assets.

QUESTIONS:

a. Calculate the following:

● Amount of Credit Risk weighted assets (CRWA) under each category

of fund based and non-fund based advance and aggregate CRWA

● Amount of Minimum capital requirement under each category and

aggregate Minimum Capital requirement for Credit Risk

b. Assuming that the Bank has a capital base of Rs. 8000 Crores, what is the

CRAR in this case.(assuming no capital requirements for other risks)

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SOLUTION

CALCULATION OF MINIMUM CAPITAL REQUIREMENTS FOR CREDIT RISK

⮚ First identify the components of Credit Portfolio where risk weights are

independent of Credit Risk Rating

⮚ Calculate the minimum capital requirements for such categories as follows:

Sr Category of Exposure Amount Risk Credit Minimum

No of weight Risk Capital

exposure weighted required

Rs in Assets @10% of

Crores exposure CRWA

1 Advances against Term 5000 0% 0 0

Deposits

2 Govt Guaranteed advances 10000 20% 2000 200

3 SME and Retail Advances 20000 75% 15000 1500

4 Real Estate advances 10000 200% 20000 2000

TOTAL 45000 37000 3700

⮚ For the balance exposure of Rs. 20000 crores of the Bank’s portfolio the

minimum capital requirements is calculated as follows:

Sr External Credit Risk Amount Risk Credit Minimum

No Rating of the Exposure of weight Risk Capital

exposure weighted required

Rs in Assets @10% of

Crores exposure CRWA

1 AAA 5000 20% 1000 100

2 AA 3000 30% 900 90

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3 A 2000 50% 1000 100

4 BBB 4000 100% 4000 400

5 BB, B & C 4000 150% 6000 600

6 Unrated 2000 100% 2000 200

TOTAL 20000 14900 1490

⮚ For the BG and LC exposure of Rs. 20000 crores of the Bank’s portfolio the

minimum capital requirements is calculated as follows:

Sr Nature of Amt of Cash Cash Amt of Credit Amt of Min

No exposure Exposure Margin Margin exposure Conversion CRWA Capital

in Rs. cr % Amt net of factor require

margin @ 10%

of

CRWA

1 Financial BG 1000 20% 200 800 50% 400 40

2000 50% 1000 1000 50% 500 50

1000 100% 1000 0 50% 0 0

2 Performance 2000 0% 0 2000 20% 400 40

BG 1000 20% 200 800 20% 160 16

2000 50% 1000 1000 20% 200 20

1000 100% 1000 0 20% 0 0

3 DA LC 1000 20% 200 800 50% 400 40

3000 50% 1500 1500 50% 750 75

2000 100% 2000 0 50% 0 0

4 DP LC 1000 0% 0 1000 20% 200 20

2000 20% 400 1600 20% 800 80

1000 50% 500 500 20% 100 10

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TOTAL 20000 9000 11000 3910 391

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⮚ The summary of CRWA and Minimum capital requirements for credit risk is as

follows:

Sr Category Amt CRWA Minimum

No Of Of Capital
Exposure Exposure Requirements
@ 10% of
CRWA
1 Adv against Term 5000 0 0
Deposits
2 Govt Guaranteed Adv 10000 2000 200
3 SME and Retail Adv 20000 15000 1500
4 Real Estate 10000 20000 2000
5 Other FB Adv 20000 14900 1490
6 BG 10000 1660 166
7 LC 10000 2250 225
TOTAL 85000 55810 5581
⮚ In case the existing capital of the Bank is Rs. 8000 Crores, the CRAR for

Credit Risk will work out as under

(Existing Capital divided CRWA ) x 100

= (8000 / 55810 ) x 100 = 14.33%

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