Bank

Meaning of Bank
An Institution having the following features: It deals with money; it accepts deposits & advances loans It deals with credit; has the ability to create credit Its a commercial organisation; its aim is to earn profit It is a unique financial institution that creates demand deposits which serve as a medium of exchange &, as a result, the banks manage the payment system of the country. FUNCTIONS:

Accepting Deposits

Advancing of Loans

Fixed Deposits Account Current Deposits Account Savings Account Recurring Deposit Account

Money at Call Cash Credit Overdraft Discounting of Bills of Exchange (BoE) Term Loans General Utility Function

Agency Functions

Remittance of Funds Collection & Payment of Credit Instruments Execution of Standing Orders Purchasing & Sale of Securities Collection of Dividends on Shares Income Tax Consultancy Acting as Trustee & Executor Acting as Representative & Correspondent

Locker Facility Traveler's Cheque Letter of Credit Collection of Statistics Underwriting Securities Gift Cheques Acting as Referee Foreign Exchange Business

BANKING STRUCTURE IN INDIA The banking institutions in the organized sector, commercial banks are the oldest institutions, some them having their genesis in the nineteenth century. Initially they were set up in large numbers, mostly as corporate bodies with shareholding with private individuals. Today 27 banks constitute a strong Public Sector in Indian Commercial Banking. Commercial Banks operating in India fall under different sub categories on the basis of their ownership and control over management. I. Public Sector Banks

Public Sector Banks emerged in India in three stages. First the conversion of the then existing Imperial Bank of India into State Bank of India in 1955, followed by the taking over of the seven associated banks as its subsidiary. Second the nationalization of 14 major commercial banks in 1969and last the nationalization of 6 more commercial Bank in 1980. Thus 27 banks constitute the Public Sector Banks. II. New Private Sector Banks

After the nationalization of the major banks in the private sector in 1969 and 1980, no new bank could be setup in India for about two decades, though there was no legal bar to that effect. The Narasimham Committee on financial sector reforms recommended the establishment of new banks of India. RBI thereafter issued guidelines for setting up of new private sector banks in India in January 1993. These guidelines aim at ensuring that new banks are financially viable and technologically up to date from the start. They have to work in a professional manner, so as to improve the image of commercial banking system and to win the confidence of the public. Eight private sector banks have been established including banks sector by financially institutions like IDBI, ICICI, and UTI etc. III. Local Area Banks

Such Banks can be established as public limited companies in the private sector and can be promoted by individuals, companies, trusts and societies. The minimum paid up capital of such banks would be 5 crores with promoters contribution at least Rs. 2 crores. They are to be set up in district towns and the area of their operations would be limited to a maximum of 3 districts. At present, four local area banks are functional, one each in Punjab, Gujarat, Maharashtra and Andhra Pradesh. I. Foreign Banks

Foreign commercial banks are the branches in India of the joint stock banks incorporated abroad. There number was 38 as on 31.03.2009. Scheduled Commercial Banks in India The commercial banking structure in India consists of: I. Scheduled Commercial Banks in India

Unscheduled Banks in India Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section42 (6) a) of the Act. "Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank". "Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank". II. Cooperative Banks

Besides the commercial banks, there exists in India another set of banking institutions called cooperative credit institutions. These have been made in existence in India since long. They undertake the business of banking both in urban and rural areas on the principle of cooperation. They have served a useful role in spreading the banking habit throughout the country. Yet, there financial position is not sound and a majority of cooperative banks has yet to achieve financial viability on a sustainable basis. The cooperative banks have been set up under various Cooperative Societies Acts enacted by State Governments. Hence the State Governments regulate these banks. In 1966, need was felt to regulate their activities to ensure their soundness and to protect the interests of depositors According to the RBI in March 2009, number of all Scheduled Commercial Banks (SCBs) was 171 of which, 86 were Regional Rural Banks and the number of Non-Scheduled Commercial Banks including Local Area Banks stood at 5. Taking into account all banks in India, there are overall 56,640 branches or offices, 893,356 employees and 27,088 ATMs. Public sector banks made up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82 per cent of staff and 60.3 per cent of all automated teller machines (ATMs).

Various types of banks Exchange Bank

Incorporated outside India Carries on foreign exchange business in India Under the direct guidance of the Reserve Bank of India

Primary functions

: Financing of foreign trade

Purchase of foreign exchange, bills of exchange Supply of money for foreign trade

Other function:
Accept deposits and supply credit like other commercial bank

Example:
Honking Bank, Standard Chartered Bank , City Bank , Bank of America

Agricultural Banks:
Established to meet the financial requirement of the farming class Provide loans to the farmers at a low rate of interest Type of loan provided short term & long term

Industrial Bank:
Specialized Financial Institution Provide long term financial assistance to industrial concerns Guide on technical and managerial Problems Underwrite shares and debentures issued by industrial undertakings Example: IFCI, IDBI, SFC, etc

Co-operative Banks:
Formed on the principles of co-operation Extend credit facilities to farmers and small scale industrial concerns Offer loans to cottage and small scale industries at a low rate of interest

FUNCTIONS OF COMMERCIAL BANKS

MAIN FUNCTIONS

SUBSIDIARY FUNCTION

ACCEPTING DEPOSITS

GRANTING OF LOANS AND ADVANCES

AGENCY FUNCTIONS

UTILITY FUNCTION

MAIN FUNCTION

ACCEPTING DEPOSITS Saving account Cash credit Current account Fixed deposit Recurring deposits Flexi deposits

Granting loans and advances Loans Cash credit Bill discounting

SUBSIDIARY FUNCTION
Agency functions: Collection of cheques and bills Payment of insurance premium Purchase and sale of securities Transfer of funds Under writing of capital issues Serving as a guarantor Realization of accounts Acting as a trustee executor etc.

Utility functions Safe custody of valuables Issue of L/C Issue of travelers cheque Accepting of Bill of Exchange Underwriting of capital issue Providing credit information Advice on financial matters Dealing in foreign trade Financing foreign trade Credit creation

Accepting deposits:
One of the major activities of the Banks. Banks are also called custodians of public money. The money is accepted as deposit for safe keeping . Banks use this money to earn interest from people who need money. Banks share a part of this interest with the depositors.

Accepting deposits:
Types

Demand Deposits Payable on demand

Time Deposits Payable after fixed time

Saving Account

Current Account

Fixed Deposit

Recurring Deposits

Combination

Flexi Deposit account

Saving Account:
To park your temporary saving To keep money required for expenses Low rate of interest 3.5% to 4% No restriction on deposits Withdrawals are restricted to discourage habit of expenses Any individual or HUF can open account but not commercial or artificial person. Even a minor can open account Account can be opened in joint names Interest is calculated on the minimum balance on a specified date

Tips of opening a saving Account:

Select a Bank with minimum deposit requirement Insist on a cheque book Understand the restrictions on the deposits and withdrawal Select a Bank which has minimum restrictions Obtain a full schedule of service charges Select Bank with minimum charges for services

Documents required to open account:

Duly filled- up Application form May require introduction from an existing account holder Passport sixe photographsIn case joint account, photographs of all the account holders. Photocopy of PAN Card If no PAN: Copy of Identity Proof (Voter ID card, Driving license etc) Address proof (Ration Card , Voter ID card, Electricity Bill etc)

Current account
Commercial/Business purpose Minimum no of restrictions (free to operate for business) Multiple withdrawals on single day (withdrawal unlimited subject to the minimum balance) No interest Facilities available are Facilities available are: Overdraft facility Discounting of bills/ bundies etc. Payment to creditors and receipts from debtors by cheques

Tips of opening a current account

Choose a relatively larger branch (additional services can be availed) Select a Bank with least minimum deposit requirement Insist on a cheque book and count the cheque leaves. Store your cheque book carefully Obtain a full schedule of service charges Select Bank with minimum charges for services

Documents required to open Current account Duly filled up Application form May require introduction from an existing account holder Passport size photograph-(owners of the organization-partners/proprietor etc.)
In case of Limited Company Copy Resolution is necessary Photocopy of PAN card Copy of constitutional deed (e.g. Partnership deed, Memorandum and Articles of Association etc) Copy of Trade License

Fixed deposits
Money deposited for specific tenure(15 days to five years or more) Withdrawal is time based and not demand based Higher rate of interest Rate increases with increase in tenure No movement of funds once deposited Interest rate lowered if withdrawn before time

Tips for opening Fixed deposits

Decide the period in advance (time for which you will not need the money) Shop around for the best rate of interest available. Avoid Banks which do not have a sufficiently long history. If need for withdrawal arises take advice of the banker-(if overdraft is more feasible) Be very careful while entrusting you money to finance companies which promise lucrative rates of interest.

Documents for opening fixed deposits

Similar as required in case of current account and saving account.

Recurring deposits
Daily / Weekly / Monthly deposit of fixed amount. Encourages the savings habit on a regular or recurring basis. Rate of interest are almost equal to the rates of fixed deposits. Generally range for a period of six months to ten years. Minimum Rs. 5 and in multiple of Rs. 5/ Interest is compounded quarterly. Rate depends upon tenure.

Flexi Accounts
Combination of Fixed deposit and Saving account. Also termed as two-in-one account. Interest is higher than SB but lower than FD. Not rigid like Fixed Deposits. Cheque book facility is available. Monthly statement available giving full particulars. Interest on average balance maintained.

Important Banking Term Bank Charges

Saving Account
Minimum balance charges Cheque return charges Inoperative charges Outstation Cheque collection charges High value clearing charges

Current Account
Minimum balance charges Cheque return charges Inoperative charges Outstation Cheque collection charges High value clearing charges Cheque book charges Ledger folio charges

Bank Rate:

Bank Rate. In accordance with the general tradition of the 1930s, RBI started with a cheap money policy and had fixed a low bank rate (3%) and did not change it till November 1953 when it raised the bank rate to 3.5 percent. The Bank rate gradually raised to 10% in July 1981- these were only changes during this period. The bank rate remained unchanged at 10 percent for another 10Years (1981-91). It was revised upwards to 11 percent in July 1991 and further to 12 percent in October 1991. The bank rate or the central banks rediscount rate is an important monetary instrument in modern economies. Its most useful role is to signal and/or clarify the central banks monetary and interest rate stance to all participants in the financial sector and particularly to banks. If monetary policy is effective and credible, a change in the bank rate will result in a change in prime lending rate of banks and thus act as an independent instrument of monetary control. However, the role of the bank rate as an instrument of monetary policy has been very limited in India because of these basic factors:

1. The structure of interest rates is administered by RBI- they are not automatically linked to the bank rate; 2. Commercial banks enjoy specific refinance facilities, and not necessarily rediscount their eligible securities with RBI at bank rate; and 3. The bill marked is under-developed and the different sub-markets of the money market are not influenced by the bank rate. In other words, the bank rate in India is not the pace setter to the other market rates of interest and the money market rates do not automatically adjust themselves to changes in the bank rate. At the sometime, the deposit rates and lending rates of banks (and of development finance instaurations) are not related to the bank rate. The Government of India and RBI are reviewing the rules and procedures for general access to RBI rediscount facilities so as to make bank rate an active instrument of monetary policy as in other modern economies. Since the later part of 1995, India passed through a severe liquidity crunch and as a result the prime lending rates were ruling high. Industrial production was affected adversely. One step which RBI took was to reduce the bank rate from 12 to 11 percent in April 1997, and gradually to 6.5 percent. The reduction of the bank rate was to help in the reduction of other interest rates and thus stimulate borrowing from banks. Cash Reserve Requirements (CRR) .Another weapon available to RBI for credit control is the use of variable cash reserve requirements. Under the RBI Act, 1934, very commercial bank has to keep certain minimum cash reserve with RBIinitially; it was 5percent against demand deposits and 2per cent against time deposits- these are known as the statutory cash reserve requirement between 3 per cent and 15 percent of the total demand and time deposits. During 1973, RBI exercised this power twice, as a form 3 to 5 per cent in June 1973and to 7 per cent in September 1973. Since then, RBI has raised or reduced C. R. R. a number of times (and ultimately raised to the maximum limit of 15 percent of net demand and time liabilities to influence the volume of cash with the commercial banking system and thus influence their volume of credit.

As explained already, India economy was passing through a serve liquidity problem since 1995-96 which was adversely affecting investment and production. RBI reduced CRR successively to 8 percent in October 1997 and finally to 5 per cent in June 2002. Pressure is being brought on RBI to reduce CRR to international levels and not to use it as a weapon of credit control. The purpose of reducing CRR is to leave large cash reserves with banks so as to enable them to expand bank credit. It may be mentioned that the Indian economy has been reeling under serious economic recession for many years and reduction of CRR and expansion of bank credit to industry and trade is one method to stimulate the Indian economy. RBI has been pursuing its medium term objective of reducing CRR to the statutory minimum of 3 percent. What is Bank rate? Bank Rate is the rate at which central bank of the country (in India it is RBI) allows finance to commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase deposit rates as well as Prime Lending Rate. This any revision in the Bank rate indicates could mean more or less interest on your deposits and also an increase or decrease in your EMI. What is Bank Rate ? (For Non Bankers) : This is the rate at which central bank (RBI) lends money to other banks or financial institutions. If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa. Thus, it can said that in case bank rate is hiked, in all likelihood banks will hikes their own lending rates to ensure and they continue to make a profit. What is CRR? The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and has come into force with its gazette notification. Consequent upon amendment to sub-Section 42(1), the Reserve Bank, having regard to the needs of securing the monetary stability in the country, can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceiling rate. [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, the

Reserve Bank could prescribe CRR for scheduled banks between 3 per cent and 20 per cent of total of their demand and time liabilities]. RBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation. Thus we can say that this serves duel purposes i.e. it not only ensures that a portion of bank deposits is totally riskfree, but also enables RBI to control liquidity in the system, and thereby, inflation by tying the hands of the banks in lending money. What is CRR (For Non Bankers) : CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks dont hold these as cash with themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivalent to holding cash with themselves. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. Thus, When a banks deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to hold additional Rs 9 with RBI and Bank will be able to use only Rs 91 for investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investment. This power of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system. What is SLR? Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 24%. (reduced w.e.f. 8/11/208, from earlier 25%) RBI is empowered to increase this ratio up to 40%. An increase in SLR also restrict the banks leverage position to pump more money into the economy.

What is SLR ? (For Non Bankers) : SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio of cash and some other approved to liabilities (deposits) It regulates the credit growth in India. What are Repo rate and Reverse Repo rate? Repo (Repurchase) rate: is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate

Reverse Repo: rate is the rate at which banks park their short-term excess liquidity with the RBI. The RBI uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas Reverse repo rate signifies the rate at which the central bank absorbs liquidity from the banks.
Bankers Bank The central bank maintains accounts of all commercial banks. The statutory reserves are to be kept with the central bank. These accounts are used for inter-bank settlements and for foreign exchange transactions by commercial banks with the central bank. The central bank also acts as the lender of last resort to the commercial banks. During critical situations banks may run out of reserves and may require selling assets to meet their commitments. In such situations, Central Bank may come to the rescue of these banks, by providing funds so that they can overcome the immediate problem. For example, on October 19, 1987 (Black Monday), the US stock market suffered the worst oneday decline in its history with a wipe out of about 25% of the value of stocks. This forced the

banks, which were holding stocks as collateral securities, to sell the stocks to avoid further loss. A large number of individuals and pension funds had invested in stocks, and a huge financial collapse looked imminent. Early next day, the Federal Reserve (Central Banking System of US) pledged to provide emergency loans to banks to obviate dumping of stocks in the market. Thus, a serious economic disaster was averted by the timely action of the countrys central bank.

Cash Back: Cash back can refer to two different kinds of card transactions: 1) An option available to retail consumers when, during a debit card transaction, the customer can request to add an extra amount to the purchase price and receive the added amount in cash. Cash back using debit provides customers a convenient method of obtaining cash when purchasing goods and services without having to make a separate trip to an ATM or bank. 2) A cardholder benefit offered by some credit card companies that pays the cardholder a small percentage of their net expenditures (purchases less refunds). Cash back benefits often provide the cardholder with the opportunity to choose from taking the cash, or using the "points" for purchases, travel (as with miles awards for air travel) or gift cards. Typically, cardholders must reach a certain points level to redeem for cash or other benefits. Some credit cards offer varying levels of cash back depending on the purchase. For example, a cardholder might earn 5% back on gas purchases, 2% on groceries and 1%on all other purchases. Cheque:
A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand

Characteristics of a Cheque:
A cheque is a bill of exchange A cheque always upon a banker A cheque is always payable on demand

Person relating to cheque:

Drawer-One who draws the cheque (an account holder) Drawee-The bank on which the cheque is drawn Payee- A person who is to receive the payment

Various Types of cheque

TYPES OF CHEQUES

BEARER CHEQUE

CROSSED CHEQUE

ORDER CHEQUE

GENERAL CROSSING

SPECIAL CROSSING TYPES OF CHEQUES

NOT NEGOTIABLE CROSSING

BEARER CHEQUE

CROSSED CHEQUE

ORDER CHEQUE

GENERAL CROSSING

SPECIAL CROSSING

NOT NEGOTIABLE CROSSING

Post Dated Cheque A cheque dated later than the date of issue (future dated cheque) It will not have any value till the date mentioned in the cheque The payee to submit the cheque for clearance only on or after the date of the cheque

DISHONOUR OF CHEQUES REASONS:

Insufficient funds. Stop payment. Mismatching of signatures. Difference of amt in words & words & fig. Overwriting. Lapse of time.

PENALTIES : Two years imprisonment for bouncing. Fine (depends of the bank).

Demand Draft:
Bill of exchange payable on demand that is on presentment ('on sight'). Person or party that wrote the draft is called a drawer; the person, party, or bank who is expected to pay it (on whom it is drawn) is called a 'drawee' or a 'payer,' and the person or party who receives the payment is called a 'payee.' A check is a demand draft drawn on a bank.

Deposit Slip:
A small written form that is sometimes used to deposit funds into your account. A deposit slip indicates the date, the name of the depositor, the depositor's account number and the amounts of checks, cash, and coin being deposited. The bank clerk typically verifies the funds received against the amounts listed on the deposit slip. The deposit slip is processed to indicate it was received and hands any requested cash to the customer.

Drawee: A legal and banking term used to describe the party that has been directed by the depositor to pay a certain sum of money to the person presenting the check or draft. A typical example is if you are cashing a paycheck. The bank that cashes your check is the drawee, your employer who wrote the check is the drawer, and you are the payee.

Non-performing assets (NPA) Non-performing assets, also called non-performing loans, are loans, made by a bank or finance company, on which repayments or interest payments are not being made on time. A loan is an asset for a bank as the interest payments and the repayment of the principal create a stream of cash flows. It is from the interest payments than a bank makes its profits. Banks usually treat assets as non-performing if they are not serviced for some time. If payments are late for a short time a loan is classified as past due. Once a payment becomes really late (usually 90 days) the loan classified as nonperforming. A high level of non-performing assets compared to similar lenders may be a sign of problems, as may a sudden increase. However this needs to be looked at in the context of the type of lending being done. Some banks lend to higher risk customers than others and therefore tend to have a higher proportion of nonperforming debt, but will make up for this by charging borrowers higher interest rates, increasing spreads. A mortgage lender will almost certainly have lower nonperforming assets than a credit card specialist, but the latter will have higher spreads and may well make a bigger profit on the same assets, even if it eventually has to write off the non-performing loans.

Working Capital Finance Finance to meet the entire range of short-term fund requirements Day-to-day operational cycle. Inventories Managing internal cash flows Supporting supply chains Funding production and marketing operations Cash support to business expansion Carrying current assets

Project Finance
Large Industrial & Infrastructure project Purpose Construction of ventures Capital intensive business Expansion Modernization and automation Approved on the basis of assessment of Strong in house appraisal of cost Viability of the venture Credit standing of promoter Interest : Fixed of Floating (bases upon risk involved) Loan tenors : 5 to 10 years (Structured on the basis of the projects revenue generation estimate) Repayment scheduled : Depends on revenue generation estimate e.g.= Particular project will not generate any revenue in the first 2 years. In such case a seven years loan may be structured for repayment from the 3rd year onwards.

Corporate Term loans

Medium size term loan project Purpose Business Expansion Repayment of high cost debt

 Technology up-gradation R & D expenditure Leveraging specific cash streams Implementing early retirement schemes Supplementing Working Capital

Cash Credit
Most popular Working Capital finance in India. Certain limit is sanctioned. Withdrawals within allowed within the limit. Borrower can use borrowing as per requirement. Deposit surplus amount back into the amount. Interest is charged on daily balance of amount. Some of the bank charges nominal % or % as commitment charges.

Overdraft
Temporary borrowings to meet contingencies in business Withdrawals exceeding balance in current account or limit sanctioned in cash credit account. Usually sanctioned by Branch Manager or assessment of customer urgencies. Backed by collateral securities and Credit standing.

Difference
Cash Credit Long term facility subject to yearly renewal. Need not repaid back periodically. Security as a % of Book debt, stock plant & M/c Over Draft Occasional Temporary facility. Repayment in shot period as agreed. Security such as Shares, units, LIC, Debentures etc. In some cases clean O/Ds are also granted depending on perceived worth of Individual.

Bill discounting
Borrower is granted loan against bill. Amount paid after dedicating some % as margin. Bank presents this bill to drawee at due date & collect the amount of the bill. Borrower is charged commission plus Interest. It can be one time transaction or sometimes banker sanctions limit for bill discounting.

Assignment 1 Write Short notes on the followings: a. Kinds of Deposits, b. Features of Savings Account, c. Documents required to open Current A/c d. Time Deposits, e. Recurring Deposit, f. Flexi Account, g. Corporate Loans h. Different types of Securities i. Retail Loan j. Working Capital Finance k. Project Finance l. Overdraft

Assignment 2
Advice in case of the following situations: a) Mr. Azad doesnt have PAN, as his income is below 1,50,000. He wants to open a Saving account with State Bank of India, Azadpur Branch. b) The Finance Manager of Fools Ltd. Decided that, they will approach Bank of India to open a Saving account in the name of M/s Fools Ltd. c) Soma Haldar, a house wife wants to deposit money in a bank account, where she could get interest at a higher rate than saving deposit account and with a higher flexibility. d) Alam Hussain, a trader of consumables get a cheques of Rs. 2,00,000 from one of his customer, he needs the fund within the day itself.

Assignment 3
Give reason, whether any bank charge will be applicable: a) M/s Ajoy Industries limited is maintaining a current account with Allahabad Bank, Mahim Branch. The company, during the year 2008-09 was not defaulter in any respect (e.g. minimum balance, cheques return, inoperation etc.). But bank respect ledger folio charges. b) Asha Ltd. Is maintaining a current account with Punjab National Bank. They (Asha Ltd.) Received one cheque from one of its debtor of Rs. 11,000, but it was dishonored. Asha Ltd. Wants to know whether any bank charge will be deductible

from their account. In this case Asha Ltd. are not in default, as the cheques dishonored due to insufficient fund in the account of the debtor. c) Mr. Sheo Kumar Sharma made a fixed deposit with Bank of Baroda for Rs. 10,000 with a tenure of 36 months on 01.01.2008 on 01.01.2009, due to urgent requirement of money, he approached to his banker for withdrawal of the Fixed Deposit.

Assignment 4
Distinguish: a) Cash Credit & Overdraft b) Complete Loans & Retail Loans.

Working Capital Requirement

Capital required for day-day requirements of a concern. Required for maintenance of inventories, extending credit to customers and maintaining cash balance. Requirement is met by: Partly out of credit extended by suppliers of goods and services. Partly out of its own internal sources. Partly out of short-term borrowings from banks.

Analysis of Working Capital

Gross working capital (GWC): Firms total investment in current assets

Net Working capital (NWC) =CA (Current Assets)

CL

(Current Liabilities)

NWC can be positive or negative Positive Negative NWC NWC = = CA > CL CA < CL

Working capital cycle

Cash is converted back to cash after following the stages: Raw material, WIP, Finished goods, and Sundry debtors.s

Sundry debtors

Cash

Raw material

Finished goods

Work in process

BASIC DATA
Average amount outstanding 1,50,000 96,000 81,600 2,00,200 1,32,000 3,95,800 3,080 2,400 1,200 Average value per day (365days assumed)

Stocks: progress

Raw materials Work-in-

Finished goods Debtors Creditors Average working capital Sales Cost of sales Purchase of raw material

Working Capital Cycle

Raw material holding: Raw material stock Daily purchases Less Credit taken: Creditors Daily purchases Production Period: Work-n-progress Daily cost of sales Finished goods turn-over: Finished goods Daily cost of sales Customer credit period: Debtors Daily sales Days The amount paid by the company , for its raw material, is received back by the company from sales after 154 days. = = 1,50,000 1,200 = 1,32,000 1,200 96,000 2, 400 = 81,600 2,400 = 2,00,200 3,080 = 65 Days 154 = 34 Days = 110 Days 15 Days = 40 Days = 125 Days

Working capital Requirement can be calculated by applying following formula. Total operating expenses expected during the year No . of operating cycles in a year

There will be about 2.37 operating cycles (365 days / 154 days) If the operating expenses are Rs. 5,00,000. The working capital requirement will be Rs. 2,10,970(5,00000/2.37) In other words : If operating expenses per day are Rs. 1,000 and The working capital cycle is 154 days. It will take 154 days to the company to convert raw material into cash, The working capital required is Rs. 1,000*154 days = Rs. 1,54,000

Inventory Conversion Period

Total time needed for: I. II. Producing a product, and Selling the product.

Typically, it includes: Raw material conversion period Work-in-process conversion period Finished goods conversion periods

Debtors Conversion Period

Time required to collect outstanding amount from customers.

Minimum Margin Money

Credit limits<Rs. 1 Crore : -Bank to ensure maintenance margin of 5% of the annual turn over Example: Suppose annual turnover : Rs. 1,00,000

Owners contribution at least : Rs. 5,000s

Minimum Current Ratio

Credit limit Rs. 1 crore: -Banks to ensure maintenance minimum current ratio of 1.33:1 Example: Lone requirement If: Current Assets Than: Current Liability must be Rs. 1 crore : Rs. 1.33 crore : Rs. 1.5 crore

Important ratios to be studied by banker in balance-sheet:

Current Ratio Acid Test or quick Ratio Gross Profit Ratio Debtors Ratio Net Return Ratio Debtor/Creditor Ratio Debt/Equity Ratio Proprietary Ratio Solvency Ratio Inventory Turn-over Ratio

Current Ratio
Ratio between current assets and current liabilities Obtained by dividing current assets by current liabilities Important to a banker since it indicates the liquidity of the borrower. Current assets Current liabilities Current assets: Assets convertible into cash within a short period Includes stocks, debtors, cash and investments

Current Liabilities : Liabilities due for payment in a short period Shorty- term bank borrowings, trade creditors, provision for a taxation, etc.

CURRENT RATIO
Ratio of 2:1 (Considered to be an ideal ratio) Current assets are twice the current liabilities Means there are sufficient assets to pay for the current liabilities

Ratio of 1:1 is satisfactory Ratio below 1:1 is unsatisfactory Decision cannot always depend on ratio Sometimes ratio may be 2:1 yet situation unfavorable Quality of assets included as current assets is more important The ratio by itself has no meaning if the assets are not good E.G.:- Unsalable stock included in current assets

Acid Test or Quick Ratio

Also called Liquidity Ratio Involves only the liquid resources in current Ratio Quick assets (current assets minus inventory) Quick liabilities (Current liabilities minus bank borrowings) Quick assets include: Cash and bank balance, readily saleable securities and book debts

Current liabilities in this case shall not include Short term bank borrowing , i.e. , overdraft and cash credit facilities

Acid Test or Quick Ratio

Decline in current ratio and quick ratio indicates overtrading Good current ratio but low quick ratio Indicate dis-proportionate high investment in stocks (Quick asset exclude inventory or closing stock from current

assets) Ratio of less than 1 will be undersirable a ratio of 2 ideal

Gross Profit to Sales Ratio/G.P. Ratio

Gross Profit*100 Sales Yearly rise in this ratio considered a good sign Generally expressed as a percentage Compared with ratio of companies engaged in same line of business Ratio reflects the efficiency or otherwise of management

Debtors Ratio
Account Receivable (Sundry Debtors and Bills Receivable) Average Daily Monthly Credit Sales Indicates what part of the sales is on credit basis Indicates the period of credit extended to the customers Too high ratio indicates slackness in collection Resulting lack of cash to pay the creditors

Net Return Ratio

Nest Profit before interest and Tax * 100

Nest Fixed Assets + Working Capital Obtained by dividing net profit after depreciation but before taxation by net worth of the company Indicates profitability as compared to total own funds employed Judges the overall performance of the concern Comparison of ratio for multiple periods shows the utilization of facilities

Debt/ Equity Ratio

Current and Long term Debts Share Capital and Free Reserves Obtained by dividing debt (borrowed fund ) by equity (own fund) Indicating proportion of debt to equity Normal level of debt equity ratio as to be seen by bank is 2:1

Proprietary Ratio
Proprietors Funds Total Assets Funds belonging to proprietors or shareholders as compared to the total assets. Higher the ratio, it is for all concerned

Solvency Ratio
Net Tangible Assets Total Outside Liabilities Obtained by relating Net Tangible Assets to total outside liabilities. Measures ability to repay all external debts out of own assets. Ideally this ratio should be more than 1. Larger the ratio better is the solvency of the unit.

Cash Credit
Most popular working capital finance in India Certain limit is sanctioned Withdrawals within allowed within the limit Borrower can use borrowings as per requirement Deposit surplus amount back into the account Interest is charged on daily balance of account Some of the bank charges nominal % or % as commitment charges

Cash Credit
Most popular working capital finance in India Certain limit is sanctioned Withdrawals within allowed within the limit

Borrower can use borrowings as per requirement Deposit surplus amount back into the account Interest is charged on daily balance of account Some of the bank charges nominal % or % as commitment charges

Margin
Bank do not extend finance equal to 100% of working capital Some % say 25% are required to be contributed by borrower Normal maximum permissible bank finance is 75% of your WC requirements

Sources of Working capital finance

Internal Nest gains from operation Sale of fixed assets Capital introduction

External Bank borrowings Private loans

Term Loan by Indian banks

Granted by development banks: Industrial Finance Corporation of India (IFCI), The industrial Development Bank of India (IDBI), The State Financial Corporations Other Commercial banks Bigger advances are granted by commercial banks in participation with the term- lending institutions.

Tem Loan Appraisal

Depends to a large extent on estimates or forecasts on following broad basis:

Technical Feasibility -Location and other infrastructure. Economic feasibility-demand for the additional output or the product. Managerial Competence-technical competence, administrative ability, integrity and Resourcefulness of the management Financial Feasibility-Cost of the project, production, profitability , estimated cash flow and Balance sheet

Difference
Term Lone Purpose: New projects or of the Expansion, diversification or Modernization of the existing units. year. Repayment schedule 8 to 10 years. of stock Secured by immovable and movable Properties . Option to convert part of the loan into Equity shares . Appraisal on technical, economic and liquidity. Financial feasibility. Appraisal on short-term No such clause. Working Capital Purpose: Day-to-day requirements concern. Generally granted for one

Against the hypothecation

Securities

Primary Securities

Collateral Securities

Securities offered primarily towards personal his loan.

Security in addition to the

Obligation of the borrower. Land & Building Plant & Machinery Life insurance policy( Policy only) Fixed Deposit with banks (But with post office) NSC KVP etc.

Stock. Debtors or other receivables ( in case Of cash credit.) Plant & Machinery Endowment Other fixed assets ( in case of term Loans. not Flat or buildings (in cash of housing loans.) Cars ,Buses, Lorries ( in case of loans to Purchase the same.)

Assignment 1
Write short notes on the followings: a) Method of lending , d ) Debtor Ratio , b) Current Ratio, c) Acid Test Ratio

e) Debt Equity Ratio f) Solvency Ratio I ) Margin

g) Inventory Turnover Ratio , h) Working capital cycle, j) Collateral Security.

Assignment2
Distinguish between Prime a cash security & collateral security.

Assignment 3
a) Mr. Sachin approached his banker for a cash credit limit of Rs. 2,00,000, for which he is offering MISPO (Deposits in the post office under monthly income scheme ) as collateral security. b) M/s Akash Enterprise is enjoying a cash credit limit of Rs. 1,00,000 with Bank of Maharashtra, park Avenue Branch, against stock . But he has not submitted stock statement till date. c) Alisa & co. is going to purchase a new plant worth Rs. 1,50,000, and approached Bank of Patiala for a cash credit limit for the same.

Introduction- Documentary credit

An arrangement between buyer and is Bank. Bank acts at the request and on instruction of buyer. Buyers Bank undertakes to make payment to the sellers Bank Promotes trading in the course of import and export. Documentary Credits are akin to bank guarantees.

Flow
Seller

- Documentary credit
Buyer

Sale contract Delivery of goods Application for LC

Advising Bank

Issuing Bank

LC (original)

Benefits (Letter of credit)

 Universally accepted arrangement for payment against documents. It allows the seller to rely on credit of the bank instead of the buyer. The invoice is the sellers representation of what has been sold and shipped. It assures to buyer that terms of contract has been complied with Advantages of an LC for the Buyer It allows the seller to rely on the credit of the bank instead of the buyer. Advantages of an LC for the Buyer The invoice is the sellers representation of what h as been sold and shipped.

Types of documentary credit Non funded facility where bank do not offer actual loan facility in terms of Assures other party to the transaction on behalf of its customer about
fulfillment of terms of contact (guarantee) money.

The documents giving such assurance are.

Letter of Credit

Bank Guarantee

Type of LC
Revocable Can be called back by the buyer Advantageous to opening bank Cheaper Issued only in circumstances where alternate buyer are available or in case of affiliated parties or subsidiary companies Irrevocable Cant be called back or amended by the buyer without consent of all the parties. He is bound to discharge the same On satisfaction of terms by the seller The banker undertakes to buy the shipping documents If the documents are in order the bank will pay irrespective of any controversy between buyer and

seller as regard fulfillment of Confirmed LC Confirmation of LC by any bank in the country Enforcement or payment in local country.

contract Non- Confirmed LC Without confirmation a LC may not be operative in practical terms.

Application for LC
The Documentary credit operations starts with application by buyer on the basis of LC requirement clause in PO In Bankers prescribed form The terms of credit are set as per purchase agreements The LC should contain complete and precise conditions

Important points
Type: Effective date: Expiry date: Amount : Revocable or irrevocable? i.e. issuance date, normally it is application date, otherwise as mentioned by bank The date up to which the performance should be complete and LC must be presented The amount available under the credit should be worded clearly

Checklist for Seller

Check your Company name and full title is correct Check the buyers details Ensure address is quoted correctly Type of credit i.e. irrevocable and confirmed by bank in own country The terms of credit i.e. as Sight: The payment on presentation of correct document or terms say 60 days/ 90 days credit terms.

Checklist for Buyer

The terms of expiryThere should be sufficient time for the following Produce the goods Assemble the documents Ship them Deliver them to the bank within expiry date

Consider postal delay for payment of document at abroad

 Postal delay will leave less time in case of compliance and corrections Amount of LC: Extra cost agreed Escalation clause Allows variations in value, quantity or unit price Terms of delivery: FOB or CIF Are Partial shipments permitted?

Bank guarantee
Its a commercial instrument Accessory contract To secure compliance with the contract It is a offshoot of main contract between two parties The Promisor undertakes to indemnify the promise for debt, default miscarriage of another person

Instances when BG is issued

Buyer to Seller to guarantee the future payment Seller/ contractor as guarantee of contract fulfillment against advanced Importer to safeguard against governmental policy changes and as a guarantee of due payment Performance guarantee

BANK AND HIRE PURCHASE FINANCE Hire purchase

Its contractual agreement between owner and hirer. Owner let out his goods on hire to hirer. An option is given to the to hirer for purchasing the goods in accordance with the terms of contract.

Two aspects of Hire purchase Agreement

Bailment of goods

Sale contract

HP

Installment purchase Hire Purchase

Leasing Leasing
Leasing do not allow to purchase the goods in all cases e.g. in operating lease

Installment Purchase
Ownership is transferred immediately after the first installment is paid

Ownership is transferred after the user exercises his option to purchase the item

Product range for HP

TV, Audio Systems, Refrigerators, Automobiles etc.

Owners obligations
He must have title to goods at the time of delivery Ensure that hirer has quite possession of goods Deliver the possession of goods Ensure goods are of merchantable quality Reasonably fit for intended use

Hirers Obligation
He should take reasonable case of the goods He cant sell the goods Pledge them Use for any other purpose than specified in the contract Pay sum as agreed Arrange for the insurance cover

Rights
Owner Repossess the upon the breach of the HP agreement Hirer Terminate the contract any time before final payment Purchase the goods before final payment

Tax aspect
Income tax : Depreciation is not allowed to the hirer on hire purchaser Depreciation is allowed to the buyer on purchase by installment payment Sales Tax/VAT: Hire purchase transactions are liable to sales tax/ VAT Sales tax/VAT is levied only when the hirer assigns the option to purchase Sales tax/ VAT must be determined with reference to the depreciated value of the items. Rate caries from state to state.

Accounting Aspect
Hirers angle The cash purchase price is capitalized and liability is recorded for cash price less down payment. Depreciation is charged on cash price Interest component in is provided as expenses Payment of installment is recorded

Accounting Aspect
In the books of finance company: Cash price receivable is recorded as current asset Finance income component recorded current liability under the head Unmatured Finance Charges. Down payment is recorded against Receivable A/c. Appropriate part of the Unmatured Finance Income is recorded as current income of the period. At the end of each accounting period, the hire purchase price less the installment received is shown as a receivable. Cost + Profit Cash Price Debited to Asset A/C

Interest

Debited to P/L A/c year to year

H.P. Price

Example:
On 1st April, 2009 Anand & Co. (Hirer) acquired a pick- up van on hire purchase from French Motor Co. Ltd. The terms of the contract were as follows: The cash price of the van was Rs. 5,00,000. Rs. 2,00,000 was to be paid on as down payment. The balance was to be paid in annual installments of Rs. 1,00,000 plus interest. Interest chargeable on the outstanding balance was 6% p.a.

Depreciation @ 10% p.a. is to be written- off using reducing balance method. Journal entries in the Books of Anand & co. for first year will be 01.04.2009 Pick-up Van A/c To French Motor Co. Ltd A/c 5,00,000 5,00,000

01.04.2009

(Being the purchase of a Pick-up van On hire purchase from French Motor Co. Ltd) French Motor Co. Ltd A/c 2,00,000 To Bank A/c 2,00,000 (Being the amount paid as down payment)

31.03.2010

Interest A/c.Dr. To French Motor Co. Ltd A/c

18,000 18,000.

(Being the interest payable @ 6% on Rs. 60,000 for 1st year) 31.03.2010 French Motor Co. Ltd A/c ..Dr. 1,18,000 [Rs, 1,00,000 + Rs. 18,000] To Bank A/c 1,18,000 st (Being the payment of 1 installment along with interest) Depreciation A/cDr. 50,000 To Pick-up Van A/c 50,000 (Being the depreciation charged @ 10% p.a. on Rs. 50,000) Profit & Loss A/c .Dr. 68,000 To Depreciation A/c 50,000 To Interest A/c 18,000 (Being the depreciation and interest transferred to P/L A/c)

31.03.2010

31.03.2010

French Motor Co. Ltd (finance company) will make the following for the 1 st year (Under sales Method) 01.04.2009 Anand & Co A/c..Dr. To H.P. sales A/c (Being the goods on hire purchase) 5,00,000 5,00,000

01.04.2009

Bank A/cDr. 2,00,000 To Anand & Co. 2,00,000 (Being Down payment received from the party)

31.03.2010

Anand & Co. A/c.Dr. 18,000 To Interest A/c 18,000 (Being the interest charge @ 6% on Rs. 3,00,000) Bank A/cDr. 1,18,000 To Anand & Co. 1,18,000 (Being the 1st installment received in H.P. sale) Interest A/cDr. 18,000 To Profit & Loss A/c 18,000 (Being the interest received from Anand & Co. transferred to P/l A/c)

31.03.2010

31.03.2010

Assignment
1. Write Short-notes on the following : a) Documentary Credit. b) Revocable letter of credit. c) Irrevocable letter of credit. d) Benefits of Documentary credit. e) Bank Guarantee. f) Hire Purchase. g) Salient Features of Hire-Purchase. h) Legal Aspects of Hire-Purchase. i) Income Tax aspects in Hire-Purchase.

PLASTIC MONEY
Introduction

Plastic money refers to the substitution of the usage of currency money. Avoids the risk of loss or theft of currency money. It is the exclusive property of cardholder meaning only he can use it. Used to make payment for goods and services at the time of purchase. Major Banks issuing Credit Card in India

State Bank of India credit card (SBI credit card) Bank of Baroda credit card or BOB credit card. ICICI credit card HDFC credit card IDBI credit card ANB AMRO credit card Standard Chartered credit card HSBC credit card Citibank credit card

Concept of Credit Card

A convenient payment mechanism Person purchase goods and services without immediate payment of cash Makes onetime collective payment At the end specific period called billing cycle Usually a month With a provision to spread the payment over several easy installment.

Concept of Debit Card

Debit cards, look like credit cards. It operate like cash or a personal check. When we use a debit card, our money is quickly deducted from the bank account. Debit cards are accepted at many locations, including grocery stores, retail stores, gasoline stations, and restaurants. Its an alternate to carrying a checkbook or cash. With debit card, we use our own money and not the issuers money.

Operational Aspect
The debit card software requires terminal at every point of purchase. It is called point of sales (POS) terminal. The customer, on making the purchase inserts the card which has magnetic strip at the back into the bolt of machine The merchant enters the value of transaction. The customer will enter PIN which is known to only cardholder. The machine places automatic call. Checks the balance in the account and the same time reduces the balance to the extent of the transaction value.

Types of plastic money

Credit Card Pay later product Can avail revolving credit up to 50 days No access to customers A/c Not necessary to open bank A/c Telecommunication network is not required Risk of fraud exists

Debit Card Pay now product Instantly debited to customers A/c Direct access to customers A/c Essential to open bank A/c Point of sale terminal are required to be installed and hence capital Risk minimized through use of PIN no

Issuance
After analysis of your application, evaluation of creditworthiness and financial status. The sponsor bank will issue you credit card. The credit limit per billing cycle is specified say times of monthly salary or 20% of annual income. The bank will charge entrance fees. Annual fees in advance every year on renewal of card. The card is operation immediately once the cardholder sign at the back of the card.

Approval of credit card application

It is suggested to give your mobile number and e-mail id at the time of application for Credit Card. This will help the issuer to intimate you either through SMS or through email with the approved status of your application. You will also receive a letter by post informing you of the card approval.

Declination of application You will receive a letter from the Bank even if your application for Card is
not approved.

If in case there is a further information of missing documents, you will be

sent a letter asking for the same. Then you need to fulfill with the documents to the specified address.

Purchase
When the card holder purchases something. He presents his card instead of cash or cheque. The merchant checks the card against hot list or warning bulletin provided by the issuer. The cardholder will sign the vouchers. The signature should tally with the one at the back of card.

Collection
After the purchase the ME will approach issuing bank or its clearing representative. Claims the amount through the copy of the sales vouchers and purchase statement. The bank discounts 2-3% and pays it to ME. In effect to ME it is as if cash sales with discount.

Payment of bill
Pay the bill within grace period By cheque By depositing cash

Through interest banking

Important points regarding credit cards

Cash withdrawal attracts interest on immediate effect Any payment towards bill is first adjusted with previous dues.

PERSONAL BANKING FINANCE

Loans can be divided into following category Housing Loan Car Loans Personal Loan Educational Loan Loan to Pensioners etc.

Housing Loan
Purpose Purpose or construction of a new house / flat. Purchase an existing (old) house / flat. Extend, repair. Renovate or alter a house / flat. Purchase a plot of land meant for construction of a dwelling unit.

Eligibility
Anyone who is over 21 years of age and has a steady source of income is eligible.

Credit Appraisal
Main objective is to assess the repayment capacity: The following points are considered : Income Age Academic background and employment stability. Family Background

Assets and Liabilities Saving history / capacity Number of dependents Income and expenditure pattern

Additional documents required for an old house / flat:

In the case of an old existing house. Valuation certificate from approved valuer. Certificate from a government approved architect/ structural engineer regarding the condition of the flat/house as well as its remaining life.

Minimum Margin i.e., borrowers contribution 15% for new house/flat. 20% for old house/flat. 20% for repairs and renovation.

Car Loans
Car Loan can be taken from banks to purchase: A new car, jeep, Multi Utility Vehicle or SUV An old car / jeep/ MUV/ SUV (less than 5 years old) : : : : 30 times NMI 2.5 times NAI No ceiling Upto Rs. 15 lacs

Loan Amount: For salaried employees For others New Vehicles Old Vehicles Margin: Loan upto Rs. 6 lacs Loan above Rs. 6 lacs

: 10 to 15% : 20 to 30%

Repayment tenure
New vehicle Upto 84 months i.e. 7 years. Old vehicle Upto 84 months from the date of original purchase

E.g. Mr. Sunil is purchasing a 2nd hand car in 2007 which was originally purchased in 2004. His maximum loan repayment period will be 4 years i.e. upto 2011.

Rate of Interest
Depends upon Type of vehicle Period of repayment Bank Branch type : metro urban, rural, semi urban etc. Range 7.5 to 12%

Personal Loan

Purpose: To meet any kind of personal expenses E.g.Home appliances Marriage Family function, etc.

Loan Amount Minimum : Rs. 24000 Maximum : 12 times NMI salaried & 1 years NAI For self employed Rs. 2.5 lacs For Pensioner Rs. 1.5 lacs For Trader Rs. 1 lacs. Example:

On 1st April, 2009 Anand & Co. (Hirer) acquired a pick-up van on hire purchase from French Motor Co. Ltd. The terms of the contract were as follows: The cash price of the van was Rs. 5,00,000. Rs. 2,00,000 was to be paid on as down payment. The balance was to be paid in annual installment of Rs.1,00,000 plus interest. Interest chargeable on the outstanding balance was 6% p.a. Depreciation @ 10% p.a. is to be written-off using reducing balance method.

Expenses considered for loan

Fees payable to college / school/ hostel. Examination/ Library/ Laboratory fees Purchase of Books / Equipment/ Instruments/ Uniforms. Caution Deposit / Building Fund/ Refundable Deposit. Travel Expenses / Passage money for studies abroad. Purchase of computers considered necessary for completion of course. Cost of a Two-wheeler upto Rs. 50,000/Any other expenses required to complete the course like study tours project work etc.

Amount of Loan: For studies in India, maximum Rs. 10 lacs. Studies abroad, maximum Rs. 20 lacs. Interest Rate: In general. For loans upto Rs. 4 lakh varies from 10.50% p.a. to 12.00% For loans above Rs. 4 lakh varies from 11.50% p.a. to 16.00

Repayment Tenure:

Repayment generally starts

Earlier of the two

1 year after completion of

course Security :

6 months after securing a job

Depending upon whether the student is studying in India or abroad, security demanded by the Banks varies. As per SBI norms Amount Upto Rs. 4 lacs Above Rs. 4 lacs to Rs. 7.50 lacs. Above Rs. 7.50 lacs to Rs. 10 lacs (India)/Rs. 15 lacs (Abroad) Rs. 15 lacs to Rs. 20 lacs Studies in India No Security Third Party Guarantee Tangible Collateral security for full value of loan ---Studies Abroad No Security Third Party Guarantee Tangible Collateral security of suitable value of loan or third party guarantee. Tangible Collateral security for full value of loan

Assignment 1: Write Short-notes on the followings: a) Credit Card

b) c) d) e) f) g) h) i)

Debit Card Advantages of Credit Card. Distinction between: Debit Card & Credit Card Housing Loan Personal Loan EMI Loan Appraisal Education Loan

Remittance Business
The act of transfer of money on behalf of the customers -both domestic and foreign. -from one place to another

Bank provide following service: Demand Draft (D.D.) Pay Order Mail Transfers Telegraphic Transfers or Tele Orders Electronic Mode Trustee Business Lockers Facility Collection Business

Interest Calculation for the Saving Bank Accounts

Step -1 Find the minimum balance between the 10th day and the last day of each month. Add all balances obtained in the different months of the particular period under consideration. Calculate the simple interest on the sum, obtained in the step (2) above, for one month at the prevailing rate at that time.

Step -2

Step -3

Example:Lucky opened a Saving Account with the HDFC Bank on 16 th may 2008 and deposited Rs. 8,500. He withdrew Rs. 3,000 on 3rd June 02009 and after that he neither deposited nor withdrew any amount during the June 2009. What interest he will get for the month of a) May 2009 and b) June 2009?

Solution:
The amount on which he would receive interest of May 2009 = Nil (i.e. 0,00) Reason As he has opened the saving bank account on 16th May 2009 Between 10th May 2009 and 16th May 2009, no amount is credited in his account hence the minimum balance is zero. So the amount qualifying for the interest calculation is Nil. The amount on which the interest will be give is Rs. 5,500 As after the withdrawal of Rs. 3,000 the minimum balance from the period 10th to the last of the Month was Rs. 5,500 only.

Introduction
Documents used while operating with bank: Deposit Slips Demand Draft Pay Order Bank Statement Pass Book Cheques etc.

Post Dated Cheque A cheque dated later than the date of issue (future dated cheque) It will not have any value till the date mentioned in the cheque The payee to submit the cheque for clearance only on or after the date of the cheque

DISHONOUR OF CHEQUES REASONS:

Insufficient funds. Stop payment. Mismatching of signatures. Difference of amt in words & words & fig. Overwriting. Lapse of time.

PENALTIES : Two years imprisonment for bouncing. Fine (depends of the bank).

Answers in case of Dishonoured Cheques

The following abbreviations are generally used. a) R.D. = Refer to drawer. Generally due to nonsufficient fund. b) N.S.= Not sufficient. ; N.E.= No effects. And N.F. = No funds are other abbreviations. c) E.I.= Endorsement irregular when an endorsement on a cheque is not in older.

d) E.N.C.=Effect not cleared. : the drawer has paid in cheques or bills, which are in course of collection, but their proceeds are not available for meeting the cheque. e) D.D.=Drawer deceased : death of customer, no payment prior to his demise. f) The abbreviation W. & F.D. stands for words and figures differ. : amount stated in words differs from that given in figures. g) D.R.= Discharge required. h) E.A.= Exceeds arrangement: where there is an overdraft arrangement and the cheque presented exceeds the drawing limit allowed to the customer.

Mechanism of Clearing House:

A cheque is said to be honoured when the payment of the same is made. But before the payment is made, a cheque is routed. Day -1 Deposited in the Payees Bank Goes to RBI Day -2 Handing over of cheque to Drawers Bank Balance Passed, if insufficient funds then returned and the Sorting at RBI (Evening) Day -3 If passed credited to Payees A/c If returned, instrument will be returned to Payees Bank with the memo by Drawers bank with reasons for return.

High Value Clearing (cleared within a single day) High Value Cheques Cheques of Value Rs. 1 lac or more
Deposited in the Payees Bank by 10-10.30 a.m. Goes to RBI by 11.00 a.m. Sorting at RBI Handing over of cheque to Drawers Bank by 2.00 p.m. Balance Passed & credited to Payees A/c If short balance cheque returned to RBI by 3.00 p.m. and sent to depositor by 4.00 p.m. Note: In some banks there is also a provision for the party to inform the Bank to at least a day ahead of issuing a high value payment.

Assignments
1. Write Short-Notes on the followings: Demand Draft (DD) Pay Order(PO) 2. Discuss the followings with your views: Distinguish between DD, PO & MT. What do you mean by collection business & Trustee business of
Banks.